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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 June 30, 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 - 2,517,400 shares as of August 1, 2001.
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INDEX
SPAN-AMERICA MEDICAL SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - June 30, 2001 and September 30, 2000.........................3
Statements of Income - three and nine months ended June 30, 2001
and July 1, 2000.........................................................4
Statements of Cash Flows - nine months ended June 30, 2001 and
July 1, 2000.............................................................5
Notes to Financial Statements - June 30, 2001.................................6
Item 2. Management's Discussion and Analysis of Interim Financial
Condition and Results of Operations......................................9
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
June 30, Sept. 30,
2001 2000
(Unaudited) (Note)
----------- -----------
Assets
Current assets:
Cash and cash equivalents $ 910,352 $ 587,663
Securities available for sale 4,851,888 4,402,770
Accounts receivable, net of allowances of $345,000
(2001) and $390,000 (2000) 4,281,226 4,291,586
Inventories (Note 2) 2,226,675 2,066,482
Prepaid expenses and deferred income taxes 338,643 380,423
----------- -----------
Total current assets 12,608,784 11,728,924
Property and equipment, net (Note 3) 3,264,356 3,346,200
Cost in excess of fair value of net assets acquired,
net of accumulated amortization of $990,909 (2001)
and $880,342 (2000) 1,960,986 2,071,554
Other assets (Note 4) 2,073,955 2,014,170
----------- -----------
$19,908,081 $19,160,848
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 2,005,383 $ 1,576,688
Accrued and sundry liabilities 1,167,225 1,481,541
----------- -----------
Total current liabilities 3,172,608 3,058,229
Deferred income taxes 168,000 168,000
Deferred compensation 1,013,216 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 15,486,257 14,875,581
----------- -----------
Total shareholders' equity 15,554,257 14,903,581
----------- -----------
Contingencies (Note 8)
$19,908,081 $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 Nine Months Ended
-------------------------- ----------------------------
June 30, July 1, June 30, July 1,
2001 2000 2001 2000
---------- ---------- ----------- -----------
Net sales $7,346,663 $6,849,782 $20,983,818 $19,096,696
Cost of goods sold 5,101,288 4,912,265 14,673,955 13,545,542
---------- ---------- ----------- -----------
Gross profit 2,245,375 1,937,517 6,309,863 5,551,154
Selling and marketing expenses 1,414,601 1,099,948 3,836,266 3,228,370
General and administrative expenses 480,097 576,464 1,648,010 1,654,209
---------- ---------- ----------- -----------
1,894,698 1,676,412 5,484,276 4,882,579
---------- ---------- ----------- -----------
Operating income 350,677 261,105 825,587 668,575
Non-operating income:
Investment income 45,482 53,894 148,672 145,267
Royalty income and other 117,540 110,640 312,203 246,587
---------- ---------- ----------- -----------
163,022 164,534 460,875 391,854
Income before income taxes 513,699 425,639 1,286,462 1,060,429
Provision for income taxes 180,000 151,000 450,000 376,000
---------- ---------- ----------- -----------
Net income $ 333,699 $ 274,639 $ 836,462 $ 684,429
========== ========== =========== ===========
Net income per share of common stock (Note 5)
Basic $ 0.13 $ 0.11 $ 0.33 $ 0.27
Diluted $ 0.13 $ 0.11 $ 0.33 $ 0.27
Dividends per common share $ 0.03 $ 0.03 $ 0.09 $ 0.08
Weighted average shares outstanding:
Basic 2,511,400 2,503,400 2,508,382 2,500,499
Diluted 2,534,937 2,504,265 2,528,771 2,500,787
See accompanying notes.
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Span-America Medical Systems, Inc.
Statements of Cash Flows
(Unaudited)
Nine Months Ended
------------------------------
June 30, July 1,
2001 2000
------------ -----------
Operating activities:
Net income $ 836,462 $ 684,429
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 477,389 547,394
Provision for losses on accounts receivable 28,872 (90,000)
Gain on sale and disposal of property,
plant and equipment (24,627)
Decrease (increase) in cash value of life insurance 283 (53,586)
Deferred compensation (17,822) (16,502)
Changes in operating assets and liabilities:
Accounts receivable (12,630) (526,998)
Inventory (160,193) (58,887)
Prepaid expenses and other assets (4,280) 46,792
Accounts payable and accrued expenses 114,379 1,142,014
----------- -----------
Net cash provided by operating activities 1,262,460 1,650,029
Investing activities:
Purchases of marketable securities (880,000) (970,000)
Proceeds from sales of marketable securties 425,000 --
Purchases of property, plant and equipment (202,914) (416,390)
Proceeds from sale of property, plant,
and equipment 29,200
Payments for other assets (56,071) (20,034)
----------- -----------
Net cash used for investing activities (713,985) (1,377,224)
Financing activities:
Dividends paid (225,786) (200,072)
----------- -----------
Increase in cash and cash equivalents 322,689 72,733
Cash and cash equivalents at beginning of year 587,663 1,029,586
----------- -----------
Cash and cash equivalents at end of year $ 910,352 $ 1,102,319
=========== ===========
See accompanying notes.
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SPAN-AMERICA MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 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 of America
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 of America 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 nine month period ended June 30, 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:
June 30, 2001 Sep. 30, 2000
------------- -------------
Raw Materials $1,609,009 $1,564,539
Finished Goods 617,666 501,943
------------- -------------
$2,226,675 $2,066,482
============= =============
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment, at cost, is summarized by major classification as
follows:
June 30, 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 5,766,012 5,565,181
Furniture and fixtures 535,684 533,601
Automobiles 9,520 9,520
Leasehold improvements 11,345 11,345
------------- -------------
10,580,031 10,377,117
Less accumulated depreciation 7,315,675 7,030,917
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$ 3,264,356 $ 3,346,200
============= =============
NOTE 4 - OTHER ASSETS
Other assets consist of the following:
June 30, 2001 Sep. 30, 2000
------------- -------------
Patents, net of accumulated amortization
of $983,501 (June 2001) and $901,437
(Sep. 2000) $ 374,192 $ 425,185
Cash value of life insurance policies 1,442,003 1,442,286
Other 257,760 146,699
------------- -------------
$ 2,073,955 $ 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 Nine Months Ended
June 30, 2001 July 1, 2000 June 30, 2001 July 1, 2000
------------- ------------ ------------- ------------
Numerator for basic and diluted
earnings per share:
Net income $ 333,699 $ 274,639 $ 836,462 $ 684,429
========== ========== ========== ==========
Denominator:
Denominator for basic earnings per share
weighted average shares 2,511,400 2,503,400 2,508,382 2,500,499
Effect of dilutive securities:
Employee and board stock options 23,537 865 20,389 288
---------- ---------- ---------- ----------
Denominator for diluted earnings per share:
Adjusted weighted average shares
and assumed conversions 2,534,937 2,504,265 2,528,771 2,500,787
========== ========== ========== ==========
Net income per share:
Basic $ 0.13 $ 0.11 $ 0.33 $ 0.27
Diluted $ 0.13 $ 0.11 $ 0.33 $ 0.27
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:
<Table>
<Caption>
Three Months Ended Nine Months Ended
June 30, 2001 July 1, 2000 June 30, 2001 July 1, 2000
------------- ------------ ------------- ------------
Net sales:
Medical $ 4,487,789 $ 3,801,028 $ 12,846,060 $ 11,322,935
Custom products 2,858,874 3,048,754 8,137,758 7,773,761
----------- ----------- ------------ ------------
Total 7,346,663 6,849,782 20,983,818 19,096,696
=========== =========== ============ ============
Operating profit (loss):
Medical 472,018 265,214 1,239,574 864,537
Custom products (23,176) 86,054 (30,388) 94,266
----------- ----------- ------------ ------------
Total 448,842 351,268 1,209,186 958,803
Corporate expense (98,165) (90,163) (383,599) (290,228)
Other income 163,022 164,534 460,875 391,854
----------- ----------- ------------ ------------
Income before income taxes $ 513,699 $ 425,639 $ 1,286,462 $ 1,060,429
=========== =========== ============ ============
</Table>
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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.
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141 - "Business Combinations." This statement addresses accounting and reporting
for all business combinations and defines the purchase method as the only
acceptable method. The statement is effective for all business combinations
initiated after June 30, 2001.
Also in June 2001, the FASB issued SFAS No. 142 - "Goodwill and Other Intangible
Assets." This statement addresses how goodwill and other intangible assets
should be accounted for at their acquisition (except for those acquired in a
business combination) and after they have been initially recognized in the
financial statements. The statement is effective for all fiscal years beginning
after December 15, 2001.
The Company is currently evaluating the impact that these new standards will
have on its financial statements.
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 third quarter of fiscal 2001 rose 7% to $7.3 million
compared with $6.8 million in the third quarter of fiscal 2000. For the year to
date in fiscal 2001, net sales increased 10% to $21.0 million from $19.1 million
in the same period last year. The increase in sales for the third quarter was
mostly due to higher medical mattress sales. The increase in net sales for the
year to date resulted from higher sales volume in both the medical and custom
products segments.
Net income for the third quarter of fiscal 2001 rose 22% to $334,000 or
13 cents a diluted share, compared with $275,000 or 11 cents a diluted share, in
the third quarter of fiscal 2000. The earnings increase during the quarter was
due to higher medical sales volume, a more profitable product mix, and lower
manufacturing overhead and administrative expenses.
Net income for the year to date increased 22% to $836,000 or 33 cents a
diluted share, compared with $684,000 or 27 cents a diluted share, in the first
nine months of fiscal 2000. The year-to-date increase was due mostly to the
higher sales volume and a favorable product mix.
The Company's total medical sales increased 18% to $4.5 million in the
third quarter this year from $3.8 million in the same quarter last year. Medical
mattress sales were up 32% in the third quarter while sales of overlays,
positioners, and seating products increased by 1%, 7%, and 8%, respectively. For
the year to date in fiscal 2001, medical sales rose 13% to $12.8 million from
$11.3 million in the same period last year due mostly to an increase in unit
sales of mattresses which rose by 36%. During the year-to-date period, sales of
overlays declined by 6%, while sales of positioners and seating products
increased by 5% and 6%, respectively. Management expects that sales of medical
products for the remainder of fiscal 2001 will be similar to those of the same
period in fiscal 2000.
Sales in the custom products segment decreased by 6% during the third
quarter to $2.86 million from $3.05 million in the same period last year. The
decline occurred entirely 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 three quarters of fiscal 2001.
Year-to-date sales of custom products increased 5% to $8.1 million from $7.8
million in the same period last year. The sales increase for the year to date
resulted from higher demand for consumer mattress pads and pillows sold through
our marketing partner, Louisville Bedding Company. Management expects that sales
in the custom products segment during the remainder of fiscal 2001 will be
similar to those of the same quarter in fiscal 2000.
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The Company's gross profit increased 16% to $2.24 million for the third
quarter of 2001 compared with $1.94 million in the third quarter of fiscal 2000.
The gross margin percentage for the third quarter of fiscal 2001 increased to
30.6% compared with 28.3% in the third quarter last year. Year-to-date gross
profit increased 14% to $6.31 million in the first nine months of fiscal 2001
from $5.55 million for the same period last year. The year-to-date gross margin
percentage increased to 30.1% from 29.1% for the same period last year. The
increases in gross profit level and gross margin percentage resulted from higher
sales volume and a more profitable product mix as medical sales, which generally
have a higher gross margin, grew faster than sales of custom products. The
medical segment has a higher gross margin than the custom products segment
mainly because many of the Company's medical products are patented and
proprietary. 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 29%, or $315,000, to $1.4
million during the third quarter of fiscal 2001 compared with the same quarter
last year. For the year to date in fiscal 2001, these expenses increased, 19% or
$608,000, to $3.8 million in fiscal 2001 compared with $3.2 million for the same
period last year. The changes were due to increases in commissions, shipping
expense, product development expense, 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 decreased 17% for the third quarter
of fiscal 2001 to $480,000 compared with $576,000 in the third fiscal quarter of
last year. The decrease in administrative expenses resulted primarily from a
decline in bad debt expense. For the year-to-date, general and administrative
expenses were flat at $1.6 million compared with the same period last year.
General and administrative expenses for fiscal year 2001 are expected to be
similar to those of fiscal 2000.
Investment income decreased by 16% to $45,500 in the third quarter of
fiscal 2001 compared with $53,900 in the same quarter last year. The decrease
for the quarter was due to lower interest rates on the Company's floating rate
debt securities. For the first nine months of fiscal 2001 investment income
increased by 2% to $148,700 compared with $145,300 in the same period last year.
The year-to-date increase was due to higher marketable securities balances
during the period.
Royalty income and other increased 6% to $117,500 in the third quarter
of fiscal 2001 and rose 27% to $312,200 for the year-to-date as a result of
increased royalty income on a shielded syringe product licensed to Becton &
Dickinson. Management expects total non-operating income for the remainder of
fiscal 2001 to be similar to that of the same period in fiscal 2000.
During the first nine months of fiscal 2001, the Company paid dividends
of $225,800 or 27% of net income for the year-to-date period. This amount
represented three quarterly dividends of $.03 per share.
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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 volume, (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 $1.26 million during the
first three quarters of fiscal 2001 compared with $1.65 in the same period last
year. The decline in cash flow for the first nine months of fiscal 2001 was due
mostly to higher inventory levels and a decrease in accrued liabilities during
the period. The Company's working capital increased by $765,000 or 9% during the
nine months ended June 30, 2001 as a result of higher cash, marketable
securities, and inventory levels. In addition, the current ratio increased to
4.0 at June 30, 2001 from 3.8 at fiscal year end 2000.
Accounts receivable, net of allowances, remained level at $4.3 million
at the end of the third quarter of fiscal 2001 compared to the end of fiscal
2000. Average collection time for the year-to-date in fiscal 2001 was 54.5 days
compared with 52.7 days for the same period last year. All of the Company's
accounts receivable are unsecured.
Inventory levels increased 8% or $160,000 to $2.2 million at the end of
the third quarter of fiscal 2001 compared with $2.1 million at the end of fiscal
2000. The increase occurred primarily in the areas of consumer finished goods
and medical raw materials, and was related to increased sales volume in both
areas. Management expects inventory levels during the remainder of fiscal 2001
to be similar to those of fiscal 2000.
Net property and equipment declined 2% during the first nine months of
fiscal 2001. Capital expenditures of $203,000 were offset by normal depreciation
expense. Management does not expect to make significant capital expenditures
during the remainder of fiscal 2001. 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 6-9
month period between the time the order is placed and the time of the final
payment. Realized gains and losses on the contracts would not be incurred unless
the Company cancelled the equipment order after entering into the forward
contracts. Unrealized gains and losses on open contracts are not material to the
Company's results of operations or financial condition.
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The Company's trade accounts payable increased by $429,000 or 27%
compared with fiscal year end 2000, reflecting normal monthly fluctuations.
Accrued and sundry liabilities decreased by $314,000 or 21% compared with fiscal
year end 2000 as a result of decreases in accrued incentive compensation and
medical insurance expense.
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 third
quarter of fiscal 2001. However, an increase in future inflation rates could
affect the Company primarily through higher raw material costs. The Company
would attempt to recover potential cost increases through higher sales prices on
its products. However, because of market competition, there can be no assurance
that we would be able to fully offset the 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 June
30, 2001, the Company held $4.85 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 June 30, 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: August 10, 2001
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