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 DECEMBER 29, 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 (I.R.S. 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
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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 - 2,527,900 shares as of 2/4/02
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INDEX
SPAN-AMERICA MEDICAL SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements (Unaudited)
Balance Sheets - December 29, 2001 and September 29, 2001............3
Statements of Income - Three months ended December 29, 2001 and
December 30, 2000....................................................4
Statements of Cash Flows - Three months ended December 29, 2001 and
December 30, 2000....................................................5
Notes to Financial Statements - December 29, 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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2
SPAN-AMERICA MEDICAL SYSTEMS, INC.
BALANCE SHEETS
December 29, September 29,
2001 2001
(Unaudited) (Note)
------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 862,148 $ 1,074,391
Securities available for sale (Note 2) 6,204,773 5,477,219
Accounts receivable, net of allowances of $368,000
(Dec. 2001) and $366,000 (Sep. 2001) 3,863,417 3,987,731
Inventories (Note 3) 2,152,937 2,103,162
Prepaid expenses and deferred income taxes 224,052 299,489
------------------------------------
Total current assets 13,307,327 12,941,992
Property and equipment, net (Note 4) 3,429,110 3,425,249
Cost in excess of fair value of net assets acquired,
net of accumulated amortization of $1,027,765 (Dec. 2001)
and (Sep. 2001) 1,924,131 1,924,131
Other assets (Note 5) 1,982,473 1,894,019
------------------------------------
$ 20,643,041 $ 20,185,391
====================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,848,833 $ 1,640,195
Accrued and sundry liabilities 1,434,119 1,458,178
------------------------------------
Total current liabilities 3,282,952 3,098,373
Deferred income taxes 176,000 176,000
Deferred compensation 977,034 983,125
Contingencies (Note 8)
Shareholders' equity (Note 6)
Common stock, no par value, 20,000,000 shares
authorized; issued and outstanding shares 2,517,400
at Dec. 2001 and Sep. 2001 91,725 91,725
Additional paid in capital 1,708 1,708
Retained earnings 16,113,622 15,834,460
------------------------------------
Total shareholders' equity 16,207,055 15,927,893
------------------------------------
$ 20,643,041 $ 20,185,391
====================================
See accompanying notes.
Note: The Balance Sheet at September 29, 2001 has been derived from the audited
financial statements at that date.
3
SPAN-AMERICA MEDICAL SYSTEMS, INC.
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
-----------------------------------------
Dec. 29, Dec. 30,
2001 2000
----------------- -----------------
Net sales $ 6,891,457 $ 7,144,263
Cost of goods sold 4,672,428 4,964,485
----------------- -----------------
Gross profit 2,219,029 2,179,778
Selling and marketing expenses 1,367,783 1,254,182
General and administrative expenses 505,853 562,039
----------------- -----------------
1,873,636 1,816,221
----------------- -----------------
Operating income 345,393 363,557
Non-operating income:
Investment income 29,720 58,711
Royalty income and other 170,572 82,061
----------------- -----------------
200,292 140,772
Income before income taxes 545,685 504,329
Provision for income taxes 191,000 177,000
----------------- -----------------
Net income $ 354,685 $ 327,329
================= =================
Net income per share of common stock (Note 5):
Basic $ 0.14 $ 0.13
Diluted $ 0.14 $ 0.13
Dividends per common share $ 0.03 $ 0.03
Weighted average shares outstanding:
Basic 2,517,400 2,503,400
Diluted 2,558,112 2,509,545
See accompanying notes.
4
SPAN-AMERICA MEDICAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<Table>
<Caption>
Three Months Ended
-----------------------------------------
Dec. 29, Dec. 30,
2001 2000
----------------- -----------------
OPERATING ACTIVITIES:
Net income $ 354,685 $ 327,329
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 119,099 156,772
Provision for losses on accounts receivable 24,000 12,000
Increase in cash value of life insurance (46,585) (1,586)
Deferred compensation (6,091) (5,640)
Changes in operating assets and liabilities:
Accounts receivable 102,759 51,378
Inventory (49,775) 116,828
Prepaid expenses and other assets 52,029 (60,660)
Accounts payable and accrued expenses 184,578 114,047
----------------- -----------------
Net cash provided by operating activities 734,699 710,468
INVESTING ACTIVITIES:
Purchases of marketable securities (800,000) (355,000)
Proceeds from sale of marketable securities 70,000
Purchases of property, plant and equipment (94,627) (2,850)
Payments for other assets (46,793) (7,145)
----------------- -----------------
Net cash used for investing activities (871,420) (364,995)
FINANCING ACTIVITIES:
Dividends paid (75,522) (75,102)
----------------- -----------------
(Decrease) increase in cash and cash equivalents (212,243) 270,371
Cash and cash equivalents at beginning of period 1,074,391 587,663
----------------- -----------------
Cash and cash equivalents at end of period $ 862,148 $ 858,034
================= =================
See accompanying notes.
5
SPAN-AMERICA MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 29, 2001
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 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 three month period ended December 29, 2001 are not necessarily
indicative of the results that may be expected for the year ended September 28,
2002. For further information, refer to the Company's Annual Report on Form 10-K
for the year ended September 29, 2001.
2. INVENTORIES
- ---------------
The components of inventories are as follows:
Dec. 29, 2001 Sep. 29, 2001
---------------------------------
Raw materials $ 1,526,772 $ 1,509,159
Finished goods 626,165 594,003
---------------------------------
$ 2,152,937 $ 2,103,162
=================================
3. PROPERTY AND EQUIPMENT
- --------------------------
Property and equipment, at cost, is summarized by major classification as
follows:
Dec. 29, 2001 Sep. 29, 2001
---------------------------------
Land $ 317,343 $ 317,343
Land improvements 246,172 246,172
Buildings 3,727,761 3,727,761
Machinery and equipment 6,087,061 5,992,434
Furniture and fixtures 533,601 533,601
Automobiles 9,520 9,520
Leasehold improvements 11,345 11,345
---------------------------------
10,932,803 10,838,176
Less accumulated depreciation 7,503,693 7,412,927
---------------------------------
$ 3,429,110 $ 3,425,249
=================================
4. OTHER ASSETS
- ----------------
Other assets consist of the following:
Dec. 29, 2001 Sep. 29, 2001
---------------------------------
Patents, net of accumulated amortization
of $1,039,893 (Dec. 2001)
and $1,011,560 (Sep. 2001) $ 335,186 $ 354,226
Cash value of life insurance policies 1,415,439 1,368,854
Other 231,848 170,939
---------------------------------
$ 1,982,473 $ 1,894,019
=================================
6
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 No. 128,
"Earnings Per Share."
Dec. 29, 2001 Dec. 30, 2000
-----------------------------
Numerator for basic and diluted earnings per share
Net income $ 354,685 $ 327,329
-----------------------------
Denominator:
Denominator for basic earnings per share
weighted average shares 2,517,400 2,503,400
Effect of dilutive securities:
Employee and board stock options 40,712 6,154
-----------------------------
Denominator for diluted earnings per share:
Adjusted weighted average shares
and assumed conversions 2,558,112 2,509,554
=============================
Net income per share
Basic $ 0.14 $ 0.13
Diluted $ 0.14 $ 0.13
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 No. 131 "Disclosures about Segments of an Enterprise and Related
Information."
The following table summarizes certain information on industry segments:
Dec. 29, 2001 Dec. 30, 2000
------------------------------------
Net Sales:
Medical $ 4,356,249 $ 4,619,223
Custom products 2,535,208 2,525,040
------------------------------------
Total 6,891,457 7,144,263
====================================
Operating profit (loss):
Medical $ 515,284 $ 645,588
Custom products (66,355) (149,590)
------------------------------------
Total 448,929 495,998
Corporate expense (103,536) (132,441)
Other income 200,292 140,772
------------------------------------
Income before income taxes $ 545,685 $ 504,329
====================================
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.
7
7. GOODWILL AND OTHER INTANGIBLES
- ---------------------------------
On September 30, 2001 the Company adopted Statement of Financial Accounting
Standards No. 142 - "Goodwill and Other Intangible Assets" (SFAS No. 142). As of
December 29, 2001, the Company had goodwill (net of amortization) of $1,924,131
and patents and trademarks (net of accumulated amortization) of $354,226. These
assets are part of the medical segment. The Company has re-assessed the useful
lives of goodwill and patents and trademarks. Goodwill was determined to have an
indefinite useful life. Amortization of goodwill ceased on September 30, 2001.
The useful lives of individual patents and trademarks were reviewed and no
material changes were required. No impairment losses were recorded on these
intangible assets as a result of the adoption of SFAS No. 142. The following
table reconciles the Company's reported net income and earnings per share with
pro forma balances from previous periods adjusted to exclude goodwill
amortization, which is no longer recorded under SFAS No 142.
Three Months Ended
---------------------------------
Dec. 29, 2001 Dec. 30, 2000
---------------------------------
Reported net income $ 354,685 $ 327,329
Add back: Goodwill amortization after-tax 30,936
---------------------------------
Adjusted net income $ 354,685 $ 358,265
=================================
Basic earnings per share:
Reported net income $ 0.14 $ 0.13
Goodwill amortization after-tax 0.01
---------------------------------
Adjusted net income $ 0.14 $ 0.14
=================================
Diluted earnings per share:
Reported net income $ 0.14 $ 0.13
Goodwill amortization after-tax 0.01
---------------------------------
Adjusted net income $ 0.14 $ 0.14
=================================
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.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
INTERIM FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Net sales for the first quarter of fiscal 2002 decreased 4% to $6.9
million compared with $7.1 million in the first quarter of fiscal 2001. The
sales decrease occurred primarily in the medical segment and was due to higher
than usual medical sales in last year's first quarter as one of our distributors
accelerated their purchases in advance of a scheduled price increase. Net income
for the first quarter of fiscal 2002 rose 8% to $355,000, or $0.14 per diluted
share, compared with net income of $327,000, or $0.13 per diluted share, in the
first quarter of fiscal 2001. The earnings increase resulted from higher gross
profit and increased royalties from product licensing.
The Company's medical sales decreased 6% to $4.36 million in the first
quarter this year from $4.62 million in the same quarter last year. The decline
occurred primarily in sales of patient positioners and overlays which declined
22% and 25%, respectively, compared with the first quarter of last year. These
declines were caused mostly by unusually high sales of overlays and positioners
in last year's first quarter as one of our medical distributors accelerated
their purchases in advance of a scheduled price increase. Sales to this
distributor were about $400,000 higher than usual in the December 2000 quarter
and $400,000 lower than usual in the March 2001 quarter. This unusual order
pattern created an unfavorable medical sales comparison for the December 2001
quarter (Q1 of fiscal 2002) and is expected to result in a more favorable than
normal comparison for the March 2002 quarter (Q2 of fiscal 2002). The Company's
other medical product lines were not affected by the situation described above.
Within the medical mattress product line, sales of powered products rose 122%
during the quarter, and sales of non-powered mattresses declined by 18%. Sales
of medical seating products were up by 8% from the first quarter last year.
Medical sales also benefited from Selan(R) skin care products, which added
$230,000 to first quarter sales. These products were not offered in the
comparable quarter last year. Management expects that total medical sales for
the year will be higher in fiscal 2002 than in fiscal 2001.
Sales in the custom products business unit were flat at $2.5 million
compared with the same period last year. Within that segment, sales of consumer
foam bedding products rose 14 % to $1.9 million compared with $1.7 million in
the first quarter of last year. Most of this increase occurred in the
Geo-Systems(TM) line of mattress pads that are sold through Louisville Bedding
Company. However, sales of industrial packaging products declined 26% to
$623,000 compared with the same quarter last year. Most of the industrial
products decline was due to the loss of a customer who redesigned their product,
eliminating the need for our component part. In addition, sales of industrial
products have been more affected than the Company's other product lines by the
weakness in the U.S. economy. For the custom products segment, management
expects that sales will be slightly higher in fiscal 2002 than in fiscal 2001.
9
The Company's gross profit increased 2% to $2.22 million in the first
quarter of fiscal 2002 compared with $2.18 million in the first quarter last
year. The gross profit margin percentage rose to 32.2% compared with 30.5% last
year. These improvements were due to a more profitable product mix in the
medical segment and better raw material utilization, which resulted in lower
overall material costs. Management expects that the Company's gross margin
percentage for fiscal 2002 will be similar to that of fiscal 2001.
Sales and marketing expenses were up 9% in the first quarter of fiscal
2002 to $1.37 million compared with $1.25 million in the prior year. The
majority of the increases came in the areas of shipping costs and product
development expenditures. The increase in product development expense reflects
the Company's increased efforts in that area. Total sales and marketing expenses
for fiscal 2002 are expected to be higher than those of fiscal 2001.
General and administrative expenses decreased by $57,000 (10%) to
$506,000 in the first quarter of fiscal 2002 compared with the first quarter of
last year. The decline was due to (1) unrealized gains on the cash value of
corporate-owned life insurance policies, and (2) the elimination of goodwill
amortization expense as a result of the Company's adoption on September 30, 2001
of Statement of Financial Standards No. 142 - "Goodwill and Other Intangible
Assets." Please see Note 7 in the Notes to Financial Statements for more details
about amortization expense. The adoption of SFAS No. 142 is expected to reduce
amortization expense by approximately $147,000 in fiscal 2002. However, other
administrative expenses are expected to increase slightly during the year,
partially offsetting the reduction in amortization expense.
Non-operating income increased by 42% to $200,000 in the first quarter
of fiscal 2002 compared with the same quarter last year due to higher royalty
income from a syringe product licensed to Becton Dickinson & Company (BD). The
Company's license agreement with BD is expected to expire in December 2005. The
increase in royalty income was partially offset by a reduction in interest
income of 49% due to falling interest rates on the company's marketable debt
securities. Management expects total non-operating income in fiscal 2002 to be
higher than that of fiscal 2001.
During the first quarter of fiscal 2002, the Company paid dividends of
$75,500, or 21% of net income. This payment represented one quarterly dividend
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
increases or expense changes 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: the loss of a major
distributor of the Company's medical or custom products, raw material cost
increases, the inability to achieve anticipated sales volume of medical or
custom products, changes in relationships with large customers, the impact of
competitive products and pricing, government reimbursement changes in the
medical market, FDA regulation of medical device manufacturing, and other risks
referenced in the Company's Annual Report on Form 10-K.
10
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company generated cash from operations of approximately $735,000
during the first quarter of fiscal 2002 compared with $710,000 in the first
quarter of fiscal 2001. The Company's working capital increased by $181,000 (2%)
to $10.0 million during the three months ended December 29, 2001 while the
current ratio declined slightly to 4.1.
Accounts receivable, net of allowances, declined by $124,000 (3%) to
$3.9 million at the end of the first quarter of fiscal 2002 compared with $4.0
million at the end of fiscal 2001. The decline was due to normal monthly
fluctuations in accounts receivable levels. All of the Company's accounts
receivable are unsecured.
Inventories increased 2% to $2.2 million at the end of the first
quarter of fiscal 2002 compared with $2.1 million at fiscal year end 2001. The
increase was due to normal monthly fluctuations in inventory levels. Management
expects inventory levels during fiscal 2002 to be similar to those of fiscal
2001.
Net property and equipment remained level at $3.4 million at the end of
the first quarter of fiscal 2002 because depreciation expense generally offset
capital expenditures of $95,000. Management expects that capital expenditures
during fiscal 2002 will be similar to those 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 final
payment date upon delivery of the equipment. 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 increased by $209,000 or 13%
compared with fiscal year end 2001, reflecting normal monthly fluctuations.
Accrued and sundry liabilities decreased by $24,000 or 2% compared with fiscal
year end 2001.
Management believes that funds on hand and funds generated from
operations are adequate to finance operations and expected capital requirements
during fiscal 2002.
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 and labor 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 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.
11
ITEM 3. MARKET RISK
The Company is exposed to market risk in two areas: short term
investments and cash value of life insurance. As of December 29, 2001, the
Company held $6.2 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 $62,000.
In addition, the Company's other assets at December 29, 2001 included
$1.4 million in cash value of life insurance, which is subject to market risk
related to equity pricing and interest rate changes. 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 believes that substantial fluctuations in equity markets and
interest rates and the resulting changes in cash value of life insurance would
not have a material adverse effect on the financial position of the Company.
During the quarter ended December 29, 2001, the Company's cash value of life
insurance increased by 3%, creating income of approximately $45,000.
12
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 -
The Company held its Annual Meeting of Shareholders on February 1,
2002. At this meeting, Thomas F. Grady, Jr., J. Ernest Lathem, M.D., and James
M. Shoemaker, Jr. were elected to three-year terms as directors. The voting
details are as follows:
For Against Abstain Not Voted
--------- ------- ------- ---------
Thomas F. Grady, Jr. 2,116,396 264,243 0 0
J. Ernest Lathem, M.D. 2,273,019 107,620 0 0
James M. Shoemaker, Jr. 2,117,396 263,243 0 0
ITEM 5. Other Information
None
ITEM 6. Exhibits & Reports on Form 8-K
(a) None
(b) None
13
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: February 11, 2002
14