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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
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FORM 10-Q
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/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED JULY 1, 1995.
OR
/ / TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From to .
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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: (803) 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
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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 - 3,175,437 shares as of August 1, 1995
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INDEX
SPAN-AMERICA MEDICAL SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - July 1, 1995 and
October 1, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Income - three and nine months
ended July 1, 1995 and July 2, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows - nine months ended
July 1, 1995 and July 2, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements - July 1, 1995 . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Interim
Financial Condition and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
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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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
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PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
SPAN-AMERICA MEDICAL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
JULY 1, OCTOBER 1,
1995 1994
(Unaudited) (Note)
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ASSETS
Current Assets
Cash and equivalents $ 2,597,788 $ 1,557,542
Marketable securities 2,071,091 1,956,039
Accounts receivable, net of allowances
of $472,000 at July 1, 1995 and
$341,500 at October 1, 1994 4,006,210 3,909,025
Inventories - Note B 2,479,752 2,722,976
Prepaid expenses and other 158,433 327,981
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Total Current Assets 11,313,274 10,473,563
Property and equipment, Net - Note C 5,661,267 6,251,133
Costs in excess of fair value of net
assets acquired, net of accumulated
amortization of $156,378 at July 1,
1995 and $109,006 at October 1, 1994 1,707,202 1,543,723
Other assets - Note D 1,726,392 1,745,646
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$20,408,135 $20,014,065
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 1,436,163 $ 1,724,891
Accrued and sundry liabilities 1,027,126 1,026,307
Current portion of long-term debt 70,375 70,375
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Total Current Liabilities 2,533,664 2,821,573
Long-term Debt, less current portion 303,938 356,719
Deferred Income Taxes and Compensation 1,973,151 1,916,493
Shareholders' Equity
Common Stock, no par value, 20,000,000
shares authorized; issued and
outstanding 3,271,737 shares at July 1,
1995 and 3,226,997 shares at October 1,
1994 4,679,657 4,432,931
Additional paid-in capital 145,834 145,834
Retained Earnings 11,146,204 10,767,609
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15,971,695 15,346,374
Less guaranteed ESOP obligation 374,313 427,094
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Total Shareholders' Equity 15,597,382 14,919,280
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$20,408,135 $20,014,065
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Note: The Balance Sheet at October 1, 1994 has been derived from the audited
financial statements at that date.
See Notes to Consolidated Financial Statements.
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SPAN-AMERICA MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
July 1, July 2, July 1, July 2,
1995 1994 1995 1994
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Net Sales $7,758,581 $8,247,886 $22,393,086 $24,098,305
Cost of Goods Sold 5,476,974 5,862,009 16,128,315 16,883,546
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Gross Profit 2,281,607 2,385,877 6,264,771 7,214,759
Selling and
Marketing Expenses 1,147,633 1,121,281 3,483,219 3,068,623
General and
Administrative
Expenses 711,781 678,665 2,008,605 2,044,826
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Income from Operations 422,193 585,931 772,947 2,101,310
Other (expense)/income:
Interest expense (8,911) (7) (8,911) (18,210)
Investment income
and other 97,452 45,553 233,765 173,448
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88,541 45,546 224,854 155,238
INCOME BEFORE
INCOME TAXES 510,734 631,477 997,801 2,256,548
Provision For Income
Taxes-Note E 191,000 240,000 374,000 858,000
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NET INCOME $ 319,734 $ 391,477 $ 623,801 $ 1,398,548
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Earnings Per
Common Share -Note F $ .10 $ .12 $ .19 $ .41
Dividends per
Common Share $ .025 $ .025 $ .075 $ .075
Weighted Average
Shares Outstanding 3,271,737 3,323,700 3,263,427 3,421,448
See Notes to Consolidated Financial Statements.
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SPAN-AMERICA MEDICAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
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July 1, July 2,
1995 1994
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OPERATING ACTIVITIES
Net Income $ 623,801 $1,398,548
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 825,174 811,053
Provision for losses on accounts
receivable 104,000 107,000
Loss on disposal of property, plant
and equipment and abandonment
of leasehold improvements 27,704 5,768
Gain on sale of other assets (3,640)
Increase in cash value of life
insurance (81,775) (52,267)
Deferred compensation 56,658 (76,315)
Changes in operating assets and liabilities:
Accounts receivable (222,533) (162,248)
Inventory 243,224 (441,783)
Prepaid expenses and other current assets 228,139 45,130
Accounts payable and accrued expenses (287,909) (315,943)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 1,512,843 1,318,943
INVESTING ACTIVITIES
Purchases of marketable securities (607,410)
Proceeds from the sale of marketable
securities 513,706 500,000
Purchases of property,plant and
equipment (163,568) (469,683)
Proceeds from sale of property, plant
and equipment 63,150
Payments for other assets (37,019) (42,366)
Proceeds from sale of other assets 3,750
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NET CASH (USED FOR) INVESTING ACTIVITIES (227,391) (12,049)
FINANCING ACTIVITIES
Principal payments on long-term debt (161,657)
Dividends paid (245,206) (254,725)
Payment of note payable (73,956)
Purchase and retirement of Common Stock (1,566,300)
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NET CASH (USED FOR) FINANCING ACTIVITIES (245,206) (2,056,638)
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INCREASE/(DECREASE) IN CASH AND CASH
EQUIVALENTS 1,040,246 (749,744)
Cash and cash equivalents at beginning
of period 1,557,542 2,226,912
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $2,597,788 $1,477,168
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See Notes to Consolidated Financial Statements.
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SPAN-AMERICA MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
July 1, 1995
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles 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 generally accepted accounting principles 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 and nine
months periods ended July 1, 1995 are not necessarily indicative of the results
that may be expected for the year ended September 30, 1995. For further
information, refer to the Company's annual report on Form 10-K for the year
ended October 1, 1994.
NOTE B - INVENTORIES
The components of inventories are as follows:
July 1, October 1,
1995 1994
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Raw Materials $1,954,726 $1,633,937
Work in Process 21,014 18,454
Finished Goods 504,012 1,070,585
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$2,479,752 $2,722,976
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NOTE C - PROPERTY AND EQUIPMENT
Property and equipment, at cost, is summarized by major classification as
follows:
July 1, October 1,
1995 1994
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Land $ 317,343 $ 317,343
Land Improvements 240,016 240,016
Buildings 3,613,216 3,613,216
Machinery & Equipment 8,008,643 8,042,247
Furniture & Fixtures 587,894 577,168
Automobiles 9,520 9,520
Leasehold Improvements 95,420 88,001
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12,872,052 12,887,511
Less Accumulated Depreciation 7,210,785 6,636,378
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$ 5,661,267 $ 6,251,133
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NOTE D - OTHER ASSETS
Other assets consist of the following:
July 1, October 1,
1995 1994
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Patents, net of accumulated
amortization of $354,118 at
July 1, 1995 and $283,830 at
October 1, 1994 $ 689,696 $ 723,769
Cash value of life insurance
policies 860,791 779,016
Terminated contract rights,
net of accumulated amortization
of $160,754 at July 1, 1995 and
$116,912 at October 1, 1994. 131,526 175,368
Other 44,379 67,493
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$1,726,392 $1,745,646
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NOTE E - INCOME TAXES
The provision for income taxes is based on the Company's estimate of the taxes
expected to be due for the full fiscal year.
NOTE F - EARNINGS PER COMMON SHARE
Earnings per common share are computed using the weighted average number of
shares outstanding. The effect of common stock equivalents on earnings per
share is not material. Future contingent shares have not been included in a
fully diluted earnings per share calculation as their effect would be
antidilutive.
NOTE G - FAIR VALUE DISCLOSURES
In December 1991 the Financial Accounting Standards Board (FASB) issued
Statement No. 107, "Disclosure about Fair Value of Financial Instruments."
Companies with less than $150 million in total assets are required to provide
the disclosures for fiscal years ending after December 15, 1995. Accordingly,
the Company would be required to adopt this statement no later than its 1996
fiscal year. Early adoption of this Statement is permitted. The Company
presently does not intend to implement this statement early.
NOTE H - SUBSEQUENT EVENT
Following the close of its third fiscal quarter, the Company repurchased 96,300
shares of its common stock for approximately $450,000 ($4.72 per share) in a
private transaction from an unaffiliated seller.
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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 1995 declined 6 % to $7.8 million
compared to $8.2 million in the third quarter of fiscal 1994. The decline in
revenues was due mainly to lower sales of the Company's consumer TerryFoam
products caused by a customer's decision to reduce inventory levels of seasonal
products. Offsetting some of the decline were sales increases in the Company's
industrial and medical foam business units. For the year to date in fiscal
1995, net sales fell 7% to $22.4 million from $24.1 million in the same period
last year. The sales decrease for the year to date resulted mainly from lower
unit and dollar volume of the Company's health care foam overlay and contract
packaging products. Net income for the third quarter of 1995 was $319,700
($.10 per share) compared to net income for the third quarter of 1994 of
$391,500 ($.12 per share). The third quarter earnings brought year-to-date net
income for 1995 to $623,800 ($.19 per share) as compared to $1,398,500 ($.41
per share) in fiscal 1994. The lower earnings resulted from the decline in
sales volume and higher bad debt expenses related to a consumer customer's
bankruptcy filing in late June.
The Company's health care foam sales increased by 3% to $3.6 million in the
third quarter this year from $3.5 million in the same quarter last year due
mainly to an increase in dollar volume and unit sales of mattresses lead by the
Company's two new mattress products, PressureGuard IV and Dynaguard. For the
year to date in fiscal 1995, health care foam sales decreased by 13% to $10.1
million from $11.6 million in the same period last year as the increase in
mattress sales did not offset the decline in unit sales of foam overlays.
Management expects that sales of health care foam overlay products will decline
slightly during the remainder of fiscal 1995. However, sales of other health
care products are expected to increase, offsetting the majority of the expected
declines in foam overlay sales.
Sales of the Company's health care foam products to Baxter Healthcare
Corporation, one of the Company's largest customers, have been impacted during
the last five quarters by Baxter's decision in February 1994 to begin carrying
a competing line of foam products. Baxter continues to carry the Company's
health care foam products, but not on an exclusive basis as they did prior to
February 1994. The Company's sales to
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Baxter are expected to continue at current levels during the remainder of
fiscal 1995. During the last year, the Company has been successful in
establishing relationships with other national and regional distributors.
Sales of health care products to these new customers during the last quarter of
fiscal 1995 are expected to be higher than the last quarter of 1994.
Sales of consumer foam products declined during the third quarter by 27% to
$1.6 million from $2.2 million in the same period last year. The decline was
due mainly to lower sales of the Company's consumer TerryFoam products caused
by a customer's decision to reduce inventory levels of seasonal products. Year
to date sales of consumer foam products increased 3% to $5.1 million from $4.9
million. Most of the increase was due to higher unit sales volume of consumer
foam mattress pads which more than offset the decline in TerryFoam sales.
Management expects that consumer foam sales in the fourth quarter of fiscal
1995 will be similar to those in the fourth quarter of fiscal 1994.
Industrial foam sales increased by 26% in the third quarter of fiscal 1995 to
$968,000 from $769,000 in the same quarter last fiscal year. For the year to
date, industrial sales rose 33% to $2.6 million from $1.9 million in fiscal
1994. The third quarter and year to date increase was primarily the result of
higher sales to existing customers. Industrial foam sales in the fourth
quarter of fiscal 1995 are expected to be higher than in the fourth quarter of
fiscal 1994.
Contract packaging sales decreased 11% to $1.6 million in the third quarter of
fiscal 1995 from $1.8 million in the third quarter of fiscal 1994 due to a
lower volume of health care contract packaging products. Year to date contract
packaging sales decreased 17% in 1995 to $4.7 million from $5.6 million in the
same period in 1994. Management expects that contract packaging sales in the
fourth quarter of fiscal 1995 will be higher than those in the fourth quarter
of fiscal 1994.
The Company's gross profit declined approximately 4% to $2.3 million for the
third quarter of 1995 from $2.4 million in the third quarter of fiscal 1994.
The gross margin percentage for the third quarter of fiscal 1995 remained
constant at 29% as compared to the third quarter last year. Year-to-date gross
profit decreased by 13% to $6.3 million in the first nine months of this fiscal
year from $7.2 million for the same period last year. The year-to-date gross
margin percentage decreased to 28% from 30% last year. The decreases in gross
profit level and margin were due to lower sales volume during the first three
quarters of fiscal 1995 and to a less profitable product mix. Management
expects the Company's gross margin percentage for
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fiscal 1995 to be slightly lower than that of fiscal 1994.
Sales and marketing expenses remained constant at $1.1 million for the third
quarter of fiscal 1995 compared to the same quarter last year. For the year to
date in fiscal 1995, these expenses increased by 14% to $3.5 million as
compared to $3.1 million in the same period last year. The majority of the
increase in sales and marketing expenses occurred in the medical foam portion
of the business and was the result of the Company's change from using a single
exclusive distributor to using multiple national distributors to sell its
health care foam products. Total sales and marketing expenses for the full
1995 fiscal year are expected to be higher than those of fiscal 1994.
General and administrative expenses increased by 5% for the third quarter of
fiscal 1995 to $712,000 as compared to $679,000 in the third fiscal quarter of
last year. The increase was caused by higher bad debt expenses related to a
consumer customer's bankruptcy filing in late June. Fiscal 1995 year to date
general and administrative expenses decreased by approximately $40,000 or 2% to
$2.0 million compared to the first nine months of fiscal 1994. General and
administrative expenses for the full 1995 fiscal year are expected to be
slightly lower than in fiscal 1994.
During the first nine months of fiscal 1995, the Company paid dividends of
$245,000, or 39% of net income for the year to date period. This amount
represented three quarterly dividends of $.025 per share.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash from operations of $1,513,000 during the first nine
months of fiscal 1995, which was used to fund its investing and financing
activities. The Company's working capital increased by $1.1 million or 15%
during the nine months ended July 1, 1995 as a result of cash provided by
operations. The Company's current ratio increased to 4.5 at July 1, 1995 from
3.7 at fiscal year end 1994.
Accounts receivable, net of allowances, increased by $97,000 (2%) to $4.0
million. All of the Company's accounts receivable are unsecured.
Inventory, net of reserves, declined by $243,000, or 9%, during the first three
quarters of fiscal 1995 to $2.5 million. The decline reflects normal monthly
fluctuations in raw material and finished goods inventory. Management expects
a slight increase in inventory levels by fiscal year end 1995.
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Net property and equipment decreased by $590,000, or 9%, during the first nine
months of fiscal 1995. The change resulted from the combination of capital
expenditures of $164,000 and normal depreciation expense. Management expects
that capital expenditures during the remainder of fiscal 1995 will be minimal.
Costs in excess of the fair value of net assets acquired increased by
approximately $163,000, net of accumulated amortization. The change was
primarily due to the Company's issuance in November 1994 of 37,740 shares of
its common stock at an approximate market value of $211,000 as an additional
purchase price pursuant to the agreement by which the Company acquired
Healthflex in February 1992.
In July 1995, the Company repurchased 96,300 shares of its common stock for
approximately $450,000 ($4.72 per share) in a private transaction from an
unaffiliated seller. The repurchased shares will be retired.
The Company's trade accounts payable declined by $289,000 (17%) to $1.4 million
during the first three quarters of fiscal 1995. The decrease was due mainly to
normal monthly fluctuations in accounts payable balances. Accrued and sundry
liabilities remained stable at $1.0 million as compared to fiscal year end
1994.
IMPACT OF INFLATION
Inflation was not a significant factor for the Company during the first three
quarters of fiscal 1995. Higher inflation rates could impact the Company
through higher raw material costs. The Company's profit margin could be
adversely affected to the extent that the Company is unable to pass along to
its customers any increased costs.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company and its subsidiary are from time to time parties to
various legal actions arising in the normal course of business.
However, management believes that as a result of legal defenses
and insurance arrangements, there are no proceedings threatened
or pending against the Company that, if determined adversely,
would have a material adverse effect on the business or the
Company's operations or financial position.
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) Exhibit 3.(ii) Amendment to the Corporation's Bylaws dated
April 25, 1995
(b) Exhibit 27 Financial Data Schedule
(For SEC Use Only)
(c) 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
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Richard C. Coggins
Vice President - Finance
/s/ Charles B. Mitchell
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Charles B. Mitchell
Pres. and Chief Executive Officer
DATE: August 10, 1995
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