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 MARCH 29, 1997.
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.
(Exact name of Registrant as specified in its charter)
South Carolina 57-0525804
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
70 Commerce Center
Greenville, South Carolina 29615
(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 - 3,193,641 shares as of May 1, 1997
INDEX
SPAN-AMERICA MEDICAL SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - March 29, 1997 and
September 30, 1996..................................................... 3
Statements of Income - three and six months
ended March 29, 1997 and March 30, 1996................................ 4
Statements of Cash Flows - six months ended
March 29, 1997 and March 30, 1996...................................... 5
Notes to Financial Statements - March 29, 1997.................................. 6
Item 2. Management's Discussion and Analysis of Interim
Financial Condition and Results of Operations....................... 8
PART II. OTHER INFORMATION.............................................................. 12
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.
BALANCE SHEETS
MARCH 29, SEPT. 28,
1997 1996
(Unaudited) (Note)
ASSETS
Current Assets
Cash and equivalents $ 1,031,204 $ 925,370
Securities available for sale 1,722,390 1,194,068
Accounts receivable, net of allowances
of $497,000 at March 29, 1997 and
$419,000 at September 28, 1996 5,358,418 5,733,810
Inventories - Note B 3,466,452 3,463,637
Prepaid expenses and other 253,653 226,959
----------- -----------
Total Current Assets 11,832,117 11,543,844
Property and equipment, Net - Note C 4,788,383 5,074,106
Costs in excess of fair value of net
assets acquired, net of accumulated
amortization of $364,362 at March 29,
1997 and $290,650 at September 28, 1996 2,587,534 2,491,635
Other assets - Note D 1,833,090 1,971,010
----------- -----------
$21,041,124 $21,080,595
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 1,721,004 $ 2,117,643
Accrued and sundry liabilities 1,045,893 960,011
Current portion of long-term debt 286,344
Total Current Liabilities 2,766,897 3,363,998
Deferred Income Taxes and Compensation 1,649,910 1,697,282
Shareholders' Equity Common Stock, no par value,
20,000,000 shares authorized; issued and
outstanding 3,193,641 shares at March 29, 1997
and 3,241,042 shares at September 28, 1996 4,341,489 4,516,895
Additional paid-in capital 52,894 145,834
Retained Earnings 12,229,934 11,642,930
----------- -----------
16,624,317 16,305,659
Less guaranteed ESOP obligation 286,344
Total Shareholders' Equity 16,624,317 16,019,315
----------- -----------
$21,041,124 $21,080,595
=========== ===========
Note:The Balance Sheet at September 28, 1996 has been derived from the audited
financial statements at that date.
See Notes to Financial Statements.
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SPAN-AMERICA MEDICAL SYSTEMS, INC.
STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
March 29, March 30, March 29, March 30,
1997 1996 1997 1996
Net Sales $8,560,956 $7,470,758 $16,299,907 $14,519,943
Cost of Goods Sold 6,226,800 5,701,111 11,794,059 10,657,601
--------- --------- ---------- ----------
Gross Profit 2,334,156 1,769,647 4,505,848 3,862,342
Selling and
Marketing Expenses 1,103,296 1,304,806 2,213,745 2,416,640
General and
Administrative
Expenses 668,902 603,909 1,254,435 1,219,416
--------- --------- ---------- ----------
Income/(Loss)
from Operations 561,958 (139,068) 1,037,668 226,286
Other (expense)/income:
Interest expense (8,017) (16,004)
Investment income
and other 77,994 74,939 159,990 165,364
--------- --------- ---------- ----------
77,994 66,922 159,990 149,360
INCOME/(LOSS) BEFORE
INCOME TAXES 639,952 (72,146) 1,197,658 375,646
Provision For/
(Benefit From) Income
Taxes 241,000 (27,000) 449,000 141,000
--------- ---------- ---------- ----------
NET INCOME/(LOSS) $ 398,952 (45,146) $ 748,658 $ 234,646
========= ========= ========== ==========
Earnings/(Loss) Per
Common Share -Note E $.12 $(.01) $.23 $.07
Dividends per
Common Share $.025 $.025 $.05 $.05
Weighted Average
Shares Outstanding 3,191,784 3,224,570 3,220,473 3,214,889
See Notes to Financial Statements.
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SPAN-AMERICA MEDICAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
March 29, March 30,
1997 1996
---------- -------
OPERATING ACTIVITIES
Net Income $748,658 $234,646
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 530,834 525,162
Provision for losses on accounts
receivable 126,000 78,000
Loss on disposal of property, plant
and equipment and abandonment
of leasehold improvements 15,475
Change in cash value of life
insurance 100,233 (73,029)
Deferred compensation (47,372) 61,661
Changes in operating assets and liabilities:
Accounts receivable 249,209 (368,759)
Inventory (2,815) (914,814)
Prepaid expenses and other current assets 4,918 (145,313)
Accounts payable and accrued expenses (310,757) (17,221)
----------- ---------
NET CASH PROVIDED BY/(USED FOR)
OPERATING ACTIVITIES 1,398,908 (604,192)
INVESTING ACTIVITIES
Acquisition of Embracing Concepts, Inc. (592,435)
Purchases of marketable securities (1,208,386) (800,000)
Proceeds from the sale of marketable
securities 680,247 1,444,868
Purchases of property,plant and
equipment (88,769) (201,171)
Payments for other assets (35,303) (64,987)
--------- ---------
NET CASH (USED FOR) INVESTING ACTIVITIES (652,211) (213,725)
FINANCING ACTIVITIES
Dividends paid (161,654) (161,171)
Common Stock issued upon exercise of options 50,250
Purchase and retirement of Common Stock (479,209) (33,484)
---------- ------------
NET CASH (USED FOR) FINANCING ACTIVITIES (640,863) (144,405)
---------- ----------
INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS 105,834 (962,322)
Cash and cash equivalents at beginning
of period 925,370 1,242,396
-------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,031,204 $ 280,074
========== ==========
See Notes to Financial Statements.
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SPAN-AMERICA MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
March 29, 1997
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited 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 six months periods ended March 29,
1997 are not necessarily indicative of the results that may be expected for the
year ended September 27, 1997. For further information, refer to the Company's
annual report on Form 10-K for the year ended September 28, 1996.
NOTE B - INVENTORIES
The components of inventories are as follows:
March 29, Sept. 28,
1997 1996
Raw Materials $2,817,623 $2,788,443
Work in Process 35,029 28,043
Finished Goods 613,800 647,151
--------- ----------
$3,466,452 $3,463,637
========== ==========
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment, at cost, is summarized by major classification as
follows:
March 29, Sept. 28,
1997 1996
Land $ 317,343 $ 317,343
Land Improvements 240,016 240,016
Buildings 3,613,966 3,613,966
Machinery & Equipment 8,460,518 8,372,358
Furniture & Fixtures 625,778 625,169
Automobiles 9,520 9,520
Leasehold Improvements 66,006 92,420
---------- ----------
13,333,147 13,270,792
Less Accumulated Depreciation 8,544,764 8,196,686
---------- ----------
$ 4,788,383 $ 5,074,106
========== ==========
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NOTE D - OTHER ASSETS
Other assets consist of the following:
March 29, Sept. 28,
1997 1996
Patents, net of accumulated
amortization of $529,513 at
March 29, 1997 and $478,077 at
September 28, 1996 $ 648,902 $ 665,035
Cash value of life insurance
policies 1,013,260 1,113,493
Terminated contract rights,
net of accumulated amortization
of $263,052 at March 29, 1997 and
$233,824 at September 28, 1996. 29,228 58,456
Other 141,700 134,026
---------- -----------
$1,833,090 $1,971,010
========== ==========
NOTE E - 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.
NOTE F - TERMINATION OF EMPLOYEE STOCK OWNERSHIP PLAN
In September 1996, the Board of Director's voted to terminate the Company's
Employee Stock Ownership Plan (ESOP) effective September 30, 1996, the end of
the 1996 plan year. Accordingly, all participants became fully vested on that
date. The unallocated shares of stock held by the ESOP were sold at market value
to the Company and retired. The proceeds were used to reduce the principle
balance of the loans. All shares allocated to the participants will be
distributed pursuant to the terms and conditions of the ESOP.
NOTE G - EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. The impact
of Statement 128 on the calculation of primary earnings per share and fully
diluted earnings per share for the first quarter ended December 1997 is not
expected to be material.
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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 1997 increased 15% to $8.6 million
compared to $7.5 million in the second quarter of fiscal 1996. For the year to
date in fiscal 1997, net sales increased 12% to $16.3 million from $14.5 million
in the same period last year. The increase in sales for both the quarter and
year to date were primarily due to increases in each of our foam business units
generating sales increases during the quarter.
Net income for the second quarter of 1997 increased to $399,000 ($.12 per share)
compared to a net loss of $45,000 ($.01 per share) in the second quarter of
fiscal 1996. Net income for the first half of fiscal 1997 was $749,000 ($.23 per
share), up 219% from $235,000 ($.07 per share) in fiscal 1996. The increase in
earnings was mainly due to higher sales volume, improved manufacturing
efficiencies, and lower selling expenses.
The Company's total medical sales increased by 13% to $4.1 million in the second
quarter this year from $3.6 million in the same quarter last year due to
increases in sales of mattress overlays, patient positioners, and static
mattresses. These sales increases more than offset the decline in the Company's
dynamic mattresses as compared to the second quarter of 1996 resulting from a
change in 1996 in the Medicare reimbursement criteria.
For the year to date in fiscal 1997, medical sales increased by 12% to $8.0
million from $7.1 million in the same period last year due also to higher unit
and dollar volume of all major product lines except dynamic mattresses.
Management expects that sales of medical products will be higher in 1997 than in
fiscal 1996 as a result of an agreement, dated June 1, 1996, to become exclusive
supplier of a national distributor's private label foam products. However, an
increase in convoluted foam product sales could result in a lower gross profit
margin percentage on medical foam products.
Sales of consumer foam products increased by 45% during the second quarter to
$2.3 million from $1.6 million in the same period last year. The increase in
sales was primarily due to a promotion of convoluted foam mattress pads and
pillows. Year to date sales of consumer foam products increased 34% to $3.9
million from $2.9 million for the same reason. Management
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expects consumer foam sales to increase during the next quarter of fiscal 1997
to be similar to second quarter levels.
Industrial foam sales increased 2% in the second quarter of fiscal 1997 to
$763,000 from $750,000 in the same quarter last fiscal year. For the year to
date, industrial sales increased 6% to $1.6 million from $1.5 million in fiscal
1996. The second quarter and year to date sales increases were the result of
higher sales to existing customers. Industrial foam sales in fiscal 1997 are
expected to be slightly higher than in fiscal 1996.
Contract packaging sales decreased 8% to $1.4 million in the second quarter of
fiscal 1997 from $1.5 million in the second quarter last year. Year to date
contract packaging sales decreased 6% to $2.8 million from $3 million. Lower
volumes of medical contract packaging products caused both decreases. Management
expects that contract packaging sales for fiscal 1997 will be approximately the
same as those of fiscal 1996.
The Company's gross profit increased approximately 32% to $2.3 million for the
second quarter of 1997 from $1.8 million in the second quarter of fiscal 1996.
The gross margin percentage for the second quarter of fiscal 1997 increased to
27% as compared to 24% in the second quarter last year. Year-to-date gross
profit increased 17% to $4.5 million in the first six months of fiscal 1997 from
$3.9 million for the same period last year. The year-to-date gross margin
percentage increased to 28% as compared to 27% for the same period last year.
The increases in gross profit levels and gross margin percentage resulted from
improved manufacturing efficiencies and product mix. Management expects the
Company's gross margin percentage for fiscal 1997 to be slightly higher than
that of fiscal 1996.
Sales and marketing expenses declined by 15% to $1.1 million for the second
quarter of fiscal 1997 compared to $1.3 million in the same quarter last year.
For the year to date in fiscal 1997, these expenses decreased by 8% to $2.2
million as compared to $2.4 million in the same period last year. The decrease
in sales and marketing expenses occurred in travel and compensation expenses.
Total sales and marketing expenses for fiscal 1997 are expected to be lower than
those of fiscal 1996.
General and administrative expenses increased 11% for the second quarter of
fiscal 1997 to $669,000 as compared to $604,000 in the second fiscal quarter of
last year. The increase resulted from increased incentive compensation and
insurance expenses. For the fiscal year to date general and administrative
expenses
9
increased by 3% to $1.3 million compared to $1.2 million for the first six
months of fiscal 1996 for the same reasons. General and administrative expenses
for the 1997 fiscal year are expected to be similar to those in fiscal 1996.
During the first six months of fiscal 1997, the Company paid dividends of
$162,000, or 22% of net income for the year-to-date period. This amount
represented two quarterly dividends of $.025 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 as compared to
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 consumer
products, the inability to achieve anticipated sales volume of medical products,
changes in relationships with large customers, the impact of competitive
products and pricing, government reimbursement changes in the medical market,
F.D.A. regulation of medical device manufacturing, 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 approximately $1.4 million during
the first six months of fiscal 1997. The Company's working capital increased by
$885,000 or 11% during the six months ended March 29, 1997 as a result of an
increase of approximately $500,000 in securities available for sale, a decline
in accounts payable and the repayment of debt related to the Employee Stock
Ownership Plan as discussed below. The Company's current ratio increased to
4.3 at March 29, 1997 from 3.4 at fiscal year end 1996.
Accounts receivable, net of allowances, decreased by $375,000 (7%) to $5.4
million at the end of the second quarter of 1997 as compared to $5.7 million at
the end of fiscal 1996. All of the Company's accounts receivable are unsecured.
Inventory remained level at $3.5 million. Management expects a slight decrease
in inventory levels during fiscal 1997.
Net property and equipment decreased by $286,000, or 6%, during the first six
months of fiscal 1997. The
10
change resulted from the combination of capital expenditures of $89,000 and
normal depreciation expense. Management expects capital expenditures during the
remainder of fiscal 1997 to increase over the first half of the fiscal year.
Costs in excess of the fair value of net assets acquired increased by
approximately $96,000, net of accumulated amortization. The change was primarily
due to the issuance in October 1997 of 31,474 shares of its common stock at an
approximate market value of $170,000 as an additional purchase price pursuant to
the agreement by which the Company acquired Healthflex in February 1992.
In September 1996, the Board of Directors voted to terminate the Company's
Employee Stock Ownership Plan (ESOP) effective September 30, 1996, the end of
the 1996 plan year. Accordingly, all participants became fully vested in
allocated shares on that date. All allocated shares will be distributed to the
participants pursuant to the plan. As of September 30, 1996, the ESOP held
42,875 shares of unallocated Company stock. These unallocated shares were
repurchased and retired by the company at fair market value on the purchase date
of $4.52 per share. The ESOP used the proceeds of this sale plus additional
contributions from the Company to fully retire the loans which were secured by
the unallocated shares and guaranteed by the Company.
In November 1996, the Company repurchased 45,000 shares of its common stock for
approximately $193,000 ($4.28 per share) in a private transaction from an
unaffiliated seller. The repurchased shares were retired.
The Company's trade accounts payable decreased by $397,000 (19%) to $1.7 million
during the first two quarters of fiscal 1997. The decrease was due mainly to
normal monthly fluctuations in accounts payable balances. Accrued and sundry
liabilities increased by $86,000 (9%) to $1 million as compared to fiscal year
end 1997 primarily due to an increase in accrued medical insurance which was not
fully offset by decreases in property and income taxes payable.
IMPACT OF INFLATION
Inflation was not a significant factor for the Company during the first two
quarters of fiscal 1997. 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.
11
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, 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 -
The Company held its Annual Meeting of
Shareholders on February 4, 1997. At this
Annual Meeting, Roy W. Black, Thomas D.
Henrion, and Douglas E. Kennemore, M.D. were
elected to three-year terms as Directors.
Robert A. Whitehorne was elected to a one-year
term, filling the unexpired term of Charles B.
Mitchell who resigned from the Board. The
voting details are as follows:
For Against Abstain
Roy W. Black 2,278,346 0 89,547
Thomas D. Henrion 2,290,586 0 77,307
Douglas E. Kennemore, M.D. 2,277,486 0 90,407
Robert A. Whitehorne 2,278,646 0 89,247
ITEM 5. Other Information - None
ITEM 6. Exhibits & Reports on Form 8-K
(a) Exhibit 3 Amended and Restated By-Laws of
Span-America Medical Systems, Inc. dated
February 4, 1997
(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
Richard C. Coggins
Vice President - Finance
/s/ James D. Ferguson
James D. Ferguson
Pres. and Chief Executive Officer
DATE: May 10, 1997
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