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 27, 1998.
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 jurisdiction (I.R.S.Employer
of incorporation or Identification Number)
or organization)
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 -- 2,805,029 shares as of July 28, 1998
INDEX
SPAN-AMERICA MEDICAL SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets-June 27, 1998 and September 27, 1997 .............. 3
Statements of Income-three and nine months ended
June 27, 1998 and June 28, 1997 ............................ 4
Statements of Cash Flows-nine months ended June 27, 1998
and June 28, 1997 .......................................... 5
Notes to Financial Statements .................................... 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
2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
SPAN-AMERICA MEDICAL SYSTEMS, INC.
BALANCE SHEETS
June 27, Sept. 27,
1998 1997
(Unaudited) (Note)
----------- ---------
ASSETS
Current Assets
Cash and equivalents $ 779,172 $ 1,605,474
Securities available for sale 3,682,578 3,493,430
Accounts receivable, net of allowances of
$511,000 at June 27, 1998 and $610,000
at September 27, 1997 4,348,627 3,482,843
Inventories-Note B 2,222,204 2,117,871
Prepaid expenses and other 362,800 419,044
Current assets-discontinued operations 62,582 2,390,075
---------- ----------
Total Current Assets 11,457,963 13,508,737
Property and equipment, Net-Note C 3,852,193 3,773,380
Costs in excess of fair value of net assets
acquired, net of accumulated amortization
of $548,640 at June 27, 1998 and $438,073
at September 27, 1997 2,403,256 2,513,823
Other assets-Note D 1,889,397 1,875,874
Property and equipment-discontinued operations 954,500
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LIABILITIES AND SHAREHOLDERS' EQUITY $19,602,809 $22,626,314
------------ -----------
Current Liabilities
Accounts payable $ 1,835,166 $ 1,877,893
Accrued and sundry liabilities 717,555 1,671,090
Current Liabilities-discontinued operations 41,538 566,424
---------- ----------
Total Current Liabilities 2,594,259 4,115,407
Deferred Income Taxes and Compensation 1,526,250 1,531,398
Shareholders' Equity
Common Stock, no par value, 20,000,000 shares
authorized; issued and outstanding shares
2,805,029 at June 27, 1998 and 3,125,338
shares at September 27, 1997 1,369,829 3,991,745
Additional paid-in capital 53,160 53,160
Retained Earnings 14,059,311 12,934,604
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Total Shareholders' Equity 15,482,300 16,979,509
---------- ----------
$19,602,809 $22,626,314
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----------- -----------
Note: The Balance Sheet at September 27, 1997 has been derived from the audited
financial statements at that date as restated to reflect the sale of the
contract packaging business segment as a discontinued operation. See Note E.
See Notes to Financial Statements.
3
SPAN-AMERICA MEDICAL SYSTEMS, INC.
STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
June 27, June 28, June 27, June 28,
1998 1997 1998 1997
-------- ------- -------- --------
Net sales $7,396,976 $7,014,056 $21,130,329 $20,502,717
Costs of goods sold 5,122,393 4,858,514 14,488,679 14,027,875
--------- --------- ---------- ----------
Gross Profit 2,274,583 2,155,542 6,641,650 6,474,842
Selling and marketing expenses 1,143,982 1,172,001 3,311,914 3,263,468
General and administrative expenses 551,671 538,626 1,744,847 1,732,696
--------- --------- ---------- ---------
Income from continuing operations 578,930 444,915 1,584,889 1,478,678
Other income:
Investment income and other 104,884 91,630 317,041 251,620
--------- --------- --------- --------
INCOME BEFORE INCOME TAXES AND
DISCONTINUED OPERATIONS 683,814 536,545 1,901,930 1,730,298
Provision for income taxes 253,000 201,000 704,000 649,000
--------- --------- --------- ---------
Net income from continuing operations 430,814 335,545 1,197,930 1,081,298
Income from discontinued operations
net of income taxes 63,374 153,530 66,280
-------- --------- ---------
NET INCOME $ 430,814 $ 398,919 $1,351,460 $1,147,578
--------- --------- ---------- ----------
Earnings per share of common stock-
Note F
Net income from continuing
operations:
Basic $.15 $.11 $.40 $.34
Diluted $.15 $.10 $.39 $.34
Income from discontinued
operations net of income taxes:
Basic $.00 $.02 $.05 $.02
Diluted $.00 $.02 $.05 $.02
Net income:
Basic $.15 $.13 $.45 $.36
Diluted $.15 $.12 $.44 $.36
Dividends per common share $.025 $.025 $.075 $.075
Weighted averages shares outstanding
Basic 2,823,337 3,167,650 2,973,745 3,202,865
Diluted 2,946,837 3,208,061 3,089,339 3,231,079
See Notes to Financial Statements.
4
SPAN-AMERICA MEDICAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
-----------------
June 27, June 28,
1998 1997
-------- -------
OPERATING ACTIVITIES
Net Income $1,351,460 1,147,578
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 706,008 798,195
Provision for losses on
accounts receivable 29,000 159,000
Change in cash value of life
insurance (88,128) 57,571
Deferred compensation (5,148) (68,224)
Changes in operating assets and
liabilities:
Accounts receivable 477,417 341,514
Inventory (104,333) 311,820
Prepaid expenses and other
current assets 135,461 (62,344)
Accounts payable and accrued
expenses (1,521,148) 286,340
----------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 980,589 2,971,450
INVESTING ACTIVITIES
Sale of Contract Packaging 1,842,300
Purchases of marketable securities (3,577,696) (3,091,072)
Proceeds from the sale of marketable
securities 3,385,382 1,327,226
Purchases of property, plant and
equipment (531,417) (94,983)
Payments for other assets (21,791) (38,675)
-------- --------
NET CASH PROVIDED BY/(USED FOR)
INVESTING ACTIVITIES 1,096,778 (1,897,504)
FINANCING ACTIVITIES
Dividends paid (226,753) (241,496)
Common Stock issued upon exercise
of options 120,500
Purchase and retirement of Common Stock (2,797,416) (693,294)
----------- ---------
NET CASH (USED FOR) FINANCING ACTIVITIES (2,903,669) (934,790)
----------- ---------
(DECREASE)/INCREASE IN CASH AND CASH
EQUIVALENTS (826,302) 139,156
Cash and cash equivalents at beginning
of period 1,605,474 925,370
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CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 779,172 $1,064,526
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See Notes to Financial Statements.
5
SPAN-AMERICA MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
June 27, 1998
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 nine months periods ended June 27,
1998 are not necessarily indicative of the results that may be expected for the
year ended October 3, 1998. For further information, refer to the Company's
annual report on Form 10-K for the year ended September 27, 1997. Form 10-K for
the year ended September 27, 1997 has not been restated to reflect the
discontinued operations discussed in Note E.
NOTE B - INVENTORIES
The components of inventories are as follows:
June 27, Sept. 27,
1998 1997
------- --------
Raw Materials $1,614,415 $1,579,124
Finished Goods 607,789 538,747
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$2,222,204 $2,117,871
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NOTE C - PROPERTY AND EQUIPMENT
Property and equipment, at cost, is summarized by major classification as
follows:
June 27, Sept. 27,
1998 1997
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Land $ 317,343 $ 317,343
Land Improvements 240,016 240,016
Buildings 3,642,151 3,613,966
Machinery & Equipment 5,148,761 4,721,792
Furniture & Fixtures 517,552 507,205
Automobiles 9,520 9,520
Leasehold Improvements 66,006 66,006
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9,941,349 9,475,848
Less Accumulated Depreciation 6,089,156 5,702,468
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$3,852,193 $3,773,380
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6
NOTE D - OTHER ASSETS
Other assets consist of the following:
June 27, Sept. 27,
1998 1997
-------- ---------
Patents, net of accumulated
amortization of $659,980 at
June 27, 1998 and $581,501 at
September 27, 1997 $ 556,587 $ 613,275
Cash value of life insurance
policies 1,206,575 1,118,447
Other 126,235 144,152
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$1,889,397 $1,875,874
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NOTE E - SALE OF CONTRACT PACKAGING BUSINESS UNIT
On February 27, 1998, the Company sold substantially all of the assets of its
contract packaging business unit. The purchase price for the contract packaging
assets was $2.3 million, with $1.84 million paid in cash at closing and the
remainder financed by Span-America over five years. No gain or loss was recorded
as a result of the sale. The Company's results for all periods presented have
been restated to reflect the sale of the contract packaging business as a
discontinued operation. The balance sheet at September 27, 1997 has been
restated to reflect the reclassification of all assets and liabilities relating
to the contract packaging operations as assets and liabilities related to
discontinued operations.
Operating results of the discontinued contract packaging operations are as
follows:
Three Months Ended Nine Months Ended
June 27, June 28, June 27, June 28,
1998 1997 1998 1997
-------- -------- -------- --------
Net sales 0 $1,692,532 $3,170,055 $4,503,779
Income before income taxes 0 102,374 244,530 106,280
Provision for income taxes 0 39,000 91,000 40,000
--------- --------- --------- ---------
Net income 0 63,374 153,530 66,280
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--------- --------- --------- ---------
NOTE F - EARNINGS PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, EARNINGS PER SHARE. Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants,
and convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented,
7
and where necessary, restated to conform to the Statement 128 requirements.
The following table sets forth the computation of basic and diluted earnings
per share:
Three Months Ended Nine Months Ended
June 27, June 28, June 27, June 28,
1998 1997 1998 1997
------- ------- ------- --------
Numerator for basic and
diluted earnings per share:
Net income from continuing operations $430,814 $335,545 $1,197,930 $1,081,298
Income from discontinued operations 0 63,374 153,530 66,280
net of income taxes -------- -------- ---------- ----------
NET INCOME $ 430,814 $ 398,919 $1,351,460 $1,147,578
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Denominator:
Denominator for basic earnings per
share weighted average shares 2,823,337 3,167,650 2,973,745 3,202,865
Effect of dilutive securities:
Employee and Board Stock Options 123,500 40,411 115,594 28,214
--------- --------- --------- ---------
Denominator for diluted earnings
per share adjusted weighted
average shares and assumed
conversions 2,946,837 3,208,061 3,089,339 3,231,079
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income from continuing
operations:
Basic $.15 $.11 $.40 $.34
Diluted $.15 $.10 $.39 $.34
Income from discontinued
operations net of income taxes:
Basic $.00 $.02 $.05 $.02
Diluted $.00 $.02 $.05 $.02
Net income:
Basic $.15 $.13 $.45 $.36
Diluted $.15 $.12 $.44 $.36
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
INTERIM FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
On February 27, 1998 the Company sold substantially all of the
assets of its contract packaging business unit. The Company's
results for all periods presented have been restated to reflect the
sale of the contract packaging business as a discontinued
operation.
Net sales from continuing operations for the third quarter of
fiscal 1998 increased 5% to $7.4 million compared to $7.0 million
in the third quarter of fiscal 1997. The sales increase in the
third quarter was due mainly to higher volumes of patient
positioners, mattresses and various industrial products. For the
year to date in fiscal 1998, net sales from continuing operations
increased 3% to $21.1 million from $20.5 million in the same
period last year. The year-to-date increase was due to higher
volume of industrial products sold to new and existing customers.
Net income from continuing operations for the third quarter of 1998
increased 28% to $431,000 ($.15 per diluted share) compared to
$336,000 ($.10 per diluted share) in the third quarter of fiscal
1997. Net income from continuing operations for the first three
quarters of fiscal 1998 was $1.2 million ($.39 per diluted share),
up 11% from $1.1 million ($.34 per diluted share) in fiscal 1997.
The increases in earnings were mainly due to higher sales volume
and slightly lower operating expenses.
The Company's total medical sales increased by 14% to $4.2 million
in the third quarter this year from $3.7 million in the same
quarter last year. This increase resulted from higher unit sales of
patient positioners and replacement mattresses which more than
offset a decline in unit sales of foam overlays. Medical sales in
the third quarter of fiscal 1998 also benefited from lower sales
discounts following the expiration of several volume incentive
programs. For the year to date in fiscal 1998, medical sales
increased by 2% to $11.9 million from $11.7 million in the same
period last year as a result of higher unit and dollar volume of
powered mattresses and patient positioners which offset a decline
in unit sales of non-powered mattresses. Management expects that
total medical sales during the last quarter of fiscal 1998 will be
similar to third quarter levels.
Sales of consumer foam products decreased by 10% during the third
quarter to $2.2 million from $2.4 million in the same period last
year. Year to date sales of consumer foam products decreased 2% to
$6.3 million from $6.4 million. Both decreases were primarily due
to lower unit and dollar volume of private label bathmat products.
Management expects that total consumer sales in the fourth quarter
of fiscal 1998 will be slightly lower that those in this year's
third quarter.
Industrial foam sales increased 18% in the third quarter of fiscal
1998 to $1 million from $871,000 in the same quarter last fiscal
year. For the year to date, industrial sales increased 23% to $3.0
million from $2.4 million in fiscal 1997. The third quarter and
year to date sales increases were the result of higher sales to our
top three industrial customers and sales to several new customers.
Industrial foam sales in the fourth quarter of fiscal 1998 are
expected to be similar to third quarter levels.
9
The Company's gross profit increased approximately 6% to $2.3
million for the third quarter of 1998 from $2.2 million in the
third quarter of fiscal 1997. The gross margin percentage for the
third quarter of fiscal 1998 remained at 31% as compared to the
third quarter last year. Year-to-date gross profit increased 3% to
$6.6 million in the first nine months of fiscal 1998 from $6.5
million for the same period last year. The year-to-date gross
margin percentage declined slightly to 31.4% as compared to 31.6%
for the same period last year. Management expects the Company's
gross margin percentage for the fourth quarter of fiscal 1998 to be
less than that of the third quarter due to sales price reductions
in the consumer segment.
Sales and marketing expenses decreased by 2% to $1.1 million for
the third quarter of fiscal 1998 compared to $1.2 million in the
same quarter last year. For the year to date in fiscal 1998, these
expenses increased by 1% to $3.3 million as compared to the same
period last year. The year-to-date increase in sales and marketing
expenses occurred in shipping, compensation, and training expenses.
Total sales and marketing expenses for the fourth quarter of fiscal
1998 are expected to be similar to those of the third quarter.
General and administrative expense increased 2% for the third
quarter of fiscal 1998 to $552,000 as compared to $539,000 in the
third fiscal quarter of last year. For the fiscal year to date in
1998 general and administrative expenses remained unchanged at $1.7
million as compared to the first nine months of fiscal 1997.
General and administrative expenses for the fourth quarter of the
1998 fiscal year are expected to be similar to those of the third
quarter.
During the first nine months of fiscal 1998, the Company paid
dividends of $227,000, or 17% of net income for the year-to-date
period. This amount represented three quarterly dividends of $0.025
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 and expense levels 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 of Form
10-K.
10
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
In connection with the Company's sale of its' contract packaging
business unit all assets relating to that business unit have been
reclassified as assets or liabilities relating to discontinued
operations. All assets and liabilities discussed in this section
relate to continuing operations. All assets and liabilities
related to discontinued operations are expected to be liquidated
before fiscal year end 1998.
The Company generated cash from continuing operations of
approximately $981,000 during the first nine months of fiscal 1998.
The Company's working capital decreased by $530,000 or 6% to $8.9
million during the nine months ended June 27, 1998 as a result of
the sale of the contract packaging business unit and the repurchase
of stock as discussed below. The Company's current ratio increased
to 4.4 at June 27, 1998, from 3.3 at fiscal year end 1997.
Accounts receivable, net of allowances, increased 25% to $4.3
million at the end of the third quarter of 1998 as compared to $3.5
million at the end of fiscal 1997 as a result of higher sales of
TerryFoam seasonal products. Accounts receivable for TerryFoam
sales generally have longer collection times than the Company's
other product lines. All of the Company's accounts receivable are
unsecured.
Inventory, net of reserves, increased 5% to $2.2 million at the end
of the third quarter of 1998 as compared to $2.1 million at the end
of fiscal 1997. Management expects a slight decrease in inventory
levels by fiscal year end 1998.
Net property and equipment increased by $79,000, or 2% during the
first nine months of fiscal 1998. The change resulted from the
combination of capital expenditures of $531,000 and normal
depreciation expense. Management expects capital expenditures
during the remainder of fiscal 1998 to be minimal.
Costs in excess of the fair value of net assets acquired decreased
by approximately $111,000, net of accumulated amortization. The
change was primarily due to normal amortization expense.
The Company's trade accounts payable decreased by $43,000 (2%) to
$1.8 million from $1.9 million during the first three quarters of
fiscal 1998. Accrued and sundry liabilities decreased by $954,000
(57%) to $718,000 as compared to $1.7 million at fiscal year end
1998 primarily due to decreases in accrued compensation, property
taxes, and income taxes payable.
In February 1998, the Company repurchased 280,579 shares, or 9.0%
of its common stock for approximately $2.16 million ($7.70 per
share) in a private transaction from an unaffiliated shareholder.
In other unrelated transactions during fiscal year 1998, the
Company repurchased 80,730 of its common stock for approximately
$637,000 ($7.89 per share) in private transactions. The
repurchased shares were retired.
11
IMPACT OF INFLATION
-----------------------
Inflation was not a significant factor for the Company during the
first three quarters of fiscal 1998. 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.
PART II. OTHER INFORMATION
---------------------------
ITEM 1. Legal Proceedings
The Company is from time to time party of 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 27 Financial Data Schedule (For SEC Use Only)
(b) None
12
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: July 28, 1998
13