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 APRIL 3, 1999.
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 - 2,495,400 shares as of May 1, 1999.
INDEX
SPAN-AMERICA MEDICAL SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements (Unaudited)
Balance Sheets - April 3, 1999 and October 3, 1998........................................................... 3
Statements of Income - three and six months ended April 3, 1999 and March 28, 1998........................... 4
Statements of Cash Flows - six months ended April 3, 1999 and March 28, 1998................................. 5
Notes to Financial Statements - April 3, 1999................................................................ 6
Item 2. Management's Discussion and Analysis of Interim
Financial Condition and Results of Operations.................................................... 9
PART II. OTHER INFORMATION........................................................................................... 14
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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............................................................................................................ 15
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2
PART 1. FINANCIAL INFORMATION
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ITEM 1. Financial Statements
SPAN-AMERICA MEDICAL SYSTEMS, INC.
BALANCE SHEETS
April 3, Oct. 3
1999 1998
(Unaudited) (Note)
----------- -------
ASSETS
Current Assets
Cash and equivalents $ 572,644 $ 1,121,437
Securities available for sale 3,077,143 2,602,056
Accounts receivable, net of allowances of $372,000 at April 3,
1999 and $429,000 at October 3, 1998 3,937,933 4,809,352
Inventories - Note D 2,133,076 2,117,994
Prepaid expenses and other 312,728 312,929
Income tax refund due 400,000
----------- ------------
Total current assets 10,033,524 11,363,768
Property and equipment, net - Note E 3,673,477 3,821,735
Costs in excess of fair value of net assets acquired,
net of accumulated amortization of $659,208 at April 3,
1999 and $585,496 at October 3, 1998 2,292,688 2,366,400
Other assets - Note F 1,967,390 1,860,417
------------ -----------
$17,967,079 $19,412,320
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 1,572,031 $ 1,549,232
Accrued and sundry liabilities 866,190 1,065,999
---------- ---------
Total current liabilities 2,438,221 2,615,231
Deferred income taxes and compensation 1,096,624 1,100,681
Shareholders' Equity
Common Stock, no par value, 20,000,000 shares authorized; issued and outstanding
shares 2,626,000 at April 3, 1999 and
2,820,029 shares at October 3, 1998 218,695 1,426,079
Additional paid-in capital 67,463 67,463
Retained earnings 14,146,076 14,202,866
----------- -----------
Total shareholders' equity 14,432,234 15,696,408
----------- -----------
$17,967,079 $19,412,320
=========== ===========
Note: The Balance Sheet at October 3, 1998 has been derived from the audited
financial statements at that date.
See Notes to Financial Statements.
3
SPAN-AMERICA MEDICAL SYSTEMS, INC.
STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
April 3, March 28, April 3, March 28,
1999 1998 1999 1998
------------ ----------- ----------------- ----------------
Net sales $6,500,252 $7,379,095 $11,676,669 $13,733,353
Cost of goods sold 4,800,377 4,978,371 8,476,613 9,366,287
--------- --------- --------- ---------
Gross profit 1,699,875 2,400,724 3,200,056 4,367,066
Selling and marketing expenses 1,141,277 1,130,596 2,201,804 2,167,931
General and administrative expenses 594,202 578,040 1,050,606 1,193,176
---------- ---------- ---------- ----------
Operating (loss)/income (35,604) 692,088 (52,354) 1,005,959
Other income:
Investment income and other 83,235 95,592 173,910 212,157
----------- --------- ---------- ----------
Income before income taxes
and discontinued operations 47,631 787,680 121,556 1,218,116
Provision for income taxes 17,000 292,000 43,000 451,000
---------- ---------- ----------- ----------
Income from continuing operations 30,631 495,680 78,556 767,116
Income from discontinued operations
net of income taxes - 13,310 - 153,530
----------- ----------- ----------- -----------
NET INCOME $ 30,631 $ 508,990 $ 78,556 $ 920,646
=========== =========== =========== ===========
Earnings per share of common
stock - Note C
Income from continuing operations:
Basic $.01 $.17 $.03 $.25
Diluted $.01 $.16 $.03 $.24
Income from discontinued operations
net of income taxes:
Basic $.00 $.00 $.00 $.05
Diluted $.00 $.00 $.00 $.05
Net income:
Basic $.01 $.17 $.03 $.30
Diluted $.01 $.16 $.03 $.29
Dividends per common share $.025 $.025 $.05 $.05
Weighted averages shares outstanding
Basic 2,627,631 2,986,211 2,661,891 3,048,949
Diluted 2,657,496 3,097,568 2,700,989 3,160,590
See Notes to Financial Statements.
4
SPAN-AMERICA MEDICAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
April 3, March 28,
1999 1998
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OPERATING ACTIVITIES
Net income $ 78,556 $920,646
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 384,146 494,834
Provision for losses on accounts receivable 26,223 29,000
Change in cash value of life insurance (125,466) (85,466)
Deferred compensation (4,057) (3,312)
Changes in operating assets and liabilities:
Accounts receivable 860,109 620,821
Inventory (15,082) (295,685)
Prepaid expenses and other current assets 36,030 22,554
Income tax refund due 400,000
Accounts payable and accrued expenses (177,011) (1,398,089)
----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,463,448 305,303
INVESTING ACTIVITIES
Sale of Contract Packaging 1,842,300
Purchases of marketable securities (1,010,000) (3,177,696)
Proceeds from the sale of marketable securities 520,000 2,885,382
Purchases of property, plant and equipment (109,302) (368,693)
Payments for other assets (30,209) (14,110)
--------- ---------
NET CASH (USED FOR)/PROVIDED BY
INVESTING ACTIVITIES (629,511) 1,167,183
FINANCING ACTIVITIES
Dividends paid (135,346) (155,877)
Common Stock issued upon exercise of options 138,250 48,000
Purchase and retirement of Common Stock (1,385,634) (2,411,801)
------------ ---------------
NET CASH (USED FOR) FINANCING ACTIVITIES (1,382,730) (2,519,678)
------------ ------------
(DECREASE) IN CASH AND CASH EQUIVALENTS (548,793) (1,047,192)
Cash and cash equivalents at beginning of period 1,121,437 1,605,474
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CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 572,644 $ 558,282
========== =========
See Notes to Financial Statements.
5
SPAN-AMERICA MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
April 3, 1999
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 April 3,
1999 are not necessarily indicative of the results that may be expected for the
year ended October 2, 1999. For further information, refer to the Company's
annual report on Form 10-K for the year ended October 3, 1998.
NOTE B - 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 the six months ended March
28, 1998 have been restated to reflect the contract packaging business as a
discontinued operation.
Operating results of the discontinued contract packaging operations are as
follows:
Three Months Ended Six Months Ended
April 3, March 28, April 3, March 28,
1999 1998 1999 1998
----------- ----------- ---------- ----------
Net sales - 1,264,367 - $3,170,055
Income before income taxes 21,310 244,530
Provision for income taxes 8,000 91,000
--------- ---------- -------- ----------
Income from discontinued operations 13,310 $ 153,530
========= ========== ======== ==========
NOTE C - 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, and where necessary, restated to conform to the
Statement 128 requirements.
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NOTE C - EARNINGS PER COMMON SHARE, continued
-------------------------
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended Six Months Ended
April 3, March 28, April 3, March 28,
1999 1998 1999 1998
----------- ----------- ---------- ------------
Numerator for basic and diluted earnings per share:
Income from continuing operations $ 30,631 $ 495,680 $ 78,556 $ 767,116
Income from discontinued operations,
net of income taxes 13,310 153,530
NET INCOME $ 30,631 $ 508,990 $ 78,556 $ 920,646
============= ============= ============= =============
Denominator:
Denominator for basic earnings per share
weighted average shares 2,627,631 2,986,211 2,661,891 3,048,949
Effect of dilutive securities:
Employee and Board stock options 29,865 111,357 39,098 111,641
------------- ------------- ------------- -------------
Denominator for diluted earnings per share
adjusted weighted average shares
and assumed conversions 2,657,496 3,097,568 2,700,989 3,160,590
============= ============= ============= =============
Income from continuing operations:
Basic $ .01 $ .17 $ .03 $ .25
Diluted $ .01 $ .16 $ .03 $ .24
Income from discontinued operations net of
income taxes:
Basic $ .00 $ .00 $ .00 $ .05
Diluted $ .00 $ .00 $ .00 $ .05
Net income:
Basic $ .01 $ .17 $ .03 $ .30
Diluted $ .01 $ .16 $ .03 $ .29
NOTE D - INVENTORIES
The components of inventories are as follows:
April 3, Oct. 3,
1999 1998
------ ----
Raw Materials $1,586,699 $1,568,262
Finished Goods 546,377 549,732
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$2,133,076 $2,117,994
========== ==========
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NOTE E - PROPERTY AND EQUIPMENT
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Property and equipment, at cost, is summarized by major classification as
follows:
April 3, Oct. 3,
1999 1998
----- ----
Land $ 317,343 $ 317,343
Land Improvements 240,016 240,016
Buildings 3,697,676 3,642,151
Machinery & Equipment 5,296,623 5,242,846
Furniture & Fixtures 517,552 517,552
Automobiles 9,520 9,520
Leasehold Improvements 66,006 66,006
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10,144,736 10,035,434
Less Accumulated Depreciation 6,471,259 6,213,699
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$ 3,673,477 $ 3,821,735
=========== ===========
NOTE F - OTHER ASSETS
Other assets consist of the following:
April 3, Oct. 3,
1999 1998
---- ----
Patents, net of accumulated
amortization of $739,628 at
April 3, 1999 and $686,755 at
October 3, 1998 $ 520,030 $ 542,695
Cash value of life insurance
policies 1,348,957 1,223,491
Other 98,403 94,231
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$1,967,390 $1,860,417
========== ==========
NOTE G - CONTINGENCIES
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The company previously reported that it was a defendant in a legal action
involving a claim relating to a terminated employee. The claim has been settled,
and the settlement amount was not material to the Company's operations or
financial condition.
In addition to the case mentioned above, 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, insurance
arrangements and indemnification provisions with the parties believed to be
financially capable, none of these actions should have a material effect on its
operations or its financial condition.
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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
fiscal 1998 have been restated to reflect the sale of the contract
packaging business as a discontinued operation.
During the first quarter of 1999 the Company closed its consumer foam
plant and consolidated those operations into the Company's primary
manufacturing plant in Greenville, SC. As a result of this change the
company will now report on two segments of business: medical and custom
products. The custom products segment includes those products formerly
reported in the consumer and industrial product segments.
Net sales from continuing operations for the second quarter of fiscal
1999 declined 12% to $6.5 million compared to $7.4 million in the
second quarter of fiscal 1998. For the year to date in fiscal 1999, net
sales from continuing operations decreased 15% to $11.7 million from
$13.7 million in the same period last year. The decreases in sales for
both the quarter and year to date were primarily due to lower sales in
the custom products segment, resulting from two discontinued lines of
consumer foam mattress pads last year.
Net income from continuing operations for the second quarter of 1999
decreased to $30,600 or $.01 per diluted share, compared to $496,000 or
$.16 per diluted share, in the second quarter of fiscal 1998. Net
income from continuing operations for the first half of fiscal 1999 was
$78,600, or $.03 per diluted share, compared to $767,100 or $.24 per
diluted share in fiscal 1998. The decreases in earnings were mainly due
to lower sales volume and slightly higher manufacturing costs.
The Company's total medical sales decreased by 1% to $4.1 million in
the second quarter this year from $4.2 million in the same quarter last
year. Mattress sales were up 28%. However, overlay sales, which
comprise a larger percentage of total medical sales, were down 22%.
Seating product sales were up 9% for the second quarter of fiscal 1999
compared with the same quarter last year. For the year to date in
fiscal 1999, medical sales increased by 1% to $7.73 million from $7.67
million in the same period last year as higher unit and dollar volume
of mattress sales offset reduced unit sales of mattress overlays.
Management expects that sales of medical products in 1999 will be
slightly lower than those of fiscal 1998.
Sales of custom products decreased by 26% during the second quarter to
$2.4 million from $3.2 million in the same period last year. Year to
date sales of custom products decreased 35% to $3.9 million from $6.1
million. The sales declines were caused by two discontinued consumer
product lines and lower sales of TerryFoam products. In
9
the second quarter the weakness in consumer product sales was somewhat
offset by record sales of industrial products, which grew 33% to $1.3
million as a result of new customers and continued healthy demand from
existing customers. Management expects consumer foam sales in fiscal
1999 to be less than those of fiscal year 1998 levels as a result of
last year's decision to discontinue the two consumer product lines.
The Company's gross profit declined by approximately 29% to $1.7
million for the second quarter of 1999 from $2.4 million in the second
quarter of fiscal 1998. The gross margin percentage for the second
quarter of fiscal 1999 decreased to 26% compared to 33% in the second
quarter last year. Year-to-date gross profit declined 27% to $3.2
million in the first six months of fiscal 1999 from $4.4 million for
the same period last year. The year-to-date gross margin percentage
declined to 27% as compared to 32% for the same period last year. The
decreases in gross profit level and gross margin percentage resulted
from lower sales volume and slightly higher manufacturing costs.
Management expects the Company's gross margin percentage for fiscal
1999 to be less than that of fiscal 1998.
Sales and marketing expenses remained level at $1.1 million for the
second quarter of fiscal 1999 as compared to the same quarter last
year. For the year to date in fiscal 1999, these expenses also remained
level at $2.2 million as compared to the same period last year. Total
sales and marketing expenses for fiscal 1999 are expected to be similar
to those of fiscal 1998.
General and administrative expenses increased 3% for the second quarter
of fiscal 1999 to $594,000 as compared to $578,000 in the second fiscal
quarter of last year. For the fiscal year to date in 1999 general and
administrative expenses were down 12% to $1.1 million as compared to
$1.2 million in the first six months of fiscal 1998. The decline in
general and administrative expenses for the six months ended April 3,
1999 resulted from lower compensation costs and an increase in the cash
value of life insurance. General and administrative expenses for the
1999 fiscal year are expected to be slightly lower than those of fiscal
1998.
During the first six months of fiscal 1999, the Company paid dividends
of $135,300, or 172% 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 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:
(a) the loss of a major distributor of the Company's products, (b) the
inability to achieve anticipated sales volumes, (c) changes in
relationships with large customers, (d) the impact of competitive
products and pricing, (e) government reimbursement changes in the
10
medical market, (f) F.D.A. regulation of medical device manufacturing,
(g) raw material and labor cost increases, and (h) other risks
referenced in the Company's Annual Report on Form 10-K.
11
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
In connection with the Company's sale of it 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 were converted to cash before fiscal year end 1998.
The Company generated cash from continuing operations of approximately
$1.5 million during the first six months of fiscal 1999. The Company's
working capital decreased by $1.2 million or 13% during the six months
ended April 3, 1999 as a result of the repurchase of stock as discussed
below. The Company's current ratio declined to 4.12 at April 3, 1999
from 4.35 at fiscal year end 1998.
Accounts receivable, net of allowances, decreased 18% to $3.9 million
at the end of the second quarter of 1999 as compared to $ 4.9 million
at the end of fiscal 1998 due to the discontinued consumer product
lines mentioned above, and the collection of related accounts
receivable. All of the Company's accounts receivable are unsecured.
Inventory remained level at $ 2.1 million. Management expects little
change in inventory levels during the remainder of fiscal 1999.
Net property and equipment decreased by $148,000, or 4%, during the
first six months of fiscal 1999 primarily as a result of normal
depreciation expense. Management expects capital expenditures during
the remainder of fiscal 1999 to be similar to those of the first half
of the fiscal year.
In various transactions during the first six months of fiscal 1999, the
Company repurchased 234,029 shares, of its common stock for
approximately $1.4 million ($4.62 to $6.06 per share) in private
transactions from unaffiliated sellers. The repurchased shares were
retired.
Accrued and sundry liabilities decreased by $199,800 (19%) to $ 866,200
as compared to $1.1 million at fiscal year end 1998 primarily due to a
decrease in accrued property taxes and income taxes payable.
IMPACT OF INFLATION
-------------------
Inflation was not a significant factor for the Company during the first
two quarters of fiscal 1999. Higher inflation rates could impact the
Company primarily 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.
12
YEAR 2000
---------
The year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of
the Company's computer programs or hardware that have date-sensitive
software or embedded chips may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in system failures or
miscalculations causing disruptions of operations, including, among
other things a temporary inability to process transactions, send
invoices or engage in similar normal business activities. In addition,
disruptions to the economy generally resulting from Year 2000 could
also materially adversely affect the company.
The Company has fully completed its assessment, remediation, testing
and implementation of all significant information technology systems
that could be affected by the year 2000. The Company has also conducted
a review of its product lines and has determined that most of the
products it has sold and will continue to sell do not require
modification to be Year 2000 compliant.
The Company has not incurred substantive Year 2000 costs and does not
anticipate any substantive Year 2000 costs in the future.
The Company has been in contact with suppliers and major customers to
confirm that they are or will be Year 2000 compliant. The Company does
not directly interface with any significant third party vendors. To
date, the company is not aware of any external agent with a Year 2000
issue that would materially impact the company's results of operations,
liquidity or capital resources. However, the company has no means of
ensuring that external agents will be Year 2000 ready. The inability of
external agents to complete their Year 2000 resolution process in a
timely fashion could materially impact the company. The effect of
non-compliance by external agents is not determinable.
Management of the Company believes it has resolved its material Year
2000 issues. In the event that unexpected Year 2000 issues arise, the
company has contingency plans for certain critical applications. These
contingency plans involve, among other actions, manual workarounds,
increasing inventories and adjusting staffing strategies.
13
PART II. OTHER INFORMATION
-----------------
ITEM 1. Legal Proceedings
The company previously reported that it was a defendant in a
legal action involving a claim relating to a terminated employee. The
claim has been settled, and the settlement amount was not material to
the Company's operations or financial condition.
The Company is from time to time a 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 - 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
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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
President and Chief Executive Officer
DATE: May 14, 1999
15