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 MARCH 30, 2002
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
------------------------- -------------------
(State or other jurisdiction of (IRS 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 - 2,531,150 shares as of May 8, 2002
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INDEX
SPAN-AMERICA MEDICAL SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
- -------------------------------
Item 1. Financial Statements (Unaudited)
Balance Sheets - March 30, 2002 and September 29, 2001..............................................3
Statements of Income - three and six months ended March 30, 2002
and March 31, 2001.............................................................................4
Statements of Cash Flows - six months ended March 30, 2002 and
March 31, 2001.................................................................................5
Notes to Financial Statements - March 30, 2002......................................................6
Item 2. Management's Discussion and Analysis of Interim Financial
Condition and Results of Operations............................................................9
Item 3. Market Risk...............................................................................12
PART II. OTHER INFORMATION........................................................................13
- ---------------------------
Item 1 Legal Proceedings
Item 2 Changes in Securities
Item 3 Defaults upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
SIGNATURES.........................................................................................14
- ----------
2
Part 1. FINANCIAL INFORMATION
Item 1. Financial Statements
SPAN-AMERICA MEDICAL SYSTEMS, INC.
BALANCE SHEETS
March 30, Sept. 29,
2002 2001
(Unaudited) (Note)
--------------- ----------------
Assets
Current assets:
Cash and cash equivalents $ 993,875 $ 1,074,391
Securities available for sale 5,884,223 5,477,219
Accounts receivable, net of allowances of $423,000
(Mar. 2002) and $366,000 (Sep. 2001) 3,639,194 3,987,731
Inventories (Note 2) 2,090,364 2,103,162
Prepaid expenses and deferred income taxes 303,720 299,489
--------------- ----------------
Total current assets 12,911,376 12,941,992
Property and equipment, net (Note 3) 3,366,746 3,425,249
Cost in excess of fair value of net assets acquired,
net of accumulated amortization of $1,027,765 (Mar. 2002)
and (Sep. 2001) 1,924,131 1,924,131
Other assets (Note 4) 2,390,171 1,894,019
--------------- ----------------
$ 20,592,424 $ 20,185,391
=============== ================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 1,482,968 $ 1,640,195
Accrued and sundry liabilities 1,312,307 1,458,178
--------------- ----------------
Total current liabilities 2,795,275 3,098,373
Deferred income taxes 176,000 176,000
Deferred compensation 970,456 983,125
Shareholders' equity
Common stock, no par value, 20,000,000 shares
authorized; issued and outstanding shares 2,527,900
(Mar. 2002) and 2,517,400 (Sep. 2001) 149,240 91,725
Additional paid in capital 1,708 1,708
Retained earnings 16,499,745 15,834,460
--------------- ----------------
Total shareholders' equity 16,650,693 15,927,893
--------------- ----------------
Contingencies (Note 8)
$ 20,592,424 $ 20,185,391
=============== ================
See accompanying notes.
Note: The Balance Sheet at September 29, 2001 has been derived from the audited
financial statements at that date.
3
SPAN-AMERICA MEDICAL SYSTEMS, INC.
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
------------------------------- ----------------------------------
March 30, March 31, March 30, March 31,
2002 2001 2002 2001
-------------- --------------- ---------------- ----------------
Net sales $ 7,557,360 $ 6,492,892 $ 14,448,816 $ 13,637,155
Cost of goods sold 5,007,493 4,608,182 9,679,920 9,572,667
-------------- --------------- ---------------- ----------------
Gross profit 2,549,867 1,884,710 4,768,896 4,064,488
Selling and marketing expenses 1,524,866 1,167,483 2,892,649 2,421,665
General and administrative expenses 585,227 605,874 1,091,081 1,167,914
-------------- --------------- ---------------- ----------------
2,110,093 1,773,357 3,983,730 3,589,579
-------------- --------------- ---------------- ----------------
Operating income 439,774 111,353 785,166 474,909
Non-operating income:
Investment income 20,923 44,479 50,644 103,190
Royalty income 166,264 111,962 336,217 193,510
Other income 86,999 640 87,618 1,154
-------------- --------------- ---------------- ----------------
274,186 157,081 474,479 297,854
-------------- --------------- ---------------- ----------------
Income before income taxes 713,960 268,434 1,259,645 772,763
Provision for income taxes 252,000 93,000 443,000 270,000
-------------- --------------- ---------------- ----------------
Net income $ 461,960 $ 175,434 $ 816,645 $ 502,763
============== =============== ================ ================
Net income per share of common stock (Note 5)
Basic $ 0.18 $ 0.07 $ 0.32 $ 0.20
Diluted $ 0.18 $ 0.07 $ 0.32 $ 0.20
Dividends per common share $ 0.03 $ 0.03 $ 0.06 $ 0.06
Weighted average shares outstanding:
Basic 2,524,515 2,510,345 2,520,958 2,506,873
Diluted 2,592,129 2,541,829 2,575,121 2,525,688
See accompanying notes.
4
SPAN-AMERICA MEDICAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
-------------------------------------
March 30, March 31,
2002 2001
---------------- ----------------
Operating activities:
Net income $ 816,645 $ 502,763
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 239,463 310,703
Provision for losses on accounts receivable 48,000 24,000
(Increase) decrease in cash value of life insurance (70,585) 30,283
Deferred compensation (12,669) (11,731)
Income received from Prudential demutualization (83,636)
Changes in operating assets and liabilities:
Accounts receivable 307,168 231,376
Inventory 12,798 12,324
Prepaid expenses and other assets (130,939) (87,455)
Accounts payable and accrued expenses (303,098) (631,586)
---------------- ----------------
Net cash provided by operating activities 823,147 380,677
Investing activities:
Purchases of marketable securities (800,000) (580,000)
Proceeds from sales of marketable securties 470,000 225,000
Purchases of property, plant and equipment (130,388) (87,882)
Payments for other assets (301,831) (55,958)
---------------- ----------------
Net cash used for investing activities (762,219) (498,840)
Financing activities:
Dividends paid (151,359) (150,444)
Common stock issued upon exercise of options 9,915
---------------- ----------------
Net cash used for financing activities (141,444) (150,444)
Decrease in cash and cash equivalents (80,516) (268,607)
Cash and cash equivalents at beginning of year 1,074,391 587,663
---------------- ----------------
Cash and cash equivalents at end of year $ 993,875 $ 319,056
================ ================
See accompanying notes.
5
SPAN-AMERICA MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
MARCH 30, 2002
NOTE 1 - BASIS OF PRESENTATION
---------------------
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States 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 six month
period ended March 30, 2002 are not necessarily indicative of the results that
may be expected for the year ended September 28, 2002. For further information,
refer to the Company's Annual Report on Form 10-K for the year ended September
29, 2001.
NOTE 2 - INVENTORIES
-----------
The components of inventories are as follows:
Mar. 30, 2002 Sep. 29, 2001
------------- -------------
Raw Materials $ 1,375,832 $ 1,509,159
Finished Goods 714,532 594,003
----------- -----------
$ 2,090,364 $ 2,103,162
=========== ===========
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment, at cost, is summarized by major classification as
follows:
Mar. 30, 2002 Sep. 29, 2001
------------- -------------
Land $ 317,343 $ 317,343
Land improvements 246,172 246,172
Buildings 3,727,761 3,727,761
Machinery and equipment 5,641,276 5,992,434
Furniture and fixtures 535,221 533,601
Automobiles 9,520 9,520
Leasehold improvements 11,345 11,345
----------- -----------
10,488,638 10,838,176
Less accumulated depreciation 7,121,892 7,412,927
----------- -----------
$ 3,366,746 $ 3,425,249
=========== ===========
NOTE 4 - OTHER ASSETS
------------
Other assets consist of the following:
Mar. 30, 2002 Sep. 29, 2001
------------- -------------
Patents, net of accumulated amortization
of $1,062,132 (Mar. 2002) and $1,011,560 (Sep. 2001) $ 315,484 $ 354,226
Cash value of life insurance policies 1,439,439 1,368,854
Deposits on inventory and equipment 295,347 116,140
Other 339,901 54,799
----------- -----------
$ 2,390,171 $ 1,894,019
=========== ===========
6
NOTE 5 - EARNINGS PER COMMON SHARE
-------------------------
The following table sets forth the computation of basic and diluted earnings per
share in accordance with Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share."
Three Months Ended Six Months Ended
Mar. 30, 2002 Mar. 31, 2001 Mar. 30, 2002 Mar. 31, 2001
------------- ------------- ------------- -------------
Numerator for basic and diluted
earnings per share:
Net income $ 461,960 $ 175,434 $ 816,645 $ 502,763
========= ========= ========= =========
Denominator:
Denominator for basic earnings per share
weighted average shares 2,524,515 2,510,345 2,520,958 2,506,873
Effect of dilutive securities:
Employee and board stock options 67,614 31,484 54,163 18,815
--------- --------- --------- ---------
Denominator for diluted earnings per share:
Adjusted weighted average shares
and assumed conversions 2,592,129 2,541,829 2,575,121 2,525,688
========= ========= =========
Net income per share:
Basic $ 0.18 $ 0.07 $ 0.32 $ 0.20
Diluted $ 0.18 $ 0.07 $ 0.32 $ 0.20
NOTE 6 - OPERATIONS AND INDUSTRY SEGMENTS
--------------------------------
The company reports on two segments of business: medical and custom products.
This industry segment information corresponds to the markets in the United
States for which the Company manufactures and distributes its polyurethane foam
and packaging products and therefore complies with the requirements of SFAS 131
"Disclosures about Segments of an Enterprise and Related Information."
The following table summarizes certain information on industry segments:
Three Months Ended Six Months Ended
Mar. 30, 2002 Mar. 31, 2001 Mar. 30, 2002 Mar. 31, 2001
------------- ------------- ------------- -------------
Net sales:
Medical $ 4,743,671 $ 3,739,048 $ 9,099,919 $ 8,358,271
Custom products 2,813,689 2,753,844 5,348,897 5,278,884
----------- ----------- ----------- -----------
Total 7,557,360 6,492,892 14,448,816 13,637,155
=========== =========== =========== ===========
Operating profit (loss):
Medical 453,748 121,968 969,032 767,556
Custom products 124,126 142,378 57,771 (7,212)
----------- ----------- ----------- -----------
Total 577,874 264,346 1,026,803 760,344
Corporate expense (138,100) (152,994) (241,636) (285,435)
Other income 274,186 157,082 474,478 297,854
----------- ----------- ----------- -----------
Income before income taxes $ 713,960 $ 268,434 $ 1,259,645 $ 772,763
=========== =========== =========== ===========
7
Total sales by industry segment include sales from unaffiliated customers, as
reported in the Company's statements of income. In calculating operating profit,
non-allocable general corporate expenses, interest expense, other income, and
income taxes are not included, but certain corporate operating expenses incurred
for the benefit of all segments are included on an allocated basis.
NOTE 7 - GOODWILL AND OTHER INTANGIBLES
------------------------------
On September 30, 2001 the Company adopted SFAS No. 142 - "Goodwill and Other
Intangible Assets" (SFAS No. 142). As of March 30, 2002, the Company had
goodwill (net of amortization) of $1,924,131 and patents and trademarks (net of
accumulated amortization) of $315,484. These assets are part of the medical
segment. The Company has re-assessed the useful lives of goodwill and patents
and trademarks. Goodwill was determined to have an indefinite useful life.
Amortization of goodwill ceased on September 30, 2001. The useful lives of
individual patents and trademarks were reviewed and no material changes were
required. The Company has completed the first step of the goodwill impairment
test and has determined that goodwill is not impared. Consequently, no
impairment losses were recorded on the Company's intangible assets as a result
of the adoption of SFAS No. 142.
The following table reconciles the Company's reported net income and earnings
per share with pro forma balances from previous periods adjusted to exclude
goodwill amortization, which is no longer recorded under SFAS No. 142.
Three Months Ended Six Months Ended
Mar. 30, 2002 Mar. 31, 2001 Mar. 30, 2002 Mar. 31, 2001
------------- ------------- ------------- -------------
Reported net income $ 461,960 $ 175,434 $ 816,645 $ 502,763
Add back: Goodwill amortization after-tax 30,936 61,872
--------- --------- --------- ---------
Adjusted net income $ 461,960 $ 206,370 $ 816,645 $ 564,635
========= ========= ========= =========
Basic earnings per share:
Reported net income $ 0.18 $ 0.07 $ 0.32 $ 0.20
Goodwill amortization after-tax 0.01 0.02
--------- --------- --------- ---------
Adjusted net income $ 0.18 $ 0.08 $ 0.32 $ 0.22
========= ========= ========= =========
Diluted earnings per share:
Reported net income $ 0.18 $ 0.07 $ 0.32 $ 0.20
Goodwill amortization after-tax 0.01 0.02
--------- --------- --------- ---------
Adjusted net income $ 0.18 $ 0.08 $ 0.32 $ 0.22
========= ========= ========= =========
NOTE 8 - CONTINGENCIES
-------------
From time to time the company is a defendant in legal actions involving claims
arising in the normal course of business. The company believes that, as a result
of legal defenses and insurance arrangements, none of these actions should have
a material adverse effect on its operations or financial condition.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
INTERIM FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Net sales for the second quarter of fiscal 2002 rose 16% to $7.6
million compared with $6.5 million in the second quarter of fiscal 2001. For the
year to date in fiscal 2002, net sales increased 6% to $14.4 million from $13.6
million in the same period last year. The increase in net sales for the second
quarter and year to date resulted from higher unit sales of PressureGuard(R)
therapeutic mattresses for the medical market and Geo-Systems(TM) mattress pads
for the consumer market.
Net income for the second quarter of fiscal 2002 rose 163% to $462,000,
or 18 cents a diluted share, compared with $175,000, or 7 cents a diluted share,
in the second quarter of fiscal 2001. Net income for the year to date increased
62% to $817,000 or 32 cents a diluted share, compared with $503,000, or 20 cents
a diluted share, in the first six months of fiscal 2001. The increase in
earnings for both the second quarter and year to date was due mostly to higher
sales volume and higher non-operating income in the first half of fiscal 2002.
The Company's total medical sales increased by 27% to $4.7 million in
the second quarter this year from $3.7 million in the same quarter last year.
Medical mattress sales rose 48% in the second quarter, while sales of overlays
and positioners were up by 4% and 24%, respectively. The increases in overlays
and positioners were related to unusual buying patterns in the first half of
last fiscal year as one of our medical distributors accelerated their purchases
in advance of a scheduled price increase. Sales to this distributor were about
$400,000 higher than usual in the December 2000 quarter and $400,000 lower than
usual in the March 2001 quarter. As a result, approximately $600,000 of the
second quarter fiscal 2002 increase in medical sales was due to increased
demand, and $400,000 was due to the situation described above. Without those
timing differences, medical sales in the second quarter of fiscal 2002 would
have increased approximately 14% compared with the same quarter in 2001. The
Company's other medical product lines, including mattresses, skin care, and
seating products, were not affected by the unusual buying patterns. Within the
medical mattress product line, sales of powered products rose 181% during the
quarter, and sales of non-powered mattresses increased by 19%. Sales of seating
products were up by 16% from the second quarter last year. Medical sales also
benefited from Selan(R) skin care products, which added $219,000 to second
quarter sales. These products were not offered in the comparable quarter last
year.
For the year to date in fiscal 2002, medical sales rose 9% to $9.1
million from $8.4 million in the same period last year. The increase was driven
by higher unit volumes of mattresses and seating products, which grew by 24% and
12%, respectively. These increases were partly offset by volume declines in
overlays and positioners, which decreased by 12% and 4%, respectively.
Management expects sales of medical products for the remainder of fiscal 2002 to
be similar to those of the same period in fiscal 2001.
9
Sales in the custom products segment increased by 2% during the second
quarter to $2.81 million from $2.75 million in the same period last year. For
the year-to-date, custom products sales increased 1% to $5.34 million from $5.28
million in the same period last year. The custom products segment includes
consumer and industrial foam products. Sales of consumer foam products increased
12% in the second quarter and 13% for the year to date compared with the same
periods last year as a result of higher demand for our consumer Geo-Systems(TM)
overlays sold through our marketing partner, Louisville Bedding Company.
However, sales of our industrial product lines have been weak due to the loss of
a large customer and the slower manufacturing economy. Industrial sales declined
20% in the second quarter of 2002 and 23% for the year to date compared with the
same periods in 2001. Most of the decline in industrial sales was due to the
loss of a large customer who redesigned their product to remove the foam
components. Management expects that custom product sales during the remainder of
fiscal 2002 will be slightly higher than those of the same period in fiscal
2001.
The Company's gross profit level increased by 35% in the second quarter
of fiscal 2002 to $2.5 million from $1.9 million in the second quarter last
year. The gross margin percentage for the second quarter increased to 33.7%
compared with 29.0% in the second quarter last year. For the first half of
fiscal 2002, gross profit increased 17% to $4.8 million from $4.1 million, and
the gross margin percentage increased to 33.0% compared with 29.8% for the first
half of fiscal 2001. The increases in gross margin for the second quarter and
year to date were due to higher sales volume, a more profitable product mix in
the medical segment, and improved manufacturing cost efficiencies. The medical
segment has historically had a higher gross margin than the custom products
segment mainly because most of the Company's medical products are patented and
proprietary. Management expects the Company's gross margin percentage for fiscal
2002 to be similar to that of fiscal 2001.
Sales and marketing expenses increased by $357,000 (31%) to $1.5
million during the second quarter of fiscal 2002 compared with the same quarter
last year. For the year to date in fiscal 2002, these expenses increased
$471,000 (19%) to $2.9 million compared with $2.4 million for the same period
last year. For both the quarter and the year-to-date periods, the majority of
the increases came in the areas of shipping costs, commissions, and incentive
compensation. Total sales and marketing expenses for fiscal 2002 are expected to
be higher than those of fiscal 2001.
General and administrative expenses decreased $21,000 (3%) for the
second quarter of fiscal 2002 to $585,000 compared with $606,000 in the second
fiscal quarter of last year. For the year-to-date in fiscal 2002, general and
administrative expenses decreased $77,000 (7%) to $1.09 million compared with
$1.17 million for the same period in fiscal 2001. The declines for both the
second quarter and year to date were due to (1) unrealized gains on the cash
value of corporate-owned life insurance policies, and (2) the elimination of
goodwill amortization expense as a result of the Company's adoption on September
30, 2001 of Statement of Financial Standards No. 142 - "Goodwill and Other
Intangible Assets." Please see Note 7 in the Notes to Financial Statements for
more details about amortization expense. The adoption of SFAS No. 142 is
expected to reduce amortization expense by approximately $147,000 for the full
10
year of fiscal 2002. However, other administrative expenses are expected to
increase slightly during the year, partially offsetting the reduction in
amortization expense.
Non-operating income increased by 75% to $274,000 in the second quarter
of fiscal 2002 compared with the same quarter last year. For the year-to-date,
non-operating income increased by 59% to $474,000 in fiscal 2002 compared with
the same period last year. The increases were caused by (1) a one-time, pre-tax
gain of $84,000 ($55,000 or 2 cents a share after taxes) as a result of common
stock received through the demutualization of Prudential Insurance Company, and
(2) higher royalty income on a shielded syringe product licensed to Becton and
Dickinson Company (BD). The Company' license agreement with BD is expected to
expire in December 2005. The Company's investment income declined by 53% in the
second quarter of fiscal 2002 and 51% for the year to date. The decline in
investment income is the result of lower interest rates on the Company's
marketable debt securities. Management expects non-operating income for the
remainder of fiscal 2002 to be similar to that of the same period in fiscal
2001.
During the first six months of fiscal 2002, the Company paid dividends
of $151,400 or 19% of net income for the year-to-date period. This amount
represented two quarterly dividends of $0.03 per share.
The statements contained in "Results of Operations" which are not
historical facts are forward-looking statements that involve risks and
uncertainties. Management wishes to caution the reader that these
forward-looking statements such as the Company's expectations for future sales
and expense levels compared with previous periods are forecasts. Actual events
or results may differ materially as a result of risks facing the Company. Such
risks include but are not limited to: (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 medical
market, (f) FDA regulation of medical device manufacturing, (g) 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 $823,000 during the first
two quarters of fiscal 2002 compared with $381,000 in the same period last year.
The increase in cash flow was caused mainly by higher net income and improved
working capital management during the period.
The Company's working capital increased by $272,000 or 3% during the
six months ended March 30, 2002 due primarily to a reduction in accrued expenses
and accounts payable. In addition, the current ratio increased to 4.6 at March
30, 2002 from 4.2 at fiscal year end 2001.
Accounts receivable, net of allowances, decreased by $349,000 or 9% to
$3.6 million at the end of the second quarter of fiscal 2002 compared with $4.0
11
million at the end of fiscal 2001. The decrease was due to normal monthly
fluctuations in accounts receivable levels. All of the Company's accounts
receivable are unsecured.
Inventory levels remained level at $2.1 million at the end of the
second quarter of fiscal 2002. Management expects inventory levels during the
remainder of fiscal 2002 to be similar to those of fiscal 2001.
Net property and equipment declined 2% during the first six months of
fiscal 2002. Capital expenditures of $130,000 were offset by normal depreciation
expense. Management expects capital expenditures during fiscal 2002 to be
similar to those of fiscal 2001. From time to time, the Company purchases
forward contracts for foreign currency to lock in exchange rates for future
payments on manufacturing equipment ordered by the Company. The foreign exchange
contracts are used to eliminate foreign currency fluctuations during the 6-9
month period between the time the order is placed and the time of the final
payment. Realized gains and losses, if any, are included in the cost of the
related equipment. Unrealized gains and losses on open contracts are not
material to the Company's results of operations or financial condition.
The Company's trade accounts payable decreased by $157,000 or 10%
compared with fiscal year end 2001, reflecting normal monthly fluctuations.
Accrued and sundry liabilities decreased by $146,000 or 10% compared with fiscal
year end 2001 as a result of decreases in income taxes payable and accrued
property taxes.
Management believes that funds on hand and funds generated from
operations are adequate to finance operations and expected capital requirements
during fiscal 2002.
IMPACT OF INFLATION
- -------------------
Inflation was not a significant factor for the Company during the
second quarter of fiscal 2002. However, an increase in future inflation rates
could affect the Company primarily through higher raw material and labor costs.
The Company would attempt to recover potential cost increases through higher
sales prices on its products. However, because of market competition, there can
be no assurance that we would be able to fully offset the higher costs.
Consequently, the Company's profit margin could be adversely affected to the
extent that we are unable to pass these increased costs along to our customers
or to otherwise offset cost increases.
ITEM 3. MARKET RISK
The Company is exposed to market risk in two areas: short term
investments and cash value of life insurance. As of March 30, 2002, the Company
held $5.9 million in securities available for sale. These securities consisted
primarily of bonds called "variable rate demand notes" or "low floaters," which
are issued by corporations or municipalities and are backed by bank letters of
credit. The interest rates on the bonds are floating rates, which are reset
weekly based on market rates for comparable securities. The bonds have varying
maturities but can be liquidated by the Company at anytime with seven day's
12
notice. Using the level of securities available for sale at quarter end, a 1%
change in interest rates for a full year would change after-tax earnings by
approximately $59,000.
In addition, the Company's other assets at March 30, 2002 included $1.4
million in cash value of life insurance, which is subject to market risk related
to equity pricing and interest rate changes. The cash value is invested either
in a fixed income life insurance contract or in portfolios of The Prudential
Series Fund, Inc. (the "Fund"). The fixed account options are similar to fixed
income bond funds and are therefore subject to interest rate and company risk.
The Fund portfolios invest in common stocks and bonds in accordance with their
individual investment objectives. These portfolios are exposed to stock market
and interest rate risk similar to comparable mutual funds. Management believes
that substantial fluctuations in equity markets and interest rates and the
resulting changes in cash value of life insurance would not have a material
adverse effect on the financial position of the Company. During the quarter
ended March 30, 2002, the Company's cash value of life insurance increased by
2%, creating income of approximately $24,000. For the year to date in fiscal
2002, the Company's cash value of life insurance increased by 5%, creating
income of approximately $69,000 compared with a loss of $32,000 for the same
period last year.
PART II. OTHER INFORMATION
-----------------
ITEM 1. Legal Proceedings
The Company is from time to time party to various legal actions arising
in the normal course of business. However, management believes that as a result
of legal defenses and insurance arrangements with parties believed to be
financially capable, there are no proceedings threatened or pending against the
Company that, if determined adversely, would have a material adverse effect on
the business or financial position of the Company.
ITEM 2. Changes in Securities - None
ITEM 3. Defaults Upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders - None
ITEM 5. Other Information - None
ITEM 6. Exhibits & Reports on Form 8-K
(a) Exhibits
10.17 Addendum to Distribution Agreement between Louisville
Bedding Company and Span-America Medical Systems, Inc.
January 1, 2002
(b) None.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPAN-AMERICA MEDICAL SYSTEMS, INC.
/s/ Richard C. Coggins
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Richard C. Coggins
Chief Financial Officer
/s/ James D. Ferguson
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James D. Ferguson
President and Chief Executive Officer
DATE: May 13, 2002
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