SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
-----------------------------------
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 29, 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.
----------------------------------
(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 ___
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APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practical date.
Common Stock, No Par Value - 2,536,650 shares as of August 1, 2002.
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INDEX
SPAN-AMERICA MEDICAL SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - June 29, 2002 and September 29, 2001..........................3
Statements of Income - three and nine months ended June 29, 2002
and June 30, 2001.........................................................4
Statements of Cash Flows - nine months ended June 29, 2002 and
June 30, 2001.............................................................5
Notes to Financial Statements - June 29, 2002..................................6
Item 2. Management's Discussion and Analysis of Interim Financial
Condition and Results of Operations.......................................9
PART II. OTHER INFORMATION...................................................14
- ---------------------------
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
- ----------
2
Part 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Span-America Medical Systems, Inc.
Balance Sheets
June 29, Sept. 29,
2002 2001
(Unaudited) (Note)
--------------- ----------------
Assets
Current assets:
Cash and cash equivalents $ 523,269 $ 1,074,391
Securities available for sale 6,155,192 5,477,219
Accounts receivable, net of allowances
of $395,000
(June 2002) and $366,000 (Sep. 2001) 4,516,944 3,987,731
Inventories (Note 2) 2,399,259 2,103,162
Prepaid expenses and deferred income taxes 267,960 299,489
--------------- ----------------
Total current assets 13,862,624 12,941,992
Property and equipment, net (Note 3) 3,440,651 3,425,249
Cost in excess of fair value of net assets
acquired, net of accumulated amortization
of $1,027,765 (Jun. 2002) and (Sep. 2001) 1,924,131 1,924,131
Other assets (Note 4) 2,295,065 1,894,019
--------------- ----------------
$ 21,522,471 $ 20,185,391
=============== ================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 2,110,936 $ 1,640,195
Accrued and sundry liabilities 1,303,949 1,458,178
--------------- ----------------
Total current liabilities 3,414,885 3,098,373
Deferred income taxes 176,000 176,000
Deferred compensation 963,877 983,125
Shareholders' equity
Common stock, no par value, 20,000,000
shares authorized; issued and outstanding
shares 2,535,650
(June 2002) and 2,517,400 (Sep. 2001) 182,798 91,725
Additional paid in capital 1,708 1,708
Retained earnings 16,783,203 15,834,460
--------------- ----------------
Total shareholders' equity 16,967,709 15,927,893
--------------- ----------------
Contingencies (Note 8)
$ 21,522,471 $ 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 Nine Months Ended
-------------------------- -----------------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
------------ ------------ -------------- -------------
Net sales $ 8,343,492 $ 7,346,663 $ 22,792,309 $ 20,983,818
Cost of goods sold 5,814,481 5,101,288 15,494,403 14,673,955
------------ ------------ -------------- -------------
Gross profit 2,529,011 2,245,375 7,297,906 6,309,863
Selling and marketing
expenses 1,559,041 1,414,601 4,451,689 3,836,266
General and
administrative expenses 582,139 480,097 1,673,220 1,648,010
------------ ------------- -------------- -------------
2,141,180 1,894,698 6,124,909 5,484,276
------------ ------------- -------------- -------------
Operating income 387,831 350,677 1,172,997 825,587
Non-operating income:
Investment income 25,951 45,482 76,593 148,672
Royalty income 135,000 117,123 471,218 310,632
Other income 610 417 88,229 1,571
------------- ------------- -------------- ------------
161,561 163,022 636,040 460,875
------------- ------------- -------------- ------------
Income before income taxes 549,392 513,699 1,809,037 1,286,462
Provision for income taxes 190,000 180,000 633,000 450,000
-------------- ------------- -------------- ------------
Net income $ 359,392 $ 333,699 $ 1,176,037 $ 836,462
============== ============= ============== ============
Net income per share of
common stock (Note 5)
Basic $ 0.14 $ 0.13 $ 0.47 $ 0.33
Diluted $ 0.14 $ 0.13 $ 0.45 $ 0.33
Dividends per share of
common stock $ 0.03 $ 0.03 $ 0.09 $ 0.09
Weighted average shares
outstanding:
Basic 2,530,793 2,511,400 2,524,236 2,508,382
Diluted 2,629,517 2,534,937 2,593,253 2,528,771
See accompanying notes.
4
Span-America Medical Systems, Inc.
Statements of Cash Flows
(Unaudited)
Nine Months Ended
-----------------------------
June 29, June 30,
2002 2001
------------- -----------
Operating activities:
Net income $ 1,176,037 $ 836,462
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 360,080 477,389
Provision for losses on accounts receivable 72,000 28,872
(Increase) decrease in cash value of life insurance (14,934) 283
Deferred compensation (19,248) (17,822)
Income received from Prudential demutualization (83,636)
Changes in operating assets and liabilities:
Accounts receivable (595,551) (12,630)
Inventory (296,097) (160,193)
Prepaid expenses and other assets (17,343) (4,280)
Accounts payable and accrued expenses 316,512 114,379
------------ -----------
Net cash provided by operating activities 897,820 1,262,460
Investing activities:
Purchases of marketable securities (1,400,000) (880,000)
Proceeds from sales of marketable securties 800,000 425,000
Purchases of property, plant and equipment (314,758) (202,914)
Payments for other assets (350,363) (56,071)
------------- -----------
Net cash used for investing activities (1,265,121) (713,985)
Financing activities:
Dividends paid (227,294) (225,786)
Common stock issued upon exercise of options 43,473
------------- -----------
Net cash used for financing activities (183,821) (225,786)
(Decrease) increase in cash and cash equivalents (551,122) 322,689
Cash and cash equivalents at beginning of year 1,074,391 587,663
-------------- -----------
Cash and cash equivalents at end of quarter $ 523,269 $ 910,352
============== ===========
See accompanying notes.
5
SPAN-AMERICA MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 29, 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 nine-month
period ended June 29, 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:
Jun. 29, 2002 Sep. 29, 2001
--------------- ---------------
Raw Materials $ 1,549,561 $ 1,509,159
Finished Goods 849,698 594,003
--------------- ---------------
$ 2,399,259 $ 2,103,162
=============== ===============
NOTE 3 - PROPERTY AND EQUIPMENT
----------------------
Property and equipment, at cost, is summarized by major classification
as follows:
Jun. 29, 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 5,824,943 5,992,434
Furniture and fixtures 535,925 533,601
Automobiles 9,520 9,520
Leasehold improvements 11,345 11,345
--------------- --------------
10,673,009 10,838,176
Less accumulated depreciation 7,232,358 7,412,927
--------------- --------------
$ 3,440,651 $ 3,425,249
=============== ==============
NOTE 4 - OTHER ASSETS
------------
Other assets consist of the following:
Jun. 29, 2002 Sep. 29, 2001
-------------- ---------------
Patents, net of accumulated amortization
of $1,072,284 (June 2002) and $1,011,560
(Sep. 2001) $ 311,276 $ 354,226
Cash value of life insurance policies 1,383,788 1,368,854
Deposits on inventory and equipment 218,212 116,140
Other 381,789 54,799
-------------- ---------------
$ 2,295,065 $ 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 Nine Months Ended
---------------------- -----------------------
Jun. 29, Jun. 30, Jun. 29, Jun. 30,
2002 2001 2002 2001
---------- ---------- ------------ ----------
Numerator for basic and diluted
earnings per share:
Net income $ 359,392 $ 333,699 $ 1,176,037 $ 836,462
=========== ========== ============ ==========
Denominator:
Denominator for basic earnings
per share:
Weighted average shares 2,530,793 2,511,400 2,524,236 2,508,382
Effect of dilutive securities:
Employee and board stock
options 98,724 23,537 69,017 20,389
---------- ---------- ------------ ----------
Denominator for diluted earnings
per share:
Adjusted weighted average shares
and assumed conversions 2,629,517 2,534,937 2,593,253 2,528,771
=========== ========== ============ ==========
Net income per share:
Basic $ 0.14 $ 0.13 $ 0.47 $ 0.33
Diluted $ 0.14 $ 0.13 $ 0.45 $ 0.33
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 Nine Months Ended
------------------------ -------------------------
Jun. 29, Jun. 30, Jun. 29, Jun. 30,
2002 2001 2002 2001
----------- ------------ ----------- ------------
Net sales:
Medical $ 5,080,366 $ 4,487,789 $14,180,285 $12,846,060
Custom products 3,263,126 2,858,874 8,612,024 8,137,758
----------- ------------ ----------- ------------
Total 8,343,492 7,346,663 22,792,309 20,983,818
=========== ============ =========== ============
Operating profit (loss):
Medical 664,050 472,018 1,633,082 1,239,574
Custom products (94,678) (23,176) (36,907) (30,388)
----------- ------------ ----------- ------------
Total 569,372 448,842 1,596,175 1,209,186
Corporate expense (181,542) (98,164) (423,178) (383,599)
Other income 161,562 163,021 636,040 460,875
----------- ------------ ----------- ------------
Income before income taxes $ 549,392 $ 513,699 $ 1,809,037 $ 1,286,462
=========== ============ =========== ============
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 June 29, 2002, the Company had goodwill
(net of amortization) of $1,924,131 and patents and trademarks (net of
accumulated amortization) of $311,276. 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 Nine Months Ended
------------------------ -------------------------
Jun. 29, Jun. 30, Jun. 29, Jun. 30,
2002 2001 2002 2001
----------- ------------ ----------- ------------
Reported net income $ 359,392 $ 333,699 $ 1,176,037 $ 836,462
Add back: Goodwill amortization
after-tax 30,936 92,808
----------- ------------ ----------- ------------
Adjusted net income $ 359,392 $ 364,635 $ 1,176,037 $ 929,270
=========== ============ =========== ============
Basic earnings per share:
Reported net income $ 0.14 $ 0.13 $ 0.47 $ 0.33
Goodwill amortization after-tax 0.02 0.04
----------- ------------ ----------- ------------
Adjusted net income $ 0.14 $ 0.15 $ 0.47 $ 0.37
=========== ============ =========== ============
Diluted earnings per share:
Reported net income $ 0.14 $ 0.13 $ 0.45 $ 0.33
Goodwill amortization after-tax 0.01 0.04
----------- ------------ ----------- ------------
Adjusted net income $ 0.14 $ 0.14 $ 0.45 $ 0.37
=========== ============ =========== ============
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 third quarter of fiscal 2002 rose 14% to $8.3 million
compared with $7.3 million in the third quarter of fiscal 2001. For the year to
date in fiscal 2002, net sales increased 9% to $22.8 million from $21.0 million
in the same period last year. The increases in net sales for the third quarter
and the year to date were due mainly to higher sales volume of medical
mattresses and consumer overlays.
Net income for the third quarter of fiscal 2002 rose 8% to $359,000 or
14 cents a diluted share, compared with $334,000, or 13 cents a diluted share,
in the third quarter of fiscal 2001. The earnings increase during the quarter
was due primarily to higher sales volume and lower material costs. Net income
for the year to date increased 41% to $1.2 million or 45 cents a diluted share,
compared with $837,000 or 33 cents a diluted share, in the first nine months of
fiscal 2001. The year-to-date increase was due mostly to higher sales volume
and, to a lesser extent, lower amortization expense related to new accounting
rules for goodwill amortization and higher royalty income.
The Company's total medical sales increased 13% to $5.1 million in the
third quarter this year from $4.5 million in the same quarter last year. Medical
mattress sales were up 34% and sales of seating products were up 82% in the
third quarter. The largest gains in unit sales occurred in our alternating
pressure mattresses line and in the newly released Pressure Guard Easy Air(TM)
low-air-loss mattress. Seating sales increased during the third quarter as a
result of a special order from a new customer. Sales of overlays and positioners
declined by 17% and 4%, respectively. The decline in overlays reflects a
continuing trend of replacement mattresses gaining market share at the expense
of mattress overlays.
For the year to date in fiscal 2002, medical sales rose 10% to $14.2
million from $12.8 million in the same period last year due to increases in unit
sales of mattresses which rose by 28% and seating products which rose by 37%.
During the year-to-date period, sales of overlays declined by 14% and
positioners decreased by 4%. We expect that sales of medical products for the
remainder of fiscal 2002 will be slightly higher than those of the same period
in fiscal 2001.
Sales in the custom products segment increased by 14% during the third
quarter to $3.3 million from $2.9 million in the same period last year.
Year-to-date sales of custom products rose 6% to $8.6 million from $8.1 million
in the same period last year. The custom products segment includes consumer
bedding products and industrial foam products. The third quarter and
year-to-date increases in sales of custom products generally reflect higher
sales of consumer products partially offset by lower sales of industrial
products. Consumer product sales rose 26% and 18%, respectively, in the third
quarter and year-to-date periods due to higher volumes of Geo-Systems(TM)
9
mattress overlays sold through our marketing and distribution partner,
Louisville Bedding Company. We believe that consumer sales in the fourth quarter
of fiscal 2002 will be higher than those in the same period last year.
Industrial sales for the third quarter and year-to-date periods declined by 17%
and 21%, respectively due mostly to the loss of one large customer in the third
quarter last year and the shipment of a one-time order also in the third quarter
last year. It appears that past industrial sales declines have begun to level
off, and we expect that industrial sales in the fourth quarter of fiscal 2002
will be similar to those in the fourth quarter last year.
The Company's gross profit increased 13% to $2.5 million for the third
quarter of 2002 compared with $2.2 million in the third quarter of fiscal 2001.
The gross margin percentage for the third quarter of fiscal 2002 decreased
slightly to 30.3% compared with 30.6% in the third quarter last year. The gross
margin level increased because of higher sales volume, but the gross margin
percentage decreased slightly as a result of higher labor and manufacturing
overhead costs.
Year-to-date gross profit increased 16% to $7.3 million in the first
nine months of fiscal 2002 from $6.3 million for the same period last year. The
year-to-date gross margin percentage increased to 32.0% from 30.1% for the same
period last year. The increases in gross profit level and gross margin
percentage resulted from higher sales volume and a more profitable product mix
as medical sales, which generally have a higher gross margin, grew slightly
faster than sales of custom products. The medical segment has a higher gross
margin than the custom products segment mainly because many of the Company's
medical products are patented and proprietary. Management expects the Company's
gross margin percentage for fiscal 2002 to be slightly higher than that of
fiscal 2001.
Sales and marketing expenses increased by 10%, or $144,000, to $1.6
million during the third quarter of fiscal 2002 compared with the same quarter
last year. For the year to date in fiscal 2002, these expenses increased 16% or
$615,000, to $4.5 million in fiscal 2002 compared with $3.8 million for the same
period last year. For both the quarter and year to date the majority of the
increases came in the areas of shipping costs, commissions, evaluation samples,
and product development expense. Total sales and marketing expenses for fiscal
2002 are expected to be higher than those of fiscal 2001.
General and administrative expenses increased 21% for the third quarter
of fiscal 2002 to $582,000 compared with $480,000 in the third fiscal quarter of
last year. Most of the increase was the result of unrealized losses on the cash
value of variable equity life insurance policies, higher bad debt expense, and
higher insurance costs. These higher expenses were partially offset by a $37,000
decrease in amortization expense as a result of the Company's adoption at the
beginning of fiscal 2002 of Statement of Financial Accounting Standard No. 142 -
"Goodwill and Other Intangible Assets." See Note 7 in the Notes to Financial
Statements for more information on goodwill amortization expense.
For the year-to-date, general and administrative expenses increased 2%
to $1.6 million compared with the same period last year. The slight increase was
made up of increases in insurance expense and incentive compensation, which was
mostly offset by lower amortization expense as described above and in Note 7.
10
The adoption of SFAS No. 142 is expected to reduce amortization expense by
approximately $147,000 for the full fiscal year of 2002. However other
administrative expenses are expected to increase slightly during remainder of
the year, mostly offsetting the reduction in amortization expense.
Non-operating income decreased 1% to $162,000 in the third quarter of
fiscal 2002 compared with the same period last year. For the year-to-date,
non-operating income increased 38% to $636,000. Investment income decreased by
43% to $26,000 in the third quarter of fiscal 2002 compared with $45,500 in the
same quarter last year. For the first nine months of fiscal 2002 investment
income decreased by 48% to $77,000 compared with $149,000 in the same period
last year. The decreases for the quarter and year to date were due to lower
interest rates on the Company's floating rate debt securities. Royalty income
and other increased 15% to $135,000 in the third quarter of fiscal 2002 and rose
52% to $471,000 for the year-to-date as a result of increased royalty income on
a shielded syringe product licensed to Becton & Dickinson. The Company's license
agreement with BD is expected to expire in December 2005. Year to date
non-operating revenue also includes 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. Management expects total
non-operating income for the remainder of fiscal 2002 to be similar to that of
the same period in fiscal 2001.
During the first nine months of fiscal 2002, the Company paid dividends
of $227,300 or 19% of net income for the year-to-date period. This amount
represented three quarterly dividends of $.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 $898,000 during the first
three quarters of fiscal 2002, a 29% decrease compared with $1.3 million in the
same period last year. The decrease in cash flow was due mostly increases in
accounts receivable and inventory levels during the third quarter. Accounts
receivable and inventory are discussed further below.
The Company's working capital increased by $604,000 or 6% during the
nine months ended June 29, 2002 mostly as a result of increases in accounts
11
receivable and inventory levels. In addition, the current ratio declined
slightly to 4.1 at June 29, 2002 from 4.2 at fiscal year end 2001.
Accounts receivable, net of allowances, increased $529,000 or 13% to
$4.5 million at the end of the third quarter of fiscal 2002 compared to year end
fiscal 2001. The increase in accounts receivable at the end of the third quarter
of fiscal 2002 was due mainly to higher sales volume during the last six weeks
of the quarter. The average collection time (using a monthly average) for the
year-to-date in fiscal 2002 was 45.5 days compared with 54.5 days for the same
period last year. All of the Company's accounts receivable are unsecured.
Inventory levels increased 14% or $296,000 to $2.4 million at the end
of the third quarter of fiscal 2002 compared with $2.1 million at the end of
fiscal 2001. The increase occurred primarily in the area of consumer finished
goods and raw materials, and was related to a seasonable promotion of consumer
products expected to ship in the fourth quarter of fiscal 2002. Management
expects inventory levels by fiscal year end 2002 to return to more normal
levels.
Net property and equipment remained level at 3.4 million during the
first nine months of fiscal 2002. Capital expenditures of $315,000 were offset
by normal depreciation expense. Management does not expect to make significant
capital expenditures during the remainder of fiscal 2002. 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 on the contracts would not be
incurred unless the Company cancelled the equipment order after entering into
the forward contracts. 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 increased by $471,000 or 29%
compared with fiscal year end 2001 as a result of higher inventory purchases
related to higher sales volumes and a seasonal consumer products promotion.
Accrued and sundry liabilities decreased by $154,000 or 11% compared with fiscal
year end 2001 as a result of a decrease in income taxes payable.
On July 15, 2002, after the close of the quarter, the Company acquired
assets related to the Secure IV(TM) product line of VADUS(R), Inc., a privately
owned designer and manufacturer of peripheral intravenous catheters. The assets
consist primarily of patents, inventory, and equipment related to the production
and sale of the Secure IV catheter. The purchase price of the assets was
$300,000 plus closing costs and a royalty to be paid on future sales of the
product. The Secure IV has FDA 510(k) approval and is protected by 11 patents.
Management is currently evaluating several options for manufacturing and selling
the product, including manufacturing it internally, having it contract
manufactured, or licensing the product to another company. The Secure IV can be
sold through the existing distributor networks of Span-America and VADUS. We
expect the acquisition to have a slightly negative impact on earnings in the
12
fourth quarter of fiscal 2002, and a moderately negative earnings impact in
fiscal 2003. We expect the product line to make a positive contribution to sales
and earnings beginning in fiscal 2004.
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 has not been a significant factor for the Company during the
first nine months of fiscal 2002. However, an increase in future inflation rates
could affect the Company primarily through higher raw material 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 the Company would be able to offset the higher material 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 June 29, 2002, the Company
held $6.2 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
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 $62,000.
In addition, the Company's other assets at June 29, 2002 included $1.4
million in cash value of life insurance. 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 is unable to quantify
this risk, but we believe that normal market and interest rate fluctuations
(such as those seen in the last 15 years) would not have a material effect on
the financial position of the Company.
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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:
10.1 Asset Purchase Agreement By and Among Span-America Medical
Systems, Inc., Vadus, Inc., and Certain Stockholders of
Vadus, Inc. dated February 1, 2002, including amendments
dated May 20, 2002 and July 9, 2002.
10.2 Production, Marketing and Product Development Support
Agreement between Span-America Medical Systems, Inc., and
Vadus, Inc. dated February 1, 2002.
(b) Reports on Form 8-K:
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
Chief Financial Officer
/s/ James D. Ferguson
-------------------------
James D. Ferguson
President and Chief Executive Officer
DATE: August 12, 2002
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