SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly Period Ended June 29, 1996.
OR
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _________ to ________.
Commission File Number 0-11392
SPAN-AMERICA MEDICAL SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
South Carolina 57-0525804
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
70 Commerce Center
Greenville, South Carolina 29615
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (864) 288-8877
Not Applicable
Former name, former address and former fiscal year, if changed since
last report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter periods that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practical date.
Common Stock, No Par Value - 3,241,042 shares as of August 1, 1996
<PAGE>
INDEX
SPAN-AMERICA MEDICAL SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements (Unaudited)
<S> <C>
Balance Sheets - June 29, 1996 and
September 30, 1995.................................................................................. 3
Statements of Income - three and nine months
ended June 29, 1996 and July 1, 1995................................................................ 4
Statements of Cash Flows - nine months ended
June 29, 1996 and July 1, 1995...................................................................... 5
Notes to Financial Statements - June 29, 1996................................................................ 6
Item 2. Management's Discussion and Analysis of Interim
Financial Condition and Results of Operations.................................................... 8
PART II. OTHER INFORMATION........................................................................................... 12
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES............................................................................................................ 13
</TABLE>
2
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
SPAN-AMERICA MEDICAL SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 29, Sept. 30,
1996 1995
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current Assets
Cash and equivalents $ 1,107,521 $ 1,242,396
Marketable securities 1,097,296 2,876,449
Accounts receivable, net of allowances
of $402,000 at June 29, 1996 and
$355,000 at September 30, 1995 5,588,947 4,446,913
Inventories - Note B 3,580,667 2,800,896
Prepaid expenses and other 102,026 221,929
----------- -----------
Total Current Assets 11,476,457 11,588,583
Property and equipment, Net - Note C 5,273,496 5,457,350
Costs in excess of fair value of net
assets acquired, net of accumulated
amortization of $255,490 at June 29,
1996 and $172,383 at September 30, 1995 2,526,795 1,691,197
Other assets - Note D 1,952,107 1,876,573
----------- -----------
$21,228,855 $20,613,703
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 2,206,102 $ 1,651,796
Accrued and sundry liabilities 858,455 1,325,334
Current portion of long-term debt 70,375 70,375
----------- -----------
Total Current Liabilities 3,134,932 3,047,505
Long-term Debt, less current portion 233,563 286,344
Deferred Income Taxes and Compensation 1,934,052 1,844,517
Shareholders' Equity Common Stock, no par value, 20,000,000 shares authorized;
issued and outstanding 3,241,042 shares at June 29, 1996 and 3,175,437 shares at
September 30,
1995 4,516,894 4,225,122
Additional paid-in capital 145,834 145,834
Retained Earnings 11,567,518 11,421,100
----------- -----------
16,230,246 15,792,056
Less guaranteed ESOP obligation 303,938 356,719
----------- -----------
Total Shareholders' Equity 15,926,308 15,435,337
----------- -----------
$21,228,855 $20,613,703
=========== ===========
</TABLE>
Note:The Balance Sheet at September 30, 1995 has been derived from the audited
financial statements at that date.
See Notes to Financial Statements.
3
<PAGE>
SPAN-AMERICA MEDICAL SYSTEMS, INC.
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 29, July 1, June 29, July 1,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net Sales $8,752,821 $7,758,581 $23,272,764 $22,393,086
Cost of Goods Sold 6,439,766 5,476,974 17,097,368 16,128,315
--------- --------- ---------- ----------
Gross Profit 2,313,055 2,281,607 6,175,396 6,264,771
Selling and
Marketing Expenses 1,442,815 1,147,633 3,859,454 3,483,219
General and
Administrative
Expenses 701,746 711,781 1,921,161 2,008,605
--------- --------- ---------- ----------
Income from Operations 168,494 422,193 394,781 772,947
Other (expense)/income:
Interest expense (6,725) (8,911) (22,730) (8,911)
Investment income
and other 83,200 97,452 248,564 233,765
--------- --------- ---------- ----------
76,475 88,541 225,834 224,854
INCOME BEFORE
INCOME TAXES 244,969 510,734 620,615 997,801
Provision For Income
Taxes 91,000 191,000 232,000 374,000
-------- --------- ---------- ----------
NET INCOME $153,969 $319,734 $388,615 $623,801
========= ========= ========== ==========
Earnings Per
Common Share -Note E $.05 $.10 $.12 $.19
Dividends per
Common Share $.025 $.025 $.075 $.075
Weighted Average
Shares Outstanding 3,241,042 3,271,737 3,223,607 3,263,427
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
SPAN-AMERICA MEDICAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
June 29, July 1,
1996 1995
---------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 388,615 $ 623,801
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 813,765 825,174
Provision for losses on accounts
receivable 121,000 104,000
Loss on disposal of property, plant
and equipment and abandonment
of leasehold improvements 15,475 27,704
Gain on sale of other assets (3,640)
Increase in cash value of life
insurance (75,382) (81,775)
Deferred compensation 89,534 56,658
Changes in operating assets and liabilities:
Accounts receivable (1,250,446) (222,533)
Inventory (739,051) 243,224
Prepaid expenses and other current assets 105,811 228,139
Accounts payable and accrued expenses (12,572) (287,909)
---------- ----------
NET CASH (USED FOR)/PROVIDED BY OPERATING ACTIVITIES (543,251) 1,512,843
INVESTING ACTIVITIES
Acquisition of Embracing Concepts, Inc. (592,435)
Purchases of marketable securities (2,082,000) (607,410)
Proceeds from the sale of marketable
securities 3,844,868 513,706
Purchases of property,plant and
equipment (432,573) (163,568)
Proceeds from sale of property, plant
and equipment 63,150
Payments for other assets (104,053) (37,019)
Proceeds from sale of other assets 3,750
--------- ---------
NET CASH PROVIDED BY/(USED FOR)
INVESTING ACTIVITIES 633,807 (227,391)
FINANCING ACTIVITIES
Dividends paid (242,197) (245,206)
Common stock issued upon exercise of options 50,250
Purchase and retirement of Common Stock (33,484)
---------- ----------
NET CASH (USED FOR) FINANCING ACTIVITIES (225,431) (245,206)
---------- ----------
(DECREASE)/INCREASE IN CASH AND CASH
EQUIVALENTS (134,875) 1,040,246
Cash and cash equivalents at beginning
of period 1,242,396 1,557,542
--------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,107,521 $2,597,788
========== ==========
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
SPAN-AMERICA MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
June 29, 1996
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and nine months periods ended June 29,
1996 are not necessarily indicative of the results that may be expected for the
year ended September 28, 1996. For further information, refer to the Company's
annual report on Form 10-K for the year ended September 30, 1995.
NOTE B - INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
June 29, Sept. 30,
1996 1995
<S> <C> <C>
Raw Materials $2,952,297 $2,140,095
Work in Process 30,127 17,513
Finished Goods 598,243 643,288
---------- ---------
$3,580,667 $2,800,896
========== ==========
</TABLE>
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment, at cost, is summarized by major classification as
follows:
<TABLE>
<CAPTION>
June 29, Sept. 30,
1996 1995
<S> <C> <C>
Land $ 317,343 $ 317,343
Land Improvements 240,016 240,016
Buildings 3,613,216 3,613,216
Machinery & Equipment 8,355,081 8,047,499
Furniture & Fixtures 625,169 591,024
Automobiles 9,520 9,520
Leasehold Improvements 92,420 92,420
---------- ----------
13,252,765 12,911,038
Less Accumulated Depreciation 7,979,269 7,453,688
---------- ----------
$ 5,273,496 $ 5,457,350
========== ==========
</TABLE>
6
<PAGE>
NOTE D - OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
June 29, Sept. 30,
1996 1995
<S> <C> <C>
Patents, net of accumulated
amortization of $453,280 at
June 29, 1996 and $378,190 at
September 30, 1995 $ 671,003 $ 684,384
Cash value of life insurance
policies 1,090,138 1,014,756
Terminated contract rights,
net of accumulated amortization
of $219,210 at June 29, 1996 and
$175,368 at September 30, 1995 73,070 116,912
Other 117,896 60,521
---------- ----------
$1,952,107 $1,876,573
========== ==========
</TABLE>
NOTE E - EARNINGS PER COMMON SHARE
Earnings per common share are computed using the weighted average number of
shares outstanding. The effect of common stock equivalents on earnings per share
is not material. Future shares related to the Healthflex acquisition have not
been included in a fully diluted earnings per share calculation as their effect
would be antidilutive.
NOTE F - HEALTHFLEX CORPORATION
On September 23, 1995, Healthflex Corporation was merged with Span-America
Medical Systems, Inc.
7
<PAGE>
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 1996 increased 13% to $8.8 million
compared to $7.8 million in the third quarter of fiscal 1995. The increase in
revenues resulted primarily from growth in consumer foam and contract packaging
products.
For the year to date in fiscal 1996, net sales increased 4% to $23.3 million
from $22.4 million in the same period last year. The year to date sales increase
resulted mainly from higher unit and dollar volume of medical foam overlays,
patient positioners, TerryFoam products and contract packaging products.
Net income for the third quarter of 1996 declined 52% to $154,000 ($.05 per
share) compared to $320,000 ($.10 per share) in the third quarter of fiscal
1995. The third quarter earnings brought year-to-date net income for 1996 to
$389,000 ($.12 per share) as compared to $624,000 ($.19 per share) in fiscal
1995. The lower earnings in both the quarter and year to date resulted from a
less profitable product mix and increased marketing expenses.
The Company's medical sales decreased by 2% to $3.5 million in the third quarter
this year from $3.6 million in the same quarter last year due mainly to a
decrease in dollar volume and unit sales of dynamic mattresses. For the year to
date in fiscal 1996, medical sales increased by 5% to $10.6 million from $10.1
million in the same period last year because of higher unit sales of foam
overlays and positioners which offset a decrease in mattress sales. Sales of the
Company's dynamic mattress products have been affected by a tightening of
Medicare reimbursement criteria which became effective on January 1, 1996.
However, dynamic mattress sales are expected to stay at current levels for the
remainder of fiscal 1996. Management expects that total medical sales will
increase slightly during the last quarter of fiscal 1996.
Sales of consumer products increased by 60% during the third quarter to $2.6
million from $1.6 million in the same period last year. Year to date sales of
consumer products increased 8% to $5.5 million from $5.1 million. The increases
in sales for both the quarter and year to date were due mainly to higher unit
sales volume of TerryFoam products. Since TerryFoam is a highly seasonal
product, its sales are expected to decline significantly in the Company's fourth
fiscal
8
<PAGE>
quarter. Consequently, management expects that total consumer sales in the
fourth quarter of fiscal 1996 will be lower than those in this year's third
quarter.
Industrial foam sales decreased by 11% in the third quarter of fiscal 1996 to
$859,000 from $968,000 in the same quarter last fiscal year. For the year to
date, industrial sales declined 10% to $2.3 million from $2.6 million in fiscal
1995. The third quarter and year to date decreases were primarily the result
of lower sales to existing customers. Industrial foam sales in the fourth
quarter of fiscal 1996 are expected to increase over third quarter levels.
Contract packaging sales increased 13% to $1.8 million in the third quarter of
fiscal 1996 from $1.6 million in the same period last year due to a higher
demand for contract packaging products. Year to date contract packaging sales
increased 4% in 1996 to $4.9 million from $4.7 million in the same period in
1995. Management expects that contract packaging sales in the fourth quarter of
fiscal 1996 will be similar to sales levels in the previous quarter.
The Company's gross profit increased by 1% to $2.3 million for the third quarter
of 1996. The gross margin percentage for the third quarter of fiscal 1996
declined to 26% as compared to 29% in the third quarter last year. Year-to-date
gross profit decreased by 1% to $6.2 million in the first nine months of this
fiscal year from $6.3 million for the same period last year. The year-to-date
gross margin percentage decreased to 27% from 28% last year. The decreases in
gross profit margin were due to a less profitable product mix and higher
manufacturing costs during 1996 as compared to 1995. Management expects the
Company's gross margin percentage for fiscal 1996 to be slightly lower than that
of fiscal 1995.
Sales and marketing expenses increased 26% to $1.4 million for the third quarter
of fiscal 1996 compared $1.1 million in the same quarter last year. For the year
to date in fiscal 1996, these expenses increased by 11% to $3.9 million as
compared to $3.5 million in the same period last year. The majority of the
increase in sales and marketing expenses for the quarter and the year to date
was caused by the implementation of new marketing programs for the Company's
medical mattress products. Total sales and marketing expenses for the full 1996
fiscal year are expected to be higher than those of fiscal 1995.
General and administrative expenses declined by 1% to $702,000 for the third
quarter of fiscal 1996. Fiscal 1996 year to date general and administrative
expenses decreased by 4% to $1.9 million compared $2.0 million in the first nine
months of fiscal 1995. The year-to-date decrease
9
<PAGE>
resulted mainly from reduced compensation and insurance expense.
General and administrative expenses for the full 1996 fiscal year are expected
to be slightly lower than in fiscal 1995.
During the first nine months of fiscal 1996, the Company paid dividends of
$242,000, or 62% of net income for the year to date period. This amount
represented three quarterly dividends of $.025 per share.
LIQUIDITY AND CAPITAL RESOURCES
The Company used cash of $543,000 to fund its operations during the first nine
months of fiscal 1996. Working capital decreased by 2% during the nine months
ended June 29, 1996 as a result of decreases in cash and marketable securities
related in part to the Company's acquisition of Embracing Concepts, Inc. in
February 1996. The Company's current ratio decreased to 3.7 at June 29, 1996
from 3.8 at fiscal year end 1995.
Accounts receivable, net of allowances, increased by $1.1 million (26%) to $5.6
million at June 29, 1996 as compared to $4.4 million at September 30, 1995 as a
result of a higher overall sales levels in May and June 1996 and higher sales of
TerryFoam seasonal products. Accounts receivable from TerryFoam sales generally
have longer collection times than the Company's other product lines. Also,
collection times for medical sales are increasing due to increased sales to home
health care dealers. All of the Company's accounts receivable are unsecured.
Inventory, net of reserves, increased by $780,000, or 28%, during the first
three quarters of fiscal 1996 to $3.6 million. The increase occurred primarily
in medical and consumer raw materials inventory. Medical raw material inventory
was higher mainly because the Company began manufacturing a component in
December 1995 which had previously been purchased from an outside supplier. The
increase in consumer raw material inventory is related to the addition of
new products to support orders from new customers. Management expects inventory
levels to decrease by fiscal year end 1996.
Net property and equipment decreased by $184,000, or 3%, during the first nine
months of fiscal 1996. The change resulted from the combination of capital
expenditures of $433,000 and normal depreciation expense. Management expects
that capital expenditures during the remainder of fiscal 1996 will be minimal.
10
<PAGE>
Costs in excess of the fair value of net assets acquired increased by
approximately $836,000 net of accumulated amortization. The change was
primarily due to the Company's acquisition of Embracing Concepts, Inc. which is
discussed below and to the Company's issuance in October 1995 of 50,171 shares
of its common stock at an approximate market value of $237,000 as an additional
purchase price pursuant to the agreement by which the Company acquired
Healthflex in February 1992.
On February 8, 1996, the company acquired substantially all of the assets of
Embracing Concepts, Inc., a New York based company which produced therapeutic
seating cushions. The acquisition was accounted for as a purchase. The purchase
price was approximately $590,000 and was funded from the Company's existing cash
reserves.
The Company's trade accounts payable increased by $554,000 (34%) to $2.2 million
during the first three quarters of fiscal 1996. The increase was due mainly to
normal monthly fluctuations in accounts payable balances associated with the
increase in inventory levels. Accrued and sundry liabilities decreased by
$467,000 (35%) to $858,000 as compared to fiscal year end 1995 primarily due to
a decline in income taxes payable.
Management believes that funds on hand, funds generated from operations, and
funds available under the Company's $2.5 million line of credit are adequate to
finance operations and expected capital requirements in the forseeable future.
IMPACT OF INFLATION
Inflation was not a significant factor for the Company during the first three
quarters of fiscal 1996. Higher inflation rates could impact the Company through
higher raw material and labor costs. The Company's profit margin could be
adversely affected to the extent that the Company is unable to pass along to its
customers any increased costs.
11
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is from time to time involved in 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) None
(b) Exhibit 27 Financial Data Schedule
(For SEC Use Only)
(c) None.
12
<PAGE>
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/ Charles B. Mitchell
Charles B. Mitchell
Pres. and Chief Executive Officer
DATE: August 9, 1996
13
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-28-1996
<PERIOD-END> JUN-29-1996
<CASH> 1,108
<SECURITIES> 1,097
<RECEIVABLES> 5,991
<ALLOWANCES> 402
<INVENTORY> 3,581
<CURRENT-ASSETS> 11,476
<PP&E> 13,253
<DEPRECIATION> 7,979
<TOTAL-ASSETS> 21,229
<CURRENT-LIABILITIES> 3,135
<BONDS> 0
<COMMON> 4,663
0
0
<OTHER-SE> 11,264
<TOTAL-LIABILITY-AND-EQUITY> 21,229
<SALES> 23,273
<TOTAL-REVENUES> 23,521
<CGS> 17,097
<TOTAL-COSTS> 22,878
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23
<INCOME-PRETAX> 621
<INCOME-TAX> 232
<INCOME-CONTINUING> 389
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 389
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
