<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
------------------------------------
FORM 10-Q
------------------------------------
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED JUNE 28, 1997.
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 - 3,149,838 shares as of August 1, 1997
<PAGE>
INDEX
SPAN-AMERICA MEDICAL SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements (Unaudited)
<S> <C>
Balance Sheets - June 28, 1997 and
September 28, 1996.................................................................................. 3
Statements of Income - three and nine months
ended June 28, 1997 and June 29, 1996............................................................... 4
Statements of Cash Flows - nine months ended
June 28, 1997 and June 29, 1996..................................................................... 5
Notes to Financial Statements - June 28, 1997................................................................ 6
Item 2. Management's Discussion and Analysis of Interim
Financial Condition and Results of Operations.................................................... 8
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
</TABLE>
2
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
SPAN-AMERICA MEDICAL SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 28, SEPT. 28,
1997 1996
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current Assets
Cash and equivalents $ 1,064,526 $ 925,370
Marketable securities 2,966,297 1,194,068
Accounts receivable, net of allowances
of $548,000 at June 28, 1997 and
$419,000 at September 28, 1996 5,224,913 5,733,810
Inventories - Note B 3,151,817 3,463,637
Prepaid expenses and other 193,726 226,959
----------- -----------
Total Current Assets 12,601,279 11,543,844
Property and equipment, Net - Note C 4,604,714 5,074,106
Costs in excess of fair value of net
assets acquired, net of accumulated
amortization of $401,217 at June 28,
1997 and $290,650 at September 28, 1996 2,550,679 2,491,635
Other assets - Note D 1,965,687 1,971,010
----------- -----------
$21,722,359 $21,080,595
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 2,037,808 $ 2,117,643
Accrued and sundry liabilities 1,326,186 960,011
Current portion of debt 286,344
----------- -----------
Total Current Liabilities 3,363,994 3,363,998
Deferred Income Taxes and Compensation 1,629,058 1,697,282
Shareholders' Equity
Common Stock, no par value, 20,000,000
shares authorized; issued and
outstanding 3,149,838 shares at June 28,
1997 and 3,241,042 shares at September 28, 1996 4,127,401 4,516,895
Additional paid-in capital 52,894 145,834
Retained Earnings 12,549,012 11,642,930
----------- -----------
16,729,307 16,305,659
Less guaranteed ESOP obligation 286,344
----------- -----------
Total Shareholders' Equity 16,729,307 16,019,315
----------- -----------
$21,722,359 $21,080,595
=========== ===========
</TABLE>
Note: The Balance Sheet at September 28, 1996 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 28, June 29, June 28, June 29,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net Sales $8,706,588 $8,752,821 $25,006,495 $23,272,764
Cost of Goods Sold 6,358,554 6,439,766 18,152,613 17,097,368
--------- --------- ---------- ----------
Gross Profit 2,348,034 2,313,055 6,853,882 6,175,396
Selling and
Marketing Expenses 1,230,083 1,442,815 3,443,827 3,859,454
General and
Administrative
Expenses 570,662 701,746 1,825,097 1,921,161
--------- --------- ---------- ----------
Income from Operations 547,289 168,494 1,584,958 394,781
Other (expense)/income:
Interest expense (6,725) (22,730)
Investment income
and other 91,630 83,200 251,620 248,564
--------- --------- ---------- ----------
91,630 76,475 251,620 225,834
INCOME BEFORE
INCOME TAXES 638,919 244,969 1,836,578 620,615
Provision For Income
Taxes 240,000 91,000 689,000 232,000
--------- -------- ---------- ----------
NET INCOME $398,919 $153,969 $1,147,578 $388,615
========= ========= ========== ==========
Earnings Per
Common Share -Note E $.13 $.05 $.36 $.12
Dividends per
Common Share $.025 $.025 $.075 $.075
Weighted Average
Shares Outstanding 3,167,650 3,241,042 3,202,865 3,223,607
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
SPAN-AMERICA MEDICAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
June 28, June 29,
1997 1996
---------- -------
OPERATING ACTIVITIES
<S> <C> <C>
Net Income $1,147,578 $ 388,615
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 798,195 813,765
Provision for losses on accounts
receivable 159,000 121,000
Loss on disposal of property, plant
and equipment and abandonment
of leasehold improvements 15,475
Decrease/(Increase)in cash value of life
insurance 57,571 (75,382)
Deferred compensation (68,224) 89,534
Changes in operating assets and liabilities:
Accounts receivable 341,514 (1,250,446)
Inventory 311,820 (739,051)
Prepaid expenses and other current assets (62,344) 105,811
Accounts payable and accrued expenses 286,340 (12,572)
---------- ---------
NET CASH PROVIDED BY/(USED FOR)
OPERATING ACTIVITIES 2,971,450 (543,251)
INVESTING ACTIVITIES
Acquisition of Embracing Concepts, Inc. (592,435)
Purchases of marketable securities (3,091,072) (2,082,000)
Proceeds from the sale of marketable
securities 1,327,226 3,844,868
Purchases of property,plant and
equipment (94,983) (432,573)
Payments for other assets (38,675) (104,053)
---------- --------
NET CASH (USED FOR)/PROVIDED BY
INVESTING ACTIVITIES (1,897,504) 633,807
FINANCING ACTIVITIES
Dividends paid (241,496) (242,197)
Common stock issued upon exercise of options 50,250
Purchase and retirement of Common Stock (693,294) (33,484)
----------- ---------
NET CASH (USED FOR) FINANCING ACTIVITIES (934,790) (225,431)
---------- ----------
INCREASE/(DECREASE)IN CASH AND CASH
EQUIVALENTS 139,156 (134,875)
Cash and cash equivalents at beginning
of period 925,370 1,242,396
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,064,526 $1,107,521
========== ==========
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
SPAN-AMERICA MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
June 28, 1997
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 28,
1997 are not necessarily indicative of the results that may be expected for the
year ended September 27, 1997. For further information, refer to the Company's
annual report on Form 10-K for the year ended September 28, 1996.
NOTE B - INVENTORIES
The components of inventories are as follows:
June 28, Sept. 28,
1997 1996
Raw Materials $2,565,604 $2,788,443
Work in Process 32,388 28,043
Finished Goods 553,825 647,151
---------- ---------
$3,151,817 $3,463,637
========== ==========
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment, at cost, is summarized by major classification as
follows:
June 28, Sept. 28,
1997 1996
Land $ 317,343 $ 317,343
Land Improvements 240,016 240,016
Buildings 3,613,965 3,613,966
Machinery & Equipment 8,466,733 8,372,358
Furniture & Fixtures 625,778 625,169
Automobiles 9,520 9,520
Leasehold Improvements 66,006 92,420
---------- ----------
13,339,361 13,270,792
Less Accumulated Depreciation 8,734,647 8,196,686
---------- ----------
$ 4,604,714 $ 5,074,106
========== ==========
6
<PAGE>
NOTE D - OTHER ASSETS
Other assets consist of the following:
June 28, Sept. 28,
1997 1996
Patents, net of accumulated
amortization of $555,523 at
June 28, 1997 and $478,077 at
September 28, 1996 $ 626,264 $ 665,035
Cash value of life insurance
policies 1,055,922 1,113,493
Terminated contract rights,
net of accumulated amortization
of $277,666 at June 28, 1997 and
$233,824 at September 28, 1996 14,614 58,456
Other 268,887 134,026
---------- -----------
$1,965,687 $1,971,010
========== ==========
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.
NOTE F - TERMINATION OF EMPLOYEE STOCK OWNERSHIP PLAN
In September 1996, the Board of Director's voted to terminate the Company's
Employee Stock Ownership Plan (ESOP) effective September 30, 1996, the end of
the 1996 plan year. Accordingly, all participants became fully vested on that
date. The unallocated shares of stock held by the ESOP were sold at market value
to the Company and retired. The proceeds were used to reduce the principle
balance of the loans. All shares allocated to the participants will be
distributed pursuant to the terms and conditions of the ESOP.
NOTE G - EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share", which is required to be adopted for the Company's
quarter ending on December 31, 1997. At that time, the Company will be required
to change the method currently used to compute earnings per share and to restate
all prior periods. The impact of Statement 128 on the calculation of primary
earnings per share and fully diluted earnings per share for the first quarter
ending December 1997 is not expected to be material.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
INTERIM FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Year-to-date net sales for fiscal 1997 have increased 7% to $25.0 million from
$23.3 million in the same period last year. This increase was the result of
sales increases in each of the foam business units.
Net sales for the third quarter of fiscal 1997 were down 1% to $8.7 million
compared to $8.8 million in the third quarter of fiscal 1996. Increases in
revenues from medical and industrial products were offset by reductions in sales
of consumer foam and contract packaging products.
Net income for the third quarter of 1997 rose 159% to $399,000 ($.13 per share)
compared to $154,000 ($.05 per share) in the third quarter of fiscal 1996. The
third quarter earnings brought year-to-date net income for 1997 to $1.1 million
($.36 per share) as compared to $389,000 ($.12 per share) in fiscal 1996. The
increases in both the quarter and year to date earnings resulted from higher
year-to-date sales volume, improved manufacturing efficiencies, and lower
selling and administrative expenses.
The Company's medical sales increased by 6% to $3.7 million in the third quarter
this year from $3.5 million in the same quarter last year. For the year to date
in fiscal 1997, medical sales increased by 10% to $11.7 million from $10.6
million in the same period last year. Both increases are due mainly to an
increase in unit sales of mattress overlays, patient positioners and static
mattresses. These sales increases more than offset the decline in sales of the
Company's dynamic mattresses as compared to those in 1996 resulting from a
change in medicare reimbursement criteria. Management expects that total
medical sales during the last quarter of fiscal 1997 will be similar to the
third quarter.
Sales of consumer products decreased by 5% during the third quarter to $2.4
million from $2.6 million in the same period last year. Year to date sales of
consumer products increased 16% to $6.4 million from $5.5 million. The decrease
in sales for the third quarter was due lower unit sales volume of TerryFoam
products which was partially offset by an increase in sales of convoluted foam
mattress pads and pillows. This increase in convoluted foam mattress sales more
than offset the decline in Terryfoam products for the year
8
<PAGE>
to date. Since TerryFoam is a highly seasonal product, its sales are expected to
decline significantly in the Company's fourth fiscal quarter. Consequently,
management expects that total consumer sales in the fourth quarter of fiscal
1997 will be slightly lower than those in this year's third quarter.
Industrial foam sales increased by 1% in the third quarter of fiscal 1997 to
$871,000 from $859,000 in the same quarter last fiscal year. For the year to
date, industrial sales increased 5% to $2.5 million from $2.3 million in fiscal
1996. The third quarter and year to date increases were primarily the result of
higher sales to existing customers. Industrial foam sales in the fourth quarter
of fiscal 1997 are expected to be similar to third quarter levels.
Contract packaging sales decreased 7% to $1.7 million in the third quarter of
fiscal 1997 from $1.8 million in the same period last year due to lower sales
volumes of contract packaging products. Year to date contract packaging sales
decreased 6% in 1997 to $4.5 million from $4.9 million in the same period in
1996. Management expects that contract packaging sales in the fourth quarter of
fiscal 1997 will be similar to sales levels in the previous quarter.
The gross margin percentage for the third quarter of fiscal 1997 increased to
27% as compared to 26% in the third quarter last year and contributed to a 2%
increase in gross profit to $2.3 million for the third quarter of 1997 as
compared to the same period last year. Year-to-date gross profit increased by
11% to $6.9 million in the first nine months of this fiscal year from $6.2
million for the same period last year. The year-to-date gross margin percentage
remained level at 27% as compared to the same period last year. The increases in
gross profit levels and gross margin percentage resulted from improved
manufacturing efficiencies and product mix. Management expects the Company's
gross margin percentage for fiscal 1997 to be slightly higher than that of
fiscal 1996.
Sales and marketing expenses declined 15% to $1.2 million for the third quarter
of fiscal 1997 compared $1.4 million in the same quarter last year. For the year
to date in fiscal 1997, these expenses decreased by 11% to $3.4 million as
compared to $3.9 million in the same period last year. The decrease in sales and
marketing expenses for the quarter and the year to date occurred primarily in
travel, compensation expenses and consumer marketing. Total sales and marketing
expenses for the fourth quarter of 1997 are expected to be similar to those of
the third quarter.
General and administrative expenses declined by 19% to $571,000 for the third
quarter of fiscal 1997. Fiscal
9
<PAGE>
1997 year to date general and administrative expenses decreased by 5% to $1.8
million compared $1.9 million in the first nine months of fiscal 1996. Both
decreases resulted from termination of the Company's ESOP, and reduced deferred
compensation expense. General and administrative expenses for the full 1997
fiscal year are expected to be slightly lower than in fiscal 1996.
During the first nine months of fiscal 1997, the Company paid dividends of
$241,000, or 21% of net income for the year to date period. This amount
represented three 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 increases or expense
reductions as compared to previous periods are forecasts. Actual events or
results may differ materially as a result of risks facing the Company. Such
risks include but are not limited to: the loss of a major distributor of the
Company's medical or consumer products, the inability to achieve anticipated
sales volume of medical products, changes in relationships with large customers,
the impact of competitive products and pricing, government reimbursement changes
in the medical market, F.D.A. regulation of medical device manufacturing, raw
material cost increases, and other risks referenced in the Company's Annual
Report on Form 10-K.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash from operations of approximately $3.0 million during
the first nine months of fiscal 1997. The Company's working capital increased by
13% during the nine months ended June 28, 1997 as a result of increases in cash
and marketable securities of approximately $1.9 million and the repayment of
debt related to the Employee Stock Ownership Plan as discussed below. The
Company's current ratio increased to 3.7 at June 28, 1997 from 3.4 at fiscal
year end 1996.
Accounts receivable, net of allowances, decreased by $509,000 (9%) to $5.2
million at June 28, 1997 as compared to $5.7 million at September 29, 1996. All
of the Company's accounts receivable are unsecured.
Inventory, net of reserves, decreased by $312,000, or 9%, during the first three
quarters of fiscal 1997 to $3.2 million. Management expects inventory levels to
be similar at fiscal year end 1997 to those at the end
10
<PAGE>
of the third quarter.
Net property and equipment decreased by $469,000, or 9%, during the first nine
months of fiscal 1997. The change resulted from the combination of capital
expenditures of $95,000 and normal depreciation expense. Management expects that
capital expenditures during the remainder of fiscal 1997 will be higher than
those in the first three quarters.
Costs in excess of the fair value of net assets acquired increased by
approximately $59,000, net of accumulated amortization. The change resulted from
normal amortization expense and the issuance in October 1996 of 31,474 shares of
its common stock at an approximate market value of $170,000 as an additional
purchase price pursuant to the agreement by which the Company acquired
Healthflex in February 1992.
In September 1996, the Board of Directors voted to terminate the Company's
Employee Stock Ownership Plan (ESOP) effective September 30, 1996, the end of
the 1996 plan year. Accordingly, all participants became fully vested in
allocated shares on that date. All allocated shares were distributed to the
participants pursuant to the plan. As of September 30, 1996, the ESOP held
42,875 shares of unallocated Company stock. These unallocated shares were
repurchased and retired by the Company at fair market value on the purchase date
of $4.52 per share. The ESOP used the proceeds of this sale plus additional
contributions from the Company to fully retire the loans which were secured by
the unallocated shares and guaranteed by the Company. In addition, in May 1997,
the Company repurchased approximately 44,000 shares of its common stock for
approximately $214,000 ($4.89 per share) in a private transaction from the ESOP
Trustee for employees wishing to convert their allocation of ESOP shares to
cash. The repurchased shares were retired.
In November 1996, the Company repurchased 45,000 shares of its common stock for
approximately $193,000 ($4.28 per share) in a private transaction from an
unaffiliated seller. The repurchased shares were retired.
The Company's trade accounts payable decreased by $80,000 (4%) to $2.0 million
during the first three quarters of fiscal 1997. Accrued and sundry liabilities
increased by $366,000 (38%) to $1.3 million as compared to fiscal year end 1996
primarily due to increases in incentive compensation and medical insurance
accruals.
In July 1997, the Board of Directors authorized a repurchase program of up to
200,000 shares of the Company's stock. The stock will be purchased from time
11
<PAGE>
to time in the open market or in privately negotiated
transactions.
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 foreseeable future.
IMPACT OF INFLATION
Inflation was not a significant factor for the Company during the first three
quarters of fiscal 1997. 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.
12
<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.
13
<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/ James D. Ferguson
James D. Ferguson
Pres. and Chief Executive Officer
DATE: August 9, 1997
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-28-1997
<PERIOD-END> JUN-28-1997
<CASH> 1,064
<SECURITIES> 2,966
<RECEIVABLES> 5,773
<ALLOWANCES> 548
<INVENTORY> 3,152
<CURRENT-ASSETS> 12,601
<PP&E> 13,339
<DEPRECIATION> 8,734
<TOTAL-ASSETS> 21,722
<CURRENT-LIABILITIES> 3,364
<BONDS> 0
<COMMON> 4,127
0
0
<OTHER-SE> 12,602
<TOTAL-LIABILITY-AND-EQUITY> 21,722
<SALES> 25,007
<TOTAL-REVENUES> 25,258
<CGS> 18,153
<TOTAL-COSTS> 23,421
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,837
<INCOME-TAX> 689
<INCOME-CONTINUING> 1,148
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,148
<EPS-PRIMARY> .36
<EPS-DILUTED> .36
</TABLE>
