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 DECEMBER 28, 1996.
OR
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| | 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 - 3,193,641 shares as of 2/3/97
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<PAGE>
INDEX
SPAN-AMERICA MEDICAL SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - December 28, 1996 and
September 28, 1996...............................................3
Statements of Income - Three months ended
December 28, 1996 and December 30, 1995......................4
Statements of Cash Flows - Three months ended
December 28, 1996 and December 30, 1995......................5
Notes to Financial Statements - December 28, 1996...............6
Item 2. Management's Discussion and Analysis of Interim
Financial Condition and Results of Operations.......8
PART II. OTHER INFORMATION.............................................11
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..............................................................12
2
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
SPAN-AMERICA MEDICAL SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 28, September 28,
1996 1996
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current Assets
Cash and equivalents $ 951,921 $ 925,370
Securities available for sale 1,716,577 1,194,068
Accounts receivable, net of allowances of
$540,000 at December 28, 1996 and
$419,000 at September 28, 1996 5,055,401 5,733,810
Inventories - Note B 3,567,726 3,463,637
Prepaid expenses and other 165,166 226,959
---------- ----------
Total Current Assets 11,456,791 11,543,844
Property and Equipment, net - Note C 4,954,005 5,074,106
Costs in excess of fair value of net assets acquired, net of accumulated
amortization of $327,506 at December 28, 1996 and
$290,650 at September 28, 1996 2,624,390 2,491,635
Other Assets - Note D 1,880,345 1,971,010
---------- ----------
$20,915,531 $21,080,595
LIABILITIES AND SHAREHOLDERS' EQUITY =========== ==========
Current Liabilities
Accounts payable $ 1,785,824 $ 2,117,643
Accrued and sundry liabilities 1,192,389 960,011
Current portion of long-term debt 286,344
---------- ----------
Total Current Liabilities 2,978,213 3,363,998
Deferred income taxes and compensation 1,673,762 1,697,282
Shareholders' Equity
Common Stock, no par value, 20,000,000 shares authorized; issued and
outstanding 3,184,641 shares at December 28, 1996 and 3,241,042
shares at September 28, 1996 4,300,239 4,516,895
Additional paid-in capital 52,894 145,834
Retained earnings 11,910,423 11,642,930
---------- ----------
16,263,556 16,305,659
Less guaranteed ESOP obligation 286,344
---------- ----------
Total Shareholders' Equity 16,263,556 16,019,315
---------- ----------
$20,915,531 $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)
Three Months Ended
Dec. 28, Dec. 30,
1996 1995
Net Sales $7,738,952 $7,049,185
Cost of Goods Sold 5,567,259 4,956,491
--------- ---------
Gross Profit 2,171,693 2,092,694
Selling and Marketing
Expenses 1,110,449 1,111,834
General & Administrative Expenses 585,533 615,506
--------- ----------
Income from Operations 475,711 365,354
Other (expense) Income:
Interest Expense (7,988)
Investment Income
and Other 81,995 90,426
---------- ----------
81,995 82,438
---------- ----------
INCOME BEFORE INCOME TAXES 557,706 447,792
Provision For Income Taxes 208,000 168,000
----------- -----------
NET INCOME $ 349,706 $ 279,792
========== ==========
Earnings Per Share of
Common Stock - Notes E and F $ .11 $ .09
========== ==========
Dividends Per Common Share $ .025 $ .025
========== ==========
Weighted Average Shares Outstanding 3,249,162 3,205,209
========== ==========
See Notes to Financial Statements.
4
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SPAN-AMERICA MEDICAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
Dec. 28, Dec. 30,
1996 1995
-------- ------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $349,706 $279,792
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 264,114 254,888
Provision for losses on accounts receivable 93,000 38,000
Loss on disposal of property, plant
and equipment 10,636
Increase in cash value of life insurance (36,029)
Deferred compensation (23,520) 33,787
Changes in operating assets and liabilities:
Accounts receivable 592,446 344,165
Inventory (104,089) (306,394)
Prepaid expenses and other current assets 117,582 (14,564)
Accounts payable and accrued expenses (99,842) (412,967)
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,189,397 191,314
INVESTING ACTIVITIES
Purchases of marketable securities (1,208,386) (800,000)
Proceeds from the sale of marketable securities 678,840 499,868
Purchases of property, plant and equipment (65,059) (141,316)
Payments for other assets (7,222) (35,929)
---------- --------
NET CASH (USED FOR) INVESTING ACTIVITIES (601,827) (477,377)
FINANCING ACTIVITIES
Purchase and retirement of Common Stock (479,206)
Dividends paid (81,813) (80,641)
---------- ----------
NET CASH (USED FOR) FINANCING ACTIVITIES (561,019) (80,641)
---------- ----------
INCREASE/DECREASE IN CASH AND CASH EQUIVALENTS 26,551 (366,704)
Cash and cash equivalents at beginning of period 925,370 1,242,396
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 951,921 $ 875,692
========== ==========
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
SPAN-AMERICA MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
December 28, 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 month period ended December 28, 1996
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:
December 28, September 28,
1996 1996
Raw Materials $2,752,648 $2,788,443
Work in Process 31,643 28,043
Finished Goods 783,435 647,151
--------- ----------
$3,567,726 $3,463,637
========== ==========
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment, at cost, is summarized by major classification as
follows:
December 28, September 28
1996 1996
Land $ 317,343 $ 317,343
Land Improvements 240,016 240,016
Buildings 3,613,966 3,613,966
Machinery & Equipment 8,437,417 8,372,358
Furniture & Fixtures 625,169 625,169
Automobiles 9,520 9,520
Leasehold Improvements 92,420 92,420
---------- ----------
13,335,851 13,270,792
Less Accumulated Depreciation 8,381,846 8,196,686
---------- ----------
$ 4,954,005 $ 5,074,106
========== ==========
6
<PAGE>
NOTE D - OTHER ASSETS
Other assets consist of the following:
Dec. 28, Sept. 28,
1996 1996
Patents, net of accumulated
amortization of $503,596 at
December 28, 1996 and $478,077
at September 28, 1996 $ 646,738 $ 665,035
Cash value of life insurance
policies 1,113,493 1,113,493
Terminated contract rights,
net of accumulated amortization
of $248,438 at December 28, 1996
and $233,824 at September 28, 1996. 43,842 58,456
Other 76,272 134,026
---------- -----------
$1,880,345 $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 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 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 to the participants.
7
<PAGE>
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
INTERIM FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales for the first quarter of fiscal 1997 increased by 10% to $7.7 million
compared to $7.0 million in the first quarter of fiscal 1996. The medical,
consumer and industrial segments experienced sales increases. Net income for the
first quarter of fiscal 1997 increased by 25% to $350,000 ($.11 per share) from
$280,000 ($.09 per share) in the first quarter of fiscal 1996. The increase in
net income resulted from the combination of higher sales volume and lower
expenses during the first quarter of fiscal 1997 as compared to the first
quarter of fiscal 1996.
The Company's medical sales increased by 11% to $3.9 million in the
first quarter this year from $3.5 million in the same quarter last year due
mainly to an increase in unit sales of mattress overlays, patient positioners,
and static mattresses. Management expects that sales of medical products will be
higher in fiscal 1997 than in fiscal 1996 as a result of an agreement, dated
June 1, 1996, to become the exclusive supplier of a national distributor's
private label foam products. However, an increase in
convoluted foam product sales could result in a lower gross profit margin
percentage on medical foam products.
Sales of consumer products during the first quarter rose by 21% to $1.6
million from $1.3 million in the same period last year. The increase was due to
a promotion of convoluted foam mattress pads and pillows. Management expects
that consumer foam sales will increase during the next two quarters of fiscal
1997 primarily due to higher sales of TerryFoam products.
Contract packaging sales decreased 4% to $1.5 million in the first
quarter of fiscal 1997 due to a lower volume of medical contract packaging
products. Management expects that contract packaging sales will be slightly
higher in fiscal 1997 compared to fiscal 1996.
Industrial foam product sales increased by 11% in the first quarter of
fiscal 1997 to $795,000 from $715,000 in the same quarter last fiscal year. The
increase was primarily the result of higher sales to existing customers.
Industrial foam sales in fiscal 1997 are expected to be higher than in fiscal
1996.
The Company's gross profit increased by 4% to $2.2 million in the first quarter
of fiscal 1997 from $2.1 million in the first quarter last year. However, the
gross profit margin percentage
8
<PAGE>
decreased to 28.1% from 29.7%. The decrease in gross margin percent was due to
the higher sales volume of lower margin products during the first quarter of
fiscal 1997. Management expects that the Company's gross margin percentage for
fiscal 1997 will be slightly higher than that of fiscal 1996.
Sales and marketing expenses remained level at $1.1 million in the
first quarter of fiscal 1997 compared to the same quarter last year. Total sales
and marketing expenses for fiscal 1997 are expected to be lower than those of
fiscal 1996.
General and administrative expenses decreased by $30,000 (5%) in the
first quarter of fiscal 1997 compared to the first quarter of fiscal 1996.
General and administrative expenses for the full 1997 fiscal year are expected
to be similar to those of fiscal 1996.
Non-operating income decreased by $8,000 (15%) to $82,000 in the first quarter
of fiscal 1997 as compared to the same quarter last year. Management expects
non-operating income in fiscal 1997 to remain at a level similar to fiscal 1996.
During the first quarter of fiscal 1997, the Company paid
dividends of $82,000, or 23% of net income. This payment represented one
quarterly dividend 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 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 $1.2
million during the first quarter of fiscal 1997. In addition, working capital
expanded by $299,000 or 4%, during the three months ended December 28, 1996. The
increase in working capital was caused primarily by higher securities available
for sale and lower accounts payable. The Company's current ratio increased
to 3.8 at December 28, 1996 from 3.4 at fiscal year end 1996.
Accounts receivable, net of allowances, declined 12% to $5.1 million at
the end of the first quarter of 1997 as compared to $5.7 million at the end of
fiscal 1996. All of the Company's accounts receivable are unsecured.
Inventories increased by $104,000, or 3%, during the first quarter of
fiscal 1997 to $3.6 million. The increase reflects normal monthly fluctuations
in raw material and finished goods inventories. Management expects a slight
decrease in inventory levels during fiscal 1997.
Net property and equipment decreased by $120,000, or 2%, during the
first three months of fiscal 1997. The change resulted primarily from normal
depreciation expense and capital expenditures. Management expects that capital
expenditures
9
<PAGE>
during fiscal 1997 will be higher than those of fiscal 1996.
Goodwill, net of accumulated amortization, increased by $133,000. The
change was primarily due to the Company's issuance in October of 31,474 shares
of its common stock at an approximate market value of $170,000 as additional
purchase price pursuant to the agreement by which the Company acquired
Healthflex in February 1992. Other assets decreased slightly to $1.9 million as
compared to $2.0 million at fiscal year end 1996.
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 unallocated shares on that date. All allocated shares will be 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 November 1996, the Company repurchased 45,000 of its
common stock for approximately $193,000 ($4.28 per share) in a
private transaction from an unaffiliated seller. The repurchased shares
will be retired.
The Company's trade accounts payable declined by $332,000 or 16% as
compared to fiscal year end 1996. Accrued and sundry liabilities increased by
$232,000 or 24% because of increases in accrued medical insurance and income
taxes payable which were not offset by a decline in accrued property taxes.
IMPACT OF INFLATION
Inflation was not a significant factor for the Company during the first
quarter of fiscal 1997. Higher inflation rates could impact the Company through
higher raw material costs. The Company's profit margin could be adversely
affected to the extent that the Company is unable to pass along to its customers
any increased costs.
10
<PAGE>
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) None
(b) None
11
<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
President and Chief Executive Officer
DATE: February 3, 1997
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-27-1997
<PERIOD-END> DEC-28-1996
<CASH> 952
<SECURITIES> 1,717
<RECEIVABLES> 5,595
<ALLOWANCES> 540
<INVENTORY> 3,568
<CURRENT-ASSETS> 11,457
<PP&E> 13,336
<DEPRECIATION> 8,382
<TOTAL-ASSETS> 20,916
<CURRENT-LIABILITIES> 2,978
<BONDS> 0
0
0
<COMMON> 4,353
<OTHER-SE> 11,910
<TOTAL-LIABILITY-AND-EQUITY> 20,916
<SALES> 7,739
<TOTAL-REVENUES> 7,821
<CGS> 5,567
<TOTAL-COSTS> 7,263
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 558
<INCOME-TAX> 208
<INCOME-CONTINUING> 350
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 350
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
