SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
-----------------------------------
FORM 10-Q
------------------------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly Period Ended December 27, 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 - 3,114,238 shares as of 2/3/98
<PAGE>
INDEX
SPAN-AMERICA MEDICAL SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - December 27, 1997 and September 27, 1997............3
Statements of Income - Three months ended December 27, 1997 and
December 28, 1996....................................................4
Statements of Cash Flows - Three months ended December 27, 1997 and
December 28,1996.....................................................5
Notes to Financial Statements - December 27, 1997....................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
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
SPAN-AMERICA MEDICAL SYSTEMS, INC.
BALANCE SHEETS
December 27 September 27
1997 1997
----------- ------------
(Unaudited) (Note)
ASSETS
Current Assets
Cash and equivalents $ 653,739 $ 1,605,474
Securities available for sale 4,488,232 3,493,430
Accounts receivable, net of allowances of
$680,000 at December 27, 1997 and
$640,000 at September 27, 1997 4,558,953 4,914,460
Inventories - Note B 3,748,755 3,076,329
Prepaid expenses and other 386,036 419,044
---------- ----------
Total Current Assets 13,835,715 13,508,737
Property and Equipment, net - Note C 4,806,101 4,721,580
Costs in excess of fair value of net assets
acquired, net of accumulated amortization
of $474,929 at December 27, 1997 and
$438,073 at September 27, 1997 2,476,967 2,513,823
Other Assets - Note D 1,822,969 1,882,174
---------- ----------
$22,941,752 $22,626,314
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 2,615,425 $ 2,364,097
Accrued and sundry liabilities 1,675,988 1,751,310
----------- ----------
Total Current Liabilities 4,291,413 4,115,407
Deferred income taxes and compensation 1,529,921 1,531,398
Shareholders' Equity
Common Stock, no par value, 20,000,000 shares
authorized; issued and outstanding 3,098,168
shares at December 27, 1997 and 3,125,338
shares at September 27, 1997 3,799,018 3,991,745
Additional paid-in capital 53,160 53,160
Retained earnings 13,268,240 12,934,604
---------- ----------
Total Shareholders' Equity 17,120,418 16,979,509
$22,941,752 $22,626,314
=========== ===========
Note: The Balance Sheet at September 27, 1997 has been derived from the audited
financial statements at that date.
See Notes to Financial Statements.
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SPAN-AMERICA MEDICAL SYSTEMS, INC.
STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
Dec. 27, Dec. 28,
1997 1996
---- ----
Net Sales $8,259,946 $7,738,952
Cost of Goods Sold 5,980,659 5,567,259
Gross Profit 2,279,287 2,171,693
Selling and Marketing Expenses 1,115,641 1,110,449
General & Administrative Expenses 626,554 585,533
Income from Operations 537,092 475,711
Other Income:
Investment Income and Other 116,565 81,995
---------- ----------
INCOME BEFORE INCOME TAXES 653,657 557,706
Provision For Income Taxes 242,000 208,000
---------- ----------
NET INCOME $ 411,657 $ 349,706
========== ==========
Earnings Per Share of
Common Stock - Note E
Basic $ .13 $ .11
Diluted $ .13 $ .11
Dividends Per Common Share $ .025 $ .025
Weighted Average Shares Outstanding:
Basic 3,111,687 3,249,162
Diluted 3,223,612 3,265,534
See Notes to Financial Statements.
4
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SPAN-AMERICA MEDICAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
Dec. 27, Dec. 28,
1997 1996
-------- --------
OPERATING ACTIVITIES
Net Income $ 411,657 $ 349,706
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 249,983 264,114
Provision for losses on accounts receivable 16,000 93,000
Loss on disposal of property, plant
and equipment (1,586)
Increase in cash value of life insurance
Deferred compensation (1,477) (23,520)
Changes in operating assets and liabilities:
Accounts receivable 349,715 592,446
Inventory (672,426) (104,089)
Prepaid expenses and other current assets 79,870 117,582
Accounts payable and accrued expenses 176,006 (99,842)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 607,742 1,189,397
INVESTING ACTIVITIES
Purchases of marketable securities (1,487,696) (1,208,386)
Proceeds from the sale of marketable securities 482,686 678,840
Purchases of property, plant and equipment (271,572) (65,059)
Payments for other assets (12,147) (7,222)
------- -------
NET CASH (USED FOR) INVESTING ACTIVITIES (1,288,729) (601,827)
FINANCING ACTIVITIES
Purchase and retirement of Common Stock (193,717) (479,206)
Common stock issued upon exercise of options 990 --
Dividends paid (78,021) (81,813)
------- -------
NET CASH (USED FOR) FINANCING ACTIVITIES (270,748) (561,019)
------- -------
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (951,735) 26,551
Cash and cash equivalents at beginning of period 1,605,474 925,370
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 653,739 $ 951,921
------- -------
See Notes to Financial Statements.
5
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SPAN-AMERICA MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
December 27, 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 month period ended December 27, 1997
are not necessarily indicative of the results that may be expected for the year
ended October 2, 1998. For further information, refer to the Company's Annual
Report on Form 10-K for the year ended September 27, 1997.
NOTE B - INVENTORIES
The components of inventories are as follows: Dec. 27, Sept. 27,
1997 1997
---- ----
Raw Materials $3,105,697 $2,404,945
Work in Process 23,882 32,918
Finished Goods 619,176 638,466
------- -------
$3,748,755 $3,076,329
========== ==========
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment, at cost, is summarized by major classification as
follows:
December 27, September 27,
1997 1997
---- ----
Land $ 317,343 $ 317,343
Land Improvements 240,016 240,016
Buildings 3,613,966 3,613,966
Machinery & Equipment 8,820,367 8,548,795
Furniture & Fixtures 625,778 625,778
Automobiles 9,520 9,520
Leasehold Improvements 66,006 66,006
------ ------
13,692,996 13,421,424
Less Accumulated Depreciation 8,886,895 8,699,844
--------- ---------
$ 4,806,101 $ 4,721,580
=========== ===========
6
<PAGE>
NOTE D - OTHER ASSETS
Other assets consist of the following:
Dec. 27, Sept. 27,
1997 1997
---- ----
Patents, net of accumulated
amortization of $607,577 at
December 27, 1997 and $581,501
at September 27, 1997 $ 599,346 $ 613,275
Cash value of life insurance
policies 1,120,033 1,118,447
Other 103,590 150,452
------- -------
$1,822,969 $1,882,174
========== ==========
NOTE E - EARNINGS PER COMMON SHARE
In 1997, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 128, Earnings per Share. Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to the Statement 128 requirements.
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 1998 increased by 7% to $8.3
million compared to $7.7 million in the first quarter of fiscal 1997. The
consumer, industrial and contract packaging segments experienced sales
increases. Net income for the first quarter of fiscal 1998 increased by 18% to
$412,000 from $350,000 in the first quarter of fiscal 1997. Basic earnings per
share were $0.13, up 23% from $0.11 in the first quarter of fiscal 1997. Diluted
earnings per share were $0.13 for the current quarter compared with $0.11 in the
first quarter last year. The increase in net income resulted from higher sales
volume during the first quarter of fiscal 1998 as compared to the first quarter
of fiscal 1997.
The Company's medical sales decreased by 10% to $3.5 million in the
first quarter this year from $3.9 million in the same quarter last year due
mainly to lower sales of static replacement mattresses. Management expects that
sales of medical products will be slightly higher in fiscal 1998 than in fiscal
1997.
Sales of consumer products during the first quarter rose by 17% to $1.9
million from $1.6 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
1998 primarily due to higher sales of TerryFoam products.
Industrial foam product sales increased by 22% in the first quarter of
fiscal 1998 to $972,000 from $795,000 in the same quarter last fiscal year. The
increase was primarily the result of higher sales to existing customers.
Industrial foam sales in fiscal 1998 are expected to be higher than in fiscal
1997.
Contract packaging sales increased 30% to $1.9 million in the first
quarter of fiscal 1998 due to new contracts received during the last half of
fiscal 1997. Management expects that contract packaging sales will be slightly
higher in fiscal 1998 compared to fiscal 1997.
The Company's gross profit increased by 5% to $2.3million in the first
quarter of fiscal 1998 from $2.2 million in the first quarter last year.
However, the gross profit margin percentage decreased to 27.6% from 28.1%. The
decrease in gross margin percent was due to the higher sales volume of lower
margin products and higher labor costs during the first quarter of fiscal 1998.
Management expects that the Company's gross margin percentage for fiscal 1998
will be slightly higher than that of fiscal 1997.
Sales and marketing expenses remained level at $1.1 million in the
first quarter of fiscal 1998 compared to the same quarter last year. Total sales
and marketing expenses for fiscal 1998
8
<PAGE>
are expected to be higher than those of fiscal 1997.
General and administrative expenses increased by $41,000 (7%) in the
first quarter of fiscal 1998 compared to the first quarter of fiscal 1997. The
increase was due mainly to a one-time reduction in expenses in the first quarter
of last year related to termination of the Company's ESOP. General and
administrative expenses for the full 1998 fiscal year are expected to be higher
than those of fiscal 1997.
Non-operating income increased by $35,000 (42%) to $117,000 in the
first quarter of fiscal 1998 as compared to the same quarter last year due to
higher interest income. Management expects non-operating income in fiscal 1998
to be similar to that of fiscal 1997.
During the first quarter of fiscal 1998, the Company paid dividends of
$82,000, or 20% 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 $608,000
during the first quarter of fiscal 1998. In addition, working capital expanded
by $151,000 or 2%, during the three months ended December 27, 1998. The increase
in working capital was caused primarily by higher securities available for sale
and lower accounts payable. The Company's current ratio decreased to 3.2 at
December 27, 1998 from 3.3 at fiscal year end 1997.
Accounts receivable, net of allowances, declined 7% to $4.6 million at
the end of the first quarter of 1998 as compared to $4.9 million at the end of
fiscal 1997. All of the Company's accounts receivable are unsecured.
Inventories increased by $672,000, or 21%, during the first quarter of
fiscal 1998 to $3.7 million. The increase occurred mainly in raw materials for
the contract packaging segment and is to support new contracts with new
customers. Management expects a slight decrease in inventory levels during the
remainder of fiscal 1998.
9
<PAGE>
Net property and equipment decreased by $84,000, or 1%, during the
first three months of fiscal 1998. The change resulted primarily from normal
depreciation expense and capital expenditures. Management expects that capital
expenditures during fiscal 1998 will be higher than those of fiscal 1997.
Goodwill, net of accumulated amortization, decreased by $37,000. The
change was due to normal amortization expense.
The Company's trade accounts payable increased by $251,000 or 10% as
compared to fiscal year end 1997 reflecting normal monthly fluctuations. Accrued
and sundry liabilities decreased by $75,000 or 4%.
In November 1997, the Company repurchased 23,000 of its common stock
for approximately $162,000 ($7.06 per share) in a private transaction from an
unaffiliated seller. The repurchased shares were retired.
IMPACT OF INFLATION
Inflation was not a significant factor for the Company during the first
quarter of fiscal 1998. 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, 1998
12
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