SPAN-AMERICA MEDICAL SYSTEMS
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
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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 JANUARY 2, 1999.
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.
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(Exact name of Registrant as specified in its charter)
South Carolina 57-0525804
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
70 Commerce Center
Greenville, South Carolina 29615
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(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 - 2,635,800 shares as of 2/3/99
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<PAGE>
INDEX
SPAN-AMERICA MEDICAL SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
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<TABLE>
<CAPTION>
<S> <C>
Item 1. Financial Statements (Unaudited)
Balance Sheets - January 2, 1999 and October 3, 1998...............................3
Statements of Income - Three months ended January 2, 1999 and
December 27, 1997.......................................................... 4
Statements of Cash Flows - Three months ended January 2, 1999 and
December 27, 1997.................... ......................................5
Notes to Financial Statements - January 2, 1999....................................6
Item 2. Management's Discussion and Analysis of Interim Financial
Condition and Results of Operations......................................................9
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
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2
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PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
SPAN-AMERICA MEDICAL SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
January 2, October 3,
1999 1998
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(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current Assets
Cash and equivalents $ 1,148,812 $ 1,121,437
Securities available for sale 3,105,361 2,602,056
Accounts receivable, net of allowances of
$393,000 at January 2, 1999 and
$429,000 at October 3, 1998 3,323,475 4,809,352
Inventories - Note D 2,108,923 2,117,994
Prepaid expenses and other 295,602 312,929
Income tax refund due 400,000
------------ ----------
Total Current Assets 9,982,173 11,363,768
Property and Equipment, net - Note E 3,730,676 3,821,735
Costs in excess of fair value of net assets
acquired, net of accumulated amortization
of $622,352 at January 2, 1999 and
$585,496 at October 3, 1998 2,329,544 2,366,400
Other Assets - Note F 1,967,512 1,860,417
---------- ----------
$18,009,905 $19,412,320
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 1,641,503 $ 1,549,232
Accrued and sundry liabilities 825,745 1,065,999
------------ ---------
Total Current Liabilities 2,467,248 2,615,231
Deferred income taxes and compensation 1,098,846 1,100,681
Shareholders' Equity
Common Stock, no par value, 20,000,000 shares
authorized; issued and outstanding 2,616,800
shares at January 2, 1999 and 2,820,029
shares at October 3, 1998 195,008 1,426,079
Additional paid-in capital 67,463 67,463
Retained earnings 14,181,340 14,202,866
---------- ----------
Total Shareholders' Equity 14,443,811 15,696,408
Contingencies - Note G
$18,009,905 $19,412,320
========== ==========
</TABLE>
Note: The Balance Sheet at October 3, 1998 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
Jan. 2, Dec. 27,
1999 1997
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<S> <C> <C>
Net sales $5,176,417 $6,354,258
Cost of goods sold 3,676,236 4,387,916
-------- ---------
Gross profit 1,500,181 1,966,342
Selling and marketing expenses 1,060,527 1,037,335
General & administrative expenses 456,404 615,135
--------- -----------
Operating (loss)/income (16,750) 313,872
Other income:
Investment income and other 90,675 116,565
---------- -----------
Income before income taxes
and discontinued operations 73,925 430,437
Provision for income taxes 26,000 159,000
---------- -----------
Income from continuing operations 47,925 271,437
Income from discontinued operations, net of
income taxes of $83,000 at December 27, 1997 140,220
------------- ---------
Net income $ 47,925 $ 411,657
========= ===========
Earnings per share of common
stock -Note C
Net income from continuing operations:
Basic $.02 $.09
Diluted $.02 $.09
Income from discontinued operations
net of income taxes:
Basic - $.04
Diluted - $.04
Net income:
Basic $.02 $.13
Diluted $.02 $.13
Dividends per common share $.025 $.025
Weighted averages shares outstanding:
Basic 2,696,152 3,111,687
Diluted 2,744,483 3,223,612
See Notes to Financial Statements.
</TABLE>
4
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SPAN-AMERICA MEDICAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
Jan. 2, Dec. 27,
1999 1997
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<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 47,925 $411,657
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 190,862 249,983
Provision for losses on accounts receivable (11,223) 16,000
Increase in cash value of life insurance (115,466) (1,586)
Deferred compensation (1,835) (1,477)
Changes in operating assets and liabilities:
Accounts receivable 1,503,795 349,715
Inventory 9,071 (672,426)
Prepaid expenses and other current assets 17,784 79,870
Income tax refund due 400,000
Accounts payable and accrued expenses (147,983) 176,006
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NET CASH PROVIDED BY OPERATING ACTIVITIES 1,892,930 607,742
INVESTING ACTIVITIES
Purchases of marketable securities (1,010,000) (1,487,696)
Proceeds from the sale of marketable securities 500,000 482,686
Purchases of property, plant and equipment (36,628) (271,572)
Payments for other assets (18,405) (12,147)
------------ ------------
NET CASH (USED FOR) INVESTING ACTIVITIES (565,033) (1,288,729)
FINANCING ACTIVITIES
Purchase and retirement of Common Stock (1,339,071) (193,717)
Common Stock issued upon exercise of options 108,000 990
Dividends paid (69,451) (78,021)
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NET CASH (USED FOR) FINANCING ACTIVITIES (1,300,522) (270,748)
------------ -----------
INCREASE /(DECREASE) IN CASH AND CASH EQUIVALENTS 27,375 (951,735)
Cash and cash equivalents at beginning of period 1,121,437 1,605,474
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,148,812 $ 653,739
========== ==========
</TABLE>
See Notes to Financial Statements.
5
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SPAN-AMERICA MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
January 2, 1999
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 January 2, 1999 are
not necessarily indicative of the results that may be expected for the year
ended October 2, 1999. For further information, refer to the Company's Annual
Report on Form 10-K for the year October 3, 1998.
NOTE B- SALE OF CONTRACT PACKAGING BUSINESS UNIT
On February 27, 1998, the Company sold substantially all of the assets of its
contract packaging business unit. The purchase price for the contract packaging
assets was $2.3 million, with $1.84 million paid in cash at closing and the
remainder financed by Span-America over five years. No gain or loss was recorded
as a result of the sale. The Company's results for the three months ended
December 27, 1997 have been restated to reflect the contract packaging business
as a discontinued operation.
Operating results of the discontinued contract packaging operations are as
follows:
Three Months Ended
Jan. 2, Dec. 27,
1999 1997
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Net sales - $1,905,688
Income before income taxes 223,220
Provision for income taxes 83,000
----------- ---------
Income from discontinued
operations - 140,220
============ =========
NOTE C - EARNINGS PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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.
6
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The following table sets forth the computation of basic and diluted earnings per
share:
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<CAPTION>
Three Months Ended
Jan. 2, Dec. 27,
1999 1997
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<S> <C> <C>
Numerator for basic and diluted earnings per share:
Income from continuing operations 47,925 271,437
Income from discontinued operations,
net of income taxes 140,220
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NET INCOME $ 47,925 $ 411,657
========= ==========
Denominator:
Denominator for basic earnings per share
weighted average shares 2,696,152 3,111,687
Effect of dilutive securities:
Employee and Board stock options 48,331 111,925
Denominator for diluted earnings per share -------- ---------
adjusted weighted average shares
and assumed conversions 2,744,483 3,223,612
========= =========
Net income from continuing operations:
Basic $.02 $.09
Diluted $.02 $.09
Income from discontinued operations
net of income taxes:
Basic $.00 $.04
Diluted $.00 $.04
Net income:
Basic $.02 $.13
Diluted $.02 $.13
NOTE D - INVENTORIES
The components of inventories are as follows: Jan. 2, Oct.3,
1999 1998
------ ------
Raw Materials $1,538,783 $1,568,262
Finished Goods 570,140 549,732
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$2,108,923 $2,117,994
============ ==========
</TABLE>
7
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NOTE E - PROPERTY AND EQUIPMENT
Property and equipment, at cost, is summarized by major classification as
follows:
<TABLE>
<CAPTION>
Jan. 2, Oct. 3,
1999 1998
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<S> <C> <C>
Land $ 317,343 $ 317,343
Land Improvements 240,016 240,016
Buildings 3,654,961 3,642,151
Machinery & Equipment 5,266,664 5,242,846
Furniture & Fixtures 517,552 517,552
Automobiles 9,520 9,520
Leasehold Improvements 66,006 66,006
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10,072,062 10,035,434
Less Accumulated Depreciation 6,341,386 6,213,699
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$ 3,730,676 $ 3,821,735
=========== ===========
</TABLE>
NOTE F - OTHER ASSETS
Other assets consist of the following:
Jan 2, Oct 3,
1999 1998
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Patents, net of accumulated amortization of
$713,073 at January 2, 1999 and $686,755
at October 3, 1998 $ 534,781 $ 542,695
Cash value of life insurance policies 1,338,957 1,223,491
Other 93,774 94,231
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$1,967,512 $1,860,417
========== ==========
NOTE G - CONTINGENCIES
The company is a defendant in a legal action involving a claim relating to a
terminated employee. The ultimate outcome or range of potential loss from this
litigation is not presently predictable.
In addition to the case mentioned above, 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, insurance
arrangements and indemnification provisions with the parties believed to be
financially capable, none of these actions should have a material effect on its
operations or its financial condition.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
INTERIM FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
On February 27, 1998 the Company sold substantially all of the assets of
its contract packaging business unit. The Company's results for the first
quarter of fiscal 1998 have been restated to reflect the contract packaging
business as a discontinued operation.
During the first quarter of 1999 the Company closed its consumer foam
plant and consolidated those operations into the Company's primary manufacturing
plant in Greenville, S. C. As a result of this change the company will now
report on two segments of business: medical and custom products. The custom
products segment includes those products formerly included in the consumer and
industrial product segments.
Net sales for the first quarter of fiscal 1999 decreased 19% to $5.2
million compared to $6.4 million in the first quarter of fiscal 1998. The
decline in sales occurred exclusively in the custom products segment and
resulted from the Company's decision to the phase out of two lines of low-margin
consumer foam mattress pads in the fourth quarter of last year. Net income for
the first quarter of fiscal 1999 was $47,900 ($.02 per diluted share) compared
to income from continuing operations of $271,400 ($.09 per diluted share) in the
first quarter of fiscal 1998. The decline resulted from the lower consumer sales
and approximately $80,000 in costs related to closing the plant discussed above.
The Company's medical sales increased by 3% to $3.6 million in the first
quarter this year from $3.5 million in the same quarter last year due mainly to
higher sales of mattress products and lower sales discounts, following the
expiration of several volume incentive programs. Management expects that sales
of medical products will be higher in fiscal 1999 than in fiscal 1998.
Sales of custom products during the first quarter declined by 45% to $1.6
million from $2.8 million in the same period last year. The change was the
result of the previously discussed decision to discontinue two product lines.
Management expects that decision will cause sales of custom products in fiscal
1999 to be significantly less than those of fiscal 1998. Management also expects
that custom products sales will increase during the next two quarters of fiscal
1999 primarily due to higher sales of TerryFoam products.
The Company's gross profit decreased by 24% to $1.5 million in the first
quarter of fiscal 1999 from $2.0 million in the first quarter last year. The
gross profit margin percentage decreased to 29.0% from 30.9%. The decrease in
gross margin percent was due primarily to the lower consumer sales volume and
costs associated with the consolidation of manufacturing facilities as
previously discussed. Management expects that the Company's gross margin
percentage for fiscal 1999 will be slightly higher than that of fiscal 1998.
Sales and marketing expenses increased slightly to $1.06 million in the
first quarter of
9
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fiscal 1999 compared to $1.04 million in the same quarter last year. Total sales
and marketing expenses for fiscal 1999 are expected to be similar to those of
fiscal 1998.
General and administrative expenses decreased by $159,000 (26%) to
$456,000 in the first quarter of fiscal 1999 compared to the first quarter of
fiscal 1998 due mainly to an increase in cash value of life insurance. General
and administrative expenses for the full 1999 fiscal year are expected to be
slightly lower than those of fiscal 1998.
Non-operating income decreased by 22% to $91,000 in the first quarter of
fiscal 1999 as compared to the same quarter last year due to lower interest
income. Management expects non-operating income in fiscal 1999 to be similar to
that of fiscal 1998.
During the first quarter of fiscal 1999, the Company paid dividends of
$69,000, or 144% 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 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 custom 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 $1,893,000
during the first quarter of fiscal 1999. In addition, working capital declined
by $1.2 million or 14%, during the three months ended January 2, 1999. The
decrease in working capital was caused primarily by lower accounts receivable
and stock repurchases during the first quarter. The Company's current ratio
decreased to 4.1 at January 2, 1999 from 4.3 at fiscal year end 1998.
Accounts receivable, net of allowances, declined $1.5 million or 31% to
$3.3 million at the end of the first quarter of fiscal 1999 as compared to $4.8
million at the end of fiscal 1998 as a result of collection of a delinquent
payment in October. All of the Company's accounts receivable are unsecured.
Inventories remained at $2.1 million at both quarter ends. Management
expects a slight decrease in inventory levels as compared to those of fiscal
1998.
Net property and equipment decreased by $91,000, or 2%, during the first
three months of fiscal 1999. The change resulted primarily from normal
depreciation expense. Management
10
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expects that capital expenditures during fiscal 1999 will be similar to those of
fiscal 1998.
The Company's trade accounts payable increased by $92,000 or 6% as
compared to fiscal year end 1998 reflecting normal monthly fluctuations. Accrued
and sundry liabilities decreased by $240,000 or 23% due to reductions in income
and property taxes payable.
In November 1998, the Company repurchased 224,229 of its common stock for
approximately $1,339,000 ($5.44 to $6.06 per share) in private transactions from
unaffiliated sellers. The repurchased shares were retired.
Management believes that funds on hand, funds generated from operations,
and funds available under the company's $2.5 million unused line of credit are
adequate to finance operations and expected capital requirements during fiscal
1999.
IMPACT OF INFLATION
Inflation was not a significant factor for the Company during the first
quarter of fiscal 1999. 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.
11
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The company is a defendant in a legal action involving a claim relating
to a terminated employee. The ultimate outcome or range of potential loss from
this litigation is not presently predictable.
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 -
The Company held its Annual Meeting of Shareholders on January 28,
1999. At this Annual Meeting, Thomas F. Grady, Jr., J. Earnest Lathem, M.D.
and James M. Shoemaker, Jr. were elected to three year terms as directors
and Robert H. Dick was elected to a two-year term as a Director. The total
shares eligible to vote as of the record date were 2,617,929. The voting
details are as follows:
Delivered
For Against Abstain No Vote
---- ------- ------- ---------
Thomas F. Grady, Jr. 2,367,940 0 2800 0
J. Earnest Lathem, M.D. 2,367,940 0 2800 0
James M. Shoemaker, Jr. 2,367,840 0 2900 0
Robert H. Dick 2,367,780 0 2960 0
ITEM 5. Other Information
None
ITEM 6. Exhibits & Reports on Form 8-K
(a) None
(b) None
12
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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
Vice President - Finance
/s/ James D. Ferguson
---------------------
James D. Ferguson
President and Chief Executive Officer
DATE: February 3, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-2-1999
<PERIOD-END> JAN-2-1999
<CASH> 1,149
<SECURITIES> 3,105
<RECEIVABLES> 3,716
<ALLOWANCES> 393
<INVENTORY> 2,109
<CURRENT-ASSETS> 9,982
<PP&E> 10,072
<DEPRECIATION> 6,341
<TOTAL-ASSETS> 18,010
<CURRENT-LIABILITIES> 2,467
<BONDS> 0
<COMMON> 195
0
0
<OTHER-SE> 14,249
<TOTAL-LIABILITY-AND-EQUITY> 18,010
<SALES> 5,176
<TOTAL-REVENUES> 5,267
<CGS> 3,676
<TOTAL-COSTS> 5,193
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 74
<INCOME-TAX> 26
<INCOME-CONTINUING> 48
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<NET-INCOME> 48
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
