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EXHIBIT 13.1
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SPAN-AMERICA MEDICAL SYSTEMS, INC.
2000 ANNUAL REPORT
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CORPORATE PROFILE
Span-America Medical Systems, Inc. manufactures and markets a comprehensive
selection of pressure management products for the medical market, including
Geo-Matt(R), PressureGuard(R), Geo-Mattress(R), Span-Aids(R), and Isch-Dish(R)
products. The Company also supplies pillows and mattress overlays to the
consumer bedding market, and various custom packaging products to the industrial
market. Span-America's common stock trades on The Nasdaq Stock Market(R) under
the symbol SPAN.
FINANCIAL SUMMARY
(Amounts in thousands, except per share and percent data)
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<CAPTION>
2000 1999 % CHANGE
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Net sales $26,568 $ 23,063 15%
Operating income (loss) 902 (166) 643%
Income from continuing operations 971 132 636%
Earnings per share from continuing operations:
Basic 0.39 0.05 680%
Diluted 0.39 0.05 680%
Return on net sales from continuing operations 3.7% 0.6%
Cash and securities 4,990 4,194 19%
Current assets 11,729 10,113 16%
Total assets 19,161 17,679 8%
Current liabilities 3,058 2,255 36%
Shareholders' equity 14,904 14,180 5%
Return on ending shareholders' equity 6.5% 3.5%
Number of shares outstanding at fiscal year end 2,503 2,495 0%
Book value per share 5.95 5.68 5%
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TABLE OF CONTENTS
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Letter to Shareholders............................................. 1
Selected Financial Information. ................................... 6
Quarterly Financial Data........................................... 7
Management's Discussion and Financial Analysis..................... 8
Balance Sheets..................................................... 11
Statements of Income............................................... 12
Statements of Shareholders' Equity................................. 13
Statements of Cash Flows........................................... 14
Notes to Financial Statements...................................... 15
Report of Elliott, Davis & Company, LLP, Independent Auditors...... 24
Directors and Officers............................................. IBC
Corporate Data..................................................... IBC
</TABLE>
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[PHOTO]
JAMES D. FERGUSON / PRESIDENT AND CEO
[PHOTO]
THOMAS D. HENRION / CHAIRMAN
The SALES INCREASE in both our MEDICAL
and CUSTOM PRODUCTS business units was the key to
our earnings growth during the year.
TO OUR SHAREHOLDERS:
Span-America showed gains in all key areas of our business in fiscal
2000 and our sales and earnings both increased substantially. We also invested
more in sales and marketing efforts to fuel future growth while sales of new
products continued to grow rapidly. We made excellent progress in the national
accounts arena, signing several important new supply agreements. We increased
our dividend by 20% and our financial strength continued its growth.
The Company's sales increased by 15% in fiscal 2000 to $26.6 million
compared with $23.1 million last year. Most of the sales increase came from our
custom products business and was driven by our marketing alliance with
Louisville Bedding Company. Sales of custom products rose 36% during fiscal 2000
to $11.1 million. Our medical business also performed well during the year.
Medical sales were up by 4% to $15.5 million on strong performance of our
mattress products, which was held back somewhat by declines in sales of
overlays. The sales increase in both business units was the key to our earnings
growth during the year.
Earnings from continuing operations rose 636% this year to $971,000, or
39 cents a diluted share, compared with $132,000, or 5 cents a diluted share, in
fiscal 1999. The earnings increase was driven mostly by our sales growth but we
also benefited from improved manufacturing efficiencies and greater
productivity. In fiscal 2000, we combined a $3.5 million sales increase with
better efficiencies and cost controls to produce a $1.1 million increase in
operating profit.
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Targeted at the LONG TERM CARE, ACUTE CARE and
HOME CARE MARKETS, our MEDICAL
PRODUCTS provide patients with clinically
proven results. We are well positioned for CONTINUED
GROWTH in these markets as the U.S. population ages.
MEDICAL BUSINESS
GEO-MATTRESS WITH WINGS(R)>>
THE GEO-MATTRESS LINE OF THERAPEUTIC MATTRESSES CONTINUES TO BE THE ENGINE
DRIVING THE GROWTH OF MEDICAL SALES. Enjoying record growth for the second
straight year, Geo-Mattress products accounted for much of the 25% surge in
overall mattress sales. A major factor in the line's success has been
Geo-Mattress with Wings, which nearly tripled sales in its second year of
release. With a growing market share and strong clinical acceptance, Span is
well positioned for what analysts project will be steady market growth in this
product category through 2006.
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MEDICAL BUSINESS
Our medical business enjoyed a much improved market environment in
fiscal 2000. Last year, in fiscal 1999, our part of the medical market was
practically paralyzed by Medicare cut-backs and the implementation of the
Prospective Payment System. This year, the market regained some of its footing,
and our customers began to return to normal purchasing patterns. Several of our
medical products thrived in this more positive market.
Total medical sales were up by 4% in fiscal 2000 to $15.5 million.
Leading the growth was our line of therapeutic replacement mattresses, including
the Geo-Mattress(R) and PressureGuard(R) brands. Sales of these products were up
by 25% during the year. In other parts of our medical business, sales of seating
products grew by 9% in fiscal 2000, while sales of patient positioners were
flat. So, the clear winners for the year were mattresses.
Our medical mattresses are targeted at the long-term care, acute care
and home care markets, where they provide patients with excellent, clinically
proven protection against pressure ulcers. We believe we are well positioned for
continued growth in all three of these markets as the U.S. population ages.
Driving the growth is the combination of favorable demographics and the
continued shift in market preference toward therapeutic replacement mattresses.
Although this shift contributed to an 11% sales decrease in our Geo-Matt(R) and
convoluted overlays in fiscal 2000, mattress sales are still growing faster than
overlay sales are declining. This has been a trend over the last several years
and we expect it to continue.
Sales of new mattress products continued to grow in
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[PHOTO]
2000. Our newest mattress, the PressureGuard APM(2), exceeded our sales
expectations in its first year. The APM(2) adds a lateral rotation feature to
the proven performance of our alternating pressure mattress. The new mattress is
targeted at the fast growing long term care and home care markets. Another new
product, Geo-Mattress with Wings(R), has been extremely well received since its
introduction in mid-1999. It is quickly becoming a valuable addition to the
Geo-Mattress product line. New products introduced within the last three years
made up 20% of our medical sales in 2000. We will continue to expand our new
product development efforts in order to drive this percentage even higher.
Fiscal year 2000 was also a year of success in the corporate accounts
arena. We signed supply agreements with several national health care providers,
including Beverly Enterprises, the VGM Group (the country's largest buying
alliance for independent medical equipment suppliers), Centennial Healthcare (a
leading national long-term care provider), and others. In addition, we are
pleased to have received supplier-of-the-year awards from two key national
accounts. The awards were made on the basis of the strength and breadth of our
product lines, our level of sales and marketing support, on-time shipments, and
e-commerce capabilities.
Overall, we are pleased with the progress in our medical business in
2000. We plan to continue to focus on new product development, corporate account
relationships, and expanded sales and marketing efforts.
MEDICAL BUSINESS
SPAN-AMERICA SEATING PRODUCTS>>
TIME AND AGAIN, SPAN-AMERICA WAS THE CHOICE OF THE MEDICAL INDUSTRY'S BIGGEST
PLAYERS IN 2000. Among them was Beverly Enterprises, the nation's largest
operator of long term care facilities. Following a lengthy selection process,
Span-America was named exclusive provider from among more than 30 manufacturers
of wheelchair seating devices. Agreements with the nation's largest distributor
alliance, as well as with Canada's largest medical products distributor, further
demonstrate the growing reputation of Span-America among the true players in the
medical marketplace.
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[PHOTO]
INDUSTRIAL PRODUCTS
RETURNABLE PACKAGING>>
THE AUTOMOTIVE INDUSTRY OFFERS AN EXCELLENT SOURCE OF NEW GROWTH POTENTIAL FOR
SPAN-AMERICA'S INDUSTRIAL PRODUCTS. We are currently supplying a variety of
packaging components used to ship automotive parts in returnable, reusable
containers. The packaging needs of the automotive parts suppliers are ideally
suited to our design, engineering and custom foam fabrication capabilities. We
have developed an excellent reputation as a supplier of high-quality,
precision-engineered products at competitive prices. We look forward to
continued growth in sales of our industrial products.
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CUSTOM PRODUCTS BUSINESS
The custom products business was formed in 1999 by reorganizing and
combining our consumer and industrial segments. The newly combined business unit
had a major impact on sales and earnings growth in fiscal 2000. Custom products
sales jumped 36% during the year to $11.1 million compared with $8.1 million in
1999. All of the growth came from consumer pillows and mattress overlays that
are sold through our marketing partner, Louisville Bedding Company. Louisville
Bedding is one of the largest manufacturers of mattress pads and bed pillows in
North America. Span-America's lines of foam bedding products for the consumer
market fit perfectly with Louisville Bedding's sales, marketing and distribution
expertise. It has been an excellent complementary relationship, and we look
forward to growing together in the future.
One of the key growth areas in the custom products business has been
our new Geo-Systems(TM) line of mattress overlays for the consumer bedding
market. Introduced this time last year, Geo-Systems brings hospital proven
pressure management technology to consumers. The product is thicker and has a
more sophisticated surface design than traditional convoluted pads. Our
customers get more foam and better comfort for their money. It is positioned as
a more upscale, higher value product for customers who are less price sensitive.
Sales of Geo-Systems in 2000 were excellent, and we expect continued growth from
the new product line.
Our industrial product lines delivered mixed results in 2000. Sales of
industrial products declined by 10% during the year, but both gross profit and
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Sales in our CUSTOM PRODUCTS business jumped
36% during fiscal year 2000 due in a large part to our marketing
alliance with LOUISVILLE BEDDING COMPANY.
operating profit increased over fiscal 1999 results. The reason for these
diverging results is that we discontinued some low-margin products in order to
focus more on profitability. The strategy worked well, giving us a more
profitable base from which to grow.
Future growth for industrial products could come from an interesting
market - the automotive industry. Since BMW built a large assembly plant a few
miles from our headquarters, we have seen significant growth in the number of
automotive parts suppliers moving to Greenville and surrounding areas. This has
created a good market opportunity for our custom engineered industrial products.
In 2000, we began supplying foam packaging products used to ship various
automotive parts in returnable, reusable containers. These products are ideally
suited to our design and fabrication capabilities and we expect it to be a
growth area for industrial products.
FINANCIAL CONDITION
Our improved sales and earnings performance in 2000 further
strengthened the Company's financial condition. Cash flow from operations was a
healthy $1.5 million, or $0.59 per diluted share, and was generated by higher
earnings and good management of working capital. Our ratio of current assets to
current liabilities was 3.8, indicating the Company's continuing high liquidity.
We finished the year with a strong capital base of $14.9 million, or $5.95 per
share, which was up 5% over fiscal 1999. As a result of our improved
performance, we increased our dividend by 20% to $0.03 per share per quarter. We
will continue to look for opportunities to create higher returns on capital by
using our excess cash to fund growth opportunities for Span-America. However, we
will be disciplined in our approach and our efforts will be focused on
generating an excellent total return for our shareholders.
IN THE FUTURE
Our number one goal is to increase the per share value of Span-America.
We will try to accomplish that first by pursuing consistent and accelerating
growth in our core medical and custom products businesses. We believe both
markets offer good short- and long-term growth potential. To achieve growth in
these core businesses, we plan to expand sales and marketing efforts to support
our distribution partners and to target national accounts. We will invest more
in new product development capabilities focused on developing new, break-through
products as well as extending the lives of our brands through innovative line
extensions.
To accomplish our growth goals we must also look beyond our core
businesses to find or develop new markets for our existing pressure management
products. New market areas could include private label versions of our branded
products, the wound care or skin care markets, alliances with other
manufacturers, and the vast potential of the consumer market for pressure
relieving surface and seating products.
We also plan to continue our efforts to look for business opportunities
outside the current boundaries of Span-America. This would include licensing
arrangements for new products developed by other companies and maintaining an
ongoing effort to find acquisitions of related product lines or companies. In
all of these efforts, our actions will be guided by the principle of
consistently increasing the value of this Company.
We believe the future is filled with excellent opportunities for
Span-America. We approach these new possibilities with enthusiasm and with a
sharp focus on our customers and our shareholders. Thank you for your interest
in Span-America. We look forward to reporting on our progress in fiscal 2001.
Sincerely,
/s/ James D. Ferguson
JAMES D. FERGUSON / PRESIDENT AND CEO
/s/ Thomas D. Henrion
THOMAS D. HENRION / CHAIRMAN
5
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SELECTED FINANCIAL INFORMATION
FIVE-YEAR FINANCIAL SUMMARY
(Amounts in thousands, except per share and employee data)
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<CAPTION>
2000 1999 1998 1997 1996
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For the year:
Net sales $26,568 $ 23,063 $28,346 $27,695 $ 24,820
Gross profit 7,621 6,344 8,499 8,428 7,394
Operating income (loss) 902 (166) 1,805 1,833 164
Income from continuing operations 971 132 1,412 1,370 283
Cash flow from (used in) operations 1,483 2,202 364 4,669 (514)
Capital expenditures from continuing operations 413 171 562 511 398
Per share:
Income from continuing operations:
Basic $ 0.39 $ 0.05 $ 0.48 $ 0.43 $ 0.09
Diluted 0.39 0.05 0.47 0.43 0.09
Cash dividends declared 0.11 0.10 0.10 0.10 0.10
At end of year:
Working capital 8,671 7,858 8,749 9,393 8,180
Property and equipment - net 3,346 3,460 3,822 3,773 3,669
Total assets 19,161 17,679 19,412 22,626 21,081
Shareholders' equity 14,904 14,180 15,696 16,980 16,019
Book value per share 5.95 5.68 5.57 5.43 4.94
Number of employees - continuing operations 188 174 201 187 175
Key ratios:
Current ratio 3.8 4.5 4.3 3.3 3.4
Return on net sales(1) 3.7% 0.6% 5.0% 4.9% 1.1%
Return on ending shareholders' equity 6.5% 3.5% 10.0% 9.5% 3.4%
Return on average total assets 5.3% 2.7% 7.4% 7.4% 2.6%
</TABLE>
(1) Calculated using income from continuing operations.
[GRAPH]
Dollars In Millions
[GRAPH]
Dollars In Thousands
[GRAPH]
Cents Per Share
SPAN-AMERICA MEDICAL SYSTEMS, INC. 6
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QUARTERLY FINANCIAL DATA
QUARTERLY FINANCIAL DATA (UNAUDITED)
(Amounts in thousands, except per share data)
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<CAPTION>
FIRST SECOND THIRD FOURTH YEAR
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FOR FISCAL 2000
Net sales $ 5,512 $ 6,735 $ 6,850 $ 7,471 $ 26,568
Operating income 117 290 261 234 902
Net income 151 259 275 286 971
Earnings per share
Basic 0.06 0.10 0.11 0.11 0.39
Diluted 0.06 0.10 0.11 0.11 0.39
Stock price data
High 4.00 4.00 4.25 4.63 4.63
Low 3.13 3.06 2.88 3.50 2.88
FOR FISCAL 1999
Net sales $ 5,176 $ 6,500 $ 5,620 $ 5,767 $ 23,063
Operating income (loss) (17) (36) (154) 41 (166)
Income (loss) from continuing operations 48 31 (52) 105 132
Income from discontinued operations,
net of income taxes -- -- 365 -- 365
Net income 48 31 314 105 498
Earnings per share
Basic 0.02 0.01 0.13 0.04 0.19
Diluted 0.02 0.01 0.13 0.04 0.19
Stock price data
High 6.50 5.75 4.56 4.38 6.50
Low 4.63 4.13 3.63 3.38 3.38
</TABLE>
Span-America's common stock trades on The Nasdaq Stock Market(R) under the
symbol SPAN. As of September 30, 2000, there were 2,503,400 common shares
outstanding. As of December 1, 2000, there were 310 shareholders of record and
approximately 880 beneficial shareholders. The closing price of Span-America's
stock on December 1, 2000 was $ 4.06.
The Company has paid a regular quarterly cash dividend since January 1990.
In April 2000, the Board of Directors increased the quarterly dividend to $0.03
per share from $0.025 per share. Future dividend payments will depend upon the
Company's earnings and liquidity position.
[GRAPH]
Dollars In Millions
[GRAPH]
Dollars
[GRAPH]
Percent
7 SPAN-AMERICA MEDICAL SYSTEMS, INC.
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MANAGEMENT'S DISCUSSION AND FINANCIAL ANALYSIS
RESULTS OF OPERATIONS FISCAL 2000 VS. 1999
SUMMARY
Net sales in fiscal 2000 rose 15% to $26.6 million compared with $23.1
million in fiscal 1999. Most of the increase came in the custom products segment
where sales rose 36% to $11.1 million compared with $8.1 million in 1999.
Income from continuing operations rose 636% in fiscal 2000 to
$971,000, or $0.39 per diluted share compared with $132,000, or $0.05 per
diluted share, in fiscal 1999. The Company's increased earnings were primarily
due to higher sales volume, improved manufacturing efficiencies, and higher
non-operating income.
Net income in fiscal 2000 increased 95% to $971,000, or $0.39 per
diluted share, compared with net income of $498,000, or $0.19 per diluted share
in 1999. Net income for 1999 included after-tax income from discontinued
operations of $365,000, or $0.14 per diluted share. The discontinued operation
is discussed below under "Results of Operations Fiscal 1999 vs. 1998" and in
Note 2 of the Notes to Financial Statements.
SALES
Sales in the Company's medical segment rose 4% to $15.5 million in
fiscal 2000 compared with $14.9 million the previous year. The strongest
performers in the medical business were our lines of therapeutic replacement
mattresses, including Geo-Mattress(R) and PressureGuard(R) products, which grew
25% in fiscal 2000. In addition, sales of seating products increased 9%, and
sales of patient positioners were flat during the year. Sales of medical
mattress overlays, including Geo-Matt(R) and convoluted foam pads, decreased 11%
compared with the prior year. The decline in overlay sales is expected to
continue as more customers seek to eliminate their use of single-patient
overlays by purchasing therapeutic replacement mattresses instead. However, the
Company's mattress sales to date have more than offset the decline in overlay
sales. Management expects that total medical sales will increase during fiscal
2001.
Sales in the custom products segment increased 36% during fiscal 2000
to $11.1 million from $8.1 million in fiscal 1999. The sales increase came
entirely from higher volumes of the Company's pillows and mattress overlays for
the consumer market, mainly as a result of our marketing alliance with
Louisville Bedding Company. Louisville Bedding, which distributes the Company's
consumer products under a marketing and distribution agreement, is a leading
manufacturer and distributor of bedding products in North America. The higher
sales of consumer bedding products were partially offset by lower sales of
industrial and Terryfoam(R) products. Sales of industrial products declined by
10% during fiscal 2000, due to the elimination of certain low-margin products.
Management believes that total custom products sales in fiscal 2001 will be
higher than those of fiscal 2000.
GROSS PROFIT
The Company's gross profit increased by 20% to $7.6 million during
fiscal 2000 from $6.3 million in fiscal 1999. The gross profit margin percentage
increased to 28.7% for fiscal year 2000 compared with 27.5% for fiscal 1999. The
increase in gross profit level and gross margin percentage was caused mainly by
higher sales volume during the year and to a lesser extent improved
manufacturing efficiencies related to better labor utilization. Management
expects the gross margin percentage during fiscal 2001 to be slightly higher
than the gross margin percentage in fiscal 2000.
S G & A EXPENSES
Sales and marketing expenses increased 4% to $4.5 million, or 16.8% of
sales, in fiscal 2000 compared with $4.3 million, or 18.5% of sales, in fiscal
1999. The increase occurred primarily in the medical segment and was due to
higher shipping costs, incentive compensation, and higher expense for medical
marketing programs. Management expects that total sales and marketing expenses
in fiscal 2001 will be higher than 2000 levels.
General and administrative expenses increased 1% to $2.3 million in
fiscal 2000. The slight increase was the result of largely offsetting changes in
various expense line items. General and administrative expenses for 2001 are
expected to be slightly higher than 2000 levels.
OTHER
Non-operating income increased by 55% to $545,000 in fiscal 2000
compared with $352,000 in fiscal 1999. The increase was about evenly divided
between higher interest income and higher royalties received. Management expects
non-operating income in fiscal 2001 to be lower than in fiscal 2000.
During fiscal 2000, the Company paid dividends of $275,200, or 28% of
net income, for the year. This amount represented two quarterly dividends of
$0.025 per share and two quarterly dividends of $0.03 per share.
The statements contained in "Results of Operations" and "Liquidity and
Capital Resources" 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 changes compared with previous periods are
only
SPAN-AMERICA MEDICAL SYSTEMS, INC. 8
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predictions. Actual events or results may differ materially as a result of
risks and uncertainties facing the Company, including (a) the loss of a major
distributor of the Company's medical or custom products, (b) the inability to
achieve anticipated sales volumes of medical products, (c) raw material cost
increases, (d) changes in relationships with large customers, (e) the impact of
competitive products and pricing, (f) government reimbursement changes in the
medical market, (g) FDA regulation of medical device manufacturing, and other
risks referenced in the Company's Securities and Exchange Commission filings.
The Company disclaims any obligation to update any forward-looking statement
whether as a result of new information, future events or otherwise.
RESULTS OF OPERATIONS FISCAL 1999 VS. 1998
SUMMARY
Net sales in fiscal 1999 declined 19% to $23.1 million compared with
$28.3 million in fiscal 1998. The primary reason for the decrease in revenues
was the discontinuance of two lines of consumer foam mattress pads in the custom
products business unit at the end of fiscal 1998. This decline was compounded by
a weakness in the medical market as a result of Medicare cut backs and the
implementation of the prospective payment system for long term care providers.
Net income for 1999, which includes income from discontinued operations
discussed below and in Note 2, decreased 68% to $ 498,000, or $0.19 per diluted
share, compared with $ 1.6 million or $0.52 per diluted share in 1998. Income
from continuing operations for fiscal 1999 fell 91% to $132,000 or $0.05 per
diluted share, compared with earnings of $1.4 million, or $0.47 per diluted
share, in fiscal 1998. The Company's lower earnings were due primarily to lower
sales volume.
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 at the time of the sale due to the uncertainty of collectibility of
the amount financed. The Company's earnings for the year ended October 2, 1999
include a one-time gain of $365,270, net of income taxes, or $0.14 per diluted
share related to this sale. The purchasers of the business unit chose an early
payment option on an outstanding warrant and note due to the Company. Because
the Company assigned no value to the amount of the note and warrant at closing,
the early payment resulted in a one-time gain. The gain, net of taxes, is
shown as income from discontinued operations.
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, SC. As a result of this change the Company began reporting
on two business segments: medical foam and custom products. The custom products
segment includes those products formerly reported in the consumer and industrial
product segments. This industry segment information corresponds to the markets
for which the Company manufactures and distributes its polyurethane foam and
packaging products and therefore complies with the requirements of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
SALES
The Company's medical sales decreased by 7% during fiscal 1999 to
$14.9 million compared with $16.1 million in fiscal 1998. The decrease was the
result of lower sales volume primarily of medical mattress overlays which was
not offset by an 8% increase in therapeutic replacement mattress sales compared
with the prior year.
Sales in the custom products segment decreased 33% during fiscal 1999
to $8.1 million from $12.2 million in fiscal 1998 primarily as a result of the
Company's decision to discontinue two lines of low-margin mattress pads.
Approximately 20% of the decline occurred in the TerryFoam(R) product line and
was due to lower demand for these products. The weakness in consumer product
sales was somewhat offset by higher unit sales of industrial products, which
grew 4% to $4.3 million in fiscal 1999 compared with the same period in 1998.
The growth in industrial sales was the result of new customers and continued
healthy demand from existing customers.
GROSS PROFIT
The Company's gross profit decreased by 25% to $6.3 million during
fiscal 1999 from $8.5 million in fiscal 1998. The gross profit margin percentage
declined to 27.5% for fiscal year 1999 compared with 30.0% for fiscal 1998. The
decline in gross profit level and gross margin percentage resulted mainly from
lower sales volume during the year and to a lesser extent higher manufacturing
costs in early fiscal 1999 associated with closing and consolidating the
consumer foam plant.
S G & A EXPENSES
Sales and marketing expenses decreased 3% to $4.3 million, or 18.5% of
sales, in fiscal 1999 compared with $4.4 million, or 15.5% of sales, in fiscal
1998. The decline was due to lower selling expenses in the custom products
segment partially offset by higher selling expenses in the medical segment.
General and administrative expenses declined 2% to $2.2 million in
fiscal 1999.
9 SPAN-AMERICA MEDICAL SYSTEMS, INC.
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OTHER
Non-operating income decreased by 14% to $352,000 in fiscal 1999
compared with $410,000 in fiscal 1998. The majority of the decrease was due to
lower interest income on marketable securities.
During fiscal 1999, the Company paid dividends of $260,100, or 52% of
net income, for the year. This amount represented four quarterly dividends of
$0.025 per share.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash from operations of $1.5 million during
fiscal 2000. This represents a 33% decrease from an unusually high cash flow in
1999 of $2.2 million. The 1999 cash flow was abnormally high because of the
collection of a delinquent customer receivable in early fiscal year 1999. In
fiscal 2000, the Company's operating cash flow came primarily from net income,
non-cash expenses, reduced inventory, and an increase in accounts payable and
accrued expenses. Partially offsetting those cash flow components was an
increase in accounts receivable which was related to higher sales levels.
The Company's working capital increased by $813,000 or 10% to $8.7
million during fiscal 2000. The higher working capital was the result of
increases in accounts receivable and marketable securities which were only
partially offset by increases in accounts payable and accrued liabilities. The
Company's current ratio decreased to 3.8 at September 30, 2000 from 4.5 at
fiscal year end 1999.
Accounts receivable, net of allowances, increased 23% to $4.3 million
at the end of fiscal 2000 compared with $3.5 million at the end of fiscal 1999.
The majority of the increase resulted from higher sales levels. The days sales
outstanding, calculated using a monthly average for accounts receivable,
remained level in 2000 and 1999 at 53 days. All of the Company's accounts
receivable are unsecured.
Inventory, net of reserves, decreased 5% to $2.1 million at September
30, 2000 compared with $2.2 million at October 2, 1999. Management expects
inventory levels in fiscal 2001 to be similar to those of fiscal year 2000.
Net property and equipment decreased by 3% during fiscal 2000. The
change resulted primarily from normal depreciation expense and equipment
additions of $413,000. Management expects capital expenditures during fiscal
2001 to be similar to those of fiscal 2000.
The Company's trade accounts payable increased by $298,000 (23%) to
$1.6 million from $1.3 million during fiscal 2000. The increase was due to
higher purchases related to higher sales volumes and normal monthly fluctuations
in accounts payable balances. Accrued and sundry liabilities increased by
$506,000 (52%) to $1.5 million compared with $976,000 at fiscal year end 1999.
Most of the increase was due to higher accrued incentive compensation and higher
income taxes payable related to the Company's earnings improvement during 2000.
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 2001.
IMPACT OF INFLATION
Inflation was not a significant factor for the Company during fiscal
2000. However, the Company received several raw material price increases in
the fourth quarter of fiscal 2000, and we anticipate further potential cost
increases in fiscal 2001. Management expects to recover some of the cost
increases through increased sales prices on certain of the Company's products.
However, because of market competition, there can be no assurance that we will
be able to fully offset the higher raw material costs with increased sales
prices. Consequently, the Company's profit margin could be adversely affected to
the extent that we are unable to pass these cost increases along to our
customers or to otherwise offset anticipated cost increases.
MARKET RISK
The Company's market risk exposure is the potential loss arising from
changes in interest rates and its impact on investments. As of September 30,
2000, short-term investments of $4.4 million were held available for sale with
acquired maturities of less than 180 days. Short-term investments consist
primarily of high quality and highly liquid corporate commercial paper and
municipal bonds. A substantial change in overall interest rates would not have a
material effect on the financial position of the Company.
In addition, the Company's other assets at September 30, 2000 include
$1.4 million in cash value of life insurance, which is subject to market risk
related to equity pricing and interest rate changes. Management believes that
substantial fluctuations in equity markets and interest rates and the resulting
changes in cash value of life insurance would not have a material adverse effect
on the financial position of the Company.
YEAR 2000
In 1999, the Company completed its assessment and modification of all
significant information technology systems that could be affected by the Year
2000. The Company has experienced no significant Year 2000 problems to date.
SPAN-AMERICA MEDICAL SYSTEMS, INC. 10
<PAGE> 13
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, OCTOBER 2,
2000 1999
--------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 587,663 $ 1,029,586
Securities available for sale (Note 4) 4,402,770 3,163,979
Accounts receivable, net of allowances of
$390,000 (2000) and $414,000 (1999) 4,291,586 3,494,836
Inventories (Note 5) 2,066,482 2,186,436
Prepaid expenses and deferred income taxes 380,423 237,866
--------------------------------------------------------------------------------------
Total current assets 11,728,924 10,112,703
Property and equipment, net (Note 6) 3,346,200 3,460,305
Cost in excess of fair value of net assets acquired,
net of accumulated amortization of
$880,342 (2000) and $732,919 (1999) 2,071,554 2,218,977
Other assets (Note 7) 2,014,170 1,886,608
--------------------------------------------------------------------------------------
$19,160,848 $17,678,593
======================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,576,688 $ 1,279,167
Accrued and sundry liabilities (Note 8) 1,481,541 976,029
--------------------------------------------------------------------------------------
Total current liabilities 3,058,229 2,255,196
Deferred income taxes (Note 12) 168,000 190,000
Deferred compensation (Note 10) 1,031,038 1,053,180
Contingencies (Note 18)
Shareholders' equity (Note 11)
Common stock, no par value, 20,000,000 shares
authorized; issued and outstanding shares
2,503,400 (2000) and 2,495,400 (1999) 28,000
Retained earnings 14,875,581 14,180,217
--------------------------------------------------------------------------------------
Total shareholders' equity 14,903,581 14,180,217
--------------------------------------------------------------------------------------
$19,160,848 $17,678,593
======================================================================================
</TABLE>
See accompanying notes.
11 SPAN-AMERICA MEDICAL SYSTEMS, INC.
<PAGE> 14
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------------
SEPTEMBER 30, OCTOBER 2, OCTOBER 3,
2000 1999 1998
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 26,568,424 $ 23,062,941 $ 28,345,819
Cost of goods sold 18,947,044 16,718,567 19,847,035
-------------------------------------------------------------------------------------------------------------------------
Gross profit 7,621,380 6,344,374 8,498,784
Selling and marketing expenses 4,460,924 4,271,180 4,405,339
General and administrative expenses 2,257,959 2,239,519 2,288,723
-------------------------------------------------------------------------------------------------------------------------
6,718,883 6,510,699 6,694,062
-------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 902,497 (166,325) 1,804,722
Investment income and other 545,041 351,684 410,264
-------------------------------------------------------------------------------------------------------------------------
Income before income taxes
and discontinued operations 1,447,538 185,359 2,214,986
Provision for income taxes (Note 12) 477,000 53,000 803,000
-------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 970,538 132,359 1,411,986
Income from discontinued operations,
net of income taxes of $201,000 (1999)
and $91,000 (1998) (Note 2) -- 365,270 153,530
-------------------------------------------------------------------------------------------------------------------------
Net income $ 970,538 $ 497,629 $ 1,565,516
=========================================================================================================================
Earnings per share of common stock (Note 3)
Income from continuing operations:
Basic $ 0.39 $ 0.05 $ 0.48
Diluted 0.39 0.05 0.47
Income from discontinued operations, net of income taxes:
Basic -- 0.14 0.05
Diluted -- 0.14 0.05
-------------------------------------------------------------------------------------------------------------------------
Net income:
Basic 0.39 0.19 0.53
Diluted $ 0.39 $ 0.19 $ 0.52
=========================================================================================================================
Dividends per common share $ 0.11 $ 0.10 $ 0.10
Weighted average shares outstanding:
Basic 2,501,224 2,580,986 2,931,362
Diluted 2,502,278 2,601,429 3,038,350
</TABLE>
See accompanying notes.
SPAN-AMERICA MEDICAL SYSTEMS, INC. 12
<PAGE> 15
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at September 28, 1997 3,125,338 $ 3,991,745 $ 53,160 $ 12,934,604 $ 16,979,509
Net income for the 1998 fiscal year 1,565,516 1,565,516
Common stock purchased and retired (361,309) (2,797,416) (2,797,416)
Common stock issued to Directors 8,000 55,000 55,000
Common stock issued on
exercise of stock options 48,000 176,750 176,750
Tax benefits for stock options exercised 14,303 14,303
Cash dividends paid or declared
($.10 per share) (297,254) (297,254)
--------------------------------------------------------------------------------------------------------------------------------
Balance at October 3, 1998 2,820,029 1,426,079 67,463 14,202,866 15,696,408
Net income for the 1999 fiscal year 497,629 497,629
Common stock purchased and retired (364,629) (1,604,329) (67,463) (260,142) (1,931,934)
Common stock issued to Directors 8,000 40,000 40,000
Common stock issued on
exercise of stock options 32,000 138,250 138,250
Cash dividends paid or declared
($.10 per share) (260,136) (260,136)
--------------------------------------------------------------------------------------------------------------------------------
Balance at October 2, 1999 2,495,400 -- -- 14,180,217 14,180,217
Net income for the 2000 fiscal year 970,538 970,538
Common stock issued to Directors 8,000 28,000 28,000
Cash dividends paid or declared
($.11 per share) (275,174) (275,174)
--------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2000 2,503,400 $ 28,000 -- $ 14,875,581 $ 14,903,581
================================================================================================================================
</TABLE>
See accompanying notes.
13 SPAN-AMERICA MEDICAL SYSTEMS, INC.
<PAGE> 16
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------------
SEPTEMBER 30, OCTOBER 2, OCTOBER 3,
2000 1999 1998
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 970,538 $ 497,629 $ 1,565,516
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 472,929 532,394 641,504
Amortization 255,637 253,891 252,676
Gain on disposal of business (365,270)
Provision for losses on accounts receivable 141,516 134,000
Provision for deferred income taxes (140,000) 233,000 (257,000)
Gains on sale and disposal of property,
plant and equipment (24,627)
Increase in cash value of life insurance (94,659) (124,136) (105,044)
Deferred compensation (22,142) (14,501) (6,717)
Changes in operating assets and liabilities:
Accounts receivable (952,058) 1,198,593 108,796
Inventory 119,954 (68,442) (123)
Prepaid expenses and other assets (46,846) (75,815) 134,337
Income tax refund due 400,000 (400,000)
Accounts payable and accrued expenses 803,034 (399,035) (1,569,873)
-------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,483,276 2,202,308 364,072
-------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Sale of contract packaging business 566,270 1,842,300
Purchases of marketable securities (1,310,000) (1,710,000) (3,577,696)
Proceeds from sales of marketable securities 85,000 1,130,000 4,465,382
Purchases of property, plant and equipment (412,697) (170,964) (625,502)
Proceeds from sale of property, plant,
and equipment 29,200
Payments for other assets (41,528) (55,645) (34,673)
-------------------------------------------------------------------------------------------------------------------------
Net cash (used for) provided by investing activities (1,650,025) (240,339) 2,069,811
-------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Dividends paid (275,174) (260,136) (297,254)
Purchase and retirement of common stock (1,931,934) (2,797,416)
Common stock issued upon exercise of options 138,250 176,750
-------------------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (275,174) (2,053,820) (2,917,920)
-------------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (441,923) (91,851) (484,037)
Cash and cash equivalents at beginning of year 1,029,586 1,121,437 1,605,474
-------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 587,663 $ 1,029,586 $ 1,121,437
=========================================================================================================================
</TABLE>
See accompanying notes.
SPAN-AMERICA MEDICAL SYSTEMS, INC. 14
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
September 30, 2000
1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
The Company manufactures and distributes replacement mattresses,
mattress overlays, patient positioners and seating cushions for the medical
market and pillows, cushions, mattress pads and various foam products for the
custom products market throughout the United States and Canada. The Company
provides credit in the normal course of business and performs ongoing credit
evaluations on certain of its customers' financial condition, but generally does
not require collateral to support such receivables. The Company also establishes
an allowance for doubtful accounts based upon factors surrounding the credit
risk of specific customers, historical trends and other information.
FISCAL YEAR
The Company's fiscal year ends on the Saturday nearest to September 30.
The 2000, 1999, and 1998 fiscal years were 52, 52 and 53-week years,
respectively.
CASH EQUIVALENTS
The Company considers cash equivalents to be all highly liquid
investments with a maturity when purchased of three months or less. The Company
maintains a centralized cash management program whereby its excess cash balances
are invested in commercial paper and are considered cash equivalents. At times,
cash balances in the Company's accounts maintained at federally insured
financial institutions may exceed insured limits.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash and cash
equivalents, accounts receivable, cash value of life insurance, securities
available for sale, accounts payable, and debt approximate their fair values.
The fair values of the Company's securities available for sale are based on
quoted market prices, where available, or quoted market prices of financial
instruments with similar characteristics.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out
method) or market.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Maintenance, repairs, and
minor replacements that do not improve or extend the useful lives of assets are
expensed when incurred. Depreciation is computed using the straight-line method.
Estimated useful lives for buildings and land improvements range from 15 to 35
years. The estimated useful lives of all other property and equipment range from
3 years to 15 years. For income tax purposes, depreciation is computed primarily
using accelerated methods.
INTANGIBLES
Intangible assets are amortized using the straight-line method. Costs
of patents are amortized over periods ranging from 10 to 17 years, and
trademarks are amortized over periods of 5 or 10 years. Costs in excess of the
fair value of net assets acquired are amortized over 30-year and 10-year
periods. Accumulated amortization of intangible assets at September 30, 2000 and
October 2, 1999 was approximately $1,782,000 and $1,526,000 respectively. The
Company continually reviews the recoverability of the carrying value of these
assets in accordance with Statement of Financial Accounting Standard (SFAS) No.
121 "Accounting for the Impairment of Long-Lived Assets and for Assets to be
Disposed Of." The Company also reviews long-lived assets and the related
intangible assets for impairment whenever events or changes in circumstances
indicate the carrying amount of such assets may not be recoverable.
REVENUE RECOGNITION
Revenue is recognized by the Company when goods are shipped and title
passes to the customer.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
INCOME TAXES
In accordance with SFAS No. 109, "Accounting for Income Taxes," the
liability method is used in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities, and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
EARNINGS PER COMMON SHARE
Earnings per common share are computed based on the weighted average
number of shares outstanding during each period in accordance with SFAS No. 128,
"Earnings Per Share."
15 SPAN-AMERICA MEDICAL SYSTEMS, INC.
<PAGE> 18
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USES OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Although these estimates are based on management's knowledge
of current events and actions planned for the future, the estimates may
ultimately differ from actual results.
RECENT PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This standard establishes accounting and reporting standards for all
derivatives, including those imbedded in other contracts and hedging activities.
The Financial Accounting Standards Board subsequently issued SFAS No. 137
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133." This statement delayed the effective
date of SFAS No. 133 for one year and is now effective for all quarters of
fiscal years beginning after June 15, 2000. Management anticipates that adoption
of this standard will have no material effect on the Company's financial
condition or results of operations.
The Company adopted SFAS No. 130 "Reporting Comprehensive Income" in
fiscal 1999. This statement had no material effect on the Company's financial
position or results of operations in fiscal 2000 or 1999.
2. SALE OF CONTRACT PACKAGING BUSINESS UNIT
The Company's earnings for fiscal 1999 include a one-time after-tax
gain of $365,270, or $0.14 per diluted share, related to the sale of
substantially all of the assets of its contract packaging business unit in
February 1998. 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 at the time of the
sale due to the uncertainty of collectibility of the amount financed. In 1999,
the purchasers of the business unit chose an early payment option on an
outstanding warrant and note due to the Company. Because the Company assigned no
value to the amount of the note and warrant at closing, the early payment
resulted in a one-time gain. The gain, net of taxes, is shown as income from
discontinued operations.
Operating results of the discontinued contract packaging operations are as
follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $3,170,055
Income before income taxes 244,530
Gain on sale of business unit $566,270
Provision for income taxes 201,000 91,000
-------------------------------------------------------------------------------
Income from discontinued operation -- $365,270 $ 153,530
===============================================================================
</TABLE>
SPAN-AMERICA MEDICAL SYSTEMS, INC. 16
<PAGE> 19
3. EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings per share in accordance with SFAS No. 128, "Earnings Per Share."
<TABLE>
<CAPTION>
2000 1999 1998
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator for basic and diluted earnings per share:
Income from continuing operations $ 970,538 $ 132,359 $ 1,411,986
Income from discontinued operations, net
of income taxes -- 365,270 153,530
-------------------------------------------------------------------------------------------------------------------------
Net income $ 970,538 $ 497,629 $ 1,565,516
=========================================================================================================================
Denominator for basic earnings per share:
Weighted average shares outstanding 2,501,224 2,580,986 2,931,362
Effect of dilutive securities:
Employee and board stock options 1,054 20,443 106,988
-------------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share:
Adjusted weighted average shares
and assumed conversions 2,502,278 2,601,429 3,038,350
=========================================================================================================================
Income per share from continuing operations:
Basic $ 0.39 $ 0.05 $ 0.48
Diluted 0.39 0.05 0.47
Income per share from discontinued
operations, net of income taxes:
Basic -- 0.14 0.05
Diluted -- 0.14 0.05
-------------------------------------------------------------------------------------------------------------------------
Net income:
Basic 0.39 0.19 0.53
Diluted $ 0.39 $ 0.19 $ 0.52
=========================================================================================================================
</TABLE>
17 SPAN-AMERICA MEDICAL SYSTEMS, INC.
<PAGE> 20
4. SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of variable rate demand notes and
are carried at aggregate cost which approximates market. The Company had no
unrealized holding gains or losses during fiscal years 2000, 1999, or 1998.
5. INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
2000 1999
------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 1,564,539 $ 1,440,327
Finished goods 501,943 746,109
------------------------------------------------------------------------
$ 2,066,482 $ 2,186,436
========================================================================
</TABLE>
6. PROPERTY AND EQUIPMENT
Property and equipment, at cost, is summarized by major classification as
follows:
<TABLE>
<CAPTION>
2000 1999
------------------------------------------------------------------------
<S> <C> <C>
Land $ 317,343 $ 317,343
Land improvements 240,016 240,016
Buildings 3,700,111 3,700,111
Machinery and equipment 5,565,181 5,351,931
Furniture and fixtures 533,601 517,552
Automobiles 9,520 9,520
Leasehold improvements 11,345 66,006
------------------------------------------------------------------------
10,377,117 10,202,479
Less accumulated depreciation 7,030,917 6,742,174
------------------------------------------------------------------------
$ 3,346,200 $ 3,460,305
========================================================================
</TABLE>
7. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
2000 1999
------------------------------------------------------------------------
<S> <C> <C>
Patents, net of accumulated amortization
of $901,437 (2000) and $793,223 (1999) $ 425,185 $ 491,871
Cash value of life insurance policies 1,442,286 1,347,627
Other 146,699 47,110
------------------------------------------------------------------------
$ 2,014,170 $ 1,886,608
========================================================================
</TABLE>
8. ACCRUED AND SUNDRY LIABILITIES
<TABLE>
<CAPTION>
2000 1999
------------------------------------------------------------------------
<S> <C> <C>
Salaries and other compensation $ 757,077 $ 391,139
Federal and state income taxes 106,967
Payroll taxes accrued and withheld 92,094 78,056
Property taxes 108,000 99,002
Medical insurance 85,806 79,572
Warranty reserve 194,630 173,872
Customer deposits 100,091 113,497
Other 36,876 40,891
------------------------------------------------------------------------
$ 1,481,541 $ 976,029
========================================================================
</TABLE>
SPAN-AMERICA MEDICAL SYSTEMS, INC. 18
<PAGE> 21
9. BORROWINGS
At September 30, 2000, the Company had available an unused line of
credit with a bank for unsecured short-term borrowings up to $2,500,000. The
line of credit expires February 1, 2001, and is renewable annually at the bank's
discretion. The Company paid no interest expense in fiscal years 2000, 1999 or
1998.
10. DEFERRED COMPENSATION
The Company is obligated to make payments under a retirement agreement
to its founder and former chief executive officer over his remaining life. The
Company has fully accrued the present value of the expected payments due over
the executive's estimated life expectancy. The Company recognized expenses of
approximately $91,000 in 2000, $93,000 in 1999, and $95,000 in 1998 related to
this agreement.
11. SHAREHOLDERS' EQUITY
In March 1997, the Board of Directors adopted the 1997 Stock Option
Plan ("1997 Plan"). The 1997 Plan authorized the Board to grant options to key
officers and employees of the Company for up to 200,000 shares of the Company's
Common Stock. Options granted under the 1997 Plan are generally granted at the
fair market value on the date of grant. These options become exercisable and
vested at the greater of 1,000 shares per year or 20% of the grant. Vested
options expire 10 years from the date of grant for continuing employees, or
three months after termination for employees who leave the Company.
In November 1991, the Board adopted the 1991 Stock Option Plan ("1991
Plan"). The 1991 Plan authorized the Board to grant options of up to 200,000
shares of the Company's common stock to officers and key employees and 50,000
shares to directors who are neither officers nor employees of the Company. All
other terms and conditions of the 1991 Plan are similar to the 1997 Plan.
In March 1987, the Board adopted the 1987 Stock Option Plan ("1987
Plan"). The 1987 Plan authorized the Board to grant options of up to 200,000
shares of the Company's common stock to officers and key employees of the
Company. All other terms and conditions of the 1987 Plan are similar to the 1997
Plan. The 1987 Plan was terminated on March 31, 1997. The termination does not
affect options outstanding under the plan, but no further options can be granted
under the 1987 Plan.
19 SPAN-AMERICA MEDICAL SYSTEMS, INC.
<PAGE> 22
11. SHAREHOLDERS' EQUITY (CONTINUED)
A summary of activity under the Company's three stock option plans is as
follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------------ -------------------
Weighted Weighted
Average Average
Shares Ex. Price Ex. Price
Available # Shares Per Share # Shares Per Share
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at 9/27/97 54,200 316,800 $4.58 154,800 $4.61
FISCAL YEAR 1998
Shares authorized 200,000
Granted (44,000) 44,000 7.09
Exercised (48,000) 3.68
Forfeited 1,000 (1,000) 8.38
---------------------------------------------------------------------------------------
Balance at 10/3/98 211,200 311,800 5.06 145,800 5.14
FISCAL YEAR 1999
Granted
Exercised (32,000) 4.32
Forfeited 51,000 (51,000) 5.57
Forfeitures terminated (9,000) 4.00
---------------------------------------------------------------------------------------
Balance at 10/2/99 253,200 228,800 5.05 119,800 5.30
FISCAL YEAR 2000
GRANTED (37,000) 37,000 3.55
EXERCISED
FORFEITED 35,800 (35,800) 4.83
FORFEITURES TERMINATED (12,200) 3.80
---------------------------------------------------------------------------------------
BALANCE AT 9/30/00 239,800 230,000 $4.85 139,800 $5.14
=======================================================================================
</TABLE>
A summary of stock options outstanding and exercisable at fiscal year end 2000
is shown below.
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
---------------------------------- ----------------------
Weighted Wtd. Avg. Weighted
Average Remaining Average
Ex. Price Contract Ex. Price
Ranges of Exercise Prices # Shares Per Share Life (yrs) # Shares Per Share
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$3.55 - $4.81 141,000 $4.00 7.1 63,200 $4.06
5.00 - 6.88 52,000 5.46 4.4 52,000 5.46
7.09 - 8.38 37,000 7.20 6.9 24,600 7.25
------------------------------------------------------------------------------------------
$3.55 - $8.38 230,000 $4.85 6.5 139,800 $5.14
==========================================================================================
</TABLE>
The Board of Directors adopted a stock purchase incentive plan in
February 2000. The 2000 Stock Purchase Plan was created to encourage management
employees of the Company to purchase and own the Company's common stock. Since
the plan is subject to shareholder approval, no benefits have yet been paid.
Benefits of $3,700 earned in fiscal year 2000 have been accrued at September 30,
2000.
In March 1997 the Board of Directors approved the 1997 Long-Term
Incentive Stock Option Plan for certain executives of the Company based on
achievement of specified financial goals by fiscal year end 1999. As of
September 30, 2000, the Company has accrued $24,000 for these incentives.
The Company accounts for and will continue to account for stock options
under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees." Accordingly, no compensation cost has been charged to operations.
The application of Financial Accounting Standards Board Statement No. 123
"Accounting for Stock Based Compensation," which was adopted in 1997, would not
materially affect net income and earnings per share for fiscal years 2000, 1999
and 1998.
SPAN-AMERICA MEDICAL SYSTEMS, INC. 20
<PAGE> 23
12. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax liabilities and assets as of September
30, 2000 and October 2, 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
-------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Depreciation $ 526,000 $522,000
Intangible assets 29,000
Other 49,000 44,000
-------------------------------------------------------------------
Total deferred tax liabilities 575,000 595,000
Deferred tax assets:
Deferred compensation 353,000 361,000
Accrued expenses 184,000 78,000
Intangible assets 4,000
Other 108,000 90,000
-------------------------------------------------------------------
Total deferred tax assets 649,000 529,000
-------------------------------------------------------------------
Net deferred tax (assets) liabilities $ (74,000) $ 66,000
===================================================================
</TABLE>
The Company made income tax payments, net of refunds, of approximately
$488,000 and $1,678,000 in fiscal 2000 and 1998, respectively. In fiscal 1999,
the Company received income tax refunds, net of payments, of approximately
$239,000.
Federal and state income tax provisions consist of the following:
<TABLE>
<CAPTION>
2000 1999 1998
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 547,000 $ (161,000) $ 946,000
State 70,000 (19,000) 114,000
-----------------------------------------------------------------------------------------
617,000 (180,000) 1,060,000
Deferred:
Federal (127,000) 207,000 (224,000)
State (13,000) 26,000 (33,000)
-----------------------------------------------------------------------------------------
(140,000) 233,000 (257,000)
-----------------------------------------------------------------------------------------
Total income tax expense on earnings
from continuing operations 477,000 53,000 803,000
Tax expense of discontinued operations 201,000 91,000
-----------------------------------------------------------------------------------------
Income tax expense $ 477,000 $ 254,000 $ 894,000
=========================================================================================
</TABLE>
Income tax expense differs from the amounts computed by applying the federal tax
rate to income before income taxes and discontinued operations as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed tax at the statutory rate $ 492,000 $ 45,000 $ 753,000
Increases (decreases):
State income taxes, net of federal tax benefit 38,000 19,000 55,000
Tax-exempt investment income (55,000) (31,000) (48,000)
Other, net 2,000 20,000 43,000
---------------------------------------------------------------------------------------------
Income tax expense $ 477,000 $ 53,000 $ 803,000
=============================================================================================
</TABLE>
21 SPAN-AMERICA MEDICAL SYSTEMS, INC.
<PAGE> 24
13. EMPLOYEE BENEFITS AND INCENTIVE PLANS
The Company has an employee savings and investment plan (401(k) plan)
available to the Company's employees meeting eligibility requirements. The
Company matches a percentage of the employee contributions, with certain
limitations. Contributions by the Company amounted to approximately $96,000,
$104,000, and $93,000, for the 2000, 1999, and 1998 fiscal years, respectively.
14. RELATED-PARTY TRANSACTIONS
The Company paid approximately $40,000 in 2000, $59,000 in 1999, and
$53,000 in 1998 in legal fees to a firm having a member who is also a director
of the Company.
15. MAJOR CUSTOMERS
The Company has a business relationship with a customer to distribute
certain of its medical products to hospitals and other treatment facilities
throughout the United States. Sales generated by this customer amounted to
approximately 14% of net sales in 2000, 17% in 1999, and 15% in 1998.
The Company has a business relationship with other customers to
distribute certain of its consumer products. Sales to one of these customers
amounted to 24% of net sales in 2000, 12% in 1999, and 0% in 1998. Sales to
another of these customers for the 1998 fiscal year amounted to approximately
15% of the Company's net sales.
16. OPERATIONS AND INDUSTRY SEGMENTS
The Company reports on two segments of business: medical and custom
products. This industry segment information corresponds to the markets in the
United States for which the Company manufactures and distributes its
polyurethane foam and packaging products and therefore complies with the
requirements of SFAS No. 131 "Disclosures about Segments of an Enterprise and
Related Information."
SPAN-AMERICA MEDICAL SYSTEMS, INC. 22
<PAGE> 25
16. OPERATIONS AND INDUSTRY SEGMENTS (CONTINUED)
The following table summarizes certain information on industry segments:
<TABLE>
<CAPTION>
2000 1999 1998
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales:
Medical $ 15,510,093 $ 14,937,942 $ 16,146,008
Custom products 11,058,331 8,124,999 12,199,811
-----------------------------------------------------------------------------------------------
Total $ 26,568,424 $ 23,062,941 $ 28,345,819
===============================================================================================
Operating profit (loss):
Medical $ 1,364,709 $ 937,570 $ 2,067,740
Custom products (53,536) (744,206) 187,044
-----------------------------------------------------------------------------------------------
Total 1,311,173 193,364 2,254,784
Corporate expense (408,676) (359,689) (450,062)
Other income 545,041 351,684 410,264
-----------------------------------------------------------------------------------------------
Income before income taxes and
discontinued operations $ 1,447,538 $ 185,359 $ 2,214,986
===============================================================================================
Identifiable assets:
Medical $ 8,260,776 $ 8,010,564 $ 8,135,341
Custom products 4,385,033 4,123,123 5,925,304
Corporate 6,515,039 5,544,906 5,351,675
-----------------------------------------------------------------------------------------------
$ 19,160,848 $ 17,678,593 $ 19,412,320
===============================================================================================
Depreciation and amortization expenses:
Medical $ 470,590 $ 500,658 $ 450,473
Custom products 257,436 284,741 312,098
Corporate 540 886 1,335
-----------------------------------------------------------------------------------------------
728,566 786,285 763,906
Other - discontinued operations 130,274
-----------------------------------------------------------------------------------------------
$ 728,566 $ 786,285 $ 894,180
===============================================================================================
Capital expenditures:
Medical $ 234,567 $ 109,090 $ 243,565
Custom products 178,130 61,874 318,251
-----------------------------------------------------------------------------------------------
412,697 170,964 561,816
Other - discontinued operations 63,686
-----------------------------------------------------------------------------------------------
$ 412,697 $ 170,964 $ 625,502
===============================================================================================
</TABLE>
Total sales by industry segment include sales from unaffiliated
customers, as reported in the Company's statements of income. In calculating
operating profit, non-allocable general corporate expenses, interest expense,
other income, and income taxes are not included, but certain corporate operating
expenses incurred for the benefit of all segments are included on an allocated
basis.
Identifiable assets are those assets that are used in the operations of
each segment on an allocated basis. Amounts shown for corporate assets consist
primarily of cash, marketable securities, and cash surrender value of life
insurance.
The Company has several customers whose sales represent significant
portions of sales in their respective business segments. In the medical segment,
sales to one of these customers represented 23% of net medical sales in 2000,
and 26% in 1999 and 1998. In the custom products segment, sales to one customer
accounted for 58% of net custom products sales in 2000 and 35% in 1999. In 1998,
sales to another customer accounted for 34% of net sales in the custom products
segment.
23 SPAN-AMERICA MEDICAL SYSTEMS, INC.
<PAGE> 26
17. OPERATING LEASES
The Company leases truck equipment in South Carolina and manufacturing
facilities in California. Both of the leases require the Company to pay
insurance and maintenance costs.
Rental expense for all operating leases was $205,000 in 2000, $209,000
in 1999, and $343,000 in 1998.
Future minimum lease payments under non-cancelable operating leases
with initial terms of one year or more at September 30, 2000 were $226,000 for
the 2001 fiscal year, $240,000 for the 2002 fiscal year, $248,000 for the 2003
fiscal year, and $63,000 for the 2004 fiscal year.
18. CONTINGENCIES
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 and insurance arrangements, none of these actions
should have a material adverse effect on its operations or financial condition.
REPORT OF ELLIOTT, DAVIS & COMPANY, LLP, INDEPENDENT AUDITORS
Shareholders and Board of Directors
Span-America Medical Systems, Inc.
Greenville, SC
We have audited the accompanying balance sheet of Span-America Medical
Systems, Inc. as of September 30, 2000 and the related statements of income,
shareholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of Span-America Medical Systems, Inc. as of
October 2, 1999 and for the years ended October 2, 1999 and October 3, 1998 were
audited by other auditors whose report, dated October 27, 1999, expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used in significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Span-America Medical
Systems, Inc., as of September 30, 2000 and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ Elliott, Davis & Company, LLP
Greenville, SC
October 27, 2000
SPAN-AMERICA MEDICAL SYSTEMS, INC. 24
<PAGE> 27
DIRECTORS AND OFFICERS
<TABLE>
DIRECTORS
<S> <C>
Thomas D. Henrion Douglas E. Kennemore, M.D.
Chairman of the Board Retired Neurosurgeon
President Greenville, South Carolina
EquiSource, LLC
Louisville, Kentucky J. Ernest Lathem, M.D.
Retired Urological Surgeon
James D. Ferguson Greenville, South Carolina
President and Chief Executive Officer
James M. Shoemaker, Jr.
B. Kenneth Bolt Member
President Wyche, Burgess, Freeman & Parham, P.A.
Banyan Retirement Services, Inc. Greenville, South Carolina
Greenville, South Carolina
OFFICERS
Richard C. Coggins
Chief Financial Officer James D. Ferguson
Treasurer and Secretary President and Chief Executive Officer
Robert H. Dick Robert E. Ackley
President Vice President - Operations
R.H. Dick & Company, Inc.
Argyle, New York Richard C. Coggins
Chief Financial Officer
Thomas F. Grady, Jr. Treasurer and Secretary
Vice President
International Paper Keith A. Mauldin
Montvale, New Jersey Vice President - Custom Products
Clyde A. Shew
Vice President - Medical Sales and Marketing
</TABLE>
CORPORATE DATA
<TABLE>
<S> <C>
CORPORATE OFFICE SHAREHOLDER INQUIRIES AND
AVAILABILITY OF FORM 10-K REPORT
Span-America Medical Systems, Inc.
70 Commerce Center A copy of the Company's Annual Report on Form 10-K
Greenville, South Carolina 29615 for the year ended September 30, 2000 is available
(864) 288-8877 without charge to shareholders upon written request
from the following:
Mailing Address:
P.O. Box 5231 Secretary
Greenville, S.C. 29606 Span-America Medical Systems, Inc.
P.O. Box 5231
Web Site: Greenville, South Carolina 29606
www.spanamerica.com
STOCK TRANSFER AGENT
GENERAL COUNSEL
American Stock Transfer & Trust Company
Wyche, Burgess, Freeman & Parham, P.A. 59 Maiden Lane - Plaza Level
P.O. Box 728 New York, NY 10038
Greenville, South Carolina 29602 (800) 937-5449
AUDITORS
Elliott, Davis & Company, LLP Inquiries regarding stock transfers, lost certificates or
P.O. Box 6286 address changes should be directed to the Stock
Greenville, South Carolina 29606 Transfer Agent at the address above.
STOCK INFORMATION
The common stock of Span-America Medical Systems,
Inc. trades on The Nasdaq Stock Market(R) under the [SPAN LOGO]
symbol SPAN.
</TABLE>
<PAGE> 28
[PHOTO]
http://www.spanamerica.com
Span-America Medical Systems, Inc.
70 Commerce Center
Greenville, South Carolina 29615
Telephone (864) 288-8877 - Fax (864) 288-8692
