<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
-----------------------------------
FORM 10-Q
-----------------------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED APRIL 1, 2000
OR
TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _________ to ________.
Commission File Number 0-11392
SPAN-AMERICA MEDICAL SYSTEMS, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
South Carolina 57-0525804
------------------------------- ----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
70 Commerce Center
Greenville, South Carolina 29615
---------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (864) 288-8877
Not Applicable
---------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practical date.
Common Stock, No Par Value - 2,503,400 shares as of May 1, 2000.
<PAGE> 2
INDEX
SPAN-AMERICA MEDICAL SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - April 1, 2000 and October 2, 1999...........................3
Statements of Income - three and six months ended April 1, 2000
and April 3,1999........................................................4
Statements of Cash Flows - six months ended April 1, 2000 and
April 3, 1999...........................................................5
Notes to Financial Statements - April 1, 2000................................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
2
<PAGE> 3
PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
SPAN-AMERICA MEDICAL SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
April 1, October 2,
2000 1999
----------- -----------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets
Cash and equivalents $ 368,248 $ 1,029,586
Securities available for sale 4,061,957 3,163,979
Accounts receivable, net of allowances of
$320,000 at April 1, 2000 and
$414,000 at October 2, 1999 4,062,587 3,494,836
Inventories - Note C 2,064,470 2,186,436
Prepaid expenses and other 250,311 237,866
----------- -----------
Total current assets 10,807,573 10,112,703
Property and equipment, net - Note D 3,586,398 3,460,305
Costs in excess of fair value of net assets
acquired, net of accumulated amortization
of $806,631 at April 1, 2000 and
$732,919 at October 2, 1999 2,145,265 2,218,977
Other assets - Note E 1,893,811 1,886,608
----------- -----------
$18,433,047 $17,678,593
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,432,352 $ 1,279,167
Accrued and sundry liabilities 1,275,340 976,029
----------- -----------
Total current liabilities 2,707,692 2,255,196
Deferred income taxes and compensation 1,232,318 1,243,180
Shareholders' equity
Common Stock, no par value, 20,000,000 shares
authorized; issued and outstanding 2,503,400 shares at
April 1, 2000 and 2,495,400 shares at October 2, 1999 28,000
Retained earnings 14,465,037 14,180,217
----------- -----------
Total shareholders' equity 14,493,037 14,180,217
Contingencies - Note G
$18,433,047 $17,678,593
=========== ===========
</TABLE>
Note: The Balance Sheet at October 2, 1999 has been derived from the audited
financial statements at that date. See Notes to Financial Statements.
3
<PAGE> 4
SPAN-AMERICA MEDICAL SYSTEMS, INC.
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------ ------------------------------
April 1, April 3, April 1, April 3,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 6,735,098 $ 6,500,252 $ 12,246,914 $ 11,676,669
Cost of goods sold 4,800,917 4,800,377 8,633,277 8,476,613
------------ ------------ ------------ ------------
Gross profit 1,934,181 1,699,875 3,613,637 3,200,056
Selling and marketing expenses 1,071,048 1,141,277 2,128,422 2,201,804
General & administrative expenses 573,116 594,202 1,077,745 1,050,606
------------ ------------ ------------ ------------
Operating income (loss) 290,017 (35,604) 407,470 (52,354)
Other income:
Investment income and other 110,003 83,235 227,320 173,910
------------ ------------ ------------ ------------
Income before income taxes 400,020 47,631 634,790 121,556
Provision for income taxes 141,000 17,000 225,000 43,000
------------ ------------ ------------ ------------
Net income $ 259,020 $ 30,631 $ 409,790 $ 78,556
============ ============ ============ ============
Net income per share of common
stock -Note B
Basic $ 0.10 $ 0.01 $ 0.16 $ 0.03
Diluted 0.10 0.01 0.16 0.03
Dividends per common share $ 0.025 $ 0.025 $ 0.05 $ 0.05
Weighted averages shares outstanding:
Basic 2,502,697 2,627,631 2,499,048 2,661,891
Diluted 2,502,697 2,657,496 2,499,048 2,700,989
</TABLE>
See Notes to Financial Statements.
4
<PAGE> 5
SPAN-AMERICA MEDICAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------
April 1, April 3,
2000 1999
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 409,790 $ 78,556
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 357,819 384,146
Provision for losses on accounts receivable (35,000) 26,223
Increase in cash value of life insurance (41,586) (125,466)
Deferred compensation (10,862) (4,057)
Changes in operating assets and liabilities:
Accounts receivable (540,729) 860,109
Inventory 121,966 (15,082)
Prepaid expenses and other current assets 8,698 36,030
Income tax refund due 400,000
Accounts payable and accrued expenses 452,496 (177,011)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 722,592 1,463,448
INVESTING ACTIVITIES
Purchases of marketable securities (890,000) (1,010,000)
Proceeds from the sale of marketable securities 520,000
Purchases of property, plant and equipment (356,176) (109,302)
Payments for other assets (12,784) (30,209)
----------- -----------
NET CASH (USED FOR) INVESTING ACTIVITIES (1,258,960) (629,511)
FINANCING ACTIVITIES
Purchase and retirement of Common Stock -- (1,385,634)
Common Stock issued upon exercise of options -- 138,250
Dividends paid (124,970) (135,346)
----------- -----------
NET CASH (USED FOR) FINANCING ACTIVITIES (124,970) (1,382,730)
----------- -----------
(DECREASE) IN CASH AND CASH EQUIVALENTS (661,338) (548,793)
Cash and cash equivalents at beginning of period 1,029,586 1,121,437
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 368,248 $ 572,644
=========== ===========
</TABLE>
See Notes to Financial Statements.
5
<PAGE> 6
SPAN-AMERICA MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
April 1, 2000
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and six-month periods ended April 1,
2000 are not necessarily indicative of the results that may be expected for the
year ended September 30, 2000. For further information, refer to the Company's
Annual Report on Form 10-K for the year ended October 2, 1999.
NOTE B - EARNINGS PER COMMON SHARE
The Company presents its earnings per share in accordance with Financial
Accounting Standards Board Statement of Financial Accounting Standards No. 128,
Earnings per Share. The following table sets forth the computation of basic and
diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- --------------------------
April 1, April 3, April 1, April 3,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator for basic and diluted
earnings per share:
Net income $ 259,020 $ 30,631 $ 409,790 $ 78,556
========== ========== ========== ==========
Denominator:
Denominator for basic earnings per
share weighted average shares 2,502,697 2,627,631 2,499,048 2,661,891
Effect of dilutive securities:
Employee and Board stock options -- 29,865 -- 39,098
---------- ---------- ---------- ----------
Denominator for diluted earnings
per share:
Adjusted weighted average shares
and assumed conversions 2,502,697 2,657,496 2,499,048 2,700,989
========== ========== ========== ==========
Net income per share:
Basic $ 0.10 $ 0.01 $ 0.16 $ 0.03
Diluted $ 0.10 $ 0.01 $ 0.16 $ 0.03
========== ========== ========== ==========
</TABLE>
6
<PAGE> 7
NOTE C - INVENTORIES
The components of inventories are as follows:
April 1, Oct. 2,
2000 1999
---------- ----------
Raw Materials $1,493,529 $1,440,327
Finished Goods 570,941 746,109
---------- ----------
$2,064,470 $2,186,436
========== ==========
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment, at cost, is summarized by major classification as
follows:
April 1, Oct. 2,
2000 1999
----------- -----------
Land $ 317,343 $ 317,343
Land Improvements 240,016 240,016
Buildings 3,700,111 3,700,111
Machinery & Equipment 5,700,775 5,351,931
Furniture & Fixtures 524,884 517,552
Automobiles 9,520 9,520
Leasehold Improvements 66,006 66,006
----------- -----------
10,558,655 10,202,479
Less Accumulated Depreciation 6,972,257 6,742,174
----------- -----------
$ 3,586,398 $ 3,460,305
=========== ===========
NOTE E - OTHER ASSETS
Other assets consist of the following:
April 1, Oct. 2,
2000 1999
---------- ----------
Patents, net of accumulated amortization of
$847,248 at April 1, 2000 and $793,223
at October 2, 1999 $ 450,630 $ 491,871
Cash value of life insurance policies 1,389,213 1,347,627
Other 53,968 47,110
---------- ----------
$1,893,811 $1,886,608
========== ==========
7
<PAGE> 8
NOTE F - 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 131
"Disclosures about Segments of an Enterprise and Related Information."
The following table summarizes certain information on industry segments:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------ -----------------------------
April 1, April 3, April 1, April 3,
2000 1999 2000 1999
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales:
Medical $3,777,093 $4,115,770 $ 7,521,907 $ 7,729,638
Custom products 2,958,005 2,384,482 4,725,007 3,947,031
---------- ---------- ----------- -----------
Total 6,735,098 6,500,252 12,246,914 11,676,669
========== ========== =========== ===========
Operating profit:
Medical 275,248 191,067 599,323 604,678
Custom products 128,040 (97,261) 8,212 (491,128)
---------- ---------- ----------- -----------
Total 403,288 93,806 607,535 113,550
Corporate expense (113,271) (129,410) (200,065) (165,904)
Other income 110,003 83,235 227,320 173,910
---------- ---------- ----------- -----------
Income before income taxes $ 400,020 $ 47,631 $ 634,790 $ 121,556
========== ========== =========== ===========
</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.
NOTE G - 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, 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
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
INTERIM FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales for the second quarter of fiscal 2000 increased 4% to $6.7
million compared with $6.5 million in the second quarter of fiscal 1999. For the
year to date in fiscal 2000, net sales increased 5% to $12.2 million from $11.7
million in the same period last year. The increases in sales for both the
quarter and year to date were primarily due to higher sales in the custom
products segment, resulting from increased demand for consumer pillows and
mattress pads. Net income for the second quarter of 2000 increased 746% to
$259,000 or $.10 per diluted share, compared with $30,600 or $.01 per diluted
share, in the second quarter of fiscal 1999. Net income for the first half of
fiscal 2000 was $409,800, or $.16 per diluted share, compared with $78,600 or
$.03 per diluted share in fiscal 1999. The increases in earnings were mainly due
to higher sales volume, improved manufacturing efficiencies, and level selling
and administrative costs.
The Company's total medical sales decreased by 8% to $3.8 million in
the second quarter this year from $4.1 million in the same quarter last year.
Almost all of the sales decline occurred in mattress overlay product lines as a
result of hospitals switching from disposable overlays to therapeutic
replacement mattresses. Sales of our medical seating products were up 10% for
the quarter, but that was offset by slight declines in positioner and mattress
product lines, which were down by 6% and 3%, respectively. For the year to date
in fiscal 2000, medical sales decreased by 3% to $7.5 million from $7.7 million
in the same period last year due to a decline in unit sales of mattress overlays
which was mostly offset by higher unit volume of mattresses and patient
positioners. Management expects that sales of medical products for the remainder
of fiscal 2000 will be higher than those of the same period in fiscal 1999.
Sales of custom products increased by 24% during the second quarter to
$3.0 million from $2.4 million in the same period last year. Year-to-date sales
of custom products increased 20% to $4.7 million from $3.9 million. The sales
increases resulted from increased demand for consumer mattress pads and pillows
sold through our marketing partner, Louisville Bedding Company. Management
expects that custom product sales will be higher in fiscal 2000 than in fiscal
1999.
The Company's gross profit increased by approximately 14% to $1.9
million for the second quarter of 2000 from $1.7 million in the second quarter
of fiscal 1999. The gross margin percentage for the second quarter of fiscal
2000 increased to 29% compared with 26% in the second quarter last year.
Year-to-date gross profit increased 13% to $3.6 million in the first six months
of fiscal 2000 from $3.2 million for the same period last year. The year-to-date
gross margin increased to 30% compared with 27% for the same period last year.
The increases in gross profit level and gross margin percentage resulted from
higher sales volume and improved manufacturing efficiencies. Management expects
the Company's gross margin percentage for fiscal 2000 to be slightly higher than
that of fiscal 1999.
9
<PAGE> 10
Sales and marketing expenses declined by 6% to $1.07 million during the
second quarter of fiscal 2000 compared with the same quarter last year. For the
year to date in fiscal 2000, these expenses declined 3% to $2.1 million in
fiscal 2000 compared with $2.2 million for the same period last year. The
declines were due to small reductions in a number of expense categories. Total
sales and marketing expenses for fiscal 2000 are expected to be slightly higher
than those of fiscal 1999 as the Company expects to increase its investment in
marketing and product development in future quarters.
General and administrative expenses decreased 4% for the second quarter
of fiscal 2000 to $573,000 compared with $594,000 in the second fiscal quarter
of last year. For the fiscal year-to-date in 2000 general and administrative
expenses remained level at $1.1 million compared with the same period in fiscal
1999. The decrease in general and administrative expenses for the three months
ended April 1, 2000 resulted from lower payroll and professional fee expense.
General and administrative expenses for the 2000 fiscal year are expected to be
similar to those of fiscal 1999.
Non-operating income increased by 32% to $110,000 in the second quarter
of fiscal 2000 compared with the same quarter last year. For the first six
months of fiscal 2000 non-operating income increased by 31% to $227,000 compared
with the same period last year. Both the increase for the quarter and
year-to-date were due to higher royalty and interest income. Management expects
non-operating income in fiscal 2000 to be higher than that of fiscal 1999.
During the first six months of fiscal 2000, the Company paid dividends
of $124,970, or 30% of net income for the year-to-date period. This amount
represented two quarterly dividends of $.025 per share.
The statements contained in "Results of Operations" which are not
historical facts are forward-looking statements that involve risks and
uncertainties. Management wishes to caution the reader that these
forward-looking statements such as the Company's expectations for future sales
and expense levels compared with 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: (a) the loss of a major distributor of the
Company's products, (b) the inability to achieve anticipated sales volume, (c)
changes in relationships with large customers, (d) the impact of competitive
products and pricing, (e) government reimbursement changes in the medical
market, (f) FDA regulation of medical device manufacturing, (g) 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 $723,000
during the first two quarters of fiscal 2000 compared with $1.46 million in the
same period last year. Cash flow of $1.46 million for the first half of last
year was unusually high because of an income tax refund received and a large
reduction in accounts receivable caused by collection
10
<PAGE> 11
of a disputed account. Cash flow of $723,000 for the first half of this year
does not involve unusual transactions and was impacted mainly by higher net
income and an increase in accounts receivable due to higher sales levels.
The Company's working capital increased by $242,000 during the six
months ended April 1, 2000. In addition, the current ratio decreased to 4.0 at
April 1, 2000 from 4.5 at fiscal year end 1999.
Accounts receivable, net of allowances, increased by $568,000 or 16% to
$4.1 million at the end of the second quarter of fiscal 2000 compared with $3.5
million at the end of fiscal 1999. The majority of the increase was due to
higher sales levels. All of the Company's accounts receivable are unsecured.
Inventory levels declined 6 % to $2.1 million at the end of the second
quarter of fiscal 2000 compared with $2.2 million at fiscal year end 1999.
Management expects inventory levels during the remainder of fiscal 2000 to be
similar to those of fiscal 1999.
Net property and equipment decreased by $126,000, or 4%, during the
first six months of fiscal 2000. The change resulted primarily from capital
expenditures of $356,000 and normal depreciation expense. Management expects
that capital expenditures during fiscal 2000 will be higher than those of fiscal
1999.
The Company's trade accounts payable increased by $153,000 or 12%
compared with fiscal year end 1999, reflecting normal monthly fluctuations.
Accrued and sundry liabilities increased by $299,000 or 31% compared with fiscal
year end 1999 as a result of increases in income taxes payable and accrued
compensation.
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 2000.
IMPACT OF INFLATION
Inflation was not a significant factor for the Company during the
second quarter of fiscal 2000. However, the Company expects material costs to
increase in the third and fourth quarters due to anticipated raw material price
increases. 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.
YEAR 2000
The Company has completed its assessment and modification of all significant
information technology systems that could be affected by the Year 2000. All
changes have been tested and implemented, and the Company has experienced no
significant Year 2000 problems to date. The Company has also reviewed its
product lines and has determined that the products it has sold and will continue
to sell do not require modification to be Year 2000 compliant.
11
<PAGE> 12
Management believes that it has resolved its material Year 2000 issues. In the
event that unexpected Year 2000 issues arise, the Company has contingency plans
for certain critical applications. These contingency plans involve, among other
actions, manual workarounds, increasing inventories and adjusting staffing
strategies.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is from time to time party to various legal actions arising
in the normal course of business. However, management believes that as a result
of legal defenses and insurance arrangements with parties believed to be
financially capable, there are no proceedings threatened or pending against the
Company that, if determined adversely, would have a material adverse effect on
the business or financial position of the Company.
ITEM 2. Changes in Securities - None
ITEM 3. Defaults Upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders - None
ITEM 5. Other Information - None
ITEM 6. Exhibits & Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule (For SEC Use Only)
(b) None
12
<PAGE> 13
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: May 15, 2000
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-20-2000
<PERIOD-END> APR-01-2000
<CASH> 368
<SECURITIES> 4,062
<RECEIVABLES> 4,383
<ALLOWANCES> 320
<INVENTORY> 2,064
<CURRENT-ASSETS> 10,807
<PP&E> 10,559
<DEPRECIATION> 6,972
<TOTAL-ASSETS> 18,433
<CURRENT-LIABILITIES> 2,708
<BONDS> 0
0
0
<COMMON> 28
<OTHER-SE> 14,465
<TOTAL-LIABILITY-AND-EQUITY> 18,433
<SALES> 12,247
<TOTAL-REVENUES> 12,474
<CGS> 8,633
<TOTAL-COSTS> 11,839
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 635
<INCOME-TAX> 225
<INCOME-CONTINUING> 410
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 410
<EPS-BASIC> .16
<EPS-DILUTED> .16
</TABLE>
