<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
-----------------------------------
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED JANUARY 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.
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(Exact name of Registrant as specified in its charter)
South Carolina 57-0525804
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
70 Commerce Center
Greenville, South Carolina 29615
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (864) 288-8877
Not Applicable
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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 2/10/00
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INDEX
SPAN-AMERICA MEDICAL SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - January 1, 2000 and October 2, 1999.................3
Statements of Income - Three months ended January 1, 2000 and
January 2, 1999.............................................4
Statements of Cash Flows - Three months ended January 1, 2000 and
January 2, 1999.............................................5
Notes to Financial Statements - January 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
<PAGE> 3
PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
SPAN-AMERICA MEDICAL SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
January 1, October 2,
2000 1999
----------- -----------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets
Cash and equivalents $ 698,015 $ 1,029,586
Securities available for sale 4,061,568 3,163,979
Accounts receivable, net of allowances of
$355,000 at January 1, 2000 and
$414,000 at October 2, 1999 3,056,386 3,494,836
Inventories - Note C 2,155,538 2,186,436
Prepaid expenses and other 236,540 237,866
----------- -----------
Total current assets 10,208,047 10,112,703
Property and equipment, net - D 3,382,088 3,460,305
Costs in excess of fair value of net assets
acquired, net of accumulated amortization
of $769,775 at January 1, 2000 and
$732,919 at October 2, 1999 2,182,121 2,218,977
Other assets - Note E 1,968,001 1,886,608
----------- -----------
$17,740,257 $17,678,593
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,075,001 $ 1,279,167
Accrued and sundry liabilities 1,158,696 976,029
----------- -----------
Total current liabilities 2,233,697 2,255,196
Deferred income taxes and compensation 1,237,958 1,243,180
Shareholders' equity
Common Stock, no par value, 20,000,000 shares
authorized; issued and outstanding 2,495,400
shares at January 1, 2000 and October 2, 1999
Retained earnings 14,268,602 14,180,217
----------- -----------
Total shareholders' equity 14,268,602 14,180,217
Contingencies - Note G
$17,740,257 $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
Jan. 1, Jan. 2,
2000 1999
---------- -----------
<S> <C> <C>
Net sales $5,511,817 $ 5,176,417
Cost of goods sold 3,832,360 3,676,236
---------- -----------
Gross profit 1,679,457 1,500,181
Selling and marketing expenses 1,057,374 1,060,527
General & administrative expenses 504,629 456,404
---------- -----------
Operating income (loss) 117,454 (16,750)
Other income:
Investment income and other 117,316 90,675
---------- -----------
Income before income taxes 234,770 73,925
Provision for income taxes 84,000 26,000
---------- -----------
Net income $ 150,770 $ 47,925
========== ===========
Net income per share of common
stock -Note B
Basic $ .06 $ .02
Diluted $ .06 $ .02
Dividends per common share $ .025 $ .025
Weighted averages shares outstanding:
Basic 2,495,400 2,696,152
Diluted 2,495,400 2,744,483
</TABLE>
See Notes to Financial Statements.
4
<PAGE> 5
SPAN-AMERICA MEDICAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
Jan. 1, Jan. 2,
2000 1999
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 150,770 $ 47,925
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 176,094 190,862
Provision for losses on accounts receivable (20,000) (11,223)
Increase in cash value of life insurance (41,585) (115,466)
Deferred compensation (5,222) (1,835)
Changes in operating assets and liabilities:
Accounts receivable 450,861 1,503,795
Inventory 30,898 9,071
Prepaid expenses and other current assets (60,934) 17,784
Income tax refund due 400,000
Accounts payable and accrued expenses (21,499) (147,983)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 659,383 1,892,930
INVESTING ACTIVITIES
Purchases of marketable securities (890,000) (1,010,000)
Proceeds from the sale of marketable securities 500,000
Purchases of property, plant and equipment (34,065) (36,628)
Payments for other assets (4,504) (18,405)
----------- -----------
NET CASH (USED FOR) INVESTING ACTIVITIES (928,569) (565,033)
FINANCING ACTIVITIES
Purchase and retirement of Common Stock -- (1,339,071)
Common Stock issued upon exercise of options -- 108,000
Dividends paid (62,385) (69,451)
----------- -----------
NET CASH (USED FOR) FINANCING ACTIVITIES (62,385) (1,300,522)
----------- -----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (331,571) 27,375
Cash and cash equivalents at beginning of period 1,029,586 1,121,437
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 698,015 $ 1,148,812
=========== ===========
</TABLE>
See Notes to Financial Statements.
5
<PAGE> 6
SPAN-AMERICA MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
January 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 month period ended January 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 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
Jan. 1, Jan 2,
2000 1999
---------- ----------
<S> <C> <C>
Numerator for basic and diluted earnings per share:
Net income $ 150,770 $ 47,925
========== ==========
Denominator:
Denominator for basic earnings per share
weighted average shares 2,495,400 2,696,152
Effect of dilutive securities:
Employee and Board stock options -- 48,331
---------- ----------
Denominator for diluted earnings per share
adjusted weighted average shares
and assumed conversions 2,495,400 2,744,483
========== ==========
Net income per share:
Basic $ .06 $ .02
Diluted $ .06 $ .02
</TABLE>
6
<PAGE> 7
NOTE C - INVENTORIES
The components of inventories are as follows: Jan. 1, Oct. 2,
2000 1999
---------- ----------
Raw Materials $1,543,620 $1,440,327
Finished Goods 611,918 746,109
---------- ----------
$2,155,538 $2,186,436
========== ==========
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment, at cost, is summarized by major classification as
follows:
Jan. 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 5,385,996 5,351,931
Furniture & Fixtures 517,552 517,552
Automobiles 9,520 9,520
Leasehold Improvements 66,006 66,006
----------- ----------
10,236,544 10,202,479
Less Accumulated Depreciation 6,854,456 6,742,174
----------- ----------
$ 3,382,088 $3,460,305
=========== ==========
NOTE E - OTHER ASSETS
Other assets consist of the following:
Jan. 1, Oct. 2,
2000 1999
---------- ----------
Patents, net of accumulated amortization of
$820,179 at January 1, 2000 and $793,223
at October 2, 1999 $ 469,419 $ 491,871
Cash value of life insurance policies 1,389,212 1,347,627
Other 109,370 47,110
---------- ----------
$1,968,001 $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:
Three Months Ended
Jan. 1, Jan. 2,
2000 1999
-------------------------------
Net Sales:
Medical $ 3,744,815 $ 3,613,867
Custom products 1,767,002 1,562,550
-------------------------------
Total $ 5,511,817 $ 5,176,417
===============================
Operating profit:
Medical 324,075 413,611
Custom products (119,828) (393,867)
-------------------------------
Total 204,247 19,744
Corporate expense (86,793) (36,494)
Other income 117,316 90,675
------- --------
Income before income taxes 234,770 73,925
======= ========
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 first quarter of fiscal 2000 increased 6% to $5.5
million compared with $5.2 million in the first quarter of fiscal 1999. Sales
increased in both the medical and custom products segments. Net income for the
first quarter of fiscal 2000 was $150,800 ($.06 per diluted share) compared with
net income of $47,900 ($.02 per diluted share) in the first quarter of fiscal
1999. The increase resulted from a higher sales base, improved product mix and
controlled expenses.
The Company's medical sales increased by 4% to $3.74 million in the
first quarter this year from $3.61 million in the same quarter last year due
mainly to higher sales of its Geo-Mattress(R) and positioner products.
Management expects that sales of medical products will be higher in fiscal 2000
than in fiscal 1999.
Sales of custom products rose during the first quarter by 13% to $1.77
million from $1.56 million in the same period last year. The change resulted
from a 120% increase in sales of consumer bedding products due to a new supply
agreement signed in the second quarter of fiscal 1999. The higher bedding
product revenues were partially offset by lower sales of TerryFoam(R) and
industrial products. Management expects that custom products sales will be
higher in fiscal 2000 than in fiscal 1999.
The Company's gross profit increased 12% to $1.7 million in the first
quarter of fiscal 2000 from $1.5 million in the first quarter last year. The
gross profit margin percentage rose to 30.5% from 29.0%. The margin improvement
was due to the higher sales volume and improved manufacturing cost controls.
Management expects that the Company's gross margin percentage for fiscal 2000
will be slightly higher than that of fiscal 1999.
Sales and marketing expenses remained at $1.06 million in the first
quarter of fiscal 2000. Total sales and marketing expenses for fiscal 2000 are
expected to be slightly higher than those of fiscal 1999.
General and administrative expenses increased by $48,000 (11%) to
$505,000 in the first quarter of fiscal 2000 compared with the first quarter of
fiscal 1999 due mainly to lower income on company-owned life insurance policies.
Income on the cash value of these policies is recorded as a reduction in
administrative expenses. General and administrative expenses for the 2000 fiscal
year are expected to be similar to those of fiscal 1999.
Non-operating income increased by 29% to $117,000 in the first quarter
of fiscal 2000 compared with the same quarter last year due to higher royalty
and interest income. Management expects non-operating income in fiscal 2000 to
be similar to that of fiscal 1999.
9
<PAGE> 10
During the first quarter of fiscal 2000, the Company paid dividends of
$62,400, or 41% of net income. This payment represented one quarterly dividend
of $.025 per share.
The statements contained in "Results of Operations" which are not
historical facts are forward-looking statements that involve risks and
uncertainties. Management wishes to caution the reader that these
forward-looking statements such as the Company's expectations for future sales
increases or expense reductions as compared 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: the loss of a major
distributor of the Company's medical or custom products, the inability to
achieve anticipated sales volume of medical or custom products, changes in
relationships with large customers, the impact of competitive products and
pricing, government reimbursement changes in the medical market, FDA regulation
of medical device manufacturing, raw material cost increases, and other risks
referenced in the Company's Annual Report on Form 10-K.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash from operations of approximately $660,000
during the first quarter of fiscal 2000 compared with $1.9 million in the first
quarter of fiscal 1999. The decline in cash flows was due to an income tax
refund received and an unusually large reduction in accounts receivable in the
first quarter of fiscal 1999.
The Company's working capital increased by $117,000 during the three
months ended January 1, 2000. In addition, the current ratio increased to 4.6 at
January 1, 2000 from 4.5 at fiscal year end 1999.
Accounts receivable, net of allowances, declined $440,000 or 13% to
$3.1 million at the end of the first quarter of fiscal 2000 as compared with
$3.5 million at the end of fiscal 1999. All of the Company's accounts receivable
are unsecured.
Inventories remained level at $2.2 million at the end of the first
quarter of fiscal 2000 compared with fiscal year end 1999. Management expects
inventory levels to be similar to those of fiscal 1999.
Net property and equipment decreased by $78,000, or 2%, during the
first three months of fiscal 2000. The change resulted primarily from 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 decreased by $204,000 or 16% as
compared with fiscal year end 1999, reflecting normal monthly fluctuations.
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.
10
<PAGE> 11
IMPACT OF INFLATION
Inflation was not a significant factor for the Company during the first
quarter of fiscal 2000. Higher inflation rates could impact the Company through
higher raw material costs. The Company's profit margin could be adversely
affected to the extent that the Company is unable to pass along to its customers
any increased costs.
YEAR 2000
The Company has fully completed its assessment and remediation of all
significant information technology systems that could be affected by the Year
2000. The Company has completed testing of these changes and has implemented all
changes. Based on a review of its product lines, the Company has determined that
the products it has sold and will continue to sell do not require modification
to be Year 2000 compliant. 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.
11
<PAGE> 12
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 -
The Company held its Annual Meeting of Shareholders on February 3,
2000. At this Annual Meeting B. Kenneth Bolt, Thomas D. Henrion, and Douglas E.
Kennemore, M.D. were elected to three-year terms as directors. The total shares
eligible to vote as of the record date were 2,495,400. The voting details are as
follows:
For Against Abstain Not Voted
--------- ------- ------- ---------
B. Kenneth Bolt 2,369,871 26,598 0 98,931
Thomas D. Henrion 2,368,671 27,798 0 98,931
Douglas E. Kennemore, M. D. 2,369,710 27,398 0 98,292
ITEM 5. Other Information
None
ITEM 6. Exhibits & Reports on Form 8-K
(a) EX-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: February 14, 2000
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-END> JAN-01-2000
<CASH> 698
<SECURITIES> 4,062
<RECEIVABLES> 3,411
<ALLOWANCES> 355
<INVENTORY> 2,155
<CURRENT-ASSETS> 10,208
<PP&E> 10,237
<DEPRECIATION> 6,854
<TOTAL-ASSETS> 17,740
<CURRENT-LIABILITIES> 2,234
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 14,269
<TOTAL-LIABILITY-AND-EQUITY> 17,740
<SALES> 5,512
<TOTAL-REVENUES> 5,629
<CGS> 3,832
<TOTAL-COSTS> 5,394
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 235
<INCOME-TAX> 84
<INCOME-CONTINUING> 151
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 151
<EPS-BASIC> .06
<EPS-DILUTED> .06
</TABLE>
