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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 March 29, 2003

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
(State or other jurisdiction of
incorporation or organization)		   57-0525804
(IRS Employer
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 — 2,550,154 shares as of May 1, 2003

 

INDEX

SPAN-AMERICA MEDICAL SYSTEMS, INC.

         
PART I. FINANCIAL INFORMATION
        
 
        
Item 1. Financial Statements (Unaudited)
        
 
        
Balance Sheets — March 29, 2003 and September 28, 2002
     3  
 
        
Statements of Income — three and six months ended March 29, 2003 and March 30, 2002
     4  
 
        
Statements of Cash Flows — six months ended March 29, 2003 and March 30, 2002
     5  
 
        
Notes to Financial Statements — March 29, 2003
     6  
 
        
Item 2. Management’s Discussion and Analysis of Interim Financial Condition and Results of Operations
     9  
 
        
Item 3. Market Risk
     13  
 
        
Item 4. Controls and Procedures
     13  
 
        
PART II. OTHER INFORMATION
     14  
 
        
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
     15  
 
        
Officer Certifications
     16  

2

 

Part 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Span-America Medical Systems, Inc.
Balance Sheets

                   
      March 29,   Sept. 28,
      2003   2002
      (Unaudited)   (Note)
     
 
Assets
                
Current assets:
                
 
Cash and cash equivalents
   $ 1,579,550     $ 1,095,299  
 
Securities available for sale
     4,850,380       5,853,717  
 
Accounts receivable, net of allowances of $448,000 (Mar. 2003) and $381,000 (Sep. 2002)
     5,320,161       4,926,879  
 
Inventories (Note 2)
     3,041,067       1,958,388  
 
Prepaid expenses and deferred income taxes
     398,190       496,238  
 
    
     
 
Total current assets
     15,189,348       14,330,521  
 
                
Property and equipment, net (Note 3)
     3,604,566       3,631,867  
Cost in excess of fair value of net assets acquired, net of accumulated amortization of $1,027,765 (2003 and 2002)
     1,924,131       1,924,131  
Other assets (Note 4)
     2,527,335       2,019,334  
 
    
     
 
 
   $ 23,245,380     $ 21,905,853  
 
    
     
 
Liabilities and Shareholders’ Equity
                
Current liabilities:
                
 
Accounts payable
   $ 3,250,048     $ 1,702,989  
 
Accrued and sundry liabilities
     981,806       1,569,899  
 
    
     
 
Total current liabilities
     4,231,854       3,272,888  
 
                
Deferred income taxes
     282,000       282,000  
Deferred compensation
     943,616       957,299  
Shareholders’ equity
                
 
Common stock, no par value, 20,000,000 shares authorized; issued and outstanding shares 2,542,154 (Mar. 2003) and 2,538,870 (Sep. 2002)
     209,356       196,340  
 
Additional paid in capital
     8,527       8,527  
 
Retained earnings
     17,570,027       17,188,799  
 
    
     
 
Total shareholders’ equity
     17,787,910       17,393,666  
 
    
     
 
Contingencies (Note 8)
  $ 23,245,380     $ 21,905,853  
 
    
     
 

See accompanying notes.

Note: The Balance Sheet at September 28, 2002 has been derived from the audited financial statements at that date.

3

 

Span-America Medical Systems, Inc.
Statements of Income
(Unaudited)

                                   
      Three Months Ended   Six Months Ended
     
 
      March 29,   March 30,   March 29,   March 30,
      2003   2002   2003   2002
     
 
 
 
Net sales
   $ 10,839,107     $ 7,557,360     $ 18,730,762     $ 14,448,816  
Cost of goods sold
     8,205,607       5,007,493       13,590,930       9,679,920  
 
    
     
     
     
 
Gross profit
     2,633,500       2,549,867       5,139,832       4,768,896  
 
                                
Selling and marketing expenses
     1,584,014       1,453,470       3,099,406       2,750,585  
Research and development expenses
     149,000       71,396       284,376       142,064  
General and administrative expenses
     723,882       585,227       1,263,427       1,091,081  
 
    
     
     
     
 
 
     2,456,896       2,110,093       4,647,209       3,983,730  
 
    
     
     
     
 
 
                                
Operating income
     176,604       439,774       492,623       785,166  
 
                                
Non-operating income:
                                
Investment income
     18,379       20,923       48,357       50,644  
Royalty income
     153,759       166,264       318,570       336,217  
Other income
     640       86,999       1,435       87,618  
 
    
     
     
     
 
 
     172,778       274,186       368,362       474,479  
 
    
     
     
     
 
 
                                
Income before income taxes
     349,382       713,960       860,985       1,259,645  
Provision for income taxes
     123,000       252,000       302,000       443,000  
 
    
     
     
     
 
Net income
   $ 226,382     $ 461,960     $ 558,985     $ 816,645  
 
    
     
     
     
 
 
                                
Net income per share of common stock (Note 5)
                                
 
Basic
   $ 0.09     $ 0.18     $ 0.22     $ 0.32  
 
Diluted
   $ 0.09     $ 0.18     $ 0.21     $ 0.32  
 
                                
Dividends per common share
   $ 0.03     $ 0.03     $ 0.06     $ 0.06  
 
                                
Weighted average shares outstanding:
                                
 
Basic
     2,539,846       2,524,515       2,539,358       2,520,958  
 
Diluted
     2,644,583       2,592,129       2,638,618       2,575,121  

See accompanying notes.

4

 

Span-America Medical Systems, Inc.
Statements of Cash Flows
(Unaudited)

                     
        Six Months Ended
       
        March 29,   March 30,
        2003   2002
       
 
Operating activities:
                
Net income
   $ 558,985     $ 816,645  
Adjustments to reconcile net income to net cash provided by operating activities:
                
 
Depreciation and amortization
     263,176       239,463  
 
Provision for losses on accounts receivable
     52,000       48,000  
 
(Increase) decrease in cash value of life insurance
     (41,635 )     (70,585 )
 
Deferred compensation
     (13,683 )     (12,669 )
 
Income received from Prudential demutualization
     —       (83,636 )
 
Changes in operating assets and liabilities:
                
   
Accounts receivable
     (441,945 )     307,168  
   
Inventory
     (1,082,679 )     12,798  
   
Prepaid expenses and other assets
     (323,803 )     (130,939 )
   
Accounts payable and accrued expenses
     958,966       (303,098 )
 
    
     
 
Net cash (used for) provided by operating activities
     (70,618 )     823,147  
 
                
Investing activities:
                
Purchases of marketable securities
     —       (800,000 )
Proceeds from sales of marketable securities
     1,000,000       470,000  
Purchases of property, plant and equipment
     (200,280 )     (130,388 )
Payments for other assets
     (80,110 )     (301,831 )
 
    
     
 
Net cash provided by (used for) investing activities
     719,610       (762,219 )
 
                
Financing activities:
                
Dividends paid
     (177,757 )     (151,359 )
Common stock issued upon exercise of options
     13,016       9,915  
 
    
     
 
Net cash used for financing activities
     (164,741 )     (141,444 )
Increase (Decrease) in cash and cash equivalents
     484,251       (80,516 )
Cash and cash equivalents at beginning of year
     1,095,299       1,074,391  
 
    
     
 
Cash and cash equivalents at end of year
   $ 1,579,550     $ 993,875  
 
    
     
 

See accompanying notes.

5

 

SPAN-AMERICA MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
MARCH 29, 2003

NOTE 1 — BASIS OF PRESENTATION

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United States 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 six month period ended March 29, 2003 are not necessarily indicative of the results that may be expected for the year ended September 27, 2003. For further information, refer to the Company’s Annual Report on Form 10-K for the year ended September 28, 2002.

NOTE 2 — INVENTORIES

The components of inventories are as follows:

                 
    Mar. 29, 2003   Sep. 28, 2002
   
 
Raw Materials
   $ 2,057,858     $ 1,287,831  
Finished Goods
     983,209       670,557  
 
    
     
 
 
   $ 3,041,067     $ 1,958,388  
 
    
     
 

NOTE 3 — PROPERTY AND EQUIPMENT

Property and equipment, at cost, is summarized by major classification as follows:

                 
    Mar. 29, 2003   Sep. 28, 2002
   
 
Land
   $ 317,343     $ 317,343  
Land improvements
     246,172       246,172  
Buildings
     3,727,761       3,727,761  
Machinery and equipment
     6,294,326       6,125,240  
Furniture and fixtures
     570,580       539,386  
Automobiles
     9,520       9,520  
Leasehold improvements
     11,345       11,345  
 
    
     
 
 
     11,177,047       10,976,767  
Less accumulated depreciation
     7,572,481       7,344,900  
 
    
     
 
 
   $ 3,604,566     $ 3,631,867  
 
    
     
 

NOTE 4 — OTHER ASSETS

Other assets consist of the following:

                 
    Mar. 29, 2003   Sep. 28, 2002
   
 
Patents, net of accumulated amortization of $1,122,724 (Mar. 2003) and $1,087,128 (Sep. 2002)
   $ 598,568     $ 579,053  
Cash value of life insurance policies
     1,361,841       1,320,206  
Deposits on inventory and equipment
     498,327       73,675  
Other
     68,599       46,400  
 
    
     
 
 
   $ 2,527,335     $ 2,019,334  
 
    
     
 

6

 

NOTE 5 — EARNINGS PER COMMON SHARE

The following table sets forth the computation of basic and diluted earnings per share in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, “Earnings Per Share.”

                                     
        Three Months Ended   Six Months Ended
       
 
        Mar. 29, 2003   Mar. 30, 2002   Mar. 29, 2003   Mar. 30, 2002
       
 
 
 
Numerator for basic and diluted earnings per share:
                                
Net income
   $ 226,382     $ 461,960     $ 558,985     $ 816,645  
 
    
     
     
     
 
 
                                
Denominator:
                                
 
Denominator for basic earnings per share weighted average shares
     2,539,846       2,524,515       2,539,358       2,520,958  
 
Effect of dilutive securities:
                                
   
Employee and board stock options
     104,737       67,614       99,260       54,163  
 
    
     
     
     
 
 
Denominator for diluted earnings per share:
                                
   
Adjusted weighted average shares and assumed conversions
     2,644,583       2,592,129       2,638,618       2,575,121  
 
    
     
     
     
 
 
                                
Net income per share:
                                
 
Basic
   $ 0.09     $ 0.18     $ 0.22     $ 0.32  
 
Diluted
   $ 0.09     $ 0.18     $ 0.21     $ 0.32  

NOTE 6 — OPERATIONS AND INDUSTRY SEGMENTS

The company reports on three segments of business: medical, custom products, and safety catheters. This industry segment information corresponds to the markets in the United States for which the Company manufactures and distributes its 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   Six Months Ended
     
 
      Mar. 29, 2003   Mar. 30, 2002   Mar. 29, 2003   Mar. 30, 2002