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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 January 3, 2004

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   (I.R.S. 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 o

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 – 2,572,218 shares as of 1/30/04

 

 

INDEX

SPAN-AMERICA MEDICAL SYSTEMS, INC.

           
PART I. FINANCIAL INFORMATION
        
 
        
Item 1. Financial Statements (Unaudited)
        
 
        
 
Balance Sheets — January 3, 2004 and September 27, 2003
     3  
 
        
 
Statements of Income — Three months ended January 3, 2004 and December 28, 2002
     4  
 
        
 
Statements of Cash Flows — Three months ended January 3, 2004 and December 28, 2002
     5  
 
        
 
Notes to Financial Statements — January 3, 2004
     6  
 
        
Item 2. Management’s Discussion and Analysis of Interim Financial Condition and Results of Operations
     10  
 
        
Item 3. Market Risk
     13  
 
        
Item 4. Controls and Procedures
     14  
 
        
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
     16  
 
        
OFFICER CERTIFICATIONS
     17  

2

 

Span-America Medical Systems, Inc.
Balance Sheets

                   
      Jan. 3,   Sept. 27,
      2004   2003
      (Unaudited)   ( Note)
     
 
Assets
                
Current assets:
                
 
Cash and cash equivalents
   $ 1,925,860     $ 1,811,332  
 
Securities available for sale
     4,246,490       4,143,758  
 
Accounts receivable, net of allowances of $350,000 (Jan. 3, 2004) and $340,000 (Sep. 27, 2003)
     5,302,426       5,941,774  
 
Inventories (Note 2)
     2,486,650       2,539,325  
 
Prepaid expenses and deferred income taxes
     566,394       592,997  
 
    
     
 
Total current assets
     14,527,820       15,029,186  
 
                
Property and equipment, net (Note 3)
     5,985,856       4,817,450  
Cost in excess of fair value of net assets acquired, net of accumulated amortization of $1,027,765 (Jan. 3, 2004 and Sep. 27, 2003)
     1,924,131       1,924,131  
Other assets (Note 4)
     2,364,279       2,219,890  
 
    
     
 
 
   $ 24,802,086     $ 23,990,657  
 
    
     
 
 
                
Liabilities and Shareholders’ Equity
                
Current liabilities:
                
 
Accounts payable
   $ 2,793,188     $ 2,467,524  
 
Accrued and sundry liabilities
     1,797,960       1,747,385  
 
    
     
 
Total current liabilities
     4,591,148       4,214,909  
 
                
Deferred income taxes
     321,000       321,000  
Deferred compensation
     922,302       929,407  
 
                
Contingencies (Note 7)
                
 
                
Shareholders’ equity
                
 
Common stock, no par value, 20,000,000 shares authorized; issued and outstanding shares 2,571,718 at January 3, 2004 and 2,552,154 at September 27, 2003
     385,281       283,981  
 
Additional paid in capital
     19,297       10,035  
 
Retained earnings
     18,563,058       18,231,325  
 
    
     
 
Total shareholders’ equity
     18,967,636       18,525,341  
 
    
     
 
 
   $ 24,802,086     $ 23,990,657  
 
    
     
 

See accompanying notes.

Note: The Balance Sheet at September 27, 2003 has been derived from the audited financial statements at that date.

3

 

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

                   
      Three Months Ended
     
      Jan. 3,   Dec. 28,
      2004   2002
     
 
Net sales
   $ 11,508,513     $ 7,891,655  
Cost of goods sold
     8,606,742       5,385,323  
 
    
     
 
Gross profit
     2,901,771       2,506,332  
 
                
Selling and marketing expenses
     1,609,576       1,515,391  
Research and development expenses
     170,970       135,377  
General and administrative expenses
     630,871       539,544  
 
    
     
 
 
     2,411,417       2,190,312  
 
    
     
 
 
                
Operating income
     490,354       316,020  
 
                
Non-operating income:
                
 
Investment income
     17,015       29,978  
 
Royalty income
     141,339       164,810  
 
Other
     843       795  
 
    
     
 
 
    159,197       195,583  
 
Income before income taxes
     649,551       511,603  
Provision for income taxes
     228,000       179,000  
 
    
     
 
Net income
   $ 421,551     $ 332,603  
 
    
     
 
 
                
Net income per share of common stock (Note 5):
                
 
Basic
   $ 0.16     $ 0.13  
 
Diluted
   $ 0.16     $ 0.13  
 
                
Dividends per common share
   $ 0.035     $ 0.035  
 
                
Weighted average shares outstanding:
                
 
Basic
     2,561,556       2,538,870  
 
Diluted
     2,704,784       2,632,652  

See accompanying notes.

4

 

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

                     
        Three Months Ended
       
        Jan. 3,   Dec. 28,
        2004   2002
       
 
Operating activities:
                
Net income
   $ 421,551     $ 332,603  
Adjustments to reconcile net income to net cash provided by operating activities:
                
 
Depreciation and amortization
     161,689       128,307  
 
Provision for losses on accounts receivable
     (12,400 )     31,000  
 
Increase in cash value of life insurance
     (86,400 )     (52,299 )
 
Deferred compensation
     (7,105 )     (6,578 )
 
Changes in operating assets and liabilities:
                
   
Accounts receivable
     656,616       853,809  
   
Inventory
     52,675       (753,875 )
   
Prepaid expenses and other assets
     24,618       (395,221 )
   
Accounts payable and accrued expenses
     (66,579 )     617,773  
 
    
     
 
Net cash provided by operating activities
     1,144,665       755,519  
 
                
Investing activities:
                
Purchases of marketable securities
     (800,000 )     —  
Proceeds from sale of marketable securities
     700,000       65,000  
Purchases of property, plant and equipment
     (842,698 )     (90,327 )
Payments for other assets
     (87,611 )     (49,787 )
 
    
     
 
Net cash used for investing activities
     (1,030,309 )     (75,114 )
 
                
Financing activities:
                
Dividends paid
     (89,818 )     (88,862 )
Common stock issued upon exercise of options
     89,990          
 
    
     
 
Net cash provided by (used for) financing activities
     172       (88,862 )
 
                
Increase in cash and cash equivalents
     114,528       591,543  
Cash and cash equivalents at beginning of period
     1,811,332       1,095,299  
 
    
     
 
Cash and cash equivalents at end of period
   $ 1,925,860     $ 1,686,842  
 
    
     
 

See accompanying notes.

5

 

SPAN-AMERICA MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
January 3, 2004

1. BASIS OF PRESENTATION

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America 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 of America 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 3, 2004 are not necessarily indicative of the results that may be expected for the year ended October 3, 2004. For further information, refer to the Company’s Annual Report on Form 10-K for the year ended September 27, 2003.

STOCK-BASED COMPENSATION

The Company accounts for stock options under Accounting Principles Board Opinion 25, “Accounting for Stock Issued to Employees.” Accordingly, no compensation expense has been charged to operations. Had compensation expense for the plans been determined based on the fair value at the grant dates for awards under the plans consistent with the accounting method available under Statement of Financial Accounting Standards, (SFAS) No. 123 “Accounting for Stock Based Compensation,” the Company’s net income and net income per common share would have been reduced to the proforma amounts indicated below:

                   
      Jan. 3, 2004   Dec. 28, 2002
     
 
Net income
                
 
As reported
   $ 421,551     $ 332,603  
 
Stock option expense, net of taxes
     33,417       24,039  
 
    
     
 
 
Pro forma
   $ 388,134     $ 308,564  
 
    
     
 
Basic net income per common share
                
 
As reported
   $ 0.16     $ 0.13  
 
Stock option expense, net of taxes
     0.01       0.01  
 
    
     
 
 
Pro forma
   $ 0.15     $ 0.12  
 
    
     
 
Diluted net income per common share
                
 
As reported
   $ 0.16     $ 0.13  
 
Stock option expense, net of taxes
     0.01       0.01  
 
    
     
 
 
Pro forma
   $ 0.15     $ 0.12  
 
    
     
 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for grants made in 2003 and 2002, respectively: risk-free interest rates of 3.26% and 3.45%; dividend yields of 1.6% and 1.7%; volatility factors of the expected market price of the Company’s common stock of 38.4% and 40.7%; and a weighted average expected life of the option of eight years for both periods.

6

 

2. INVENTORIES

The components of inventories are as follows:

                 
    Jan. 3, 2004   Sep. 27, 2003
   
 
Raw materials
   $ 1,746,757     $ 1,763,001  
Finished goods
     739,893       776,324  
 
    
     
 
 
   $ 2,486,650     $ 2,539,325  
 
    
     
 

3. PROPERTY AND EQUIPMENT

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

                 
    Jan. 3, 2004   Sep. 27, 2003
   
 
Land
   $ 317,343     $ 317,343  
Land improvements
     246,172       246,172  
Buildings
     4,036,473       4,036,473  
Construction in process
     1,270,794       1,030,932  
Machinery and equipment
     7,374,731       6,311,639  
Furniture and fixtures
     539,209       538,045  
Automobiles
     9,520       9,520  
Leasehold improvements
     13,315       11,345  
 
    
     
 
 
     13,807,557       12,501,469  
Less accumulated depreciation
     7,821,701       7,684,019  
 
    
     
 
 
   $ 5,985,856     $ 4,817,450  
 
    
     
 

Construction in progress at January 3, 2004 represents machinery under assembly and installation and includes $463,390 which is included in accounts payable at January 3, 2004.

4. OTHER ASSETS

Other assets consist of the following:

                 
    Jan. 3, 2004   Sep. 27, 2003
   
 
Patents, net of accumulated amortization of $1,188,340 (Jan. 3, 2004) and $1,164,332 (Sep. 27, 2003)
   $ 665,548     $ 639,445  
Cash value of life insurance policies
     1,543,405       1,457,005  
Other
     155,326       123,440  
 
    
     
 
 
   $ 2,364,279     $ 2,219,890  
 
    
     
 

7

 

5. 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.”

                   
      Jan. 3, 2004   Dec. 28, 2002
     
 
Numerator for basic and diluted earnings per share:
                
Net income
   $ 421,551     $ 332,603  
 
    
     
 
Denominator:
                
Denominator for basic earnings per share:
                
 
Weighted average shares
     2,561,556       2,538,870  
Effect of dilutive securities:
                
 
Employee and board stock options
     143,228       93,782  
 
    
     
 
Denominator for diluted earnings per share:
                
 
Adjusted weighted average shares and assumed conversions
     2,704,784       2,632,652  
 
    
     
 
Net income per share:
                
 
Basic
   $ 0.16     $ 0.13  
 
Diluted
   $ 0.16     $ 0.13  

8

 

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 polyurethane foam and safety catheter products and therefore complies with the requirements of SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information.”

The following table summarizes certain information on industry segments:

                   
      Jan. 3, 2004   Dec. 28, 2002
     
 
Net Sales:
                
 
Medical
   $ 5,394,037     $ 5,264,408  
 
Custom products
     6,114,476       2,627,247  
 
Safety catheters
     —       —  
 
    
     
 
Total
     11,508,513       7,891,655  
 
    
     
 
 
                
Operating profit (loss):
                
 
Medical
   $ 594,229     $ 650,415  
 
Custom products
     222,816       (139,655 )
 
Safety catheters
     (160,235 )     (98,931 )
 
    
     
 
Total
     656,810       411,829  
 
                
Corporate expense
     (166,456 )     (95,809 )
Other income
     159,197       195,583  
 
    
     
 
Income before income taxes
   $ 649,551     $ 511,603