SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the fiscal year ended September 30, 1995
OR
[ ] TRANSITION 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 No.)
70 Commerce Center
Greenville, South Carolina 29615
(Address of principal executive offices)
Registrant's telephone number, including area code: (864) 288-8877
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, no par value
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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 period 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant computed by reference to the last price at which the stock was
sold on December 21, 1995 was $17,315,394.
The number of shares of the registrant's common stock, no par value,
outstanding as of December 21, 1995, was 3,225,608.
Documents Incorporated By Reference
Portions of the 1995 Annual Report to Shareholders are incorporated by
reference into Parts I and II, and portions of the Company's Definitive Proxy
Statement for the annual shareholder's meeting to be held February 16, 1996 are
incorporated by reference into Part III.
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PART I
Item 1. Business
Background
Span-America Medical Systems, Inc. (the "Company" or "Span-America"),
was incorporated under the laws of the state of South Carolina on September 21,
1970. The Company manufactures and distributes a variety of polyurethane foam
products and contract packaging products for the medical, consumer and
industrial markets.
Span-America commenced operations in 1975 as a manufacturer of
polyurethane foam patient positioners. During the next several years, the
Company expanded its product lines to produce lapidus (flat foam) and convoluted
foam mattress overlays for the decubitus care market. Decubitus care products
aid in the treatment or prevention of decubitus ulcers, commonly known as bed
sores or pressure ulcers. In the late 1970's the Company also began producing
foam products for industrial applications, primarily to utilize excess
manufacturing capacity. In 1985, the Company introduced its patented Geo-Matt
mattress overlay in the health care market which became the Company's leading
product. At the same time, the Company began selling its mattress overlay
products to the consumer market segment. Span-America's foam products (including
replacement mattresses described below) made up approximately 79% of the
Company's total net sales in fiscal 1995.
To diversify its operations and to capitalize upon its familiarity and
contacts within the health care industry, Span-America entered the contract
packaging business in 1987. These initial contract packaging operations were
based on a three-year commitment to supply Baxter Healthcare Corporation
("Baxter") with all of its contract packaging requirements. This agreement
expired during the first quarter of fiscal 1991. The Company currently provides
contract packaging services to a variety of customers throughout the United
States. During fiscal 1995, contract packaging products accounted for
approximately 21% of total net sales.
The Company entered the replacement mattress segment of the pressure
ulcer care market in fiscal 1992 through the acquisition of Healthflex, Inc. The
Company is currently marketing Healthflex's PressureGuard line of replacement
mattresses directly to hospitals and long-term care facilities.
The Company's long-term strategy is to become a leading health care
manufacturer specializing in products used in the prevention and treatment of
pressure ulcers. A majority of the Company's medical products are currently
directed toward pressure ulcer care applications, and the Company is actively
seeking to develop or
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acquire new products which are in this market segment. The Company also seeks to
further develop and manufacture consumer and industrial applications of its
medical products.
The Company's products are distributed primarily in the United States
and to a lesser degree in several foreign countries. Total export sales during
fiscal 1995 were approximately $954,000 or 3% of total net sales.
Industry Segment Data
The industry segment data included in Note 15 to the Company's audited
consolidated financial statements for the year ended September 30, 1995,
presented on page 24 of the 1995 Annual Report is incorporated herein by
reference.
Medical Products
Span-America's principal medical products consist of polyurethane foam
mattress overlays, therapeutic replacement mattresses, and patient positioners.
These products are marketed primarily to hospitals but are also marketed to long
term care facilities in the United States. The Company also sells these products
on a limited basis in Canada. Sales of medical products represented 45%, 47%,
and 55% of sales in 1995, 1994, and 1993 respectively.
Mattress Overlays. Span-America produces a variety of foam mattress
overlays, including convoluted and lapidus foam pads and its patented
Geo-Matt(R) overlay. Mattress overlays comprised approximately 22% of the
Company's total net sales in fiscal 1995. These products are designed to provide
patients with greater comfort and assist in treating patients suffering from
burns or pressure ulcers. Span-America's overlay products are mattress pads as
compared to complete mattresses and are marketed as less expensive alternatives
to generally higher priced air and water mattresses. The mattress overlays are
designed for single patient use.
The Geo-Matt mattress overlay, which was introduced in 1985, represents
the Company's single largest product in terms of revenues. However, Geo-Matt
sales have declined in each of the last three fiscal years. Geo-Matt was
designed with computer-aided equipment in conjunction with clinical studies
performed by the Institute for Rehabilitation and Research at the Baylor College
of Medicine. The product's patented design includes over 800 individual cells
which are cut to exacting tolerances on computer controlled equipment to create
a sophisticated and clinically effective mattress surface.
The Company's mattress overlays disperse body heat, increase air
circulation beneath the patient, and reduce moisture build-up in order to
prevent the development
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or promote the healing of pressure ulcers. Their convoluted or geometrically
contoured construction also evenly distributes the patient's body weight,
thereby minimizing the pressure that causes ulcers.
Replacement Mattresses. Span-America's replacement mattresses consist
of its PressureGuard(R) mattresses, a line of therapeutic replacement mattresses
(as distinguished from overlays), acquired through the acquisition of Healthflex
in February 1992. The patented PressureGuard product combines a polyurethane
foam shell and static air tubes to form a replacement mattress which
incorporates the comfort and pressure relieving features of both mattress
overlays and more sophisticated mattresses containing dynamic features.
PressureGuard mattresses are designed to replace existing hospital or long-term
care mattresses and to eliminate the need for mattress overlays. The
PressureGuard mattress has preventative and therapeutic features, providing
orthopedically correct positioning, equalized support and weight distribution,
shear reduction, and pressure dispersion. The product line is now being sold
primarily to acute care hospitals in the United States through the Company's
direct sales force of approximately 20 representatives. The Company is also
increasing its marketing efforts for this product in Canada. During fiscal 1995
replacement mattresses and related products made up approximately 9% of total
net sales.
In November 1993, the Company received FDA 510K marketing approval for
its PressureGuard IV (PGIV) mattress system. Building on the comfort and
orthopedic support of the PressureGuard II design, PressureGuard IV is a
sophisticated support system that provides pressure reduction and patient
comfort in a powered, dynamic mattress with turning capabilities. The mattress
automatically senses the patient's weight and adjusts to the appropriate support
level for each patient to minimize surface pressures. The system slowly and
quietly repositions patients at angles up to 30 degrees in cycles of up to two
hours, providing continuous care for effective prevention and treatment of
pressure ulcers. When disconnected from a power source, the system maintains
proper inflation and optimum patient support until power is restored and
rotation can resume. The simplicity of the PressureGuard IV mattress system
makes it easy to use and virtually maintenance free. Standard operating modes
are pre-programmed, with the flexibility to customize settings for each
patient's care. During fiscal 1995, PGIV and related products made up
approximately 6% of total net sales.
In November 1994, Span-America introduced the DynaGuard alternating
pressure mattress. This powered, dynamic replacement mattress is being targeted
to the home care market. In June 1995, the Company introduced the CustomCare(TM)
therapeutic mattress system. The CustomCare mattress uses principles of
"constant force technology" to create a new category of non-powered,
self-adjusting mattress systems for the acute care and long-term care markets.
Patient Positioners. Span-America's specialty line of patient
positioners is sold primarily under the trademark Span-Aids(R). Span-Aids
accounted for approximately 8%
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of the Company's net sales in fiscal 1995. This is the original product line of
the Company and consists of over 300 different foam items which aid in relieving
the basic patient positioning problems of elevation, immobilization, muscle
contracture, foot drop and foot or leg rotation. Span-Aids patient positioners
hold the patient's body in orthopedically correct positions, provide greater
patient comfort and tend to promote healing for long-term comatose patients or
those with a flaccid or immobilized condition. The positioners also aid in the
prevention of pressure ulcers by promoting more effective dispersion of
pressure, heat and moisture. Span-Aids are intended for single-patient use
throughout the patient's entire treatment program. Among the Span-Aids products
presently marketed are abduction pillows, body aligners, wheelchair cushions,
cast elevators and various foot and wrist positioners.
Span-America's patient positioners are sold primarily to hospitals and
long-term care facilities by several national medical products distributors.
Span-Aids are believed by the Company to be one of the most effective patient
positioning devices available in the health care market, as compared to pillows,
rolled towels and other similar materials traditionally used by nursing
personnel to position immobilized patients. Span-Aids are constructed of
open-cell polyurethane foam which allows air to circulate next to the patient's
skin, thereby reducing extensive heat and moisture build-up.
Most Span-Aids body positioners are pressure packaged to reduce the
amount of storage space required by hospitals and other facilities which utilize
them. This patented packaging method reduces the package size by as much as 75%
while protecting the positioners from dust and contamination during
transportation and storage.
Distributor Relationship. Approximately 27% of the Company's medical
foam products are sold to Baxter which distributes these products to hospitals
nationwide. Span-America has maintained a distribution relationship with Baxter
(formerly American Hospital Supply) for 17 years. Sales of the Company's medical
foam overlay products to Baxter Healthcare Corporation, have declined during the
last two fiscal years due to Baxter's decision in February 1994 to begin
carrying a competing line of foam products. A continued decline in sales to
Baxter could have a negative effect on the Company's earnings in fiscal 1996.
However, management believes that any negative earnings impact of the decline in
foam overlay sales should be offset by increases in sales of these products to
other national distributors and by sales increases in the Company's other
product lines. The Company's foam overlay products are now available through a
number of national distributors rather than exclusively from Baxter as was the
case until early 1994. Sales of medical foam products to Baxter have declined by
approximately $11 million since fiscal 1993. However, during the same period,
sales of these products to other national distributors have increased by $6
million, offsetting more than half of the decline in sales to Baxter.
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Consumer Products
Span-America's consumer products consist primarily of convoluted
mattress overlays and specially designed pillows for the consumer bedding
market. The Company's principal consumer mattress overlays are produced under
private labels for J.C. Penney and Target Stores. The majority of the Company's
consumer bedding products are marketed by Pillowtex, which sells the products to
department stores and mass merchandisers throughout the United States.
In 1990, Span-America introduced its TerryFoam(R) comfort products
which are designed to be used on all types of outdoor furniture. Formerly
produced by contract manufacturers according to the Company's specifications,
these products are now manufactured by the Company. They are being sold and
distributed directly by Span-America to retailers nationwide.
Consumer products represented approximately 23% of the Company's total
net sales in fiscal 1995 as compared to 21% in 1994 and 19% in 1993.
Industrial Products
Span-America's industrial products consist primarily of foam packaging
and cushioning materials. The Company also produces foam products which are used
for flotation, sound insulation and gasketing purposes. The majority of these
products are made to order according to customer specifications instead of being
made to stock. To date, most of the Company's industrial sales have been in the
specialty packaging segment of the industrial foam market. The Company currently
has two full-time sales representatives and several manufacturers
representatives selling its foam fabrication capabilities to the industrial
market. Its customers represent a wide variety of markets, including the
defense, electronics and sports equipment industries. The industrial foam
segment of the business made up approximately 12% of the Company's net sales in
fiscal 1995 as compared to 9% in 1994.
Contract Packaging Products
Span-America's contract packaging products are principally single-use
flexible packettes containing various chemicals which are used for cleaning,
sterilizing or lubricating purposes. Approximately 21% of the Company's fiscal
1995 sales were contract packaging products as compared to 22% in 1994, and 20%
in 1993. Contract packaging products are generally foil pouches containing a
piece of non-woven cloth which has been saturated with substances such as
alcohol or iodine. The Company markets its contract packaging capabilities
principally to large health care and pharmaceutical companies. Since the
Company's main function is that of a contract manufacturer, it primarily relies
on the distribution networks of its customers.
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The Company's contract manufacturing facilities include a high quality
water filtration system, liquid/gel blending facilities and equipment which
fills flexible packettes with a variety of chemicals, powders, gels, swab sticks
and other products. Span-America utilizes high-speed horizontal and vertical
"form, fill and seal" packaging machines to produce a significant portion of the
contract packaging products. The Company also provides bottle (liquid) filling
services to its customers.
Although Span-America functions primarily as a contract manufacturer of
flexible packaging products, it also produces a line of such products under its
own Span-Care brand, consisting principally of single-use towelettes, swabs and
gels. The Company employs two sales representatives to sell this Span-Care line
to hospitals and alternate site facilities, including long-term care facilities
and home health care distributors.
The Company also manufactures contract packaging products for the
consumer market segment. These items consist mainly of health and beauty aid
products such as towelettes, lotions and powders. Span-America acts as a
contract manufacturer of these products, blending and packaging them according
to customer specifications. They are sold and distributed by Span-America's
customers to a variety of retail outlets in the United States.
Competition
Medical. In the medical market segment, the Company faces significant
competition for sales of its foam mattress overlays. The competition for
convoluted mattress overlays is primarily based on price and delivery. For other
foam mattress overlay products (such as the Geo-Matt overlay), the competition
is based mainly on product performance and quality. However, to a lesser extent,
the competition for Geo-Matt type overlays is also based on price and delivery.
Competition with respect to the Company's Span-Aid products is primarily based
on price. However, a secondary source of competition for patient positioners
results from alternative methods such as the use of pillows and other devices to
position patients.
The Company believes that it is among the top five suppliers of foam
mattress overlays and patient positioners to the health care market. The
Company's primary competitors in the health care market include Bio Clinic
(division of Sunrise Medical), Dermacare, Gaymar, and DeRoyal.
The competition in the therapeutic replacement mattress market is based
on product performance, price and durability. Potential customers typically
select a product based on these criteria after conducting a formal clinical
evaluation of sample mattresses for periods of one to six months. A secondary
source of competition results from alternative products such as mattress
overlays which are significantly less expensive than replacement mattresses.
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The market for therapeutic replacement mattresses has developed
principally during the last three years and is currently dominated by five
suppliers: BG Industries, Hill-Rom, Comfortex, DermaCare, and Bio Clinic. BG
Industries utilizes Baxter to distribute its mattresses primarily to hospitals.
The other competitors use their own sales representatives to sell directly to
hospitals, distributors, and long-term care facilities nationwide. The Company's
entrance into the replacement mattress market in 1992 also placed it in direct
competition with Baxter for sales of replacement mattress products. See
"Distributor Relationship" on page 4 for further discussions regarding Baxter
and the Company.
Many of the Company's competitors in the health care segment are larger
and have greater resources than Span-America.
Consumer. In the consumer market segment, Span-America has encountered
significant competition for its mattress pad and pillow products. The
competition is principally based on price, which is largely determined by foam
density and thickness. However, competition also exists due to variations in
product design and packaging. There are presently a number of companies with the
manufacturing capability to produce similar bedding products. The Company's
primary competitors in this market are Comfort Clinic (a division of Sunrise
Medical) and ER Carpenter, both of which are larger than Span-America.
Industrial. The Company also has a number of competitors in the
industrial foam market, including United Foam, Hibco and Foam Design. Some of
these competitors are larger and have greater resources than Span-America. The
competition for industrial foam products is largely based on price. In some
instances, however, design and delivery capabilities are as important as the
price of the product.
Contract Packaging. A significant level of competition has been
experienced in the markets into which the medical contract packaging products
are sold. This competition is based mainly on price, quality and manufacturing
capability. Many of the contract packaging products have the characteristics of
commodity products and thus can be produced at several manufacturing facilities
in the United States. The Company's chief competitors in this market are
PDI/Nice Pak, Packaging Coordinators, Paco, Marietta Packaging and Clinipad.
There is also significant competition for the Company's contract
packaging products sold in the consumer market. The main bases for this
competition are quality, capacity and breadth of manufacturing capabilities.
There are currently many companies, some larger and with greater resources than
Span-America, which have the capability to produce equivalent products.
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Major Customers
The Company has a business relationship with Baxter Healthcare
Corporation ("Baxter") to distribute certain of its foam and contract packaging
products. In fiscal 1995, sales to Baxter amounted to approximately 12% of the
Company's total net sales and approximately 27% of the Company's sales to the
medical foam segment. Span-America also has a relationship with Pillowtex
Corporation to distribute certain of its consumer foam products. Sales to
Pillowtex during fiscal 1995 made up approximately 15% of the Company's net
sales and approximately 64% of sales in the consumer foam segment. The Company
has a relationship with another customer to manufacture specific contract
packaging products for the consumer market segment. Sales to this customer
comprised approximately 5% of the Company's fiscal 1995 net sales and 25% of the
contract packaging segment sales during the same period.
The loss of any of the customers described above could have a material
adverse effect on the Company. See "Distributor Relationship" on page 4,
"Consumer Products" on page 5, and "Competition" on pages 6 and 7 for more
information on major customers.
Seasonal Trends
Some seasonality can be identified in certain of the Company's medical
foam, consumer foam and contract packaging products. However, the
fluctuations have minimal effect on the Company's operations because of
offsetting trends among these product lines. Span-America has not experienced
any seasonal fluctuations in its industrial segment.
The most seasonal of the Company's products is the TerryFoam line of
chaise and chair pads. Demand for shipments of these products generally is
highest in January through April of each year as retail stores begin stocking
their summer merchandise. The impact of this seasonality on the Company will
depend largely on the volume of sales achieved for this product line. During
previous fiscal years, the seasonality of TerryFoam products has had only a
minor impact on the Company's operations.
Patents and Trademarks
The Company holds 28 federally registered trademarks, including SPAN-
AMERICA, SPAN-AIDS, GEO-MATT, SPAN-CARE AND PRESSUREGUARD. Other federal
registration applications are presently pending. The Company believes that these
trademarks are readily identifiable in their respective markets and add value to
the Company's product lines.
The Company also holds 44 United States patents and 8 foreign patents
relating to various components of its patient positioners, mattress overlays,
and replacement
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mattresses. Additional patent applications have been filed. Management believes
that these patents are important to the Company. However, while the Company has
a number of products covered by patents, there are competitive alternatives
available which are not covered by these patents. Therefore, the Company does
not rely solely on its patents to maintain its competitive position in the
marketplace.
Span-America's principal patents include the patents on its
PressureGuard and CustomCare replacement mattress, its Geo-Matt overlay and its
Span-Aids patient positioners. The Company's Geo-Matt and PressureGuard patents
have remaining lives of 12 and 14 years, respectively. The Company's Span-Aids
patents have remaining lives ranging from 1 to 14 years.
Certain of the Company's patents have been assigned or exclusively
licensed to the Company by Donald C. Spann, the Company's founder and former
chairman, until January 1, 1996. In connection with such assignments, the
Company is obligated to pay Mr. Spann royalties equal to 3% of net sales on all
products covered by such patents. In the event that the Company defaulted on
these royalty payments, such patents would revert to Mr. Spann. On January 1,
1996, all patents assigned or licensed to the Company by Mr. Spann will become
the property of the Company, and the Company will have no further obligation to
make the royalty payments.
Raw Materials and Backlog
Polyurethane foam, foil packaging, various chemical solutions and
non-woven cloth account for approximately 80% of Span-America's raw materials.
In addition, the Company uses corrugated shipping cartons, polyethylene plastic
packaging material and hook-and-loop fasteners. The Company believes that its
basic raw materials are in adequate supply and are available from many suppliers
at competitive prices.
As of September 30, 1995, Span-America had unshipped orders of
approximately $2.6 million which represents a 10% decrease compared to a backlog
of $2.9 million at fiscal year end 1994. All orders in the current backlog will
be filled in the 1996 fiscal year.
Employees
On September 30, 1995, the Company had full-time employment of 250
persons, including 5 officers. Of these employees, 25 were executive or
management personnel, 12 were administrative and clerical personnel, 19 were
sales personnel and 189 were manufacturing employees. The Company is not a party
to any collective bargaining agreement, and has never experienced an
interruption or curtailment of operations due to labor controversy. Management
believes that its relations with its employees are good.
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Supervision and Regulation
The Federal Food, Drug and Cosmetic Act, and regulations issued or
proposed thereunder, provide for regulation by the Food and Drug Administration
(the "FDA") of the marketing, manufacture, labeling, packaging and distribution
of medical devices, including the Company's products. These regulations require,
among other things, that medical device manufacturers register with the FDA,
list devices manufactured by them, and file various types of reports. In
addition, the Company's manufacturing facilities are subject to periodic
inspections by regulatory authorities and must comply with "good manufacturing
practices" as required by the FDA and state regulatory authorities. The Company
believes that it is in substantial compliance with applicable regulations and
does not anticipate having to make any material expenditures as a result of FDA
or other regulatory requirements.
Environmental Matters
The Company's manufacturing operations are subject to various
government regulations pertaining to the discharge of materials into the
environment. Span-America believes that it is in compliance with applicable
regulations. The Company does not anticipate that continued compliance will have
a material effect on the Company's capital expenditures, earnings or competitive
position.
Item 2. Properties
The Company's principal office and manufacturing facility is owned by
the Company and located in Greenville, South Carolina. This facility contains
approximately 125,000 square feet and is located on a 13 acre site. The Company
also leases approximately 60,000 square feet of warehouse space in Greenville
for $13,672 per month until the lease expires in May 1997.
The Company produces foam mattress overlays for the medical and
consumer markets in a 40,000 square foot facility in Norwalk, California. The
lease rate is $14,196 per month and increases annually over the term of the
lease to $15,615 per month until the lease expires in December 1997. The Company
closed its Vermont manufacturing plant in July 1994 and consolidated the
operation into the South Carolina facilities.
The South Carolina and California facilities are considered suitable
and adequate for their intended purposes.
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Item 3. Legal Proceedings
The Company and its subsidiaries are from time to time parties 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 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of the Company's 1995 fiscal year.
PART II
Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters
The stock price information contained under "Quarterly Financial Data"
within the table and the information set forth below the table on page 11 of the
Company's 1995 Annual Report is incorporated herein by reference. In addition,
the information under "Stock Information" on the inside back cover of the
Company's 1995 Annual Report is incorporated herein by reference.
Item 6. Selected Financial Data
The information contained in the "Selected Financial Information" on
page 10 of the Company's 1995 Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Financial Analysis
Management's Discussion and Financial Analysis on pages 12 through 15
of the Company's 1995 Annual Report are incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The financial statements of the Company included on pages 16 through 26
of the Company's 1995 Annual Report are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
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PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Information required under Items 10, 11, 12 and 13 of Part III is
incorporated herein by reference to portions of the definitive Proxy Statement
filed or to be filed with the Securities and Exchange Commission on or prior to
120 days following the end of the Company's 1995 fiscal year under the headings
"Election of Directors," "Business Experience of Nominees and Directors,"
"Executive Officers," "Compensation of Directors and Executive Officers,"
"Certain Transactions," and "Security Ownership of Certain Beneficial Owners and
Management."
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) and (2) Financial Statements and Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate
section of this report beginning on page F-1.
(3) Listing of Exhibits
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3.1 Amendment to the Company's by-laws dated April 25, 1995: Incorporated
by reference to Exhibit 3(ii) to the Company's quarterly report on Form
10-Q for the quarter ended July 1, 1995.
4.1 Specimen of Common Stock certificate: Incorporated by reference to
Exhibit 1 to the Form S-8, Commission File No. 33-32896.
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4.2 The Registrant hereby agrees to furnish to the Securities and Exchange
Commission upon request a copy of any instrument with respect to
long-term debt not being registered in a principal amount less than 10% of
the total assets of the Registrant and its subsidiaries on a consolidated basis.
10.1 Patent Assignment and Royalty Agreement between Donald C. Spann and
the Company, with letter amendment thereto: Incorporated by reference to
Exhibit 10(c) to the Form S-18.
10.2 Contract between the Company and Pillowtex Corporation dated
September 30, 1986: Incorporated by reference to Exhibit 10-1 to the
Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1986, Commission File No. 0-11392 (the "1986 10-K").
10.3 1987 Stock Option Plan: Incorporated by reference to Exhibit 10 to the
Company's Annual Report on Form 10-K for the fiscal year ended October
2, 1987, Commission File No. 0-11392.
10.4 Employee Stock Ownership Plan - Summary Plan Description:
Incorporated by reference to Exhibit 10.6 to the 1990 10-K.
10.5 1991 Stock Option Plan: Incorporated by reference to Exhibit 10.6 to the
1991 10-K.
10.6 Retirement Agreement dated February 6, 1991 between the Company and
Donald C. Spann: Incorporated by reference to Exhibit 10.7 to the 1991
10-K.
10.7 Contract between the Company and Healthflex, Inc. dated February 28,
1992: Incorporated by reference to Exhibit 2.1 to the February 28, 1992
Form 8-K.
10.8 Loan Agreement dated as of September 15, 1983 and amended as of April
19, 1984 and as of September 1, 1986 among Greenville County, South
Carolina, NCNB South Carolina and the Company, and Mortgage and
Security Agreement dated as of September 15, 1983, and amended as of
April 19, 1984 and as of September 1, 1986 between Greenville County and
the Company: Incorporated by reference to Exhibits 19.1 and 19.2 of the
Company's Quarterly Report on Form 10-Q for the quarter ended March
28, 1992.
10.9 Contract between the Company and BriGam, Inc. dated October 16, 1992
terminating a royalty agreement: Incorporated by reference to Exhibit
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10.10 to the Company's annual report on Form 10-K for the fiscal year
ended October 3, 1992, Commission File No. 0-11392.
10.10 Voluntary Resignation Agreement dated July 30, 1993 between the
Company and Donald C. Spann: Incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the quarter ended
July 3, 1993.
10.11 Employment Agreement dated February 28, 1992 between the Company
and John W. Wilkinson: Incorporated by reference to Exhibit 28A to the
Current Report on Form 8-K (the "February 28, 1992 Form 8-K") filed by
the Company with the Commission on February 28, 1992.
10.12 Consulting Agreement dated August 1, 1994 between the Company and
John W. Wilkinson: Incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended July 2,
1994.
10.13 Retirement Agreement dated September 23, 1994 between the Company
and Charles B. Mitchell. Incorporated by reference to Exhibit 10.13 to the
Company's Annual Report on Form 10-K for the fiscal year ended
October 1, 1994.
13.1 1995 Annual Report to Shareholders.
23.0 Consent of Ernst and Young LLP.
27.0 Financial Data Schedule (For SEC Use Only)
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
fourth quarter of the fiscal year ended September 30, 1995.
(c) Exhibits
The exhibits required by this section of Item 14 are attached
hereto or incorporated by reference.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a
separate section of this report beginning on page F-1.
</TABLE>
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Brien Laing December 20, 1995
Brien Laing, Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities on the date indicated.
/s/ Charles B. Mitchell President, Chief Executive Officer and
Charles B. Mitchell Director (Principal Executive Officer)
/s/ Richard C. Coggins Chief Financial Officer and Director
Richard C. Coggins (Principal Financial Officer)
/s/ Gwendolyn L. Randolph Controller
Gwendolyn L. Randolph
/s/ Thomas F. Grady, Jr. Director
Thomas F. Grady, Jr.
/s/ Douglas E. Kennemore Director
Douglas E. Kennemore, M.D.
/s/ Brien Laing Director
Brien Laing
/s/ W. Marcus Newberry Director
W. Marcus Newberry, M.D.
/s/ James M. Shoemaker, Jr. Director
James M. Shoemaker, Jr.
/s/ Raymond M. Tortolani Director
Raymond M. Tortolani
/s/ Robert A. Whitehorne Director
Robert A. Whitehorne
15 December 20, 1995
<PAGE>
Annual Report on Form 10-K
Items 14 (a) (1) and (2), (c) and (d)
List of Financial Statements and Financial Statement Schedules
Certain Exhibits
Financial Statement Schedules
Year Ended September 30, 1995
Span-America Medical Systems, Inc.
Greenville, South Carolina
F-1
<PAGE>
Span-America Medical Systems, Inc.
Form 10-K - Item 14(a)(1) and (2)
List of Financial Statements and Financial Statement Schedules
The following consolidated financial statements of Span-America Medical Systems,
Inc., included in the annual report of the registrant to its shareholders for
the year ended September 30, 1995 are incorporated by reference in Item 8:
Consolidated Balance Sheets - September 30, 1995 and October 1, 1994
Consolidated Statements of Income - Years ended September 30, 1995, October
1, 1994 and October 2, 1993
Consolidated Statements of Shareholders' Equity - Years ended September 30,
1995, October 1, 1994 and October 2, 1993.
Consolidated Statements of Cash Flows - Years ended September 30, 1995,
October 1, 1994 and October 2, 1993
Consolidated Notes to Financial Statements - September 30, 1995
The following consolidated financial statement schedule of Span-America Medical
Systems, Inc. is included in Item 14(d):
Schedule VIII - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.
F-2
<PAGE>
Schedule VIII - Valuation and Qualifying Accounts
Span-America Medical Systems, Inc.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
- ------------------------------------------------------------------------------------------------------------------------------------
(1) (2)
Description Balance at Beginning Charged to Costs and Charged to Other Deductions- Balance at End
of Period Expenses Accounts - Describe Describe of Period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended September 30, 1995
Deducted from asset accounts:
Reserve for uncollectible accounts $225,000 $ 24,000 $44,000 (a) $205,000
Reserve for discounts 116,500 $33,500 (b) 150,000
Totals $341,500 $ 24,000 $33,500 $44,000 $355,000
Year Ended October 1, 1994
Deducted from asset accounts:
Reserve for uncollectible accounts $215,000 $138,000 $128,000 (a) $225,000
Reserve for discounts 69,000 $47,500 (b) 116,500
Totals $284,000 $138,000 $47,500 $128,000 $341,500
Year Ended October 3, 1993
Deducted from asset accounts:
Reserve for uncollectible accounts $145,000 $ 51,000 $73,000 (c) $54,000 (a) $215,000
Reserve for discounts 81,000 12,000 (d) 69,000
Totals $226,000 $ 51,000 $73,000 $66,000 $284,000
- -----------
(a) Uncollectible accounts written off.
(b) Net increase in sales discounts charged to income as a reduction of sales.
(c) Returns and allowances charged to income as a reduction of sales.
(d) Net reduction in sales discounts credited to income as reduction of sales adjustments.
</TABLE>
F-3
(Pictures of a waterfall, mountains, sand dunes, water drop, and sky appear
here)
SPAN-AMERICA
MEDICAL SYSTEMS, INC.
1995 Annual Report
<PAGE>
(Picture of Clouds)
(Picture of Foam mattress overlay)
Innovation
The Wellspring Of Our Success
It is not the river, but the energy that compels it to move forward. It is not
the cloud, but the ability to change its shape without losing structure. It is
not the company, but the passion that drives it to redefine the status quo. It
is innovation. The persistence, the power, the moving force behind Span-America.
Span-America began 20 years ago as a fabricator of foam products for the
health care industry. But our business has always been innovation. Over the last
two decades, we have pioneered the development of products and technologies, 44
of which are registered patents of Span-America, that have changed the way
business is conducted. Today, our products include therapeutic mattress systems
and seating products for the treatment and prevention of pressure ulcers. We
make premium comfort bedding products and comfort cushions for the consumer
market. We are contract packagers for some of the country's most successful
consumer products, as well as suppliers of industrial foam products. As the
future unfolds, we will continue to use our experience as the foundation for
more innovative products and growth strategies. Span-America. Innovation is the
wellspring of our success.
Table of Contents
1995 Highlights..............................................................3
Letter to Our Shareholders...................................................4
Marketplace Overview.........................................................6
Selected Financial Information..............................................10
Quarterly Financial Data....................................................11
Management's Discussion and Financial Analysis..............................12
Consolidated Financial Statements...........................................16
Directors and Officers/Corporate Data.......................................27
2
<PAGE>
(Picture of Clouds)
(Picture of Foam mattress overlay)
1995 HIGHLIGHTS
* Sales to new medical distributors increased 35% to $7 million following the
change in fiscal 1994 from an exclusive distribution arrangement to a
broad-based distribution network.
* The DynaGuard(Registration Mark) replacement mattress was introduced to the
market in November 1994. This therapeutic alternating pressure mattress is
targeted at the rapidly expanding home care market.
* In June 1995 we introduced the PressureGuard(Registration Mark)
CustomCare(trademark) therapeutic mattress system. This newest addition to
our mattress product line uses the principle of "constant force technology"
to create the only non-powered self-adjusting therapeutic mattress system on
the market.
* Sales of new medical products introduced during the last two years increased
293% in fiscal 1995, and represented 16% of 1995 medical sales.
* The Company received FDA 510K marketing approval for a pendant controlled
version of PressureGuard IV, the successful dynamic mattress product
introduced in fiscal 1994, and for the CustomCare wheelchair cushion which is
a new, dynamic seating product incorporating the constant force technology
design.
* Sales of our custom engineered industrial foam products grew by 31% in fiscal
1995.
* In July 1995, the Company repurchased and retired 96,300 shares of its common
stock in an open market transaction for a total investment of $455,000.
Financial Summary
($ in thousands except per share and percent data)
1995 1994 % Change
Net sales $30,376 $31,129 -2.4%
Operating income 1,254 2,282 -45.0%
Net income 978 1,640 -40.4%
Net income per share .30 .49 -38.8%
Return on net sales 3.2% 5.3%
Working capital 8,541 7,652 11.6%
Total assets 20,614 20,014 3.0%
Long-term debt 286 357 -19.9%
Shareholders' equity 15,435 14,919 3.5%
Return on average
shareholders' equity 6.4% 11.0%
Span-American Medical Systems, Inc. 3
<PAGE>
TO OUR SHAREHOLDERS
Fiscal 1995 was a year of transition for Span-America. Our sales and
earnings were lower than last year's as we shifted from a manufacturing-driven
orientation, dependent on a single large distributor, to a technology-driven
company with broad-based distribution for our medical products. As a company
founded on innovation, our dynamic approach to problem-solving has always been a
key factor in our success. By restructuring our organization, we've strengthened
that foundation and paved the way for long-term growth. As a result, our
financial performance in the third and fourth quarters improved significantly as
changes made early in the year began to take effect.
As we shifted away from our reliance on a single large distributor, our
medical foam sales decreased. Overall sales in 1995 were $30.4 million, down 2%
from $31.1 million in 1994. Net income for the year was $978,000, or $.30 per
share, down 40% from $1.6 million, or $.49 per share last year. The decrease in
earnings was due to lower sales levels, a less profitable product mix and
slightly higher sales and marketing expenses during the year. While the increase
in selling expenses impacted earnings, it helped lay a solid foundation for
future growth.
Medical sales declined by 8% in 1995 to $13.6 million. The majority of the
decline occurred in the foam overlay product lines. This was partially offset by
strong growth in sales of our mattress products, and is representative of a
general trend we see in this market.
The introduction of the PressureGuard IV computer-controlled mattress in
mid-1994 and the DynaGuard alternating pressure mattress in the first quarter of
fiscal '95 signaled our change to a technology-driven company. Sales of these
dynamic pressure reduction systems, which are sold primarily in the home care
market, have more than tripled since fiscal 1994. Fiscal 1995 was a record year
for our entire PressureGuard replacement mattress product line which increased
14% over fiscal 1994. Our newest product technology, CustomCare, was introduced
in June, and we expect it to be a significant contributor to sales and
profitability in fiscal 1996. We are pleased that over 16% of our medical sales
in fiscal 1995 came from products developed within the last two years.
In addition to developing successful new products, we succeeded in greatly
expanding the distribution of our medical products. In fiscal 1995, sales to new
distributors increased by 35% over fiscal 1994. This was not enough to offset
lost overlay business from our previous exclusive distributor. We believe the
loss in sales is short-term, while the expanded distribution network will give
us enhanced market presence in fiscal 1996 and beyond.
New products also played a role in the growth of our consumer products
division, as sales increased 4% to $6.9 million. The increase came from a 21%
rise in foam mattress pad and pillow sales. The healthy increase in mattress pad
sales was due to the introduction of a ventilated pad during the first quarter,
and a variation on our patented Geo-Matt pad in the second quarter. Both
products were well received by the market, and we expect continued growth in
fiscal 1996.
(Picture of waterfall appears here)
-4-
<PAGE>
(Picture of waterfall appears here)
(Photo of Brien Laing and Charles B. Mitchell appears here)
The industrial foam division was our fastest growing segment in fiscal
1995, with sales increasing 31% to $3.6 million. Our ability to apply our
technologies and foam fabrication expertise to achieve new custom foam
applications make the outlook for this segment especially bright for fiscal
1996.
Contract packaging sales were down 10% to $6.3 million, but we generated a
four-fold increase in operating profit in that business. The higher
profitability was due to reduced cost, improved manufacturing efficiencies, and
a more profitable mix.
Overall, Span-America continued to enjoy excellent financial health in
1995, finishing the year with high liquidity, little long-term debt, and strong
cash flow. During the fourth quarter, we repurchased and retired 96,300 shares
of common stock in an open market transaction at an average price of $4.72 per
share.
We have every reason to be optimistic with regards to fiscal 1996. We have
not only navigated through a major transition, we are stronger and better
positioned because of it. With our broad base of new national distributors for
our medical products, sales are climbing. Sales from new products make up a
larger percentage of total sales than during any time in the last eight years.
We have reorganized key areas of the Company, escalated our marketing efforts,
and taken aim at the exploding home care market. Our strong financial position
makes possible a wide range of investment opportunities. As the new fiscal year
unfolds, we remain focused on regaining sales and earnings growth and improving
the value of your investment in Span-America.
Sincerely,
(Signature of Brien Laing (Signature of Charles B. Mitchell
appears here) appears here)
Brien Laing Charles B. Mitchell
Chairman of the Board President and Chief Executive Officer
-5-
<PAGE>
(Picture of PressureGuard air tubes appears here)
Medical Products Division
Follow Span-America to its source, and it will lead to the medical products
division. It was here we established our reputation as innovators, developing a
line of foam patient positioning products known as Span+Aids(Registration Mark)
unique in their design, specific in their function. Since then, we have
consistently pioneered the field of pressure management with breakthroughs in
pressure-reducing mattresses, wheelchair cushions, and therapeutic mattress
pads. Today, our markets for these products include hospitals, extended care
facilities, and the surging home health care market which combine to offer a
$900 million market potential.
Our mattress systems represent some of the most dramatic examples of our
innovative thinking. With the Healthflex acquisition in 1992, we introduced the
PressureGuard II replacement mattress. This uniquely designed replacement
mattress uses air-filled cylinders to effectively distribute the patient's
weight and minimize surface pressure. For the first time, hospitals and extended
care facilities could afford to purchase an effective pressure management system
for the cost of a replacement mattress. In mid-1994, we followed up with
PressureGuard IV, a computer-driven turning mattress, and in 1995,
DynaGuard(Registration Mark), an alternating pressure mattress. Both systems are
uniquely designed to automatically adjust air pressure at regular intervals,
providing custom treatment of pressure ulcers. In mid-1995, we again stepped
ahead of the industry with the introduction of CustomCare(trademark). It was the
industry's first dynamic pressure management technology to provide customized
pressure reduction without the aid of a power source or manual adjustments.
Today, CustomCare continues to be the only patented technology of its kind.
Span-America has also developed a number of foam mattress overlays to
provide therapeutic care and comfort. The flagship of this line is
Span-America's patented
(Picture of wheelchair and hospital bed floating in the clouds appears here)
-6-
<PAGE>
(Close up picture of a medical product appears here)
Geo-Matt(Registration Mark) overlay. Geo-Matt's engineered foam surface is
cut into over 800 individually responsive support cushions that conform to the
patient's body to absorb pressure while providing maximum support. Today,
Geo-Matt is the leading therapeutic foam overlay used in hospitals.
Additionally, Span-America markets a variety of foam pressure-reducing
products designed for more specific applications. These patient positioners
include wheelchair cushions, back supports, abduction pillows, foot drop stops,
cradle boots, and heel protectors.
Our medical products are distributed nationally through Owens & Minor,
Baxter and Durr Medical.
Industrial Foam Products
Our own success in developing innovative foam designs has led other
companies to request our custom foam fabrication services. In our industrial
foam division, we develop cost-effective solutions for applications that include
specialty packaging and engineered foam designs. Our engineers work with
industrial customers to develop specialized foam products that range from
refrigerator components to computer packaging. Our customers include
world-class manufacturers such as Fuji Photo Film, Frigidaire, and IBM.
(Close up picture of an industrial product appears here)
-7-
<PAGE>
Picture of close up of a consumer product appears here)
Consumer Products Division
Building on our successes in the medical products field, Span-America has
developed a variety of foam-based comfort products designed for the consumer
market and sold through department stores and mass merchandisers. Realizing the
similarities between our specialized therapeutic overlays and consumer bedding
products, we introduced a variation of our popular Geo-Matt which has enjoyed
similar success. Our contour pillow products grew out of the successful
introduction of our therapeutic positioning products.
In 1989, we applied our marketing and engineering experience to develop a
line of TerryFoam(Registration Mark) comfort products for the leisure market.
Today, this unique line includes beach mats, toddler resting mats, exercise
mats, and outdoor furniture cushions. Potential applications for this line of
washable, no-slip comfort products are virtually limitless. Sales of therapeutic
sleep aids and leisure comfort cushions have jumped more than 140% over the last
five years, and are expected to continue to increase.
(Picture of a TerryFoam Cushion appears here)
(Picture of a TerryFoam Cushion appears here)
-8-
<PAGE>
(Picture of various contract packaging products appears here)
Contract Packaging
Chances are, you've seen examples of our contract packaging business
without ever realizing it was Span-America. From our 60,000 square foot
packaging facility in Greenville, SC, we package consumer products such as
Contact Cold & Flu Caplets, Bausch & Lomb Sight-Savers, and Curity Lotion and
Cream. We've complemented our R&D capabilities with state-of-the-art
manufacturing equipment that includes high-speed horizontal and vertical form,
fill and seal equipment, and a Millipore water filtration system. Span-America
is also one of the few contract packagers in the country to maintain an in-house
laboratory, providing its customers with a wide range of microbiology and
chemistry testing capabilities. With quality control systems such as these,
Span-America has earned the trust and business of companies such as Smith-Kline
Beecham, Neutrogena, and Schering-Plough.
-9-
<PAGE>
Selected Financial Information
Five-Year Financial Summary
(Amounts in thousands except per share and employee data)
<TABLE>
<CAPTION>
1995 1994 1993* 1992 1991
<S> <C> <C> <C> <C> <C>
For the year:
Net sales ............................ $30,376 $31,129 $33,265 $30,328 $29,249
Gross profit ......................... 8,359 9,007 9,527 9,311 7,556
Operating income ..................... 1,254 2,282 1,596 3,439 2,644
Net income ........................... 978 1,640 1,095 2,135 1,683
Cash flow from operations ............ 1,551 2,015 2,689 2,304 2,762
Capital expenditures ................. 204 540 727 141 716
Per share:
Net income ........................... 0.30 0.49 0.31 0.64 0.51
Cash dividends declared .............. 0.10 0.10 0.10 0.10 0.06
At end of year:
Working capital ...................... 8,541 7,652 7,671 6,564 5,034
Property & equipment - net ........... 5,457 6,251 6,689 6,818 7,526
Total assets ......................... 20,614 20,014 20,577 18,796 16,371
Long-term debt ....................... 286 357 428 688 1,076
Shareholders' equity ................. 15,435 14,919 14,983 13,357 10,533
Book value per share ................. 4.86 4.62 4.26 3.91 3.21
Number of employees .................. 250 235 250 223 214
Key ratios:
Current ratio ........................ 3.8 3.7 3.5 3.1 2.5
Long-term debt to total capital ...... 1.8% 2.3% 2.7% 4.8% 8.8%
Return on net sales .................. 3.2% 5.3% 3.3% 7.0% 5.8%
Return on average shareholders' equity 6.4% 11.0% 7.7% 17.9% 17.2%
Return on average total assets ....... 4.8% 8.1% 5.6% 12.1% 10.7%
</TABLE>
* Fiscal 1993 includes an after-tax charge of $623,000 or $.18 per share,
related to the retirement of the company's former chairman and chief
executive officer. See Note 9 in Notes to Consolidated Financial Statements.
Net Sales
(Net Sales bar chart appears here with the following coordinates:)
1991 - 29.2 million, 1992 - 30.3 million, 1993 - 33.3 million,
1994 - 31.1 million, 1995 - 30.4 million
Net Income
(Net Income bar chart appears here with the following coordinates:)
1991 - 1.7 million, 1992 - 2.1 million, 1993 - 1.1 million, 1994 - 1.6 million,
1995 - .98 million
Earnings Per Share
(Earnings Per Share bar chart appears here with the following coordinates:)
1991 51 cents per share, 1992 64 cents per share, 1993 31 cents per share, 1994
49 cents per share, 1995 30 cents per share
Span-America Medical Systems, Inc.
-10-
<PAGE>
Quarterly Financial Data (Unaudited)
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
First Second Third Fourth Year
<S> <C> <C> <C> <C> <C>
For Fiscal 1995
Net sales $ 6,909 $ 7,726 $ 7,759 $ 7,982 $30,376
Operating income 179 172 422 481 1,254
Net income 152 152 320 354 978
Earnings per share .05 .05 .10 .11 .30
Stock price data
High 6 5 3/4 5 1/8 5 6
Low 4 1/4 4 4 4 1/4 4
For Fiscal 1994
Net sales $ 7,718 $ 8,133 $ 8,248 $ 7,030 $31,129
Operating income 836 679 586 181 2,282
Net income 555 452 391 242 1,640
Earnings per share .16 .13 .12 .07 .49
Stock price data
High 5 1/4 6 1/4 5 5/8 6 1/4 6 1/4
Low 4 3/4 4 1/2 4 3/4 4 3/4 4 1/2
</TABLE>
The Company's common stock is traded on the National Market System under the
NASDAQ symbol SPAN.
At September 30, 1995, there were 3,175,437 common shares outstanding. As of
December 1, 1995, there were approximately 503 shareholders of record. The
closing price of Span-America's stock on December 1, 1995, was $5 5/8.
In November 1991, the Board of Directors authorized a quarterly cash dividend of
$.025 per share. Future dividend payments will be dependent upon the Company's
earnings and liquidity position.
(Working Capital bar chart appears here with the following coordinates:)
Working Capital
1991 - 5.0 million, 1992 - 6.6 million, 1993 - 7.7 million, 1994 - 7.7 million
1995 - 8.5 million
(Long-Term Debt bar chart appears here with the following coordinates:)
Long-Term Debt
1991 - 1.1 million, 1992 - .69 million, 1993 - .43 million, 1994 - .36 million,
1995 - .29 million
(Shareholders' Equity bar chart appears here with the following coordinates:)
Shareholders' Equity
1991 - 10.5 million, 1992 - 13.4 million, 1993 - 15.0 million, 1994 - 14.9
million, 1995 - 15.4 million
Span-America Medical Systems, Inc.
-11-
<PAGE>
MANAGEMENT'S DISCUSSION AND FINANCIAL ANALYSIS
1995 Sales Composition
(A pie chart appears here with the following coordinates:)
Medical 44%
Contract Packaging 21%
Industrial 12%
Consumer 23%
(A line graph appears here with the following coordinates:)
Medical 13.6
Consumer 6.9
Industrial 3.6
Contract Packaging 6.3
Net Sales by Segment
Millions
(A bar graph appears here with the following coordinates:)
1993 1994 1995
Medical 18.3 14.8 13.6
Consumer 6.3 6.7 6.9
Industrial 2.0 2.7 3.6
Contract Packaging 6.5 7.0 6.3
Results of Operations Fiscal 1995 vs. 1994
Summary
Net sales for fiscal 1995 declined 2% to $30.4 million compared to
$31.1 million in fiscal 1994. This decline was the result of lower sales volumes
of foam overlay products in the medical segment. Sales of consumer and
industrial foam products increased during the year while contract packaging
sales declined. Net income decreased to $978,000 or $.30 per share during fiscal
1995 compared to $1.6 million or $.49 per share in fiscal 1994. The earnings
decline was caused by lower sales levels, a less profitable product mix, higher
labor costs, and a 10% increase in selling and marketing expenses.
Sales
The Company's medical sales declined by 8% during fiscal 1995 to $13.6
million compared to $14.8 million in fiscal 1994. The decline was due to lower
unit volume of medical foam overlay products. Sales of the Company's
PressureGuard replacement mattress products increased by 14% during fiscal 1995,
but did not fully offset declines in foam overlay sales. Management expects that
total sales of medical products will increase in fiscal 1996.
The Company's consumer product sales increased 4% during fiscal 1995 to
$6.9 million from $6.7 million in fiscal 1994 due to higher unit volume of
pillow and convoluted mattress pads which was partially offset by lower unit
volume of TerryFoam products. Management believes that total sales in the
consumer segment will increase during fiscal 1996.
Sales of industrial foam products increased by 31% during fiscal 1995
to $3.6 million from $2.7 million in fiscal 1994 primarily as a result of the
addition of new customers and new products in the industrial segment. Management
expects that industrial foam sales in fiscal 1996 will be higher than in fiscal
1995.
The Company's contract packaging sales declined by 10% during fiscal
1995 to $6.3 million compared to $7.0 million in fiscal 1994. The sales decline
was mainly the result of the Company's efforts to eliminate less profitable
supply contracts. Contract packaging sales are expected to increase slightly
during fiscal 1996.
Span-America Medical Systems, Inc.
12
<PAGE>
Gross Profit
The Company's gross profit decreased by 7% to $8.4 million during
fiscal 1995 from $9.0 million in fiscal 1994. The gross profit margin percentage
declined slightly to 27.5% in fiscal 1995 from 28.9% in fiscal 1994. The
reduction in gross profit level and the decline in gross margin percent age
during fiscal 1995 were the result of the 2% sales decline during the year and
higher labor costs primarily in the consumer segment. Management expects the
gross margin percentage during fiscal 1996 to be slightly higher than that
achieved during fiscal 1995.
S G & A Expenses
Sales and marketing expenses increased 10% to $4.6 million, or 15.1% of
sales, in fiscal 1995 compared to $4.2 million, or 13.3% of sales in fiscal
1994. The increase occurred primarily in the medical segment as a result of the
Company's continued expansion of sales efforts in that segment. Management
expects that total sales and marketing expenses in fiscal 1996 will be slightly
higher than the 1995 levels.
General and administrative expenses declined by 2% to $2.5 million in
fiscal 1995 as compared to $2.6 million in fiscal 1994. General and
administrative expenses for 1996 are expected to be slightly higher than in
1995.
Other
Non-operating income increased by 36% to $328,000 in fiscal 1995
compared to $242,000 in fiscal 1994. The majority of the increase was due to
higher interest income and royalty income received on sales of a patented
syringe product licensed to Becton Dickinson. Management expects non-operating
income to increase slightly in fiscal 1996.
During fiscal 1995, the Company paid dividends of $324,592, or 33% of
net income for the year. This amount represented four quarterly dividends of
$.025 per share.
Results of Operations Fiscal 1994 vs. 1993
Summary
Net sales for fiscal 1994 declined 6% to $31.1 million compared to $33.3
million in fiscal 1993. This decline was the result of lower sales volumes of
foam overlay products in the medical segment. Sales of consumer, industrial and
contract packaging products showed increases during the year. Net income
increased by 50% to $1.6 million or $.49 per share during fiscal 1994 compared
to $1.1 million or $.31 per share in fiscal 1993. Net income for fiscal 1993
included an after-tax charge of $623,000 or $.18 per share, related to the
retirement of the Company's former chairman and chief executive officer.
Excluding the one-time charge in fiscal 1993, net income for fiscal 1994
declined by 5% from an adjusted $1.7 million, or $.49 per share in fiscal 1993.
Sales
The Company's medical sales declined by 19% during fiscal 1994 to $14.8
million compared to $18.3 million in fiscal 1993. The decline was attributable
almost entirely to lower unit volume of medical foam overlay products. Sales of
the Company's PressureGuard replacement mattress products increased by 65%
during fiscal 1994, but did not fully offset declines in foam overlay sales.
In December 1993, the Company was informed that Baxter Healthcare
Corporation, which had previously distributed a majority of the Company's
medical foam products, would purchase their private label convoluted foam
products from a competing foam
Span-America Medical Systems, Inc.
13
<PAGE>
supplier and would begin carrying a competing line of foam products. Baxter's
addition of the competing product line became fully effective in February 1994.
Sales of the Company's convoluted foam overlay products were most significantly
impacted by the Baxter change since the Company no longer supplies Baxter's
private label convoluted foam products. Baxter continues to carry the Company's
medical foam products, but not on an exclusive basis as they did in the past.
The Company's medical products are now available through a number of national
distributors rather than exclusively from Baxter as was the case in fiscal 1993.
Sales of medical foam products to Baxter declined by approximately $7 million in
fiscal 1994 compared to 1993. However, during the same period, sales of these
products to other national distributors increased by $4 million, offsetting more
than half of the decline in sales to Baxter.
The Company's consumer product sales increased 5% during fiscal 1994 to
$6.7 million from $6.3 million in fiscal 1993 due mainly to higher unit volume
of TerryFoam products.
Sales of industrial foam products increased by 33% during fiscal 1994 to
$2.7 million from $2.0 million in fiscal 1993 primarily as a result of the
addition of new customers and new products in the industrial segment.
The Company's contract packaging sales, increased by 7% during fiscal
1994 to $7.0 million compared to $6.5 million in fiscal 1993. The increase was
the result of several new supply contracts received during fiscal 1994.
Gross Profit
The Company's gross profit decreased by 5% to $9.0 million during fiscal
1994 from $9.5 million in fiscal 1993. The lower gross profit level in fiscal
1994 was the result of the 6% sales decline during the year. However, the gross
profit margin percentage improved slightly in fiscal 1994 to 28.9% from 28.6% in
fiscal 1993. The higher gross margin percentage was the result of a more
profitable product mix and improved manufacturing cost controls during fiscal
1994.
S G & A Expenses
Sales and marketing expenses increased 2% to $4.2 million, or 13.3% of
sales, in fiscal 1994 compared to $4.1 million, or 12.3% of sales in fiscal
1993. The increase occurred primarily in the medical segment as a result of the
Company's continued expansion of its health care foam sales efforts.
General and administrative expenses declined by 11% to $2.6 million in
fiscal 1994 as compared to $2.9 million in fiscal 1993. The decline was due
mainly to lower retirement plan and compensation expense related to the
retirement of the former chairman and chief executive officer in fiscal 1993.
Other
Interest expense decreased by 68% during fiscal 1994. The decline was
the result of scheduled long-term debt repayments during the year. The Company
made the final scheduled payment of its remaining industrial revenue bond debt
in 1994. The remaining long-term bank debt is related to the Company's Employee
Stock Ownership Plan.
Non-operating income increased by 67% to $242,000 in fiscal 1994
compared to $145,000 in fiscal 1993. The majority of the increase was due to
higher royalty income received on sales of a patented syringe product licensed
to Becton Dickinson.
During fiscal 1994, the Company paid dividends of $335,401, or 20% of
net income for the year. This amount represented four quarterly dividends of
$.025 per share.
Span-America Medical Systems, Inc.
14
<PAGE>
Liquidity and Capital Resources
The Company generated cash from operations of approximately $1.6 million
during fiscal 1995, which was used to fund its investing and financing
activities. In addition, the Company's working capital increased 12% to $8.5
million as compared to the prior year end. The Company's current ratio increased
to 3.8 at September 30, 1995, from 3.7 at fiscal year end 1994.
Accounts receivable, net of allowances, increased 14% at September 30,
1995, to $4.4 million as compared to $3.9 million at the end of fiscal 1994. The
Company's average collection time increased to 50.2 days during fiscal 1995
compared to 45.8 days in fiscal 1994 due to sales growth in the Company's
non-medical product lines. Higher medical sales to the home care market also
lengthened the average collection time in fiscal 1995. These sales trends are
expected to continue in fiscal 1996, causing future collection times to increase
slightly. All of the Company's accounts receivable are unsecured.
Inventory increased by 3% during fiscal 1995 to $2.8 million. The
increase reflects normal monthly fluctuations in raw materials and finished
goods inventory. Management expects a slight increase in inventory levels during
fiscal 1996.
Net property and equipment decreased by $794,000, or 13%, during fiscal
1995. The change resulted primarily from the combination of capital expenditures
of $204,000 and normal depreciation expense. Management expects that capital
expenditures during fiscal 1996 will be similar to the level incurred during
fiscal 1995.
Costs in excess of fair value of net assets acquired, net of accumulated
amortization, increased by approximately $147,000. The change was primarily due
to the Company's issuance of 37,740 shares of its common stock at an approximate
market value of $211,000 as an additional purchase price in accordance with the
Healthflex acquisition agreement dated February 1992.
The Company's trade accounts payable remained level at $1.7 million in
fiscal 1995. Accrued and sundry liabilities increased by 29% since fiscal year
end 1994. The change in accrued liabilities was mainly attributable to higher
payroll taxes payable and customer deposits at fiscal year end 1995.
In July 1995, the Company purchased 96,300 shares of its common stock
for $454,536 ($4.72 per share) from an unaffiliated seller in a private
transaction. The repurchased shares have been retired. The Company issued 7,000
shares of stock to its directors in lieu of director's fees for the 1995 fiscal
year at an approximate market value of $36,000.
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
1996.
Impact of Inflation
Inflation was not a significant factor for the Company during fiscal
1995. Higher inflation rates could impact the Company through higher
manufacturing costs. The Company's profit margin could be adversely affected to
the extent that the Company is unable to pass cost increases along to its
customers due to competitive conditions.
(Two bar charts appear here with the following coordinates:)
Working Capital
Millions
1993 1994 1995
7.7 millions 7.7 millions 8.5 millions
Capital Structure
Millions
1993 1994 1995
Equity 15.0 14.9 15.4
Debt .43 .36 .29
Span-America Medical Systems, Inc.
15
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, October 1,
1995 1994
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,242,396 $ 1,557,542
Securities available for sale (Note 3) 2,876,449 1,956,039
Accounts receivable, net of allowances of
$355,000 (1995) and $341,500 (1994) 4,446,913 3,909,025
Inventories (Note 4) 2,800,896 2,722,976
Prepaid expenses and deferred income taxes 221,929 327,981
Total current assets 11,588,583 10,473,563
Property and equipment, net (Note 5) 5,457,350 6,251,133
Cost in excess of fair value of net
assets acquired, net of accumulated amortization
of $172,383 (1995) and $109,006 (1994) 1,691,197 1,543,723
Other assets (Note 6) 1,876,573 1,745,646
$20,613,703 $20,014,065
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $1,651,796 $ 1,724,891
Accrued and sundry liabilities (Note 7) 1,325,334 1,026,307
Current portion of long-term debt (Note 8) 70,375 70,375
Total current liabilities 3,047,505 2,821,573
Long-term debt, less current portion (Note 8) 286,344 356,719
Deferred income taxes (Note 11) 626,000 773,000
Deferred compensation (Note 9) 1,218,517 1,143,493
Shareholders' equity (Note 10)
Common Stock, no par value; 20,000,000 shares
authorized; issued and outstanding shares -
3,175,437 (1995) and 3,226,997 (1994) 4,225,122 4,432,931
Additional paid-in capital 145,834 145,834
Retained earnings 11,421,100 10,767,609
15,792,056 15,346,374
Less guaranteed ESOP obligations (Note 12) 356,719 427,094
Total shareholders' equity 15,435,337 14,919,280
Contingencies (Note 17)
$20,613,703 $20,014,065
</TABLE>
See accompanying notes.
Span-America Medical Systems, Inc.
16
<PAGE>
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years Ended
September 30, October 1, October 2,
1995 1994 1993
<S> <C> <C> <C>
Net sales $ 30,376,242 $ 31,128,656 $ 33,265,280
Cost of goods sold 22,016,763 22,121,681 23,738,121
Gross profit 8,359,479 9,006,975 9,527,159
Selling and marketing expenses 4,586,602 4,151,909 4,079,858
General and administrative expenses 2,518,902 2,572,784 2,893,320
Retirement compensation expense (Note 9) 958,328
7,105,504 6,724,693 7,931,506
Income from operations 1,253,975 2,282,282 1,595,653
Other (expense) income:
Interest expense (17,313) (18,210) (56,364)
Investment income and other 328,421 242,110 145,176
311,108 223,900 88,812
Income before income taxes 1,565,083 2,506,182 1,684,465
Provision for income taxes (Note 11) 587,000 866,000 589,000
Net Income $ 978,083 $ 1,640,182 $ 1,095,465
Earnings per share of Common Stock $ .30 $ .49 $ .31
Weighted average shares outstanding 3,244,075 3,374,022 3,487,709
</TABLE>
See accompanying notes.
Span-America Medical Systems, Inc.
17
<PAGE>
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Additional Guaranteed
Common Stock Paid-in Retained ESOP
Shares Amount Capital Earnings Obligation Total
<S> <C> <C> <C> <C> <C>
Balance at October 3, 1992 3,414,255 $ 5,063,157 $ 145,834 $ 8,715,705 ($ 567,844) $13,356,852
Net income for the 1993 fiscal year 1,095,465 1,095,465
ESOP loan repayments 70,375 70,375
Common Stock issued on exercise of
stock options 4,000 16,000 16,000
Common Stock issued for royalty
agreement buyout 40,000 292,280 292,280
Common Stock issued based on
Healthflex acquisition agreement 56,319 500,000 500,000
Cash dividends paid or declared
($.10 per share) (348,342) (348,342)
Balance at October 2, 1993 3,514,574 5,871,437 145,834 9,462,828 (497,469) 14,982,630
Net income for the 1994 fiscal year 1,640,182 1,640,182
ESOP loan repayments 70,375 70,375
Common Stock purchased and retired (311,000) (1,566,300) (1,566,300)
Common Stock issued based on
Healthflex acquisition agreement 23,423 127,794 127,794
Cash dividends paid or declared
($.10 per share) (335,401) (335,401)
Balance at October 1, 1994 3,226,997 4,432,931 145,834 10,767,609 (427,094) 14,919,280
Net income for the 1995 fiscal year 978,083 978,083
ESOP loan repayments 70,375 70,375
Common Stock purchased and retired (96,300) (454,536) (454,536)
Common Stock issued based on
Healthflex acquisition agreement 37,740 210,852 210,852
Cash dividends paid or declared
($.10 per share) (324,592) (324,592)
Common Stock issued to Directors 7,000 35,875 35,875
Balance at September 30, 1995 3,175,437 $ 4,225,122 $ 145,834 $11,421,100 ($ 356,719) $15,435,337
</TABLE>
See accompanying notes.
Span-America Medical Systems, Inc.
18
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Years Ended
September 30, October 1, October 2,
1995 1994 1993
<S> <C> <C> <C>
Operating activities
Net income $ 978,083 $ 1,640,182 $ 1,095,465
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 905,688 918,157 854,247
Amortization 217,419 209,229 189,553
Provision for losses on accounts receivable 24,000 138,000 51,000
Provision for deferred income taxes (89,000) (19,000) (405,000)
Losses on sale and disposal of property, plant and equipment 28,807 3,969 1,336
Loss on abandonment of leasehold improvements 7,030
Gain on sale of other assets (3,640)
Increase in cash value of life insurance (235,740) (107,304) (65,658)
Deferred compensation 75,024 (100,909) 990,542
Changes in operating assets and liabilities:
Accounts receivable (587,571) (156,819) (141,684)
Inventory (77,920) (252,029) 40,385
Prepaid expenses and other assets 90,366 (118,356) 2,039
Accounts payable and accrued expenses 225,932 (147,097) 76,710
Net cash provided by operating activities 1,551,448 2,015,053 2,688,935
Investing activities
Purchases of securities (1,408,432) (1,000,000) (1,475,205)
Proceeds from sales of securities 513,707 1,000,000 900,000
Purchases of property, plant and equipment (203,912) (539,716) (726,823)
Proceeds from sale of property, plant and equipment 63,200 48,400
Payments for other assets (55,779) (55,793) (36,891)
Proceeds from sale of other assets 3,750
Net cash used for investing activities (1,087,466) (547,109) (1,338,919)
Financing activities
Scheduled principal payments on long-term debt (161,657) (362,917)
Payments on insurance policy loans (73,956) (30,600)
Dividends paid (324,592) (335,401) (348,342)
Common Stock issued upon exercise of options 16,000
Purchase and retirement of Common Stock (454,536) (1,566,300)
Net cash used for financing activities (779,128) (2,137,314) (725,859)
(Decrease) Increase in cash and cash equivalents (315,146) (669,370) 624,157
Cash and cash equivalents at beginning of year 1,557,542 2,226,912 1,602,755
Cash and cash equivalents at end of year $ 1,242,396 $ 1,557,542 $ 2,226,912
</TABLE>
See accompanying notes.
Span-America Medical Systems, Inc.
19
<PAGE>
Notes to Consolidated Financial Statements
September 30, 1995
1. Significant Accounting Policies
Description of Business
The Company manufactures and distributes replacement mattresses, mattress pads
and patient positioners for the medical market; cushions and mattress pads for
the consumer market; various foam products for the industrial market; and
contract packaging products for the medical and consumer markets throughout the
United States and Canada. Receivables from the sale of such products are
unsecured.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
Healthflex Corporation, its wholly-owned subsidiary. Significant intercompany
accounts and transactions have been eliminated.
Inventories
Inventories are valued at the lower of cost (first-in, first-out method) or
market.
Depreciation
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, principally all depreciation is computed using
accelerated methods.
Amortization
Amortization is computed 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. Loan costs are amortized using the straight-line
method over the terms of the related debt. Cost in excess of the fair value of
net assets acquired is amortized over a 30-year period. Terminated contract
rights are being amortized over the period expected to be benefited of 5 years.
Accumulated amortization of intangible assets at September 30, 1995, and October
1, 1994, was approximately $727,000 and $510,000, respectively.
Revenue Recognition
Revenue is recognized by the Company when goods are shipped and title passes to
the customer.
Fair Value Disclosures
In December 1991, the FASB issued Statement No. 107, "Disclosure about Fair
Value of Financial Instruments." Companies with less than $150 million in total
assets are required to provide the new disclosures for fiscal years ending after
December 15, 1995. Accordingly, the Company would be required to adopt this
Statement no later than its 1996 fiscal year. Early adoption of this Statement
is permitted. The Company presently does not intend to implement this Statement
early.
Earnings Per Common Share
Earnings per common share are computed based on the weighted average number of
shares outstanding during each period. The effect of common stock equivalents on
earnings per share is not material.
Fiscal Year
The Company's fiscal year ends on the Saturday nearest to September 30. The
1995, 1994 and 1993 fiscal years were all 52-week years.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. The Company maintains a
centralized cash management program whereby its excess cash balances are
invested in bank commercial paper and are considered cash equivalents
(approximately $942,000 at September 30,1995). At times, cash balances in the
Company's accounts may exceed federally insured limits.
Income Taxes
In accordance with Statement No. 109, 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.
2. Acquisition of Healthflex, Inc.
On February 28, 1992, the Company acquired substantially all of the assets of
Healthflex, Inc., a Vermont-based company which produced specialty mattress
products used in the prevention and treatment of pressure ulcers. The
acquisition was accounted for as a purchase.
The Healthflex acquisition agreement (as amended) also provides that the
Company will be required to issue more shares of Common Stock as additional
consideration during 1996. The actual number of shares that will be issued will
depend on actual sales of Healthflex products and the market price of the
Company's Common Stock when issued. The value of any subsequently issued shares
will be allocated to cost in excess of the fair value of net assets acquired.
Accordingly, the Company issued 37,740 (1995), 23,423 (1994) and 56,319 (1993)
shares of its common stock valued at approximately $211,000, $128,000 and
$500,000, respectively, pursuant to the agreement, resulting in corresponding
increases in cost in excess of the net assets acquired.
On October 2, 1995, the Company issued 50,171 shares of its common stock
at an approximate market value of $237,000 pursuant to the agreement as
calculated based on 1995 sales.
3. Securities Available for Sale
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The Company adopted the provisions of the new
standard for investments held as of or acquired after October 2, 1994. In
Span-America Medical Systems, Inc.
20
<PAGE>
Notes to Consolidated Financial Statements
accordance with the Statement, prior period financial statements have not been
restated to reflect the change in accounting principle. The adoption of
Statement 115 as of October 2, 1994, did not substantially change net income,
the opening balance of shareholders equity or the value of investments.
Securities available for sale are carried at the lower of aggregate cost
or market. Such securities consist of investments in municipal bonds and are
stated at aggregate cost in 1995 and 1994. The aggregate market value of
marketable securities approximates cost.
4. Inventories
The components of inventories are as follows:
1995 1994
Raw materials $2,140,095 $1,633,937
Work in process 17,513 18,454
Finished goods 643,288 1,070,585
$2,800,896 $2,722,976
5. Property and Equipment
Property and equipment, at cost, is summarized by major classification as
follows:
1995 1994
Land $ 317,343 $ 317,343
Land improvements 240,016 240,016
Buildings 3,613,216 3,613,216
Machinery and equipment 8,047,499 8,042,247
Furniture and fixtures 591,024 577,168
Vehicles 9,520 9,520
Leasehold improvements 92,420 88,001
12,911,038 12,887,511
Less accumulated depreciation 7,453,688 6,636,378
$ 5,457,350 $ 6,251,133
6. Other Assets
Other assets consist of the following:
1995 1994
Patents and trademarks,
net of accumulated
amortization of $378,190 in 1995
and $283,830 in 1994 $ 684,384 $ 723,769
Cash value of life insurance 1,014,756 779,016
Terminated contract rights,
net of accumulated
amortization of $175,368 in 1995
and $116,912 in 1994 116,912 175,368
Other 60,521 67,493
$1,876,573 $1,745,646
On October 17, 1992, the Company issued 40,000 shares of unregistered
Common Stock to an unaffiliated company to purchase the rights, title and
interest in the Company's contract packaging business in lieu of future royalty
payments. The stock was valued at $292,280, or $7.307 per share, based on the
average of the high and low selling prices during the 10 days preceding the
transaction. The terminated contract rights are being amortized over the period
expected to be benefited of five years.
7. Accrued and Sundry Liabilities
Accrued and sundry liabilities consist of the following:
1995 1994
Salaries, profit-sharing and
other compensation $ 507,516 $ 471,604
Federal and state income taxes 169,662 150,262
Payroll taxes accrued and withheld 129,266 43,185
Property taxes 139,982 138,745
Medical insurance 81,617 101,040
Customer deposits 165,523 30,796
Interest and other 131,768 90,675
$1,325,334 $1,026,307
8. Long-Term Debt
Long-term debt consists of the following:
1995 1994
ESOP note payable to a bank
in quarterly installments of
$5,719 plus interest at the
bank's prime rate, to December
2002. The effective interest
rate was 9% in 1995. $142,969 $165,844
ESOP note payable to a bank due
in quarterly installments of
$11,875, plus interest at the
bank's prime rate, to March
2000. The effective interest
rate was 9% in 1995. 213,750 261,250
356,719 427,094
Less current portion 70,375 70,375
$286,344 $356,719
The ESOP notes payable are secured by pledge of the related unallocated
shares of Common Stock in the ESOP. (See Note 12.)
Maturities of long-term debt for the fiscal years succeeding September
30, 1995, are as follows:
1996 $ 70,375
1997 70,375
1998 70,375
1999 70,375
2000 46,625
Later years 28,594
$356,719
At September 30, 1995, the Company had available an unused line of
credit with a bank for unsecured short-term borrowings up to $2,500,000.
During the 1995, 1994, and 1993 fiscal years, the Company paid interest
costs of $17,313, $24,126, and $58,813, respectively.
Span-America Medical Systems, Inc.
21
<PAGE>
Notes to Consolidated Financial Statements
9. Deferred Compensation
In July 1993, the Company entered into a resignation agreement with its chief
executive officer which amended a preexisting retirement agreement. The original
retirement agreement provided for post-retirement payments, contingent on
certain conditions, beginning January 1, 1996, payable over the remaining life
of the executive. The Company had previously been accruing the present value of
the estimated future retirement benefit payments over the period from the date
of the agreement to the retirement date, January 1, 1996. Under the new
agreement, the executive became fully eligible to receive the retirement
benefits. Consequently, the company accrued an additional $496,300 to increase
the liability to the full present value of the expected payments due over the
executive's estimated life expectancy. In addition, the Company accrued $462,000
to record the liability associated with the salary continuation provision of the
resignation agreement. This new agreement set forth non-compete, confidentiality
and certain other provisions related to the executive's resignation. The Company
recognized expense of approximately $91,000 in 1995, $84,000 in 1994, and
$1,222,000 in 1993 related to these agreements.
In September 1994, the Company entered into a similar deferred
compensation agreement with an executive providing for post-retirement payments,
contingent on certain conditions, beginning in 2002 payable over the remaining
life of the executive and spouse. The Company will accrue the present value of
the estimated future retirement payments over the period from the date of the
agreement to the retirement date. The Company recognized expense of
approximately $121,000 in 1995 related to this agreement.
10. Shareholders' Equity
The Board of Directors of the Company adopted in March 1987 the 1987 Stock
Option Plan ("Plan"). The Plan authorized the Board of Directors to grant
options to key officers and employees for an aggregate of 200,000 shares of the
Company's Common Stock. Options were granted at the fair market value on the
date of grant. The options that become exercisable accumulate in an amount not
to exceed 20% annually of the total grant. As of September 30, 1995, 77,000
shares granted under this plan were fully exercisable.
The Board of Directors adopted, effective November 8, 1991, the 1991
Stock Option Plan. The plan gives the Board of Directors the right to grant
awards of up to 200,000 shares of Common Stock to officers and key employees and
50,000 shares to directors who are neither officers nor employees of the
Company. The Board of Directors has granted options for 84,000 shares under this
plan as of September 30, 1995, none of which have been exercised. Options were
granted at the fair market value on the date of grant. Shares under the 1991
plan become exercisable each year as defined in the agreements entered into with
each employee, but at a minimum of 1,000 shares per year. As of September 30,
1995, options for 53,200 of the 84,000 shares granted under the plan were fully
exercisable.
The options under the 1987 and 1991 plans which have not been exercised
expire 10 years from the date of grant, except for owners of more than 10% of
shares of the Company's Common Stock for which the options expire 5 years from
the date of grant.
A summary of the activity in the Company's stock option plans is as
follows:
Option Price Available
Per Share Outstanding for Grant
At October 2, 1993 $2.75 to $8.37 131,000 277,000
Granted $4.81 to $5.19 55,000 (55,000)
Terminated (8,000) 8,000
At October 1, 1994 $2.75 to $8.37 178,000 230,000
Granted $4.69 to $5.13 9,000 (9,000)
Terminated (26,000) 4,000
At September 30, 1995 $2.75 to $8.37 161,000 225,000
Under specific circumstances, tax benefits arising from the difference
in market value between the date of grant and the date of issuance of common
stock upon exercise are recorded as a credit to additional paid-in capital.
In 1994 the Board of Directors approved a stock based incentive plan for
the Company's senior management team based on achievement of certain financial
goals over the three-year period ending in fiscal 1997. At September 30, 1995,
the Company has made no accrual for these incentives based on current estimates
of financial goals. If the goals are achieved, the Company would issue 15,000
shares of Common Stock and the cash equivalent of 30,000 shares of Common Stock
to be divided among the participants as defined in the plan.
11. 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, 1995, and
October 1, 1994, are as follows:
1995 1994
Deferred tax liabilities:
Depreciation $ 925,000 $1,037,000
Intangible assets 174,000 202,000
Other 88,000 46,000
Total deferred tax liabilities 1,187,000 1,285,000
Deferred tax assets:
Deferred compensation 461,000 432,000
Net operating loss carryforwards 13,000 34,000
Accrued expenses 86,000 106,000
Other 57,000 54,000
Total deferred tax assets 617,000 626,000
Net deferred tax liabilities $ 570,000 $ 659,000
The Company has net operating loss carryforwards of $29,000 for income
tax purposes that expire in years 2000 through 2003. Those carryforwards
resulted from the Company's 1992 acquisition of Healthflex, Inc. The tax benefit
for these carryforwards was recognized as a reduction of goodwill relat-
Span-America Medical Systems, Inc.
22
<PAGE>
Notes to Consolidated Financial Statements
ed to the acquisition of Healthflex, Inc. No valuation allowances were necessary
relating to these carryforwards or other deferred tax assets for 1995 and 1994.
The Company made income tax payments, net of refunds, of $657,000,
$985,000 and $836,000, in the 1995, 1994, and 1993 fiscal years, respectively.
Federal and state income tax provisions consist of the following:
1995 1994 1993
Current:
Federal $ 602,000 $ 778,000 $ 885,000
State 74,000 107,000 109,000
676,000 885,000 994,000
Deferred:
Federal (79,000) (14,000) (368,000)
State (10,000) (5,000) (37,000)
(89,000) (19,000) (405,000)
Income tax expense $ 587,000 $ 866,000 $ 589,000
Income tax expense differs from the amounts computed by applying the
Federal tax rate to income before income taxes as follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Computed tax at the statutory rate $ 532,000 $ 852,000 $ 573,000
Increases (decreases):
State income taxes, net of
Federal tax benefit 43,000 69,000 47,000
Tax-exempt investment income (24,000) (16,000) (10,000)
Other, net 36,000 (39,000) (21,000)
Income tax expense $ 587,000 $ 866,000 $ 589,000
</TABLE>
12. Employee Benefit 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 $52,000, $53,000, and
$50,000 for the 1995, 1994, and 1993 fiscal years, respectively.
The Company has an Employee Stock Ownership Plan (the "ESOP") for the
benefit of employees of the Company who have completed one year of service with
the Company and have attained age 21. Under the provisions of SOP 93-6, the
company's plan is "grandfathered" and therefore the Company accounts for the
ESOP under SOP 76-3. In 1990, the ESOP borrowed $475,000 at the bank's prime
rate in a 10-year loan which is guaranteed by the Company. The ESOP used the
proceeds of the loan to purchase 100,000 shares of the Company's Common Stock
from the former chairman of the board of the Company at a price of $4.75 per
share, the average of the bid and asked prices on the day before the
transaction. In 1992, the ESOP borrowed $228,750 at the bank's prime rate on a
10-year loan which is guaranteed by the Company. The proceeds were used to
purchase an additional 15,000 shares of the Company's Common Stock from the
former chairman of the board of the Company at a price of $15.25 per share, the
average of the bid and asked prices on the day of the transaction.
The Company has reflected the guaranteed ESOP borrowings as long-term
debt on its balance sheet. The ESOP borrowings are secured by the unallocated
shares of Common Stock. A corresponding amount of "Guaranteed ESOP Obligations"
is recorded as a reduction of shareholders' equity. As the Company makes tax
deductible contributions to the ESOP to make the principal and interest payments
on the loan, shares acquired with the loan proceeds are allocated to ESOP
participants and both the liability and the amount in shareholders' equity are
reduced. At September 30, 1995, 60,625 of the original shares acquired had been
allocated to the participants of the Company's ESOP. The Company's contributions
to the ESOP were approximately $88,000 in 1995, $85,000 in 1994, and $100,000 in
1993. Interest payments for fiscal 1995, 1994, and 1993 of approximately
$35,000, $32,000 and $33,000, respectively, were partially funded by dividends
received by the ESOP of approximately $18,000, $17,000 and $12,000.
13. Related Party Transactions
In fiscal 1995, the Company issued 7,000 shares of its common stock at
an approximate market value of $36,000 to its outside directors in lieu of their
annual cash compensation.
The Company has patents and patent rights acquired from its former
chairman of the board and major shareholder. As consideration, the Company pays
royalties equal to three percent of gross sales on all manufactured products
covered by the patents. For the 1995, 1994, and 1993 fiscal years, royalties
totaled approximately $55,000, $56,000 and $57,000, respectively.
The Company paid approximately $41,000 in 1995, $48,000 in 1994, $37,000
in 1993 in legal fees to a firm having a member who is also a director of the
Company.
The Company paid approximately $56,000 in 1993 for market research
consulting services to a firm whose president is a director of the Company.
In fiscal 1994 the Company purchased and retired 57,000 shares of its
common stock from the retired chief executive officer at a market value of
approximately $300,000.
14. Major Customers
The Company has a business relationship with a customer to distribute
certain of its foam and contract packaging medical products to hospitals
throughout the United States. Sales generated by this customer amounted to
approximately 12% of net sales in fiscal 1995, 25% in 1994 and 45% in 1993.
The Company entered into an agreement in a prior year, granting a
customer the exclusive right to distribute certain consumer foam products. The
original term of the agreement expired December 31, 1989, but it is
automatically renewable for two years on each succeeding January 1st providing
that neither company terminates the agreement. Sales to this customer for the
1995, 1994 and 1993 fiscal years amounted to approximately 15%, 13% and 15% of
the Company's net sales, respectively.
Span-America Medical Systems, Inc.
23
<PAGE>
Notes to Consoldiated Financial Statements
15. Operations and Industry Segments
The Company operates in four industry segments: medical, consumer, industrial
and contract packaging. These industry segments correspond to the markets in the
United States for which the Company manufactures and distributes its
polyurethane foam and contract packaging products. Effective for fiscal 1995,
the Company has separated the contract packaging operation from the medical and
consumer segments and reported this as its own industry segment. Segment data
for all years reflects the merging of this segment which had been previously
reported as parts of two other segments.
The following table summarizes certain information on industry segments:
<TABLE>
<CAPTION>
Years Ended
September 30, October 1, October 2,
1995 1994 1993
<S> <C> <C> <C>
Net Sales:
Medical $ 13,585,122 $ 14,774,709 $ 18,345,518
Consumer 6,939,897 6,662,217 6,335,073
Industrial 3,563,206 2,710,248 2,041,907
Contract Packaging 6,288,017 6,981,482 6,542,782
Total $ 30,376,242 $ 31,128,656 $ 33,265,280
Operating Profit:
Medical $ 1,496,028 $ 2,375,364 $ 2,992,994
Consumer (116,979) 250,358 100,947
Industrial 328,789 289,112 231,818
Contract Packaging 211,076 (65,900) (23,974)
Total $ 1,918,914 $ 2,848,934 $ 3,301,785
Corporate expense (664,939) (566,652) (1,706,132)
Interest expense (17,313) (18,210) (56,364)
Other income 328,421 242,110 145,176
Income before income taxes $ 1,565,083 $ 2,506,182 $ 1,684,465
Identifiable assets:
Medical $ 5,859,805 $ 5,615,410 $ 6,373,498
Consumer 3,141,929 3,345,582 2,389,535
Industrial 1,308,267 1,134,857 771,133
Contract Packaging 5,166,317 5,625,619 6,211,975
Corporate 5,137,385 4,292,597 4,831,312
$ 20,613,703 $ 20,014,065 $ 20,577,453
Depreciation and
amortization expense:
Medical $ 392,210 $ 413,334 $ 403,500
Consumer 189,370 140,423 101,110
Industrial 60,181 47,296 31,851
Contract Packaging 479,378 521,131 500,508
Corporate 1,968 5,202 6,831
$ 1,123,107 $ 1,127,386 $ 1,043,800
</TABLE>
Span-America Medical Systems, Inc.
24
<PAGE>
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Years Ended
September 30, October 1, October 2,
1995 1994 1993
<S> <C> <C> <C>
Capital expenditures:
Medical $ 95,819 $ 104,496 $ 282,236
Consumer 67,206 370,803 64,212
Industrial 14,115 17,559 21,404
Contract Packaging 26,772 46,858 358,971
$ 203,912 $ 539,716 $ 726,823
</TABLE>
Total sales by industry segment includes sales from unaffiliated
customers, as reported in the Company's statements of income. In computing
operating profit, non-allocable general corporate expenses, interest expense,
other income and income taxes are not included, while 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 marketable securities, cash, prepayments, property and equipment
relating to corporate functions and certain other assets.
The Company has three major customers. Sales to one of these customers
was approximately 27% in 1995, 53% in 1994 and 82% in 1993 of net sales in the
medical segment. Sales to another customer accounted for approximately 64% of
net sales in the consumer segment in 1995, 61% of net sales in 1994, and 77% in
1993. Sales to the third customer accounted for approximately 25% of net sales
in the contract packing segment in 1995, 22% in 1994, and 30% in 1993.
16. Operating Leases
The Company leases manufacturing and warehousing facilities located in
South Carolina and California. These leases require the Company to pay certain
insurance and maintenance costs.
Rental expense for all operating leases was $327,000 (1995), $367,000
(1994), and $185,000 (1993).
Future minimum lease payments under noncancelable operating leases with
initial terms of one year or more consisted of the following at September 30,
1995:
1996 $342,000
1997 295,000
1998 47,000
$684,000
17. 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 parties believed to be financially capable, none of these actions should
have a material effect on its operations or financial condition.
Span-America Medical Systems, Inc.
25
<PAGE>
Report of Ernst & Young LLP
Independent Auditors
Shareholders and Board of Directors
Span-America Medical Systems, Inc.
We have audited the accompanying consolidated balance sheets of
Span-America Medical Systems, Inc. as of September 30, 1995 and October 1, 1994
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the three years in the period ended September 30, 1995.
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 audits.
We conducted our audits 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 and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Span-America Medical Systems, Inc. at September 30, 1995 and October 1, 1994,
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended September 30, 1995, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Greenville, S.C.
October 26, 1995
Span-America Medical Systems, Inc.
26
<PAGE>
Directors
Brien Laing
CHAIRMAN OF THE BOARD
RETIRED CORPORATE VICE PRESIDENT
BAXTER HEALTHCARE CORPORATION
DEERFIELD, ILLINOIS
Charles B. Mitchell
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Richard C. Coggins
CHIEF FINANCIAL OFFICER
TREASURER AND SECRETARY
Thomas F. Grady, Jr.
VICE PRESIDENT
FEDERAL PAPER BOARD COMPANY
MONTVALE, NEW JERSEY
Douglas E. Kennemore, M.D.
NEUROSURGEON
GREENVILLE, SOUTH CAROLINA
W. Marcus Newberry, M. D.
RETIRED VICE PRESIDENT OF ACADEMIC AFFAIRS
AND PROVOST
MEDICAL UNIVERSITY OF SOUTH CAROLINA
CHARLESTON, SOUTH CAROLINA
James M. Shoemaker, Jr.
MEMBER
WYCHE, BURGESS, FREEMAN & PARHAM, P.A.
GREENVILLE, SOUTH CAROLINA
Raymond M. Tortolani
PRESIDENT
MARKET FORUM
WARWICK, RHODE ISLAND
Robert A. Whitehorne
SENIOR LECTURER & DIRECTOR OF
BUSINESS RELATIONS
GRADUATE SCHOOL OF BUSINESS
COLLEGE OF WILLIAM & MARY
WILLIAMSBURG, VIRGINIA
Officers
Charles B. Mitchell
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Richard C. Coggins
CHIEF FINANCIAL OFFICER
TREASURER AND SECRETARY
Robert E. Ackley
VICE PRESIDENT - MARKETING
James D. Ferguson
VICE PRESIDENT - OPERATIONS
Mark L. Hunt
VICE PRESIDENT - MEDICAL SALES
Corporate Office
Span-America Medical Systems, Inc.
70 Commerce Drive
Commerce Center
Greenville, South Carolina 29615
(864) 288-8877
Mailing Address:
P.O. Box 5231
Greenville, SC 29606
Stock Information
The Common Stock of Span-America
Medical Systems, Inc., is traded in the National Market System under the
NASDAQ Symbol SPAN.
Stock Transfer Agent
Wachovia Bank of North Carolina, N.A.
Corporate Trust Department
P.O. Box 3001
Winston-Salem, NC 27102
(800) 633-4236
Inquiries regarding stock transfers, lost certificates or address changes should
be directed to the Stock Transfer Agent at the address above.
General Counsel
Wyche, Burgess, Freeman & Parham, P.A.
P.O. Box 728
Greenville, South Carolina 29602
Auditors
Ernst & Young LLP
P.O. Box 10647
Greenville, South Carolina 29603
Stockholder Inquiries
and Availability of Form
10-K Report
A copy of the Company's Annual Report on Form 10-K for the year ended
September 30, 1995, is available without charge to shareholders upon written
request from the following:
Secretary
Span-America Medical Systems, Inc.
P.O. Box 5231
Greenville, South Carolina 29606
Span-America Medical Systems, Inc.
27
<PAGE>
[SPAN-AMERICA logo]
Post Office Box 5231
Greenville, South Carolina 29606
864-288-887
<PAGE>
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Span-America Medical Systems, Inc. of our report dated October 26, 1995,
included in the 1995 Annual Report to Shareholders of Span-America Medical
Systems, Inc.
Our audit also included the financial statement schedule of Span-America Medical
Systems, Inc. listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole
presents fairly, in all material respects, the information set forth therein.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-32896) pertaining to the Span-America Medical Systems, Inc.
1987 Stock Option Plan and in the Registration Statement (Form S-8 No. 33-84374)
pertaining to the Span-America Medical Systems, Inc. 1991 Stock Option Plan of
our report dated October 26, 1995, with respect to the consolidated financial
statements incorporated herein by reference, and our report included in the
preceding paragraph with respect to the financial statement schedule included in
this Annual Report (Form 10-K) of Span-America Medical Systems, Inc.
ERNST & YOUNG LLP
Greenville, South Carolina
December 26, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<CASH> 1,242
<SECURITIES> 2,876
<RECEIVABLES> 4,802
<ALLOWANCES> 355
<INVENTORY> 2,801
<CURRENT-ASSETS> 11,589
<PP&E> 12,911
<DEPRECIATION> 7,454
<TOTAL-ASSETS> 20,614
<CURRENT-LIABILITIES> 3,048
<BONDS> 0
<COMMON> 4,371
0
0
<OTHER-SE> 11,064
<TOTAL-LIABILITY-AND-EQUITY> 20,614
<SALES> 30,376
<TOTAL-REVENUES> 30,705
<CGS> 22,016
<TOTAL-COSTS> 29,140
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17
<INCOME-PRETAX> 1,565
<INCOME-TAX> 587
<INCOME-CONTINUING> 978
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 978
<EPS-PRIMARY> .3
<EPS-DILUTED> .3
</TABLE>
