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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 28, 1996
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
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 16, 1996 was $13,039,172.
The number of shares of the registrant's common stock, no par value,
outstanding as of December 16, 1996 was 3,227,516.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1996 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 4, 1997 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 1996.
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 1996, 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 the PressureGuard line of replacement mattresses
directly to hospitals, long-term care facilities, and home health care dealers.
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 1996 were approximately $878,000 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 28, 1996,
presented on pages 20-22 of the 1996 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%, 45% and 47% of sales in 1996, 1995, and 1994 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 25% of the
Company's total net sales in fiscal 1996. 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 declined in 1994 and 1995 but increased slightly in fiscal 1996.
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 1996
replacement mattresses and related products made up approximately 6% 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 1996, PGIV and related products made up
approximately 3% 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 9% of the Company's net sales in fiscal 1996. 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,
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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. During fiscal 1996, approximately 23% of the
Company's medical foam products were sold to Baxter which distributes these
products to hospitals nationwide. Span-America has maintained a distribution
relationship with Baxter (formerly American Hospital Supply) for 18 years. In
September 1996, Baxter spun off its healthcare distribution and cost management
business into a new public company named Allegiance Health Care Corporation.
The Company's distribution agreement has been transferred to Allegiance, and
management expects the change to have no negative impact on the Company's sales
to Allegiance.
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. From 1986
until 1996 the Company had an exclusive agreement with Pillowtex for the
distribution of certain of its consumer foam products. That agreement was
terminated October 31, 1996. However, the termination agreement provides
that Pillowtex will continue to market the Company's products to existing
customers and will not offer competing products to those customers for a
period of 24 months from the termination date. Consequently, management
does not expect the termination of this agreement to result in a reduction
in sales to Pillowtex during fiscal years 1997 and 1998.
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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 24% of the Company's total
net sales in fiscal 1996 as compared to 23% in 1995 and 21% in 1994.
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 one full-time sales representative 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 10% of the Company's net sales in
fiscal 1996 as compared to 12% in 1995 and 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
1996 sales were contract packaging products as compared to 21% in 1995 and 22%
in 1994. 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.
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,
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consisting principally of single-use towelettes, swabs and gels. The Company
employs one sales representative and two manufacturers 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, and Medline.
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.
The market for therapeutic replacement mattresses has developed
principally during the last six 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.
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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 (which was recently
acquired by Crain Industries) 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 UFP Technology, 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 Allegiance Health Care
Corporation ("Allegiance"), formerly Baxter Healthcare Corporation, to
distribute certain of its foam and contract packaging products. In fiscal 1996,
sales to Allegiance amounted to approximately 10% of the Company's total net
sales and approximately 23% 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 1996
made up approximately 13% of the Company's net sales and approximately 55% 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 6% of the
Company's fiscal 1996 net sales and 29% 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 4, 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 33 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.
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The Company also holds 48 United States patents and 6 foreign patents
relating to various components of its patient positioners, mattress overlays,
and replacement 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 11 and 13 years, respectively. The Company's Span-Aids
patents have remaining lives ranging from 1 to 13 years.
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 28, 1996, Span-America had unshipped orders of
approximately $2.3 million which represents a 12% decrease compared to a backlog
of $2.6 million at fiscal year end 1995. All orders in the current backlog will
be filled in the 1997 fiscal year.
EMPLOYEES
On September 28, 1996, the Company had full-time employment of 256
persons, including 6 officers. Of these employees, 28 were executive or
management personnel, 15 were administrative and clerical personnel, 19 were
sales personnel and 188 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 Greer, S.C.
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 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 1996 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 7 of the
Company's 1996 Annual Report is incorporated herein by reference. In addition,
the information under "Stock Information" on the back cover of the Company's
1996 Annual Report is incorporated herein by reference.
Item 6. Selected Financial Data
The information contained in the "Selected Financial Information" on
page 6 of the Company's 1996 Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Financial Analysis
Management's Discussion and Financial Analysis on pages 8 through 10 of
the Company's 1996 Annual Report are incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The financial statements of the Company included on pages 11 through 23
of the Company's 1996 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 1996 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
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.
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 on
a consolidated basis.
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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 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.
10.3 Employee Stock Ownership Plan - Summary Plan Description:
Incorporated by reference to Exhibit 10.6 to the 1990 10-K.
10.4 1991 Stock Option Plan: Incorporated by reference to Exhibit
10.6 to the 1991 10-K.
10.5 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.
10.6 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.
10.7 Contract between the Company and BriGam, Inc. dated October
16, 1992 terminating a royalty agreement: Incorporated by
reference to Exhibit 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.
10.8 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.
10.9 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.
10.10 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.
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10.11 Agreement for Sale and Purchase of Assets By and Among
Span-America Medical Systms, Inc., Embracing Concepts, Inc.
and Edmund K. Maier February 6, 1996: Incorporated by
reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 30, 1996.
10.12 Resignation Agreement dated September 1, 1996 between the
Company and Charles B. Mitchell.
10.13 License and Distribution Agreement dated October 22, 1996
between the Company and Pillowtex Corporation.
13.1 1996 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 28, 1996.
(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.
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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 19, 1996
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/ James D. Ferguson President, Chief Executive Officer
James D. Ferguson (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/ Thomas D. Henrion Director
Thomas D. Henrion
/s/ Douglas E. Kennemore Director
Douglas E. Kennemore, M.D.
/s/ Brien Laing Director
Brien Laing
/s/ J. Ernest Lathem Director
J. Ernest Lathem, M.D.
/s/ James M. Shoemaker, Jr. Director
James M. Shoemaker, Jr.
/s/ Robert A. Whitehorne Director
Robert A. Whitehorne
15 December 19, 1996
<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 28, 1996
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 financial statements of Span-America Medical Systems, Inc.
included in the annual report of the registrant to its shareholders for the year
ended September 28, 1996 are incorporated by reference in Item 8:
Balance Sheets - September 28, 1996 and September 30, 1995.
Statements of Income - Years ended September 28, 1996, September 30,
1995, and October 1, 1994.
Statements of Shareholders' Equity - Years ended September 28, 1996,
September 30, 1995, and October 1, 1994.
Statements of Cash Flows - Years ended September 28, 1996, September 30,
1995 and October 1, 1994
Notes to Financial Statements - September 28, 1996
The following 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. C
COL. A COL. B COL. D COL. E
-----------------------------------------
ADDITIONS
- ------------------------------------------------------------------------------------------------------------------------------------
(1) (2)
Description Balance at Beginning of Charged to Costs and Charged to Other Deductions-Describe Balance at End
Period Expenses Accounts - Describe of Period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 28, 1996
Deducted from asset accounts:
Reserve for uncollectible
accounts $205,000 $113,000 $ 73,000 (a) $245,000
Reserve for discounts 150,000 $ 24,000 (b) 174,000
Totals $355,000 $113,000 $ 24,000 $ 73,000 $419,000
=====================================================================================================
-----------------------------------------------------------------------------------------------------
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
=====================================================================================================
</TABLE>
(a) Uncollectible accounts written off.
(b) Net increase in sales discounts charged to income as a reduction of sales.
F-3
RESIGNATION AGREEMENT
This Resignation Agreement (this "Agreement") is hereby
entered into as of this 1st day of September, 1996 by and between
Span-America Medical Systems, Inc. (the "Company") and Charles B.
Mitchell ("Mitchell").
WHEREAS Mitchell was employed by the Company in executive
management positions from 1982 until August 15, 1996;
WHEREAS in consideration of Mitchell's leadership and
valuable service to the Company, the Company wishes to provide
appropriately for his separation from employment;
WHEREAS this Agreement has not been agreed upon in an
adversarial context but is entered into for the protection and
benefit of both parties;
NOW THEREFORE, in consideration of the mutual covenants
contained herein and other good and valuable consideration, the
receipt of which is hereby acknowledged, the parties agree as
follows:
1. Resignation. Mitchell resigned as an officer and
director of the Company effective as of August 15, 1996. In
recognition of the deep mutual respect that the Company and
Nitchell each have for the other, Mitchell and the Company agree
that neither shall make any derogatory comments or references
with respect to the other and shall strive to be as complimentary
as possible one to the other under the circumstances.
2. Compensation.
(i) The Company shall pay on a monthly basis to Mitchell an
annual salary of $77,500 for a period of 24 months, commencing
September 1, 1996. Each of such payments shall reflect customary
withholdings.
(ii) Through August 31, 1998, the Company shall continue to
provide Mitchell with full medical insurance coverage in
accordance with the Company's current plan or as it may be
amended during such period; Mitchell shall continue as a
participant in the Company's ESOP and 401(k) on the same basis as
he is currently participating in such plans; Mitchell's current
life insurance comprising of a split dollar policy and a group
term policy currently in effect shall be continued during such
period and Mitchell shall be given such options as may be
available to personally take over such policies at the end of
such period; and Mitchell shall continue as a participant in the
Section 125 Cafeteria Plan.
<PAGE>
(iii) For purposes of any stock options held by Mitchell,
the effective termination date shall be August 31, 1998.
(iv) In the event Mitchell should die prior to full payment
of the benefits set forth in this item 2, any remaining benefits
due under this paragraph 2 shall be paid to his wife.
(v) The Company agrees to pay up to $10,850 for out
placement services on Mitchell's behalf through Jim O'Conner with
the Michelin Career Assistance Center, such funds to be paid
directly to Mr. O'Conner and/or the Michelin Career Assistance
Center.
3. Confidential Material. In addition to, and without
diminishing the effectiveness of any statutory or common law
requirements imposed on employees and former employees with
respect to confidentiality, proprietary information and similar
matters, Mitchell agrees at all times hereafter, except with the
written consent of the Company, he shall not use Confidential
Information and shall not disclose the Confidential Information
to any person or entity. Mitchell agrees to consult with the
Company prior to any use or disclosure of information if, at any
time, Mitchell has any question as to whether any particular
information is included within the meaning of "Confidential
Information" or whether Mitchell is free to disclose or use the
information. Mitchell shall immediately return to the Company
all Confidential Information he may have in his possession.
For purposes of this Agreement, the term "Confidential
Information" shall mean information that is not readily and
easily available to those in the Company's business and that
concerns the Company's prices, pricing methods, costs, profits,
profit margins, suppliers, manufacturing or processing methods,
procedures, tooling, fixtures, processes or combinations or
applications thereof developed in, by or for the Company's
business, research and development projects, data, goals, or
activities, business strategies, sales techniques, the identities
or addresses of Company employees or their functions, the course
of dealing between the Company and its customers or potential
customers of the Company, customer preferences, particular
contacts or locations of customers or potential customers,
negotiations with customers or potential customers, or any other
information concerning the Company or its business that is not
readily or easily available to those in the Company's business.
4. Noncompetition. From the date hereof until September
1, 1998, Mitchell shall not and shall not cause or permit any
company or entity directly or indirectly controlled by Mitchell
to directly or indirectly, either as principal, agent, employee,
owner (if the percentage of ownership exceeds 10% of the
ownership interest of the business), general or limited partner
(if the percentage of ownership exceeds 10% of the ownership
interest of the business), director, officer, consultant or in
any similar capacity, (i) engage or participate in any activity
2
<PAGE>
throughout the continental United States which is substantially
similar to the business of the Company, (ii) cause or encourage
any other person or entity to engage or participate in any
activity in the continental United States which is substantially
similar to the business of the Company, or (iii) attempt to
interfere with any business relationship between the Company and
any other person or entity, including, without limitation, its
employees and customers.
In the event that Mitchell enters a new business which does
not directly compete with the Company's actual or contemplated
business, the parties will negotiate in good faith to carve out
an exception to the foregoing to accommodate such business
venture.
5. Release. Mitchell, on behalf of himself, his agents,
assignees, attorneys, heirs, executors and administrators, fully
releases the Company, and its successors, assigns, parents,
subsidiaries, divisions, affiliates, officers, directors,
shareholders, employees, agents and representatives, from any and
all liability, claims, demands, actions, causes of action, suits,
grievances, debts, sums of money, controversies, agreements,
promises, damages, back and front pay, costs, expenses,
attorneys' fees, and remedies of any type which Mitchell now has
or hereafter may have by reason of any matter, cause, act or
omission arising out of or in connection with Mitchell's
employment with or voluntary resignation from the Company,
including without limiting the generality of the foregoing,
claims, demands or actions under Title VII of the CiVil Rights
Act of 1964, the Age Discrimination in Employment Act, the
Rehabilitation Act of 1973, the Civil Rights Act of 1966, the
Americans' With Disabilities Act of 1990, or any other federal,
state or local statute or regulation regarding employment,
discrimination in employment, or the cessation of his employment,
and the common law of any state.
6. Severability. If any provision of this Agreement or the
application thereof is held to be invalid, such invalidity shall
not affect other provisions of this Agreement which provisions
shall be given full effect without the invalid provisions, and to
this end the provisions of this Agreement are declared to be
severable.
7. Entire Aqreement. This Agreement, together with all
attachments hereto, sets forth all of the agreements, conditions
and understandings between the parties hereto with respect to the
subject matter hereof, and supersedes all prior and
contemporaneous agreements and understandings, express or
implied, oral or written, with respect thereto, except as
provided herein. Moreover, no waiver by any party of any
condition, or of the breach of any term, covenant, representation
or warranty contained in this Agreement, whether by conduct or
otherwise, in any one or more instances, shall be deemed or
construed as a further or continuing waiver of any such condition
3
<PAGE>
or breach or a waiver of any other condition or of the breach of
any other term, covenant, representation or warranty set forth in
this Agreement.
8. Injunctive Relief, Riqhts and Remedies. The parties
agree that the remedy at law for any breach by either party of
his/its obligations hereunder will be inadequate and that the
aggrieved party shall be entitled to such injunctive relief as a
court of competent jurisdiction may prescribe. These rights and
remedies are in addition to those provided by common or statutory
law.
9. Applicable Law and Jurisdiction. This Agreement shall
be construed and governed by and according to the laws of the
State of South Carolina. The parties hereby submit to the
jurisdiction of the Court of Common Pleas for Greenville County,
South Carolina with respect to any dispute arising under this
Agreement.
10. Headings. The headings contained herein are inserted
for reference purposes only and are not intended to have any
substantive meaning or interpretive purpose.
IN WITNESS WHEREOF, the parties have entered into this
Agreement as of the date first set forth above.
Witness: /s/ Barbara Mitchell /s/ Charles B. Mitchell
CHARLES B. MITCHELL
SPAN-AMERICA MEDICAL SYSTEMS, INC.
Witness: /s/ Kathy W. Young By: /s/ James D. Ferguson
Title: President
4
PILLOWTEX
CORPORATION
4111 Mint Way
Dallas, Texas 75237-1605
214/333-3225, FAX 214/330-6016
October 22, 1996
VIA FEDERAL EXPRESS
Mr. Jim Ferguson
Span America Medical Systems, Inc.
70 Commerce Center
Greenville, South Carolina 29615
RE: LICENSE AND DISTRIBUTION AGREEMENT
Dear Jim:
This letter will acknowledge and confirm our mutual agreement to terminate
the License and Distribution Agreement (the "Agreement") dated as of
September 30, 1986 by and between Pillowtex Corporation ("Pillowtex") and
Span America Medical Systems, Inc. ("Span"), such termination to be
effective as of October 31, 1996.
In consideration of such termination and the mutual convenants contained
herein, Span and Pillowtex agree as follows:
1. Pillowtex agrees, for a period of 24 months from the effective
date of the termination of the Agreement, not to manufacture or
sell any foam-related product to Target or JC Penney, or any of
their current affiliates other than those foam-related products
manufactured or sold by or for Span. In addition, Pillowtex
agrees that its cost from Span for products sold to JC Penney
and Target shall be increased effective as of November 4,1996 as
detailed on Attachment A hereto. Pillowtex further agrees to
fully absorb such cost increase.
2. Following termination of the Agreement, Pillowtex may place orders
for foam-related products from Span on such terms and conditions
as the parties agree, and Span agrees to use reasonable best efforts
to fill such orders according to the terms and conditions thereof.
3. Notwithstanding termination of the Agreement, Span agrees to fulfill
all unfilled purchase orders delivered to Span by Pillowtex prior
to termination of the Agreement.
<PAGE>
Span America Medical Systems, Inc.
October 22, 1996
Page Two
4. The parties acknowledge that the Non-Employment provisions of
paragraph 17 and the Confidentiality provisions of paragraph 16
of the Agreement shall survive termination for a period of one
year following the effective date of such termination. All other
rights and obligations of the parties under the Agreement are
expressly terminable hereby.
If this letter correctly reflects our agreement, please so indicate in the
space below.
Sincerely,
/s/ Chris N. Baker
Chris N. Baker
President, Pillowtex Division
CNB/ra
AGREED AND ACCEPTED:
Span America Medical Systems, Inc.
By: /s/ James D. Ferguson
Name: James D. Ferguson
Title: President/CEO
<PAGE>
SPAN-AMERICA
MEDICAL SYSTEMS, INC.
ANNUAL REPORT 1996
<PAGE>
1996 OVERVIEW
FINANCIAL SUMMARY
(in thousands except per share and percent data)
1996 1995 % Change
Net sales $31,474 $30,376 4%
Operating income 584 1,254 -53%
Net income 545 978 -44%
Net income per share .17 .30 -43%
Return on net sales 1.7% 3.2% -
Working capital 8,180 8,541 -4%
Total assets 21,081 20,614 2%
Long-term debt 0 286 -100%
Shareholder's equity 16,019 15,435 4%
Return on average
shareholder's equity 3.5% 6.4% -
TABLE OF CONTENTS
1996 Overview.................................... page 2
Letter to Our Shareholders....................... page 3
Selected Financial Information................... page 6
Quarterly Financial Data......................... page 7
Management's Discussion and Financial Analysis... page 8
Consolidated Financial Statements................ page 1 1
Directors and Officers/Corporate Data............ page 24
SPAN-AMERICA MEDICAL SYSTEMS, INC. 2
<PAGE>
TO OUR SHAREHOLDERS
A DIFFICULT YEAR Strategically and financially, 1996 was difficult and
disappointing. Despite sales increases in three of our four business units,
profits declined. Net income for fiscal 1996 was $545,000 or $.17 per share,
down 44% from $978,000 or $.30 per share in fiscal 1995. Earnings were down
for two main reasons: 1) our overall sales mix during 1996 was less profitable
than anticipated and 2) sales and marketing expenses for the year increased by
$502,000 or 11% to a total of $5.1 million, primarily to support marketing
programs targeting increased sales of our higher margin medical products.
Medical sales were up 4% over last year, primarily from volume increases in
lower-margin foam overlays and patient positioners, and gains related to the
acquisition of Embracing Concepts. In contrast, sales of our high-margin dynamic
mattress products declined due to changes in Medicare reimbursement criteria
early in the year. This regulatory change sharply reduced sales of our dynamic
products, consequently minimizing the return on our investment to support the
sales and marketing of the dynamic mattress category.
Consumer sales were up for the year a total of 8%, mainly due to increases
in contract sales of our TerryFoam technology. Convoluted mattress pads and
specialty pillows also contributed to the Consumer sales increases for 1996.
Industrial sales decreased 9% in 1996, due primarily to a soft start early
in the year. Accelerated volumes as the year progressed leave us very optimistic
about Industrial's future growth prospects. We have a solid reputation in this
market as a reliable supplier of precision packaging components at competitive
prices. As a result, we now have significant new opportunities with several
multinational companies and expect the industrial business to be a meaningful
contributor to Span-America's future growth.
The contract packaging business has improved significantly over the last
three years. However, its margins are still below desired levels, and we will
continue efforts towards strengthening that business segment. Sales in 1996 for
contract packaging were up 6%, mainly due to increased business with existing
customers. Similar to the industrial business, we have established a
3 SPAN-AMERICA MEDICAL SYSTEMS, INC.
<PAGE>
reputation of quality, service and reliability in the contract packaging
market.
A YEAR OF RESHAPING Given the 1996 performance, we are actively
restructuring the Company to restore profitability and enhance shareholder
value. Management is challenging every aspect of the business, from the expense
of this report to the long-term strategic fit and profitability prospects of
entire business units. It is our firm resolve to restore profitable sales
growth, increase margins and establish higher service levels throughout the
business. To do so, multi-functional teams are studying every aspect of the
Company in order to streamline our business, improve efficiency and increase
profitability. To date, we have identified significant cost savings that can be
realized during 1997 without compromising profitable sales growth.
Fiscal 1996 was a year of significant organizational changes at Span-
America, most recently with the appointment of Jim Ferguson as president and
chief executive officer, following the res-ignation of Charlie Mitchell in
August 1996. As general manager of the contract packaging division and vice
president of operations, Jim led his group to a fourfold increase in operating
profit over the last three years. Based on Jim's proven managerial skills, the
Board has complete confidence in his abilities to provide superior leadership to
Span-America.
FUTURE OUTLOOK Span-America's sophisticated product design and
manufacturing processes rank us among the leading innovators of foam products in
the United States. Our patented health care product designs are recognized
industry leaders in the field of tissue trauma care. Major multinational
companies rely on Span-America to domestically manufacture custom-engineered
solutions for a broad range of product needs and applications. It is based on
these strengths that we will rebuild Span-America's profitability and growth
prospects for the future. While we believe that sales growth and higher
profitability can be achieved concurrently, earnings improvement is clearly our
foremost objective for fiscal 1997.
SPAN-AMERICA MEDICAL SYSTEMS, INC. 4
<PAGE>
Among others, we are taking the following steps towards accomplishing our
corporate growth and profitability goals in fiscal 1997 and beyond:
o Redefining our medical marketing and sales strategy to simplify and
streamline our product offering and to reposition Span-America as a premier
supplier of pressure management solutions for any surface, seat, site and
setting.
o Restructuring our medical sales force to provide a unified effort to sell
surface, seating and positioning products to the acute and nonacute markets.
o Targeting acute-care selling efforts towards larger corporations with
multiple facility locations rather than smaller, single-location hospitals or
long-term care facilities.
o Pursuing sales growth in the home care market through strategic alliances
with select dealers and distributors.
o Increasing corporate-wide operating profits through material cost and scrap
reductions, improved labor efficiencies, and manufacturing overhead cost
reductions from a possible plant consolidation.
o Evaluating all business units from a strategic perspective to determine their
long-term growth and value-generating potential, then allocating the Company's
resources based on each division's ability to generate an attractive return on
invested capital.
These initiatives represent new directions and priorities for Span-America.
These efforts, combined with a focused, long-term strategic vision, provide a
solid foundation upon which we will build a strong future for Span-America. The
Company remains financially strong, with high liquidity, good working capital,
low debt and a strong shareholders' equity base.
Fiscal 1997 poses unrivalled opportunities for Span-America to improve
profitability through cost reductions and by our plans to drive for profitable
sales volume growth in all areas of the business.
(Signature of Brien Laing)
CHAIRMAN
Brien Laing
(Signature of James D. Ferguson)
PRESIDENT AND CEO
James D. Ferguson
5 SPAN-AMERICA MEDICAL SYSTEMS, INC.
<PAGE>
SELECTED FINANCIAL INFORMATION
FIVE-YEAR FINANCIAL SUMMARY
(Amounts in thousands except per share and employee data)
<TABLE>
<CAPTION>
1996 1995 1994 1993* 1992
<S> <C> <C> <C> <C> <C>
For the year:
Net sales 31,474 30,376 31,129 33,265 30,328
Gross profit 8,177 8,359 9,007 9,527 9,311
Operating income 584 1,254 2,282 1,596 3,439
Net income 545 978 1,640 1,095 2,135
Cash flow from operations (514) 1,551 2,015 2,689 2,304
Capital expenditures 451 204 540 727 141
Per share:
Net income 0.17 0.30 0.49 0.31 0.64
Cash dividends declared 0.10 0.10 0.10 0.10 0.10
At end of year:
Working capital 8,180 8,541 7,652 7,671 6,564
Property & equipment -- net 5,074 5,457 6,251 6,689 6,818
Total assets 21,081 20,614 20,014 20,577 18,796
Long-term debt 0 286 357 428 688
Shareholders' equity 16,019 15,435 14,919 14,983 13,357
Book value per share 4.94 4.86 4.62 4.26 3.91
Number of employees 256 250 235 250 223
Key ratios:
Current ratio 3.4 3.8 3.7 3.5 3.1
Long-term debt to total capital 0.0% 1.8% 2.3% 2.7% 4.8%
Return on net sales 1.7% 3.2% 5.3% 3.3% 7.0%
Return on average shareholders' equity 3.5% 6.4% 11.0% 7.7% 17.9%
Return on average total assets 2.6% 4.8% 8.1% 5.6% 12.1%
</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 Financial Statements.
(Three bar graphs appear here with the following plot points)
1992 1993 1994 1995 1996
Net Sales 30,328 33,265 31,129 30,376 31,474
Net Income 2,135 1,095 1,640 978 545
Earnings Per Share 64 31 49 30 17
SPAN-AMERICA MEDICAL SYSTEMS, INC. 6
<PAGE>
QUARTERLY FINANCIAL DATA
(UNAUDITED)
<TABLE>
<CAPTION>
(Amounts in thousands except per share data) First Second Third Fourth Year
<S> <C> <C> <C> <C> <C>
FOR FISCAL 1996
NET SALES 7,049 7,471 8,753 8,201 31,474
OPERATING INCOME (LOSS) 365 (139 ) 169 189 584
NET INCOME (LOSS) 280 (45 ) 154 156 545
EARNINGS PER SHARE 0.09 (0.01 ) 0.05 0.05 0.17
STOCK PRICE DATA
HIGH 6 3/8 7 7 6 7/16 7
LOW 4 5/8 6 4 5/8 4 1/4 4 1/4
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 0.05 0.05 0.10 0.11 0.30
Stock price data
High 6 5 3/4 5 1/8 5 6
Low 4 1/4 4 4 4 1/4 4
</TABLE>
The Company's common stock is traded on the National Market System under the
NASDAQ symbol SPAN.
At September 28, 1996, there were 3,241,042 common shares outstanding. As of
December 10, 1996, there were 458 shareholders of record and approximately 1,500
beneficial shareholders. The closing price of Span America's stock on December
10, 1996 was $4 1/2.
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 postition.
(Three bar graphs appears here with the following plot points)
1992 1993 1994 1995 1996
Working Capital 6,564 7,671 7,652 8,541 8,180
Long-Term Debt 688 428 357 286 0
Shareholders' Equity 13,357 14,983 14,919 15,435 16,019
7 SPAN-AMERICA MEDICAL SYSTEMS, INC.
<PAGE>
MANAGEMENT'S DISCUSSION
AND FINANCIAL ANALYSIS
RESULTS OF OPERATIONS FISCAL 1996 VS. 1995
SUMMARY
Net sales for fiscal 1996 increased 4% to $31.5 million compared to $30.4
million in fiscal 1995. This increase in revenues resulted from growth in
medical, consumer and contract packaging products. Sales of industrial foam
products declined as compared to the prior year. Net income decreased to
$545,000 or $.17 per share during fiscal 1996 compared to $978,000 or $.30 per
share in fiscal 1995. The earnings decline was caused by a less profitable
product mix and increased selling and marketing expenses.
(Pie Chart appears here)
1996 Sales Composition
(In thousands)
Contract Packaging 6,654
Industrial 3,253
Consumer 7,490
Medical 14,077
SALES
The Company's medical sales increased by 4%
during fiscal 1996 to $14.1 million compared to
$13.6 million in fiscal 1995. The increase was due
to higher unit volume of foam overlays and
positioners which offset a decrease in mattress
sales. Sales of the Company's dynamic mattress
products have been affected by a tightening of
Medicare reimbursement criteria which became
effective on
January 1, 1996. Management expects that medical foam sales will increase in
fiscal 1997 as a result of an agreement to become the exclusive supplier of a
national distributor's private label convoluted foam products which became
effective on June 1, 1996. However, an increase in convoluted foam product sales
could result in a lower gross margin percentage on medical foam products.
The Company's consumer product sales increased 8% during fiscal 1996 to $7.5
million from $6.9 million in fiscal 1995 due mainly to sales of a new bathmat
product. Management believes that consumer sales will increase slightly during
fiscal 1997.
Sales of industrial foam products decreased by 9% during fiscal 1996 to $3.3
million from $3.6 million in fiscal 1995. The decrease was primarily the result
of lower sales to existing customers in the first and second quarters of the
year. Management expects that industrial foam sales in fiscal 1997 will be
higher than in fiscal 1996.
The Company's contract packaging sales increased by 6% during fiscal 1996 to
$6.7 million compared to $6.3 million in fiscal 1995 due to a higher demand for
contract packaging products. Contract packaging sales are expected to increase
slightly during fiscal 1997.
GROSS PROFIT
The Company's gross profit decreased by 2% to $8.2 million during fiscal
1996 from $8.4 million in fiscal 1995. The gross profit margin percentage
declined slightly to 26.0% in fiscal 1996 from 27.5% in fiscal 1995. The
reductions in gross profit level and gross margin percentage during fiscal 1996
were due to a less profitable product mix and higher manufacturing costs.
Management expects the gross margin percentage during fiscal 1997 to be slightly
higher than that achieved during fiscal 1996.
S G & A EXPENSES
Sales and marketing expenses increased 11% to
$5.1 million, or 16.2% of sales, in fiscal 1996
compared to $4.6 million, or 15.1% of sales in
fiscal 1995. The majority of the increase was caused
by the implementation of new marketing programs for
the Company's medical mattress products. Management
expects that total sales and marketing expenses in
fiscal 1997 will be lower than 1996
levels.
(Bar graph appears here)
Net Sales by Segment
(in millions)
1994 1995 1996
Medical 14.8 13.6 14.1
Consumer 6.7 6.9 7.5
Industrial 2.7 3.6 3.3
Contract Packaging 7.0 6.3 6.7
SPAN-AMERICA MEDICAL SYSTEMS, INC. 8
<PAGE>
General and administrative expenses declined by 1% to $2.5 million in fiscal
1996. General and administrative expenses for 1997 are expected to be similar to
1996 levels.
OTHER
Non-operating income decreased by 3% to $318,000 in fiscal 1996 compared to
$328,000 in fiscal 1995. The majority of the decrease was due to lower interest
income. Management expects non-operating income in fiscal 1997 to remain at a
similar level to that of fiscal 1996.
During fiscal 1996, the Company paid dividends of $323,224, or 59% of net
income for the year. This amount represented four quarterly dividends of $.025
per share.
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, 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.
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.
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.
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.
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 percentage
during fiscal 1995 were the result of the 2% sales decline during the year and
higher labor costs primarily in the consumer segment.
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 foam segment as a result of
the Company's continued expansion of sales efforts in the medical segment.
General and administrative expenses declined by 2% to $2.5 million in fiscal
1995 as compared to $2.6 million in fiscal 1994.
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 syringe product in accordance
with the Company's license agreement with an unaffiliated manufacturer.
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.
9 SPAN-AMERICA MEDICAL SYSTEMS, INC.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company used cash of approximately $514,000 to support its operating
activities during fiscal 1996. The negative cash flow from operations was funded
by proceeds from sales of a portion of the Company's marketable securities
portfolio. The reduction in cash flow from operations resulted from lower
profitability and an increase in accounts receivable and inventory levels.
Management expects cash flow from operations to increase in fiscal 1997. The
Company's working capital declined 4% to $8.2 million during fiscal 1996 due to
an increase in current portion of long-term debt related to termination of the
Company's Employee Stock Ownership Plan and a decrease in securities available
for sale. The current ratio decreased to 3.4 at September 28, 1996 from 3.8 at
fiscal year end 1995.
Accounts receivable, net of allowances, increased 29% at September 28, 1996
to $5.7 million as compared to $4.4 million at the end of fiscal 1995. The
Company's average collection time increased to 59.0 days during fiscal 1996
compared to 50.2 days in fiscal 1995. The increase in accounts receivable
balances and average collection time was affected by a temporary extention of
special payment terms for a customer pursuant to a new supply contract and
slower collection times in the consumer business unit. Management expects
collection times to improve slightly in fiscal 1997. All of the Company's
accounts receivable are unsecured.
Inventory increased by 24% during fiscal 1996 to $3.5 million from $2.8
million at the end of fiscal 1995. The increase occurred primarily in medical
and consumer raw material inventory. Medical raw
material inventory was higher mainly because the
Company began manufacturing a component in December
1995 which had previously been purchased from an
outside supplier. The increase in consumer raw
material inventory is related to the addition of new
products to support orders from new customers and
increased inventory levels for Terryfoam products.
Management expects inventory levels to decrease
slightly during fiscal 1997.
(Bar graph appears below)
Working Capital
(In thousands)
1994 7,652
1995 8,541
1996 8,180
Net property and equipment decreased by
$383,000, or 7%,
during fiscal 1996. The change resulted primarily
from the combination of capital expenditures of $451,000 and normal depreciation
expense. Management expects that capital expenditures during fiscal 1997 will be
similar to the level incurred during fiscal 1996.
Costs in excess of fair value of net assets acquired, net of accumulated
amortization, increased by approximately $800,000. The change was primarily due
to two factors: the Company's acquisition of Embracing Concepts, Inc. which is
discussed below and the Company's issuance in October 1995 of 50,171 shares of
its common stock at an approximate market value of $237,000 as an additional
purchase price in accordance with the Healthflex acquisition agreement dated
February 1992.
On February 8, 1996, the Company acquired substantially all of the assets of
Embracing Concepts, Inc., a New York based company which produced therapeutic
seating cushions. The acquisition was accounted for as a purchase. The purchase
price was approximately $592,000 and was funded from the Company's existing cash
reserves.
The Company's trade accounts payable increased 28% to $2.1 million in fiscal
1996 as compared to $1.7 million at the end of fiscal 1995. The increase was due
mainly to normal monthly fluctuations in accounts payable balances associated
with the increase in inventory levels. Accrued and sundry liabilities decreased
by 28% to $960,000 in fiscal year 1996. The change in accrued liabilities was
mainly attributable to lower income taxes payable, payroll taxes accrued and
withheld, and customer deposits at fiscal year end 1996.
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
1997.
IMPACT OF INFLATION
Inflation was not a significant factor for the Company during fiscal 1996.
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.
SPAN-AMERICA MEDICAL SYSTEMS, INC. 10
<PAGE>
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 28, September 30,
1996 1995
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 925,370 $ 1,242,396
Securities available for sale (Note 3) 1,194,068 2,876,449
Accounts receivable, net of allowances of $419,000 (1996) and $355,000
(1995) 5,733,810 4,446,913
Inventories (Note 4) 3,463,637 2,800,896
Prepaid expenses and deferred income taxes 226,959 221,929
Total current assets 11,543,844 11,588,583
Property and equipment, net (Note 5) 5,074,106 5,457,350
Cost in excess of fair value of net assets acquired,
net of accumulated amortization of $290,650 (1996)
and $172,383 (1995) 2,491,635 1,691,197
Other assets (Note 6) 1,971,010 1,876,573
$21,080,595 $20,613,703
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,117,643 $ 1,651,796
Accrued and sundry liabilities (Note 7) 960,011 1,325,334
Current portion of debt (Note 8) 286,344 70,375
Total current liabilities 3,363,998 3,047,505
Debt, less current portion (Note 8) 286,344
Deferred income taxes (Note 11) 540,000 626,000
Deferred compensation (Note 9) 1,157,282 1,218,517
Shareholders' equity (Note 10)
Common Stock, no par value; 20,000,000 shares authorized; issued and
outstanding shares -- 3,241,042 (1996) and 3,175,437 (1995) 4,516,895 4,225,122
Additional paid-in capital 145,834 145,834
Retained earnings 11,642,930 11,421,100
16,305,659 15,792,056
Less guaranteed ESOP obligations (Note 12) 286,344 356,719
Total shareholders' equity 16,019,315 15,435,337
Contingencies (Note 17)
$21,080,595 $20,613,703
</TABLE>
See accompanying notes.
11 SPAN-AMERICA MEDICAL SYSTEMS, INC.
<PAGE>
STATEMENTS OF INCOME
[CAPTION]
<TABLE>
<CAPTION>
Years Ended
<S> <C> <C> <C>
SEPTEMBER 28, September 30, October 1,
1996 1995 1994
<S> <C> <C> <C>
Net sales $31,473,826 $30,376,242 $31,128,656
Cost of goods sold 23,296,656 22,016,763 22,121,681
Gross profit 8,177,170 8,359,479 9,006,975
Selling and marketing expenses 5,088,646 4,586,602 4,151,909
General and administrative expenses 2,504,970 2,518,902 2,572,784
7,593,616 7,105,504 6,724,693
Income from operations 583,554 1,253,975 2,282,282
Other (expense) income:
Interest expense (29,170) (17,313) (18,210)
Investment income and other 317,670 328,421 242,110
288,500 311,108 223,900
Income before income taxes 872,054 1,565,083 2,506,182
Provision for income taxes (Note 11) 327,000 587,000 866,000
Net Income $ 545,054 $ 978,083 $ 1,640,182
Earnings per share of Common Stock $ .17 $ .30 $ .49
Weighted average shares outstanding 3,227,966 3,244,075 3,374,022
</TABLE>
See accompanying notes.
SPAN-AMERICA MEDICAL SYSTEMS, INC. 12
<PAGE>
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> <C>
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
($.10 per share) (324,592) (324,592)
Common Stock issued to Directors 7,000 35,875 35,875
Balance at September 30, 1995 3,175,437 4,225,122 145,834 11,421,100 (356,719 ) 15,435,337
NET INCOME FOR THE 1996 FISCAL
YEAR 545,054 545,054
ESOP LOAN REPAYMENT 70,375 70,375
COMMON STOCK PURCHASED AND
RETIRED (5,566) (33,484) (33,484)
COMMON STOCK ISSUED ON EXERCISE
OF STOCK OPTIONS 15,000 50,250 50,250
COMMON STOCK ISSUED TO DIRECTORS 6,000 38,250 38,250
COMMON STOCK ISSUED BASED ON
HEALTHFLEX ACQUISITION
AGREEMENT 50,171 236,757 236,757
CASH DIVIDENDS PAID OR DECLARED
($.10 PER SHARE) (323,224) (323,224)
BALANCE AT SEPTEMBER 28, 1996 3,241,042 $4,516,895 $145,834 $11,642,930 ($286,344 ) $16,019,315
</TABLE>
See accompanying notes.
13 SPAN-AMERICA MEDICAL SYSTEMS, INC.
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
SEPTEMBER 28, September 30, October 1,
1996 1995 1994
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 545,054 $ 978,083 $ 1,640,182
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 825,043 905,688 918,157
Amortization 280,844 217,419 209,229
Provision for losses on accounts receivable 113,000 24,000 138,000
Provision for deferred income taxes (139,000) (89,000) (19,000)
Losses on sale and disposal of property, plant and
equipment 15,475 28,807 3,969
Loss on abandonment of leasehold improvements 7,030
Gain on sale of other assets (3,640)
Increase in cash value of life insurance (98,737) (235,740) (107,304)
Deferred compensation (61,236) 75,024 (100,909)
Changes in operating assets and liabilities:
Accounts receivable (1,390,242) (587,571) (156,819)
Inventory (622,021) (77,920) (252,029)
Prepaid expenses and other assets 17,616 90,366 (118,356)
Accounts payable and accrued expenses 525 225,932 (147,097)
Net cash (used for)/provided by operating activities (513,679) 1,551,448 2,015,053
INVESTING ACTIVITIES
Acquisition of Embracing Concepts, Inc. (592,435)
Purchases of marketable securities (2,476,757) (1,408,432) (1,000,000)
Proceeds from sales of marketable securities 4,145,785 513,707 1,000,000
Purchases of property, plant and equipment (450,601) (203,912) (539,716)
Proceeds from sale of property, plant and equipment 63,200 48,400
Payments for other assets (122,881) (55,779) (55,793)
Proceeds from sale of other assets 3,750
Net cash provided by/(used for) investing activities 503,111 (1,087,466) (547,109)
FINANCING ACTIVITIES
Scheduled principal payments on long-term debt (161,657)
Payments on insurance policy loans (73,956)
Dividends paid (323,224) (324,592) (335,401)
Common Stock issued upon exercise of options 50,250
Purchase and retirement of Common Stock (33,484) (454,536) (1,566,300)
Net cash used for financing activities (306,458) (779,128) (2,137,314)
Decrease in cash and cash equivalents (317,026) (315,146) (669,370)
Cash and cash equivalents at beginning of year 1,242,396 1,557,542 2,226,912
Cash and cash equivalents at end of year $ 925,370 $ 1,242,396 $ 1,557,542
</TABLE>
See accompanying notes.
SPAN-AMERICA MEDICAL SYSTEMS, INC. 14
<PAGE>
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 28, 1996
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.
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. Costs in excess of the
fair value of net assets acquired are amortized over 30-year and 10-year
periods. Terminated contract rights are being amortized over the period expected
to be benefitted of 5 years. Accumulated amortization of intangible assets at
September 28, 1996 and September 30, 1995, was approximately $1,008,000 and
$727,000 respectively.
REVENUE RECOGNITION
Revenue is recognized by the Company when goods are shipped and title passes
to the customer.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash and cash
equivalents, accounts receivable, cash value of life insurance, securities
available for sale, accounts payable and debt approximate their fair values. The
fair values of the Company's securities available for sale are based on quoted
market prices, where available, or quoted market prices of financial instruments
with similar characteristics.
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
1996, 1995, and 1994 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 overnight bank repurchase agreements which are backed by government
securities and are considered cash equivalents. 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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
esti-
15
SPAN-AMERICA MEDICAL SYSTEMS, INC.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
mates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Although these estimates are based on
management's knowledge of current events and actions it may undertake in the
future, they may ultimately differ from actual results.
RECENT PRONOUNCEMENTS
The Financial Accounting Standards Board has issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which is effective for financial
statements for fiscal years beginning after December 15, 1995. This standard
applies to all transactions in which an entity acquires goods and services by
issuing equity instruments, such as stock options, to employees or others. Under
SFAS No. 123, the Company has a choice in the method of accounting used for
stock-based compensation. The method chosen can be either the intrinsic-
value-based method currently used by the Company within the scope of Accounting
Principles Board (APB) Opinion 25, or the fair value method introduced by SFAS
No. 123 that might involve the recognition of compensation expense. Management
currently intends to account for the Company's stock option plan under APB
Opinion 25, and to provide the pro forma disclosure required by SFAS No. 123.
Therefore, the implementation of SFAS No. 123 during the first quarter of fiscal
year 1997 will have no effect on the Company's financial condition or results of
operations.
2. ACQUISITIONS
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. Including the effects of purchase
accounting adjustments, assets were acquired with an assigned value of
approximately $1,850,000, including an excess of cost over the fair value of net
assets acquired of approximately $1,025,000 and acquired patents of $750,000.
The Healthflex acquisition agreement (as amended) also provides that the
Company issue more shares of Common Stock as additional consideration depending
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 50,171 (1996), 37,740 (1995), 23,423 (1994) and
56,319 (1993) shares of its common stock valued at $237,000, $211,000, $128,000
and $500,000, respectively, pursuant to the agreement, resulting in
corresponding increases in cost in excess of the fair value of the net assets
acquired.
On September 30, 1996, the Company issued 31,474 shares of its common stock
at an approximate market value of $170,000 pursuant to the agreement as
calculated based on 1996 sales. This was the final consideration required
pursuant to the agreement.
On September 23, 1995, Healthflex Corporation was merged with Span-America
Medical Systems, Inc.
On February 8, 1996, the Company acquired the assets of Embracing Concepts,
Inc., a privately held manufacturer of therapeutic seating cushions
headquartered in Rochester, New York. Including the effects of purchase
accounting adjustments, excess of cost over fair value of net assets acquired of
approximately $680,000 was recorded.
3. SECURITIES AVAILABLE FOR SALE
Securities available for sale are carried at the lower of aggregate cost or
market.
The components of securities available for sale are as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Municipal bonds $ 503,028 $2,363,516
Commercial paper 197,367
U.S. government agency
securities 493,673 512,933
$1,194,068 $2,876,449
</TABLE>
4. INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Raw materials $2,788,443 $2,140,095
Work in process 28,043 17,513
Finished goods 647,151 643,288
$3,463,637 $2,800,896
</TABLE>
SPAN-AMERICA MEDICAL SYSTEMS, INC. 16
<PAGE>
5. PROPERTY AND EQUIPMENT
Property and equipment, at cost, is summarized by major classification as
follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Land $ 317,343 $ 317,343
Land improvements 240,016 240,016
Buildings 3,613,966 3,613,216
Machinery and equipment 8,372,358 8,047,499
Furniture and fixtures 625,169 591,024
Vehicles 9,520 9,520
Leasehold improvements 92,420 92,420
13,270,792 12,911,038
Less accumulated
depreciation 8,196,686 7,453,688
$ 5,074,106 $ 5,457,350
</TABLE>
6. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Patents and trademarks,
net of accumulated
amortization of $478,077
in 1996 and $378,190
in 1995 $ 665,035 $ 684,384
Cash value of life
insurance 1,113,493 1,014,756
Terminated contract
rights, net of
accumulated amortization
of $233,824 in 1996 and
$175,368
in 1995 58,456 116,912
Other 134,026 60,521
$1,971,010 $1,876,573
</TABLE>
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 benefitted of five years.
7. ACCRUED AND SUNDRY LIABILITIES
Accrued and sundry liabilities consist of the following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Salaries, commissions and
other compensation $492,530 $ 507,516
Federal and state income
taxes 15,822 169,662
Payroll taxes accrued and
withheld 18,428 129,266
Property taxes 130,000 139,982
Medical insurance 43,327 81,617
Customer deposits 43,773 165,523
Royalties 96,548 4,307
Interest and other 119,583 127,461
$960,011 $1,325,334
</TABLE>
8. DEBT
Debt consists of the following (See Note 12):
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
ESOP note payable to a bank.
The effective interest rate
was 9% in 1996. $120,094 $142,969
ESOP note payable to a bank.
The effective interest rate
was 9% in 1996. 166,250 213,750
286,344 356,719
Less current portion 286,344 70,375
$286,344
</TABLE>
The ESOP notes payable are secured by pledge of the related unallocated
shares of Common Stock in the ESOP (See Note 12).
The entire debt balance has been classified as current as a result of the
decision by the Board of Directors to terminate the ESOP (See Note 12).
At September 28, 1996, the Company had available an unused line of credit
with a bank for unsecured short-term borrowings up to $2,500,000.
During the 1996, 1995, and 1994 fiscal years, the Company paid interest of
$27,894, $17,313, and $24,126 respectively.
17 SPAN-AMERICA MEDICAL SYSTEMS, INC.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. DEFERRED COMPENSATION
The Company is obligated to make payments under a retirement agreement to
its founder and former chief executive officer over his remaining life. The
Company has fully accrued the present value of the expected payments due over
the executive's estimated life expectancy. The Company recognized expense of
approximately $97,000 in 1996, $91,000 in 1995, and $84,000 in 1994 related to
this agreement.
The Company entered into a deferred compensation agreement with an executive
providing for post-retirement payments, contingent on certain conditions,
beginning in 2002. The Company recognized approximately $107,000 and $121,000 of
expense in 1996 and 1995, respectively, to accrue the present value of estimated
future retirement payments over the period from the date of the agreement to the
retirement date. In 1996 the executive resigned from the Company and will not be
eligible for the retirement benefits. Accordingly, the Company eliminated the
accrual and recognized approximately $228,000 of income in the fourth quarter of
1996 related to this agreement. However, the Company also recognized
approximately $166,000 of severance costs in the fourth quarter of 1996 related
to this executive.
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 28, 1996, 62,000
shares authorized 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 153,000 shares under this plan as of
September 28, 1996, 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 28, 1996,
options for 72,000 of the 153,000 shares authorized 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.
A summary of the activity in the Company's stock option plans is shown
below.
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 Performance Plan for certain
executives of the Company based on achievement of certain financial goals over
the three-year period ending in fiscal 1997. At September 28, 1996, the Company
has made no accrual for these incentives based on current estimates of financial
goals.
<TABLE>
<CAPTION>
Option Price Available
Per Share Outstanding for Grant
<S> <C> <C> <C>
At October 1, 1994 $2.75 to $8.37 178,000 230,000
Granted 4.69 to 5.13 9,000 (9,000)
Exercised 5.70 (22,000)
Terminated (4,000) 4,000
At September 30, 1995 $2.75 to $8.37 161,000 225,000
Granted 5.50 to 6.03 82,000 (82,000)
Exercised 2.75 to 3.75 (15,000)
Terminated (13,000) 13,000
At September 28, 1996 $2.75 to $8.37 215,000 156,000
</TABLE>
SPAN-AMERICA MEDICAL SYSTEMS, INC. 18
<PAGE>
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 28, 1996 and
September 30, 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Deferred tax liabilities:
Depreciation $ 840,000 $ 925,000
Intangible assets 140,000 174,000
Other 77,000 88,000
Total deferred tax
liabilities 1,057,000 1,187,000
Deferred tax assets:
Deferred compensation 433,000 461,000
Net operating loss
carryforwards 13,000
Accrued expenses 130,000 86,000
Other 63,000 57,000
Total deferred tax assets 626,000 617,000
Net deferred tax
liabilities $ 431,000 $ 570,000
</TABLE>
The Company made income tax payments, net of refunds, of $620,000, $657,000
and $985,000 in the 1996, 1995, and 1994 fiscal years, respectively.
Federal and state income tax provisions consist of the following:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Current:
Federal $ 416,000 $602,000 $778,000
State 50,000 74,000 107,000
466,000 676,000 885,000
Deferred:
Federal (127,000) (79,000) (14,000)
State (12,000) (10,000) (5,000)
(139,000) (89,000) (19,000)
Income Tax
Expense $ 327,000 $587,000 $866,000
</TABLE>
Income tax expense differs from the amounts computed by applying the Federal
tax rate to income before income taxes as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Computed tax at the
statutory rate $296,000 $532,000 $852,000
Increases
(decreases):
State income
taxes, net of
Federal
tax benefit 25,000 43,000 69,000
Tax-exempt
investment
income (30,000) (24,000) (16,000)
Other, net 36,000 36,000 (39,000)
Income tax expense $327,000 $587,000 $866,000
</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,
$52,000, and $53,000 for the 1996, 1995, and 1994 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
19 SPAN-AMERICA MEDICAL SYSTEMS, INC.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. EMPLOYEE BENEFIT AND INCENTIVE PLANS -- CONTINUED
board of the Company at a price of $15.25, 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 purchased. 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 28, 1996, 72,125 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 $99,000 in 1996,
$88,000 in 1995, and $85,000 in 1994. Interest payments for fiscal 1996, 1995
and 1994 of approximately $28,000, $35,000, and $32,000 respectively, were
partially funded by dividends received by the ESOP of approximately $18,000
(1995) $17,000 (1994).
In September 1996, the Board of Directors voted to terminate the ESOP
effective September 30, 1996, the end of the 1996 plan year. In connection with
this termination all shares allocated to the participants as of September 30,
1996 will be distributed to the participants. All participants will become fully
vested as of that date. All unallocated shares of common stock will be sold and
the proceeds will be used to reduce the principal balance of the loans.
Therefore, the entire balance of the guaranteed ESOP borrowings have been
classified as current on the Company's balance sheet.
13. RELATED PARTY TRANSACTIONS
The Company has patents and patent rights acquired from its former chairman
of the board of directors and major shareholder. As consideration, the Company
paid royalties equal to three percent of gross sales on all manufactured
products covered by the patents through December 1995. For the 1996, 1995, and
1994 fiscal years, royalties totaled approximately $15,000, $55,000 and $56,000,
respectively.
The Company paid approximately $68,000 in 1996, $41,000 in 1995 and $48,000
in 1994 in legal fees to a firm having a member who is also 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 flexible packaging health care products to hospitals
throughout the United States. Sales generated by this customer amounted to
approximately 10% of net sales in fiscal 1996, 13% in 1995, and 25% in 1994.
The Company has a business relationship with another customer to distribute
certain of its consumer products. Sales to this customer for the 1996, 1995 and
1994 fiscal years amounted to approximately 13%, 14% and 13% of the Company's
net sales, respectively.
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.
The following table summarizes certain information on industry segments:
SPAN-AMERICA MEDICAL SYSTEMS, INC. 20
<PAGE>
15. OPERATIONS AND INDUSTRY SEGMENTS -- CONTINUED
<TABLE>
<CAPTION>
Years Ended
SEPTEMBER 28, September 30, October 1,
1996 1995 1994
<S> <C> <C> <C>
Net Sales:
Medical foam $14,077,224 $13,585,122 $14,774,709
Consumer foam 7,489,833 6,939,897 6,662,217
Industrial foam 3,253,232 3,563,206 2,710,248
Contract Packaging 6,653,537 6,288,017 6,981,482
Total $31,473,826 30,376,242 $31,128,656
Operating Profit:
Medical foam $ 1,011,870 $ 1,496,028 $ 2,375,364
Consumer foam (137,870) (116,979) 250,358
Industrial foam 78,022 328,789 289,112
Contract Packaging 238,764 211,076 (65,900)
Total $ 1,190,786 $ 1,918,914 $ 2,848,934
Corporate expense (607,232) (664,939) (566,652)
Interest expense (29,170) (17,313) (18,210)
Other income 317,670 328,421 242,110
Income before income taxes $ 872,054 $ 1,565,083 $ 2,506,182
Identifiable assets:
Medical foam $ 8,156,756 $ 5,859,805 $ 5,615,410
Consumer foam 3,626,439 3,141,929 3,345,582
Industrial foam 924,348 1,308,267 1,134,857
Contract Packaging 5,133,711 5,166,317 5,625,619
Corporate 3,239,341 5,137,385 4,292,597
$21,080,595 $20,613,703 $20,014,065
Depreciation and amortization expense:
Medical foam $ 412,704 $ 392,210 $ 413,334
Consumer foam 219,049 189,370 140,423
Industrial foam 41,598 60,181 47,296
Contract Packaging 426,737 479,378 521,131
Corporate 5,799 1,968 5,202
$ 1,105,887 $ 1,123,107 $ 1,127,386
Capital expenditures:
Medical foam $ 139,985 $ 95,819 $ 104,496
Consumer foam 215,808 67,206 370,803
Industrial foam 32,965 14,115 17,559
Contract Packaging 61,843 26,772 46,858
$ 450,601 $ 203,912 $ 539,716
</TABLE>
21 SPAN-AMERICA MEDICAL SYSTEMS, INC.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
15. OPERATIONS AND INDUSTRY SEGMENTS -- CONTINUED
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 cash, marketable securities and cash surrender value of life
insurance.
The Company has three customers whose sales represent a significant portion
of sales in their respective business segments. Sales to one of these customers
was in excess of 23% in 1996, 27% in 1995, and 53% in 1994 of net sales in the
medical segment. Sales to another customer accounted for 55% of net sales in the
consumer segment in 1996, 64% of net sales in 1995, and approximately 61% in
1994. Sales to a third customer accounted for approximately 29% of net sales in
the contract packaging segment in 1996, 25% in 1995 and 22% in 1994.
16. OPERATING LEASES
The Company leases truck equipment and manufacturing and warehousing
facilities located in South Carolina and California. All of the leases require
the Company to pay insurance and maintenance costs.
Rental expense for all operating leases was $331,000 (1996), $327,000 (1995)
and $367,000 (1994).
Future minimum lease payments under noncancelable operating leases with
initial terms of one year or more consisted of the following at September 28,
1996:
<TABLE>
<S> <C>
1997 $295,000
1998 47,000
$342,000
</TABLE>
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. 22
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
SHAREHOLDERS AND BOARD OF DIRECTORS
SPAN-AMERICA MEDICAL SYSTEMS, INC.
We have audited the accompanying balance sheets of Span-America Medical
Systems, Inc. as of September 28, 1996 and September 30, 1995 and the related
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended September 28, 1996. 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 financial position of Span-America Medical
Systems, Inc. at September 28, 1996 and September 30, 1995, and the results of
its operations and its cash flows for each of the three years in the period
ended September 28, 1996, in conformity with generally accepted accounting
principles.
(Signature of Ernst & Young LLP)
Greenville, S.C.
October 24, 1996
23 SPAN-AMERICA MEDICAL SYSTEMS, INC.
<PAGE>
CORPORATE DATA
DIRECTORS
Brien Laing
CHAIRMAN OF THE BOARD
RETIRED CORPORATE VICE PRESIDENT
BAXTER HEALTHCARE CORPORATION
DEERFIELD, ILLINOIS
Richard C. Coggins
CHIEF FINANCIAL OFFICER
TREASURER AND SECRETARY
Thomas F. Grady, Jr.
VICE PRESIDENT
INTERNATIONAL PAPER
MONTVALE, NEW JERSEY
Thomas D. Henrion
PRESIDENT AND CHIEF EXECUTIVE OFFICER
FOODSERVICE PURCHASING COOPERATIVE, INC.
LOUISVILLE, KENTUCKY
Douglas E. Kennemore, M.D.
NEUROSURGEON
GREENVILLE, SOUTH CAROLINA
J. Ernest Lathem, M.D.
RETIRED UROLOGICAL SURGEON
GREENVILLE, SOUTH CAROLINA
James M. Shoemaker, Jr.
MEMBER
WYCHE, BURGESS, FREEMAN & PARHAM, P.A.
GREENVILLE, SOUTH CAROLINA
Robert A. Whitehorne
SENIOR LECTURER & DIRECTOR OF
BUSINESS RELATIONS
GRADUATE SCHOOL OF BUSINESS
COLLEGE OF WILLIAM & MARY
OFFICERS
James D. Ferguson
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Richard C. Coggins
CHIEF FINANCIAL OFFICER
TREASURER AND SECRETARY
Robert E. Ackley
VICE PRESIDENT - CONSUMER SALES
Melinda J. Gage
VICE PRESIDENT - HUMAN RESOURCES
Edmund K. Maier
VICE PRESIDENT - MARKETING/R&D
Clyde A. Shew
VICE PRESIDENT - MEDICAL SALES
CORPORATE OFFICE
Span-America
Medical Systems, Inc.
70 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 on the
National Market System under the
NASDAQ symbol SPAN.
STOCK TRANSFER AGENT
Wachovia Shareholder Services
P.O. Box 8218
Boston, MA 02266-8218
(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 10-K for the year ended
September 28, 1996 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
24
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 24, 1996,
included in the 1996 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 24, 1996, with respect to the 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 18, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-28-1996
<PERIOD-END> SEP-28-1996
<CASH> 925
<SECURITIES> 1,194
<RECEIVABLES> 6,153
<ALLOWANCES> 419
<INVENTORY> 3,464
<CURRENT-ASSETS> 11,544
<PP&E> 13,271
<DEPRECIATION> 8,197
<TOTAL-ASSETS> 21,081
<CURRENT-LIABILITIES> 3,364
<BONDS> 0
0
0
<COMMON> 4,663
<OTHER-SE> 11,356
<TOTAL-LIABILITY-AND-EQUITY> 21,081
<SALES> 31,474
<TOTAL-REVENUES> 31,791
<CGS> 23,297
<TOTAL-COSTS> 30,919
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29
<INCOME-PRETAX> 872
<INCOME-TAX> 327
<INCOME-CONTINUING> 545
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 545
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
