Item 1. Business
Forward-Looking Statements
This annual report on Form 10-K includes forward-looking statements that describe anticipated results for Span-America Medical Systems, Inc. (the “Company,” “Span-America” or “we”). These statements are estimates or forecasts about Span-America and its markets based on our beliefs, assumptions and expectations. These forward-looking statements therefore involve numerous risks and uncertainties. We wish to caution the reader that these forward-looking statements, such as, but not limited to, our expectations for future sales or future expenses, are only predictions. These forward-looking statements may be generally identified by the use of forward-looking words and phrases, such as “will,” “intends,” “would,” “estimates,” “continues,” “may,” “believes,” “anticipates,” “should,” “optimistic” and “expects,” and are based on the Company’s current expectations or beliefs concerning future events that involve risks and uncertainties. Actual events or results may differ materially as a result of risks and uncertainties in our business. Such risks include, but are not limited to, the “Risk Factors” described in Item 1A.
Item 1A. Risk Factors
The loss of a key distributor or customer in the Company’s medical or custom products segments could cause a rapid and significant sales decline, which would likely result in a material decline in earnings. Many of our medical products are sold through large national distributors in the United States and Canada. We do not maintain long-term distribution agreements with most of these distributors. Instead, we supply them based on purchase orders that are issued by the customers on a daily or weekly basis. With minimal notice, either party can generally end these supplier-customer relationships. It is also possible that a non-participating distributor may acquire one or more distributors with whom we have a relationship, at which time the survivor distributor may decide to terminate the relationship. If a large customer or distributor decided to discontinue purchasing our products, our sales and earnings could quickly decline. Our largest customer in the medical segment is McKesson Corporation, which represented approximately 17% of our total net sales and 24% of our sales in the medical segment during fiscal 2016.
Historically, our consumer bedding products have been sold through our distributor, Hollander, under a marketing and distribution agreement that originally would have expired in December 2015. The agreement automatically renews for successive three-year terms unless either party provides notice of its intent not to renew at least 60 days prior to the expiration date. Neither party provided the other with the requisite notice of intent not to renew the marketing and distribution agreement in 2015. The next renewal anniversary is December 2018. Sales to Hollander accounted for approximately 18% of our total net sales during fiscal 2016 and 57% of our sales in the custom products segment. The loss of the Hollander relationship could have a material adverse effect on our business.
Through May 2016, we shipped consumer products to a major consumer retailer through a different distributor, Sinomax. Hollander verbally consented to the separate distribution channel for this retailer. Sales to Sinomax accounted for approximately 6% of our total net sales during fiscal 2016 and 19% of our sales in the custom products segment, but that distributor relationship ended in May 2016.
For more information on major customers and information on our business segments, see the discussions under Item 1. “Business - Industry Segment Data - Medical Segment - Distributor Relationships,” Item 1. “Business - Industry Segment Data - Custom Products Segment,” Item 1. “Business - Major Customers,” Note 17 - Major Customers and Note 18 - Operations and Industry Segments and Geographic Areas in the Notes to Consolidated Financial Statements.
Our sales and earnings performance can be volatile when compared from quarter-to-quarter or year-to-year because of the effect of (1) large, infrequently recurring orders of therapeutic support surfaces or medical beds in our medical segment and (2) limited-time or seasonal promotions that occur on an irregular basis in our custom products segment. Within our medical segment, our two largest volume product lines are therapeutic support surfaces and medical beds, which are sold primarily in the long-term care market. Since these products are sometimes purchased as part of capital improvement projects, the purchases can occur in large-volume quantities at irregular intervals. These large orders can cause volatility in our quarter-to-quarter and year-to-year sales and earnings comparisons.
Within our custom products segment, we have from time to time participated in several limited time, seasonal promotions of our consumer products. These promotions had the effect of temporarily increasing our sales and earnings during the periods the promotions took place. The promotions are conducted primarily at the sole discretion of our retail customers and therefore may or may not recur in future periods. While we benefit from these promotions when they take place, if similar promotions do not recur in future comparative periods, or if the quantities ordered or prices accepted are less than the comparable prior-year period, it creates an unfavorable sales and earnings comparison with prior-year periods. This situation might obscure or overshadow more gradual favorable changes, or less dramatic unfavorable changes, in our ordinary course of business, which we believe more accurately reflect the long-term financial health of our business.
Possible downturns in the U.S. economy combined with uncertainties about health care reform and tax policy could cause our sales to decline, which in turn could have a material negative effect on our earnings. The largest volume product lines within our medical segment are our lines of therapeutic support surfaces, which consist of our PressureGuard and Geo-Mattress products as well as our private-label support surfaces, and our lines of medical beds for the long-term care market. These products are generally considered by us and our customers to be capital purchase items instead of consumable supplies. We believe that purchases of these capital goods are more easily postponed during business downturns than purchases of consumables. Consequently, sales of our support surfaces and medical beds are likely to be more sensitive to general economic weakness than other medical product lines in our business. Also, uncertainties about federal and state tax policy, interest rate projections and the implementation or repeal of health care reform could cause our customers to delay, reduce or cancel capital expenditure plans, which could slow sales particularly within our support surface and medical bed product lines. Therapeutic support surface sales made up 39% of total Company sales during fiscal 2016 and increased 3% during the year compared with fiscal 2015. Sales of medical beds made up 14% of total Company sales during fiscal 2016. Sales of therapeutic support surfaces and medical beds could decline if economic conditions worsen or if health care reform and changes in tax policy result in reduced demand from our customers.
In addition, our industrial products are sold primarily to the automotive, packaging and water sports industries, as well as various other manufacturers. Our industrial business has historically been more affected by general economic trends than other Span-America product lines. Therefore an economic downturn is likely to have a greater effect on sales of industrial products than on other product lines in our business. Sales of industrial products could decline if economic conditions worsen.
Since many of our operating costs are fixed within a normal monthly range of sales and production activity, sales declines could result in proportionally greater declines in earnings performance. We would attempt to reduce expenses in response to lower sales levels, but we cannot give assurance that we would be able to fully offset the effect of a decline in sales volume. As a result, our business could be materially adversely affected by an economic downturn or weakness in the economy.
Downturns in the U.S. and global economies could also have a material adverse effect on the business or financial condition of one or more of our key customers or distributors or on several customers and distributors that, in the aggregate, account for a material portion of our sales. Such an adverse effect on our customers or distributors could, in turn, have a material adverse effect on our own business and/or financial condition as a result of a loss or material reduction in our sales to such customers or distributors and also, potentially, our inability to collect a material amount of accounts receivable (which accounts receivable are unsecured) owed to us by such customers or distributors if they become unable to pay their debts.
Since our therapeutic support surfaces and medical bed products are considered to be capital purchases by our customers, some customers may have to borrow all or a portion of the funds necessary to purchase our products. In this event, the current and projected levels of interest rates may, if such rates are increasing or are projected to increase, have a material adverse effect on the customers’ order quantities and our resulting sales to those customers.
If some or all of our medical products were determined to be subject to the medical device excise tax imposed by the Affordable Care Act, there could be a material adverse effect on our net income. Beginning January 1, 2013, the Affordable Care Act imposed a 2.3% excise tax on sales of products defined as “medical devices” by the regulations of the U.S. Food & Drug Administration (the “FDA”) unless the products fit within certain exemptions enumerated in the Affordable Care Act. Subsequently, the Consolidated Appropriations Act of 2016 imposed a two-year moratorium on the medical device excise tax on medical device sales from January 1, 2016 through December 31, 2017. We believe that all of our medical products except for Selan® skin care products are “medical devices” within the meaning of the FDA regulations. We also believe that our medical products are exempt from the excise tax because our interpretation is that they meet the definition that is commonly referred to as the “Retail Exemption.” The Retail Exemption provision allows an exemption for medical devices of a type that can be purchased by the general public at retail for individual use if (1) the device is regularly available for purchase and use by individual consumers who are not medical professionals, and (2) the device’s design demonstrates that it is not primarily intended for use in a medical institution or office or by medical professionals. While we believe all of our medical products are exempt, the Retail Exemption is based on a facts-and-circumstances inquiry into numerous factors listed in the Affordable Care Act rather than a “bright line” standard. If some or all of our medical products were found to be medical devices subject to the excise tax, we could incur material tax expenses on our sales of medical devices which could have a material adverse effect on our sales, earnings and financial condition. Our medical sales excluding Selan totaled $11.1 million from October 2015 through December 2015 (when the moratorium took effect), $46.6 million in fiscal 2015, $41.1 million in fiscal year 2014 and $35.6 million in the nine-month period from January 2013 (when the tax became effective) through our fiscal year ended in September 2013. If the excise tax were found to apply to all of our medical products (other than Selan products), our additional tax expense (excluding interest and penalties) would be approximately $255,000 for fiscal 2016, $1,071,000 for fiscal year 2015, $945,000 for fiscal year 2014 and approximately $819,000 for the nine-month period from January 2013 through September 2013. Of course, actual future sales levels and the amount of any applicable excise tax would vary.
Our acquisition of M.C. Healthcare in December 2011 has introduced different risks for the Company, including those related to international operations, foreign exchange, a unionized workforce and impairment of goodwill or other intangible assets. M.C. Healthcare’s manufacturing facility is located in Beamsville, Ontario, Canada. We are leasing the current facility under a five-year lease agreement as described elsewhere in this report. As a result, we have been operating in a foreign country under different laws, regulations and customs, all of which have added potential new risks and costs to the Company.
Prior to the acquisition, Span-America had no material foreign exchange risk. As a result of the acquisition, we now manufacture and sell products in both the U.S. and Canada. Revenues and costs are incurred in both U.S. and Canadian dollars. We are therefore subject to realized and unrealized gains or losses on foreign currency translation activities related to our operations. These foreign exchange gains or losses could have a material effect on our results of operations. See Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations - Foreign Currency Exchange” and Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” for more information on foreign exchange risk.
Span-America had no material experience in managing a unionized workforce prior to the M.C. Healthcare acquisition. Most of the manufacturing employees at our Beamsville, Ontario plant are members of a union. We are therefore subject to risks related to the management of union employees such as work slowdowns or stoppages, compliance with the terms of the union agreement and periodic contract negotiations. However, we believe that our relations with our employees are good.
The M.C. Healthcare acquisition resulted in additional goodwill of approximately $2.5 million. We evaluate this goodwill at least annually for possible impairment. If the goodwill became impaired and not recoverable, it could result in a material non-cash charge to earnings, which could have a material adverse effect on our financial condition. See Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies - Impairment of Goodwill” and Note 5 - Goodwill in the Notes to Consolidated Financial Statements for more information on goodwill impairment.
Our medical business could lose sales volume or could have a lower sales growth rate as a result of government reimbursement changes in the medical market. Most of our end-user customers in the long term care and acute care markets are eligible for reimbursement by the Centers for Medicare and Medicaid Services (“CMS”) for patient care and treatment. The reimbursement in these markets is done generally on a per diem basis, depending on the condition and needs of each patient. We receive no direct reimbursements from CMS, but our end-user customers often submit reimbursement requests to CMS. For example, we sell therapeutic support surfaces to long-term care facilities, which, in many cases, receive per-diem-based reimbursements from CMS for the care and treatment of the patients in these facilities. If the CMS reimbursement rates are reduced, the demand for our medical products could decrease, because a reduction in CMS reimbursement rates reduces the revenue of the affected facilities. The potential decrease in demand for our medical products would depend on the size of the CMS rate reduction. A significant rate reduction could have a material adverse impact on our sales and earnings.
Our earnings could be negatively affected by raw material cost increases that we are unable to recover through sales price increases. The cost of polyurethane foam represented approximately 36% of our total cost of goods sold in fiscal 2016. An increase in foam raw material costs that we are not able to pass through to our customers by increasing prices could have a significant negative effect on our profitability. Besides polyurethane foam, our other major raw material categories include therapeutic support surface covers made of various water-proof fabrics, vinyl bags, vinyl air cylinders, electronic components for medical beds and support surfaces, motors, pneumatic pumps, blowers, corrugated boxes, bed positioning actuators, steel and metal stampings. Raw materials are our single largest cost category, representing approximately 73% of our total cost of goods sold in fiscal 2016. Cost increases in these raw materials could have a significant adverse effect on earnings if we are unable to recover the higher costs through sales price increases or operating expense reductions.
Changes in applicable laws or increased government regulations to limit carbon dioxide and other greenhouse gas emissions, as a result of concern over climate change, may result in increased raw material costs or other costs, which would negatively affect our profitability.
Our sales volume could decline as a result of competition from low-cost foreign imports. During the last several years, we have experienced increased competition in our medical and custom products segments from low-cost foreign imports. In the medical segment, the number of low-cost, imported mattress and bed products has increased, but it has not yet had a significant impact on our medical business. We believe that we have potentially greater exposure to low-cost imports in our consumer bedding product lines because those products have more commodity-like characteristics than our medical products. Also, our customers in the consumer market, which are usually national retailers, are generally more likely to change suppliers to buy lower-cost products than our customers in the medical market. Therefore, we could lose significant sales volume in our consumer bedding business and some portion of our medical sales volume if we are unable to compete effectively with low-cost imports.
Substantially all of our medical products are classified as medical devices and are regulated by the FDA and Health Canada. These regulations require, among other things, that medical device manufacturers register with the FDA and Health Canada, list devices manufactured by them, and file various reports. In addition, our manufacturing facilities are subject to periodic inspections by regulatory authorities and must comply with “good manufacturing practices” as required by the FDA, state and Canadian regulatory authorities. Although we believe that we are in substantial compliance with currently applicable regulations, the existence of the regulations creates the risk of a product recall and related expenses as well as the risk of additional expenses required to meet new regulatory requirements.
Loss of key personnel, and/or our inability to attract qualified personnel including qualified hourly production personnel, may limit our ability to grow and reduce our ability to compete. We are committed to the idea that the people engaged in working for the Company are our strongest and best resource. Most recently, it has been difficult to find and retain qualified production personnel in Greenville. If we are unable to attract and retain production personnel, then production of our products could be compromised. We believe that our relationship with our employees is good, but in the event of a significant work slowdown or work stoppage, our sales and profitability would be materially adversely affected.
Our sales volume could decline in the event other devices or pharmaceuticals are determined to be more effective than our products for the prevention and treatment of pressure ulcers. Our therapeutic support surfaces are designed and indicated for the prevention and treatment of pressure ulcers. In the event that other devices or pharmaceuticals are demonstrated to be superior to our therapeutic support surfaces in the prevention and treatment of pressure ulcers, and if we are unable to respond to the challenge with our own new products of a superior type, then we could experience a material sales and profitability decline.
Our ability to compete effectively in the medical market is dependent on a continuous stream of innovation in the form of new, more medically effective and more cost effective new products. Our product development results are very important in maintaining and expanding our competitive position in the medical marketplace. If for whatever reason, including loss of key personnel, regulatory setbacks or delays, lack of adequate financial resources, the inability to access needed technologies due to such technologies being subject to intellectual property ownership by others, a key product development not meeting performance requirements, premature product obsolescence and other factors, we are unable to keep up the rate of new product design and development, our competitive position in the marketplace could be compromised resulting in a decrease in sales and earnings.
One of the key strengths of our Company is its sales organization, including field sales representatives and specialists, and such strength is dependent on the continuity of our sales organization. Loss of a significant portion of our sales organization, be it to our direct competition, other medical device companies, our inability to provide competitive compensation, illnesses, retirement or other factors, could have a material adverse effect on our sales level or our rate of sales increase.
We are dependent on our suppliers, particularly our foam suppliers, to have the ability to meet our needs on a timely basis for raw materials used in our products. In the event our suppliers, particularly our foam suppliers, cannot respond on time to our orders for raw materials, or in the event one or more key suppliers go out of the business, we may incur backorders and in turn may not be able to produce our products in time to fill orders from our customers. If this situation occurred, our customers may cancel their orders with us and seek substitute products from our competition, in which case we could lose market share and experience a decrease in sales, or a decrease in the rate of sales growth.
A shortage of one or more chemicals used in the production of foam could result in a reduction in the supply of foam and an increase in the price. As noted above, various types of foam represent the most prevalent raw material in many of our products. In turn, foam is comprised of various chemicals purchased by our foam suppliers for the production of their foam products. In the event of a shortage of any of the key chemicals, the foam suppliers may not be able to produce the foam we order and/or the price could be higher to reflect the chemical shortage, in which case we may not be able to produce our products at planned costs, we may not be able to increase the price sufficiently to cover the cost, we may incur backorders and we may suffer reduced profitability.
Adverse product liability settlements could have a material impact on our reputation, sales and profitability. While we believe our products are safe, efficacious and reliable, and we believe our products meet all known regulatory requirements in the markets in which they are sold, customers and/or patients may take a different position. The Company maintains insurance coverage that would mitigate costs related to products liability claims. However, a material adverse products liability settlement or judgment could damage our reputation, require the payment of costs, fines and legal expenses, result in the loss of one or more customers and potentially risk a reduction in sales or the rate of sales increase.
Larger, well-established competitors dominate the markets in which we compete. Virtually all of our competitors for our therapeutic surfaces, medical beds and custom products range from somewhat larger to substantially larger than the Company. While we believe we are holding or gaining market share in our largest product lines, depending on the particular market, larger, well-financed competitors present a formidable challenge. If we are unable to compete effectively with these larger competitors, we could lose market share, and sales could decrease.
Our growth has been fueled by a combination of organic growth from product development interspersed with occasional acquisitions. Product development risks are discussed above. In the event suitable acquisitions are not available, are too expensive, are too complex, or if available, are unreasonable in price, are not straightforward, are a distraction to management, are difficult to integrate, or result in distributor dislocations, among other problems, our growth component related to acquisitions could be hindered, resulting in a reduction in the rate of sales increase at best, and Company management and customer distraction could result at worst, and ultimately, the acquisition could fail to be additive to the Company. In addition, if capital to fund acquisitions is not available or too expensive, then our ability to grow through acquisitions could be limited to those that could be funded internally.
While we are not solely dependent on our intellectual property and trade secrets to protect our products, to a certain extent these protections provide a deterrent to the competition. If for whatever reason we are unable to protect our intellectual property in the form of patent claims, trade secrets including know-how, and trademarks, then new or more aggressive competition would be anticipated with the result that our sales and profitability could be materially adversely affected.
A successful cyber-attack on our computer system and network could seriously disrupt our operations and compromise Company and customer information. While we have purchased and installed software designed to ward off hostile cyber-attacks, we are not immune from a focused cyber-attack. A successful cyber-attack could make it impossible to enter orders from customers, place orders with suppliers, conduct supply chain operations, invoice customers, meet payroll and conduct other day to day operational tasks using our computer system. Such an event could lead to our inability to supply customers on time, large and lengthy backorders, a sharp decline in customer service levels, and as a result, a decrease in sales and profitability.
Storms, fires, floods, and the like could interrupt our operations and prevent a rapid return to operating status, which could compromise our ability to supply our customers and result in a loss of sales and a reduction in profitability. With the exception of a few “purchased” products for resale, we manufacture all of our products in one of only two locations. Medical beds are produced in our Beamsville, Ontario, Canada location but not in our Greenville location, and our therapeutic support surfaces are primarily produced in Greenville but not in Beamsville. In the event of a damaging hurricane, tornado, fire or flood in Greenville, or a damaging blizzard, fire or flood in Beamsville, the ability to produce certain products could be seriously compromised for a lengthy period of time. To the extent products may not be available to satisfy customer orders, our sales and profitability could be materially adversely affected.
Span-America is a microcap public company with a limited outstanding common stock float, limited analyst coverage, and relatively light daily trading volume, all of which may constrain buy and sell transactions to small quantities over an extended period of time. Existing and prospective shareholders may find it difficult to buy or sell the desired quantities of our common stock without impacting the stock price either negatively or positively depending on the desired transaction. As such, it may be necessary to achieve the desired total transaction in several smaller quantity steps, with the result that transaction costs to the shareholder could be more than transaction costs for a single transaction. While we believe our repurchase of common stock in October 2015 was in the best interest of the shareholders, the common stock repurchased by the Company was retired, resulting in a further reduction in the float.
If, for any of the reasons noted above, or other factors within or beyond our control, our free cash flow is materially constrained in any quarterly period or for any longer period of time, we may not be able to continue to pay all or a portion of our current dividend to shareholders. While our management and Board are proud of the Company’s record in creating value for shareholders and in returning a portion of such value to shareholders periodically in the form of regular quarterly dividends and special dividends, management and the Board acknowledge that the future payment of such dividends is dependent upon many factors including the avoidance of the material negative impact of any of the risk factors noted above, or any other risk factors not so noted above that are beyond reasonable expectations at this time.
During fiscal year 2016, we began distributing certain of our medical products through a local distributor in Australia. As we expand the distribution of our products beyond North America, the company will be subject to increased risks related to various anti-corruption laws in the countries where we do business. The laws of most countries make the payment or offer of payment or receipt of a bribe, kickback or other corrupt payment a crime, subjecting both the company and individual employees to criminal and civil penalties, including fines and prison sentences. These anti-corruption laws include, but are not limited to, the U.S. Foreign Corrupt Practices Act (the “FCPA”). If our employees or representatives fail to comply with these anti-corruption laws, including the FCPA, the company could be subject to penalties and fines, which could disrupt our business and have negative financial and legal consequences.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
We own our principal office and manufacturing facility, which is located in Greenville, South Carolina. This facility contains approximately 188,000 square feet used by the medical and custom products segments and is located on a 13-acre site. We believe that our current manufacturing and storage space is adequate to support our operations during the next several years, based on projected sales growth rates.
We lease 15,000 square feet of warehouse space in Salt Lake City, Utah for use as a distribution center for our medical products segment. We lease this facility on a month-by-month basis at a rate of $7,500 per month.
We also have a five-year commitment to lease a 50,000 square foot manufacturing and showroom facility in Beamsville, Ontario, Canada at CAD $278,000 for the first two years increasing ratably to CAD $295,000 for the final year ending in December 2021. We use this facility in our medical segment.
We consider the South Carolina, Ontario and Utah facilities to be suitable and adequate for their intended purposes.
Item 3.
Item 3. Legal Proceedings
From time to time we are a party to various legal actions arising in the normal course of business. We believe that as a result of legal defenses and insurance arrangements with parties we believe to be financially capable, there currently are no proceedings threatened or pending against us that, if determined adversely, would have a material adverse effect on our financial condition or results of operations.
Item 4.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The common stock of Span-America Medical Systems, Inc. trades on The NASDAQ Global Market® under the symbol SPAN. As of December 21, 2016, there were 2,755,625 common shares outstanding, 127 shareholders of record and approximately 1,929 beneficial shareholders. The closing price of Span-America’s stock on December 21, 2016 was $18.24 per share.
The high and low sales prices for the Company’s common stock in each of the last eight fiscal quarters are shown on the following table.
On November 12, 2014, the Company’s Board of Directors (the “Board”) declared a special cash dividend of $1.00 per share and a regular quarterly cash dividend of 15 cents ($0.15) per share. The regular quarterly dividend was paid on December 11, 2014 to shareholders of record on November 25, 2014. The special dividend was paid on January 7, 2015, to shareholders of record on December 17, 2014.
The Company has paid a regular quarterly cash dividend since January 1990. The Board increased the quarterly dividend to $0.15 per share in July 2014 and $0.16 per share in July 2015. We expect the Company to continue to pay quarterly dividends for the foreseeable future, although the Board may discontinue paying dividends at any time. Future dividend payments will depend upon the Company’s earnings and liquidity position. The Company’s credit facility does not have any covenants directly restricting the Company’s ability to pay dividends; however, it has financial covenants that we believe are customary relating to tangible net worth and leverage ratios that may indirectly restrict our ability to pay dividends.
The information regarding equity compensation plans set forth under Item 12 below is incorporated herein by reference.
We announced on November 28, 2007 that the Board authorized the Company to repurchase up to 138,772 shares of its common stock. On February 11, 2009, the Board expanded the repurchase program by 100,000 shares, bringing the total number of authorized shares to 238,772. In September 2015, the Board authorized the repurchase of 261,310 shares of common stock from former director Robert Johnston and his affiliate, The Jerry Zucker Revocable Trust (the “Johnston/Zucker shares”). Immediately prior to the repurchase of the Johnston/Zucker shares, the Company had a total of 66,489 remaining shares available to be repurchased under the plans authorized in 2007 and 2009. The Board therefore used the remaining previously authorized shares and authorized an additional 194,821 shares (261,310 - 66,489) to complete the Johnston/Zucker share repurchase. After the completion of the Johnston/Zucker share repurchase, there were no remaining shares available to be repurchased under the previously authorized plans.
The Johnston/Zucker share repurchase was completed in two transactions on two different dates. The first transaction for 249,310 shares was completed on October 1, 2015, which occurred during our 2015 fiscal year that ended on October 3, 2015. The second transaction for 12,000 shares was completed on October 9, 2015 and was part of our first quarter of fiscal year 2016. Including the Johnston/Zucker repurchases and prior stock repurchases under the existing repurchase program, the Company has repurchased a total of 433,593 shares of its common stock since beginning the repurchase program in November 2007, or 15.6% of the outstanding shares at the beginning of the repurchase program.
The Company did not repurchase any shares of its common stock during the fourth quarter of fiscal year 2016.
See Note 10 - Revolving Credit Facility in the Notes to Consolidated Financial Statements for information on financial covenants, which could restrict our ability to repurchase shares of Company common stock without bank approval.
PERFORMANCE GRAPH
Notwithstanding any statement in any of the Company’s previous or future filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, incorporating future or past filings, including this Annual Report on Form 10-K, in whole or in part, the following Performance Graph shall not be incorporated by reference into any such filing unless the incorporation specifically lists the following Performance Graph.
The following graph sets forth the performance of the Company’s common stock for the five-year period from October 1, 2011 through October 1, 2016, compared to the Russell MicroCap Index and a peer group index. The peer group index was prepared by an unaffiliated third party and is comprised of all exchange-listed companies that had the standard industry classification code 3842 (which relates to medical products and supplies) as of October 1, 2016. The companies included in the peer group index are shown below. All stock prices reflect the reinvestment of cash dividends.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG
SPAN-AMERICA MEDICAL SYSTEMS, INC.,
THE RUSSELL MICROCAP INDEX
AND A PEER GROUP
Assumes $100 invested on October 1, 2011.
Assumes dividends reinvested. Fiscal year ended October 1, 2016.
COMPANIES INCLUDED IN PEER GROUP INDEX
Standard Industry Classification Code 3842 at October 1, 2016
Item 6.
Item 6. Selected Financial Data
Selected Financial Data for the Company’s last five fiscal years is shown in the table below.
(1) See Note 2 in Notes to 2012 Consolidated Financial Statements for information regarding the acquisition of M.C. Healthcare Products Inc.
(2) Cash dividends declared include special dividends of $1.00 per share in fiscal years 2015 and 2013.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
Span-America’s operations are divided into two primary business units or segments: medical and custom products. Our revenues, profits and cash flows are derived from the development, manufacture and sale of products for these two market segments. In the medical segment, we manufacture and market a comprehensive selection of pressure management products, including Geo-Matt®, PressureGuard®, Geo-Mattress®, Span-Aids®, Custom Care® and Isch-Dish® products. We manufacture and market medical bed frames including the Rexx, Advantage and Encore® series bed frames as well as related bedside furniture, tables and seating products for the long-term care market. We also market the Risk Manager® bedside safety mat, which is manufactured to our specifications by a third-party supplier. We license and market, but do not manufacture, Selan® skin care products. Our medical products are marketed by our network of sales representatives located in key market areas throughout North America. Many of our medical products are resold to end-user customers by our medical products distributors who work with our sales force to meet customer needs. In the custom products segment, we manufacture consumer mattress pads and pillows for the retail bedding market and various engineered foam products for the industrial market. Our consumer mattress pads and pillows are marketed primarily by our distributor, Hollander. We sell the industrial product line directly to our customers through our own sales force instead of using distributors.
Our primary strategic focus is on the medical business. Our medical segment is generally more profitable than our custom products segment, and we invest the large majority of our resources in maintaining and growing our medical business. Our secondary focus is on the custom products segment. We seek to use our available manufacturing and operational core competencies to pursue consumer and industrial business when we believe it will provide opportunities for growth and an attractive return on our investment of capital and resources. We expect that our long-term growth opportunities will come primarily from our medical segment. We also expect growth opportunities in the custom products segment, but the long-term sales and earnings performance of the custom products segment will likely be more volatile than that of the medical segment.
RESULTS OF OPERATIONS FISCAL 2016 VS. 2015
Summary
Net sales for fiscal year 2016 rose 5% to $67.6 million compared with $64.3 million in fiscal 2015. Net income for fiscal 2016 rose 6% to $4.2 million, or $1.54 per diluted share, from $4.0 million, or $1.33 per diluted share, in fiscal 2015. The sales increase was due to higher sales in the custom products segment that benefited from a seasonal promotion of consumer bedding products that took place in the first quarter of fiscal 2016.
Sales
Sales in the medical segment decreased 3%, or $1.5 million, to $46.3 million in fiscal 2016 compared with $47.8 million in fiscal 2015. All of the medical sales decrease came from Span-Canada, where sales of our medical beds and related products were down by 14% to $10.3 million compared with a record $12.0 million in fiscal 2015. Our Span-Canada sales decreased in fiscal 2016 primarily because we received fewer large orders related to construction of new facilities and major refurbishments of older buildings. Among our pressure management product lines, sales increased by 1% to $36.0 million in fiscal 2016, up from $35.8 million in fiscal 2015. Within this product group, sales of therapeutic support surfaces increased by 3%, but that increase was partly offset by sales decreases among our other pressure management product lines.
Product line leaders within the therapeutic support surface group during fiscal 2016 included our Geo-Mattress® Plus and Pro products as well as our PressureGuard® Custom Care® series and the PressureGuard APM2 surfaces. The growth in sales of therapeutic support surfaces during fiscal 2016 came primarily from our Geo-Mattress, PressureGuard APM® and Protocol® product lines. Therapeutic support surfaces made up 56% of our medical segment sales in fiscal 2016 compared with 53% in fiscal 2015.
Sales volumes in our other medical product lines were down during fiscal 2016 compared with fiscal 2015 due to sluggish demand from many of our customers. This is the continuation of a trend we have seen for several years, which we believe is related to gradual changes in market preferences and in selling, marketing and distribution tactics for these products. If the trend continues, we expect that sales decreases among these product lines will be partially or fully offset by sales increases from our therapeutic support surfaces and medical beds. Sales of mattress overlays declined by 3%. Patient positioner sales were down by less than 1%. Sales of seating and skin care products decreased by 4% and 14%, respectively. Finally, sales of the Risk Manager bedside safety mat were down by 12% during fiscal 2016 because of increasing product and price competition in the market for bedside safety products. Medical sales accounted for 69% of total net sales in fiscal year 2016 compared with 74% in fiscal year 2015.
Our custom products segment consists of mattress pads and pillows for the consumer bedding market and specialty foam products for the industrial market. Sales in the custom products segment rose 29% in fiscal 2016 to $21.3 million compared with $16.5 million in fiscal 2015.
Within the custom products segment, consumer bedding sales increased 37% to $17.2 million compared with $12.6 million in fiscal 2015. The growth in consumer sales came from a seasonal promotion of bedding products in the first quarter of fiscal 2016, the addition of a new customer for bedding products that began in May 2016, and an increase in online sales. The consumer sales growth described above was partially offset by our loss of the Sinomax business in May 2016 after Sinomax opened its first manufacturing facility in the U.S. and in-sourced the manufacturing of these products.
Industrial sales, which represent the remaining part of the custom products segment, increased 3% to $4.0 million in fiscal 2016 compared with $3.9 million in fiscal 2015 due to increased demand from customers in the automotive and packaging markets.
Gross Profit
Our gross profit increased 3% during fiscal 2016 to $22.3 million compared with $21.6 million in fiscal 2015. However, our gross margin decreased to 32.9% for fiscal 2016 compared with 33.6% for fiscal 2015 in spite of significant sales growth during fiscal 2016 because our overall sales mix in fiscal 2016 shifted toward our lower-margin custom products segment where sales grew at a faster rate during fiscal 2016 than in the medical segment. Custom products sales made up 31% of total sales in fiscal 2016 compared with only 26% in fiscal 2015. Our product lines within the custom products segment have historically had much lower gross margins than our medical product lines.
Selling, Research & Development and Administrative Expenses
Selling and marketing expenses decreased 3% to $10.5 million (15.5% of net sales) in fiscal 2016 compared with $10.8 million (16.8% of net sales) in fiscal 2015. The decrease was the result of lower selling expenses related to lower sales volumes of our Span-Canada products and lower marketing expenses in our custom products segment caused by the termination of a consumer marketing project in late fiscal 2015. In addition, most of our sales growth in fiscal 2016 came from our consumer product lines, which have little incremental sales and marketing costs associated with higher sales volumes.
Total research and development expenses remained level at $1.1 million in fiscal 2016 compared with fiscal 2015. We invest almost all of our research and development resources in the medical segment for the development of new products, new features of existing products and design improvements. Our research and development expenses will likely fluctuate from quarter to quarter and from year to year, depending on the nature of the development projects being pursued.
General and administrative expenses increased 2% to $4.6 million in fiscal 2016 from $4.5 million in fiscal 2015. The increases in general and administrative expenses were due to higher costs in the categories of incentive and other compensation, which was partly offset by higher income from cash value of life insurance.
Operating Income
Total operating income increased 16% in fiscal 2016 to $6.1 million compared with $5.3 million in fiscal 2015. Growth in sales volume and margin improvements within the custom products segment were the primary drivers for the increase in fiscal 2016 operating income. In the medical segment, operating income for fiscal 2016 decreased by 5% to $6.0 million compared with $6.3 million in fiscal 2015 due to the 3% decrease in medical sales volume. In the custom products segment, operating income increased 441% to $802,000 in fiscal 2016 compared with an operating loss of $235,000 in fiscal 2015 due to the $4.8 million, or 29%, sales increase in custom products sales during the year as well as margin improvements among our consumer product lines.
Non-Operating Income and Expenses
We generated net non-operating expense of $8,000 in fiscal 2016 compared with a net non-operating gain of $408,000 in fiscal 2015. The decline was caused mostly by lower foreign currency exchange gains as a result of relatively stable US-Canadian dollar exchange rates during fiscal 2016 compared with the weakening of the Canadian dollar vs. the US dollar during fiscal year 2015.
See “Liquidity and Capital Resources” below for further discussion about our revolving credit facility and “Foreign Currency Exchange” below for more information about foreign exchange risks.
Net Income and Dividends
Net income for fiscal 2016 rose 6% to $4.2 million compared with $4.0 million in fiscal 2015. Earnings per share increased by 16% in fiscal 2016 to $1.54 per diluted share compared with $1.33 per diluted share in fiscal 2015. The increase in net income for fiscal 2016 was due primarily to strong sales growth and margin improvements within our custom products segment. The growth rate in earnings per share during fiscal 2016 was higher than the growth rate in net income because we had fewer shares outstanding during fiscal 2016 as a result of stock repurchases in October 2015. See “Liquidity and Capital Resources” below for more information on the Company’s stock repurchases.
During fiscal 2016, we paid dividends of $1.8 million, or 41% of net income for the year. This amount consisted of four quarterly dividends of $0.16 per share.
Outlook
We believe sales for the first quarter of fiscal 2017 will be lower than they were in the first quarter of fiscal 2016 due mainly to a decrease in sales of consumer bedding products. However, we believe our quarterly comparisons will be more favorable for the remainder of fiscal 2017 after the first fiscal quarter. As we reported in fiscal 2016, our consumer sales will be down in fiscal 2017 because of the loss of the Sinomax business, and because the seasonal promotion of consumer products that took place in the first quarter of fiscal 2016 will not be repeated in the first quarter of fiscal 2017. However, we expect that our medical sales levels in the first quarter of fiscal 2017 will be higher than they were in the first quarter of fiscal 2016, which should partly offset the expected decrease in consumer sales.
We believe our earnings for the first quarter of fiscal 2017 will be slightly lower than those of the first quarter of fiscal 2016. We expect that our sales mix during the first quarter of fiscal 2017 will be more profitable than it was in the first quarter of fiscal 2016, which we believe will partly offset the decline in profitability associated with lower consumer sales volume during the quarter.
RESULTS OF OPERATIONS FISCAL 2015 VS. 2014
Summary
Net sales for fiscal year 2015 rose 15% to $64.3 million compared with $55.9 million in fiscal 2014. Net income for fiscal 2015 rose 54% to $4.0 million, or $1.33 per diluted share, from $2.6 million, or $0.87 per diluted share, in fiscal 2014. The increases in sales and earnings in fiscal 2015 occurred primarily in our medical segment and were due to significant growth in sales of our medical beds and related products from Span-Canada as well as strong growth in sales of therapeutic support surfaces, our largest medical product line. We also had increased sales volumes in our consumer and industrial product lines, which are part of the custom products segment.
Sales
Sales in the medical segment increased 13%, or $5.5 million, to a record $47.8 million in fiscal 2015 compared with $42.3 million in fiscal 2014 due to increased sales from our Span-Canada medical beds and related products and our Span-America pressure management products. Span-Canada product line sales were up 30%, or $2.8 million, to $12.0 million in fiscal 2015 compared with $9.3 million in fiscal 2014 as a result of broad-based growth in sales of our beds and related products, led by higher volume of our new Encore bed.
Sales in our pressure management medical product lines increased by 8% during fiscal 2015 to $35.8 million compared with $33.0 million in fiscal 2014. The growth in sales of pressure management products came almost entirely from our line of therapeutic support surfaces where sales increased by 14% to $25.3 million in fiscal 2015 compared with $22.2 million in fiscal 2014. Product leaders within the therapeutic support surface group included the GeoMattress® Ultramax® as well as our PressureGuard® APM2 and Custom Care® support surfaces. Therapeutic support surfaces made up 53% of our medical segment sales in fiscal 2015 and 52% in fiscal 2014.
Sales volumes in our other medical product lines were generally down during fiscal 2015 compared with fiscal 2014 due to sluggish demand from many of our customers for mattress overlays, patient positioners and skin care products, which declined by 1%, 5% and 2%, respectively. The exception occurred in our line of wheelchair cushions and related seating products, where sales increased by 1% during fiscal 2015 compared with fiscal 2014. Sales of the Risk Manager bedside safety mat decreased by 20% during fiscal 2015 due to increasing product and price competition in the market for bedside safety products. Medical sales accounted for 74% of total net sales in fiscal year 2015 and 76% in fiscal year 2014.
Sales in the custom products segment rose 22% in fiscal 2015 to $16.5 million compared with $13.5 million in fiscal 2014. Within the custom products segment, consumer bedding sales increased 26% to $12.6 million compared with $10.0 million in fiscal 2014 due primarily to regaining the business of a large retail customer through our distributor, Sinomax, which was lost for a period of time during fiscal 2014 as previously reported.
Industrial sales, which make up the other part of the custom products segment, increased 10% to $3.9 million in fiscal 2015 compared with $3.5 million in fiscal 2014. The industrial sales growth during fiscal 2015 was broad-based, coming from new and existing customers in the major parts of our industrial market, including the automotive, packaging and water sports industries.
Gross Profit
Our gross profit increased 15% during fiscal 2015 to $21.6 million compared with $18.8 million in fiscal 2014. The increase in gross profit resulted from higher sales volume in the medical segment, particularly among our Span-Canada beds and related products. Our gross margin remained level at 33.6% for fiscal 2015 and fiscal 2014 in spite of significant sales growth during fiscal 2015 because our overall sales mix in fiscal 2015 shifted slightly toward our lower-margin custom products segment where sales grew at a faster rate during fiscal 2015 than in the medical segment.
Selling, Research & Development and Administrative Expenses
Selling and marketing expenses increased 7% to $10.8 million (16.8% of net sales) in fiscal 2015 compared with $10.1 million (18.1% of net sales) in fiscal 2014. The increase occurred primarily in the medical segment and was the result of increases in commissions, other incentive compensation, shipping costs and other expenses related to higher sales volume during fiscal 2015.
Total research and development expenses increased 6% to $1.1 million in fiscal 2015 compared with fiscal 2014 due to new-product development projects in the medical segment.
General and administrative expenses increased 11% to $4.5 million in fiscal 2015 from $4.0 million in fiscal 2014. The increases in general and administrative expenses were due to higher costs in the categories of incentive and other compensation and property/casualty insurance combined with lower income from cash value of life insurance.
Operating Income
Total operating income increased 46% in fiscal 2015 to $5.3 million compared with $3.6 million in fiscal 2014 mostly as a result of higher sales volumes among our medical products. In the medical segment, operating income for fiscal 2015 increased by 60% to $6.3 million compared with $4.0 million in fiscal 2014 due to the 13% increase in medical sales volume. In the custom products segment, operating income decreased 191% to an operating loss of $235,000 in fiscal 2015 compared with operating income of $258,000 in fiscal 2014 due to lower margins on custom products sales during the year.
Non-Operating Income and Expenses
We generated net non-operating income of $408,000 in fiscal 2015 compared with $18,000 in fiscal 2014. The fiscal 2015 non-operating income consisted primarily of realized foreign currency gains of $401,000 resulting from the strengthening of the U.S. dollar versus the Canadian dollar during the fiscal year. See “Liquidity and Capital Resources” below for further discussion about our revolving credit facility and “Foreign Currency Exchange” below for more information about foreign exchange risks.
Net Income and Dividends
Net income for fiscal 2015 rose 54% to $4.0 million, or $1.33 per diluted share, from $2.6 million, or $0.87 per diluted share, in fiscal 2014. The earnings increase for fiscal 2015 was the result of higher sales volume in the medical segment, particularly from our Span-Canada business, a comparatively lower rate of growth in overall operating expenses and an increase in non-operating income as previously described above.
During fiscal 2015, we paid dividends of $4.8 million, or 120% of net income for the year. This amount consisted of three quarterly dividends of $0.15 per share, one quarterly dividend of $0.16 per share and one special dividend of $1.00 per share.
LIQUIDITY AND CAPITAL RESOURCES
We generated cash flow from operations of $4.8 million during fiscal 2016, which represented an increase of 13% compared with cash flow of $4.3 million during fiscal 2015. The increase in cash flow during fiscal 2016 was caused by higher net income for the year, a smaller increase in accounts receivable in fiscal 2016 compared with 2015 and a decrease in inventory during fiscal 2016. These increases in cash flow were partially offset by a decrease in accounts payable during the year. The reductions in inventory and accounts payable levels during fiscal year 2016 compared with 2015 were primarily caused by the working capital requirements of the seasonal promotion of consumer products that was in process at fiscal year-end 2015 but not at fiscal year-end 2016.
Our primary uses of cash provided by operations during fiscal 2016 were dividend payments of $1.8 million, equipment purchases of $440,000 and stock repurchases of $210,000.
Working capital increased by $3.2 million, or 28%, to $14.6 million at fiscal year-end 2016 compared with $11.4 million at fiscal year-end 2015. In addition, our current ratio increased to 3.4 at fiscal year-end 2016 from 2.6 at fiscal year-end 2015. The increases in working capital and current ratio during fiscal 2016 were the result of increases in cash and prepaid expenses combined with a reduction in accounts payable during fiscal 2016. These changes were partly offset by a decrease in inventory during fiscal 2016. The decreases in inventory and accounts payable were related to the seasonal promotion of consumer products as described above.
Accounts receivable, net of allowances, increased 3%, or $266,000, to $8.1 million at the end of fiscal 2016 compared with $7.8 million at the end of fiscal 2015. The days sales outstanding (or average collection time), calculated using a 12-month average for trade accounts receivable balances, remained stable at 40.9 days in 2016 compared with 41.0 days in 2015. Approximately $1.8 million included in accounts receivable at fiscal year-end 2016 were for sales made by Span-Canada. All of Span-America’s accounts receivable are unsecured. Certain receivables of Span-Canada are insured under the terms of an insurance policy.
Inventory, net of reserves, decreased by $1.3 million, or 15%, to $7.4 million at fiscal year-end 2016 compared with $8.7 million at fiscal year-end 2015. The decrease occurred primarily in the category of consumer finished goods and was related to the seasonal promotional order that shipped during the first quarter of fiscal 2016. At fiscal year-end 2016 our inventory included approximately $2.4 million of inventory related to Span-Canada. The work-in-process inventory shown in Note 3 in the Notes to Consolidated Financial Statements is entirely associated with Span-Canada. Inventory turns increased to 5.6 times per year in fiscal 2016 compared with 5.3 times in fiscal 2015.
Goodwill remained stable at $3.9 million at fiscal year-end 2016 compared with fiscal year-end 2015.
Net intangibles decreased by $225,000, or 10%, to $2.0 million during fiscal 2016. The decrease was primarily due to $295,000 of amortization expense.
From the end of fiscal year 2015 to the end of fiscal 2016:
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Our deferred income tax asset increased by 31%, or $108,000, to $459,000 from $351,000 primarily due to incentive compensation expense accrued during fiscal 2016 that will not be deductible for tax purposes until fiscal year 2017.
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Prepaid expenses increased by $468,000, or 114%, to $879,000 primarily as a result of the payment of a refundable deposit on a performance bond related to a bid to provide beds and therapeutic support surfaces to a government customer in Canada.
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Net property and equipment decreased by $420,000, or 9%, during fiscal 2016. The decrease was made up of $855,000 in depreciation expense, partially offset by approximately $440,000 in equipment purchases.
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Other assets decreased 1% to $2.9 million at fiscal year-end 2016 compared with $3.0 million at fiscal year-end 2015 mainly as a result of decreases in deposits for raw material and equipment purchases, partially offset by an increase in the cash surrender of life insurance policies.
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Our accounts payable decreased by $1.6 million, or 40%, to $2.4 million at fiscal year-end 2016 compared with $4.0 million at fiscal year-end 2015 due to a decrease in raw material purchases in September 2016 compared with September 2015. Our accounts payable balance was unusually high at fiscal year-end 2015 because of raw material purchases related to the seasonal promotion that was in process at the time. By fiscal year-end 2016, our accounts payable balance had returned to a more normal level.
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Accrued and sundry liabilities increased by 15% during the year to $3.6 million compared with $3.1 million last year due mainly to increases in accruals for incentive compensation expense and rebates owed to customers. The increase in accrued rebates during fiscal 2016 was related to an order from a large customer in the medical segment that shipped during the last three months of fiscal 2016. See Note 8 in the Notes to Consolidated Financial Statements below for more information.
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Accumulated other comprehensive loss remained stable at $2.5 million.
We have a revolving credit facility from a bank which expires on April 30, 2018. The maximum principal amount we can borrow at any one time is $5.0 million. There is no unused commitment fee charged for the credit facility. The credit facility is unsecured and accrues interest at a variable rate equal to 30-day LIBOR plus a margin ranging from 85 to 165 basis points, depending on our leverage ratio (as defined in the agreement). The interest rate, including the margin of 85 basis points, was 1.2795% in January 2016, the last time we had borrowings outstanding. Interest-only payments are required monthly. We have pledged to grant the bank a security interest in our accounts, instruments, and chattel paper upon its request in the event of a default as defined in the credit agreement. Our obligations under the credit agreement are guaranteed by our subsidiary, Span Medical Products Canada Inc.
The credit facility includes financial covenants relating to tangible net worth and leverage ratios, and restricts mergers and acquisitions, asset sales, indebtedness, liens and capital expenditures. Violation of loan covenants could result in acceleration of the term of the agreement. The lending bank waived any event of default in connection with (1) our regular quarterly dividend payments of $1.8 million during fiscal year 2015, which represented 46% of our net income for the fiscal year, (2) the special dividend of $1.00 per share declared in November 2014 and paid on January 7, 2015 and (3) the Johnston/Zucker stock repurchase described below and elsewhere in this report. We believe that we were in compliance with all other loan covenants in the credit facility as of October 1, 2016. There were no borrowings under this credit facility as of October 1, 2016. See Note 10 - Revolving Credit Facility in the Notes to Consolidated Financial Statements below for more information on the credit facility.
The Company announced on November 28, 2007 that the Board authorized the Company to repurchase up to 138,772 shares of its common stock. On February 11, 2009, the Board expanded the repurchase program by 100,000 shares, bringing the total number of authorized shares for repurchase to 238,772. Prior to our announcement on October 2, 2015 of a large stock repurchase in a private transaction, we had repurchased a total of 172,283 shares under our existing repurchase program. On October 2, 2015, we announced that the Company had agreed to repurchase an additional 261,310 shares of common stock from former director Robert B. Johnston and his affiliate, The Jerry Zucker Revocable Trust. Including the Johnston/Zucker repurchase and prior stock repurchases under the existing repurchase program, the Company has repurchased a total of 433,593 shares of its common stock since the start of the repurchase program in November 2007, or 15.6% of the outstanding shares at the beginning of the repurchase program.
We believe that funds on hand, funds generated from operations and funds available under our revolving credit facility will be adequate to finance our operations and expected capital requirements during fiscal year 2017 and for the foreseeable future.
OFF-BALANCE-SHEET ARRANGEMENTS
We have no off-balance-sheet arrangements.
CONTRACTUAL OBLIGATIONS
The following table summarizes our significant contractual obligations and commercial commitments at October 1, 2016 and the future periods in which such obligations are expected to be settled in cash. For additional information regarding these obligations, see the referenced footnotes in the Notes to Consolidated Financial Statements under Item 8 below.
IMPACT OF INFLATION AND COST OF RAW MATERIALS
Fiscal 2014: General market inflation was low in the United States and Canada during fiscal year 2014 and consequently had minimal impact on our sales and earnings. Prices for polyurethane foam, our primary raw material in the U.S., were relatively stable during fiscal year 2014. We incurred small foam price increases during the first half of the fiscal year that were rolled back later in the fiscal year. Prices for our primary raw materials in Canada were also relatively stable during fiscal year 2014. For the full year of fiscal 2014, inflation had a minimal impact on our sales prices and a small negative impact on our earnings.
Fiscal 2015: General market inflation was low in the United States and Canada during fiscal year 2015 and consequently had minimal impact on our sales and earnings. Prices for polyurethane foam, our primary raw material in the U.S., were relatively stable during fiscal year 2015. However, near the end of fiscal year 2015, we received small decreases in the prices of several of our polyurethane foam raw materials. Prices for our primary raw materials used in Canada were relatively stable during fiscal year 2015. For the full fiscal year 2015, inflation had a minimal impact on our sales prices and earnings.
Fiscal 2016: General market inflation was low in the United States and Canada during fiscal year 2016 and consequently had minimal impact on our sales and earnings. Prices for polyurethane foam, our primary raw material in the U.S., were relatively stable during fiscal year 2016. The price of polyurethane foam, our primary raw material, can sometimes be affected by the price of crude oil. While oil prices have been volatile during fiscal 2016, we have seen minimal changes in the prices of polyurethane foam, and we do not have any current indication as to whether future changes in oil prices will impact the future price of polyurethane foam. See Item 7A
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to financial market risk in four areas: commodity price risk, cash value of life insurance, our credit facility and foreign currency exchange. Commodity price risk could affect our operations primarily through our purchase of raw materials used in our manufacturing processes. The cost of polyurethane foam, our primary raw material, is indirectly influenced by oil prices. However, other market factors also affect foam prices, including the available supply of component chemicals, demand for related products from domestic and international manufacturers, competition among domestic suppliers, our purchase volumes and regulatory requirements. Consequently, it is difficult for us to accurately predict the impact that future inflation and other factors might have on the cost of polyurethane foam, our largest-volume raw material. If the cost of polyurethane foam increased significantly, and if we were unable to offset the cost increase through sales price increases or other expense reductions, our earnings could be materially negatively affected. If we experienced a 1% across-the-board increase in the cost of polyurethane foam, and if we were unable to offset the increase, our pre-tax earnings would be reduced by approximately $112,000. See the discussion above under “Impact of Inflation and Cost of Raw Materials” for more information.
Other assets at October 1, 2016 included $2.7 million in cash value of life insurance, which is subject to market risk related to equity pricing and interest rate changes. The cash value is generated from life insurance policies that are being used as the funding vehicle for a retirement program for Span-America’s founder and former chairman and his ex-wife. See “Present Value of Deferred Compensation” under “Critical Accounting Policies” above. The cash value is invested in a combination of fixed income life insurance contracts and a portfolio of mutual funds managed by an insurance company. The fixed income contracts are similar to fixed income bond funds and are therefore subject to interest rate and company risk. The mutual fund portfolios invest in common stocks and bonds in accordance with their individual investment objectives. These portfolios are exposed to stock market, company and interest rate risks similar to comparable mutual funds. We believe that substantial fluctuations in equity markets and interest rates and the resulting changes in cash value of life insurance would not have a material adverse effect on our financial position. During the fiscal year ended October 1, 2016, cash value of life insurance increased by 6%, creating after-tax income of approximately $147,000. During the fiscal year ended October 3, 2015, cash value of life insurance increased by 2%, creating after-tax income of approximately $43,000. The reason the cash value of life insurance increased more in fiscal year 2016 than it did in fiscal year 2015 is because the values of the underlying investments in the life insurance policies increased more during fiscal 2016 than they did during fiscal 2015, reflecting the general performance in equity and fixed income markets in fiscal 2016 compared with fiscal 2015.
Our credit facility accrues interest at a variable rate equal to 30-day LIBOR plus a margin ranging from 85 to 165 basis points depending on our then-applicable leverage ratio (as defined in the credit facility). Interest is payable monthly. The interest rate, including the margin of 85 basis points, was 1.2795% in January 2016, the last time we incurred interest. A material increase in interest rates could have a negative impact on our financial condition and earnings to the extent that we had significant outstanding borrowings under the facility. The degree of impact would vary depending on the level of the borrowings. We had no outstanding balance under our credit facility as of October 1, 2016. Assuming a constant level of debt of $1.0 million for an entire fiscal year, a 100 basis point increase in the interest rate on the outstanding loan balance would increase our interest expense by $10,000 per year.
As a result of the M.C. Healthcare asset acquisition, we own assets in Canada and manufacture and sell products in Canada in addition to the U.S. We are therefore subject to realized and unrealized gains or losses on foreign currency translation activities related to our operations. Foreign exchange gains or losses have not had a material effect on our results of operations since the M.C. Healthcare acquisition. We do not currently hedge our foreign exchange risks because our foreign exchange transactions occur infrequently and in relatively small amounts since our revenues and costs are incurred in both U.S. and Canadian dollars. Our foreign exchange risk could increase if the exchange rates between the U.S. and Canadian dollars became more volatile.
Most of our M.C. Healthcare operating costs and liabilities are denominated in Canadian dollars. Sales are denominated in the currency of the country in which they occur. Accordingly, material changes in the Canadian-U.S. dollar exchange rate may significantly impact our revenues and costs and the value of our assets and liabilities. The magnitude and direction of this impact primarily depends on our production and sales volume, the proportion of our production and sales that occur in Canada, the proportion of our financial liabilities denominated in Canadian dollars and the magnitude, direction and duration of changes in the Canadian-U.S. dollar exchange rate. Increases in the value of the Canadian dollar versus the U.S. dollar reduce our earnings, which are reported in U.S. dollar terms. Assets and liabilities are translated into U.S. dollars at the quarter-end exchange rate. Revenues and expenses are translated at weighted average exchange rates. Based on our levels of assets and liabilities in Canada as of October 1, 2016, for every 1% increase in the value of a Canadian dollar compared to a U.S. dollar our total assets would have increased by approximately $109,000, and our total liabilities would have increased by approximately $10,000 for a net change of approximately $99,000. For fiscal year 2016, our net realized foreign currency exchange gain was $5,000 compared with $401,000 in fiscal 2015. The decrease in foreign currency exchange gain in fiscal 2016 was the result of relative stability in the exchange rates between the U.S. and Canadian dollars during fiscal 2016 compared with a weakening of the Canadian dollar versus the U.S. dollar during fiscal 2015.
Item 8.
Item 8. Consolidated Financial Statements and Supplementary Data
Span-America Medical Systems, Inc.
Consolidated Financial Statements
October 1, 2016
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
Span-America Medical Systems, Inc.
Greenville, South Carolina
We have audited the accompanying consolidated balance sheets of Span-America Medical Systems, Inc. as of October 1, 2016, and October 3, 2015, and the related consolidated statements of comprehensive income, changes in shareholders' equity, and cash flows for each of the years in the three year period ended October 1, 2016. Our audits also include the financial statement schedule of Span-America Medical Systems, Inc. listed in Item 15(c). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Span-America Medical Systems, Inc. as of October 1, 2016, and October 3, 2015, and the results of its operations and its cash flows for each of the years in the three year period ended October 1, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material aspects the information set forth therein.
/s/ ELLIOTT DAVIS DECOSIMO, LLC
Greenville, South Carolina
December 23, 2016
The accompanying notes are an integral part of these consolidated financial statements.
(1) Dividends per share for fiscal year 2015 include a special dividend of $1.00 per share paid on January 7, 2015.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
(1) Dividends per share for fiscal year 2015 include a special dividend of $1.00 per share paid on January 7, 2015.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 1, 2016
1. SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Span-America Medical Systems, Inc. (the “Company,” “we,” or “Span-America”), located in Greenville, SC, manufactures and distributes therapeutic support surfaces, mattress overlays, patient positioners, seating cushions, skin care products and fall prevention products for the medical market and pillows, mattress pads and various foam products for the custom products market throughout the United States and Canada. Our wholly-owned subsidiary, Span Medical Products Canada Inc. (“Span-Canada”), located in Beamsville, Ontario, Canada, manufactures and sells medical bed frames and distributes related in-room furnishing products, including bedside furniture, chairs, tables and over-bed tables for use in the long-term care market. We are operating Span-Canada under the registered business name M.C. Healthcare Products (“M.C. Healthcare”).
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and Span-Canada, its wholly-owned subsidiary. Significant inter-entity accounts and transactions have been eliminated.
Cash and Cash Equivalents
We consider all highly liquid investments with a maturity when purchased of three months or less to be cash equivalents. Depending on market conditions, we may maintain a centralized cash management program whereby our excess cash balances are invested in commercial paper and are considered cash equivalents. Cash balances in our accounts usually exceed federally insured limits.
Accounts Receivable
We provide credit in the normal course of business and perform ongoing credit evaluations on certain of our customers, but we generally do not require collateral to support these receivables. We also establish an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. Account balances are charged against the allowance after all collection efforts have been exhausted and the potential for recovery is considered remote.
Inventories
Our inventories are valued at the lower of cost (first-in, first-out method) or market.
Property and Equipment
Property and equipment is stated at cost. Maintenance, repairs and minor replacements that do not improve or extend the useful lives of assets are expensed when incurred. Depreciation is computed using the straight-line method. Estimated useful lives for buildings and land improvements range from 5 to 35 years. The estimated useful lives of all other property and equipment range from 3 to 10 years. For income tax purposes, substantially all depreciation is computed using accelerated methods.
Goodwill and Intangibles
Intangible assets are amortized using the straight-line method. Costs of patents are amortized over 17 years, and trademarks are amortized over 10 years. Trade names, non-competition agreements and customer relationships associated with the asset acquisition of M.C. Healthcare are being amortized over periods of 2.0 to 11.8 years, which represent the estimated remaining useful lives of the identifiable intangible assets at the time of the acquisition. Goodwill, or costs in excess of the fair value of net assets, was acquired from three separate acquisitions. Annually as of the end of our fiscal year, we review goodwill for impairment. We also review long-lived assets and the related intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. See Note 5 - Goodwill and Note 6 - Intangibles.
Foreign Currency Translation
Span-Canada uses the Canadian dollar as its functional currency. The assets and liabilities of Span-Canada are translated into U.S. dollars at the year-end exchange rate. Revenues and expenses are translated at weighted average exchange rates. The resulting translation adjustments are recorded as a separate component of shareholders' equity in “Accumulated Other Comprehensive Loss.”
Revenue Recognition
We recognize revenue when title and risk of loss pass to the customer and collection is reasonably assured. Our sales prices are fixed at the time revenue is recognized. There are no customer acceptance provisions, and the right to return exists only in cases of damaged product, non-compliance with customer specifications or warranty claims. Taxes collected from customers and remitted to government authorities are recorded on a net basis (excluded from revenues).
We have applied the accounting and disclosure requirements of Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) No. 104.
Advertising Costs
Advertising costs are expensed as incurred.
Shipping and Handling Costs
Shipping and handling costs that are not reimbursed by customers are charged to selling and marketing expenses and were approximately $2,215,000 in fiscal 2016, $2,113,000 in fiscal 2015, and $2,123,000 in fiscal 2014.
Customer Rebates
We offer rebates to our distributors based on predetermined sales targets. These rebates vary by the type of product sold and by distributor and are based on a percentage of the applicable sales target. The rebate expense is charged as a reduction of gross sales. Rebate expense and the associated liability are calculated and recorded as the rebate-related revenue is recognized.
Earnings Per Share of Common Stock
Earnings per share of common stock are computed based on the weighted average number of shares outstanding during each period.
Stock-Based Compensation
We measure and recognize compensation expense for all stock-based payments at fair value. Stock-based payments include stock option grants. We grant options to purchase common stock to some of our employees under various plans at prices equal to the market value of the stock on the dates the options are granted. New shares of stock are issued upon share option exercise. We do not have treasury stock.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for grants made in fiscal 2011: risk-free interest rate of 2.54%; dividend yield of 2.50%; volatility factor of the expected market price of our common stock of 43.02%; and a weighted average expected life of the options of 9.0 years. We have not made any stock option grants since fiscal year 2011.
Fiscal Year
Our fiscal year ends on the Saturday nearest to September 30. Fiscal year 2016 was a 52-week year. Fiscal years 2015 and 2014 were 53-week and 52-week years, respectively. Fiscal year 2017 will be a 52-week year.
Income Taxes
The liability method is used in accounting for federal and state 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 are projected to be in effect when the differences are expected to reverse. The Company’s practice is to recognize interest and penalties, if any, related to income tax matters as part of income tax expense.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes and the disclosure of contingent assets and liabilities. Although these estimates are based on our knowledge of current events and actions planned for the future, the estimates may ultimately differ from actual results.
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued a standard on revenue recognition that supersedes previously issued revenue recognition guidance. This standard provides a five-step approach to be applied to all contracts with customers and requires expanded disclosures about the nature, amount, timing and uncertainty of revenue (and the related cash flows) arising from customer contracts, significant judgments and changes in judgments used in applying the revenue model and the assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued a standard to delay the effective date by one year. In accordance with this delay, the new standard is effective for us beginning in the first quarter of fiscal 2019. Early adoption is permitted, but not before the original effective date of the standard. The new standard is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. We are currently assessing the impact this standard will have on our consolidated financial statements as well as the method by which we will adopt the new standard.
In July 2015, the FASB issued a new standard regarding the measurement of inventory. Under this standard, inventory that is measured using the first-in, first-out ("FIFO") or average cost methods is required to be measured at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This standard does not impact inventory measured on a last-in, last-out ("LIFO") method. It will be effective for us beginning in fiscal 2017. We are currently assessing the impact this standard will have on our consolidated financial statements.
In November 2015, the FASB issued Accounting Standards Update ("ASU") 2015-07, "Balance Sheet Classification of Deferred Taxes (Topic 740)." Current guidance requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position; however, the new guidance requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is permitted. We are currently assessing the potential impact of this new accounting pronouncement on the Company's statement of financial position.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” This standard modifies how entities measure equity investments and present changes in the fair value of financial liabilities; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; changes presentation and disclosure requirements, and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early application is permitted. We do not expect that the adoption of this ASU will have any impact on the Company’s statement of operations.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires the lessee to recognize assets and liabilities for leases with lease terms of more than twelve months. For leases with a term of twelve months or less, the Company is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. Further, the standard also requires a finance lease to recognize both an interest expense and an amortization of the associated expense. Operating leases generally recognize the associated expense on a straight line basis. ASU 2016-02 requires the Company to adopt the standard using a modified retrospective approach and adoption for reporting periods beginning after December 15, 2018. We are currently evaluating the impact that ASU 2016-02 will have on the Company’s financial position, results of operations and cash flows.
In March 2016, the FASB issued ASU 2016-09 that changes the accounting for certain aspects of share-based payments to employees. The new guidance requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also allows an employer to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election for forfeitures as they occur. The guidance is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted. We are currently evaluating the impact ASU 2016-09 will have on our consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which provides guidance for the accounting for credit losses on instruments within its scope. The amendments provide guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. The amendments require a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments also require that credit losses on available-for-sale debt securities be presented as an allowance. The amendments should be applied on either a prospective transition or modified-retrospective approach depending on the subtopic. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those annual periods. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force),” which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The amendments in this update are effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. We are currently assessing the impact of the future adoption of this standard on our consolidated Statements of Cash Flows.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our financial statements upon adoption.
Subsequent Events
In preparing these consolidated financial statements, we have evaluated events and transactions for potential recognition or disclosure through the issuance of the financial statements.
2. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company accounts for the fair value measurements for financial assets and liabilities measured on a recurring basis as required by the Fair Value Measurements and Disclosures topic of the Financial Accounting Standards Board Accounting Standards Codification (“ASC”). This guidance establishes a framework for measuring fair value and expands disclosure about fair value measurements. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
Following is a brief description of these three levels:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 - Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability;
Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level (with “3” being the lowest) of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
Following is a description of the valuation methodologies used for assets measured at fair value.
Cash value of life insurance policy: Valued at the cash surrender value of the life insurance policy as of the last business day of the fiscal year, as determined by the issuer of the insurance policy, which approximates fair value.
The method described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although we believe our valuation method is appropriate and consistent with methods used by other market participants, the use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The following table summarizes information on the fair value measurement of the Company’s assets as of October 1, 2016 and October 3, 2015, grouped by the categories described above:
3. INVENTORIES
4. PROPERTY AND EQUIPMENT
5. GOODWILL
As of October 1, 2016 and October 3, 2015, we had goodwill of $3,937,676 and $3,930,282, respectively. These amounts include goodwill from three reporting units, all of which are part of our medical segment.
On December 9, 2011, we acquired, through Span Medical Products Canada Inc., our wholly-owned subsidiary, substantially all of the assets of M.C. Healthcare Products Inc. (“old M.C. Healthcare”). The carrying value of goodwill was increased by $7,394 for fiscal 2016 and reduced by $361,561 and $195,703 for fiscal 2015 and 2014, respectively, as a result of changes in the foreign currency exchange rate. Under Canadian tax law, a portion of goodwill acquired in connection with an asset acquisition may be amortized for tax purposes. We expect 75%, or approximately $2,000,000, of the goodwill associated with Span-Canada to be amortizable and deductible for tax purposes.
For the fiscal year ended October 1, 2016, we tested each of our three reporting units for goodwill impairment in accordance with ASC 350-20-35 Intangibles - Goodwill and Other. We determined that the fair value of each of our reporting units was greater than its respective carrying value, and therefore no impairment charges were recognized in fiscal 2016.
We calculate the estimated fair value of our reporting units by using an income approach, which includes internally developed discounted cash flow models. To determine fair value, we make assumptions about a number of internal and external factors. Significant assumptions used in the impairment analysis include financial projections of sales, expenses, profit margins, working capital requirements, capital expenditures, tax rates and discount rates. These assumptions are based on our historical operating results for each of our reporting units, our detailed operating plan for fiscal year 2017 and our financial forecasts for fiscal years 2018 through 2021. There is significant uncertainty about the various assumptions made in the analysis. Our estimates of cash flows may differ from actual cash flows due to, among other things, changes in our estimated sales and expense growth rates, other changes in our financial forecasting models, economic conditions in the U.S. and Canadian medical markets, Medicare reimbursement changes, government budget changes in the Canadian healthcare market and other risks referenced from time to time in our Securities and Exchange Commission filings. See Part 1, Item 1A. “Risk Factors” earlier in this report for more information on factors that could affect our assumptions used in the impairment analysis. These factors increase the risk of differences between projected and actual performance that could impact future estimates of the fair values of all reporting units. Significant differences between these estimates and actual cash flows could result in impairment charges in future periods.
6. INTANGIBLES
On December 9, 2011, we acquired, through a new wholly-owned subsidiary, substantially all of the assets of old M.C. Healthcare and acquired intangibles of approximately $3,980,000. At October 1, 2016 and October 3, 2015 we had intangibles associated with the asset acquisition of M.C. Healthcare of trade names, non-competition agreements and customer relationships (net of accumulated amortization of $1,367,399 and $1,115,246, respectively) of $1,653,110 and $1,894,170, respectively. Changes in the balances shown for trade names, non-competition agreements and customer relationships result solely from foreign currency fluctuations.
In addition, we had patents and trademarks (net of accumulated amortization) of $336,789 as of October 1, 2016 and $320,592 as of October 3, 2015. We reviewed the useful lives of individual patents and trademarks and determined that the useful lives did not require any material changes. The intangibles and the patents and trademarks are primarily associated with the medical segment.
Amortization expense for intangibles, patents and trademarks during fiscal years 2016, 2015 and 2014 was $295,092, $326,775 and $394,169, respectively. Estimated amortization expense for the next five fiscal years based on existing intangibles is as follows:
7. OTHER ASSETS
8. ACCRUED AND SUNDRY LIABILITIES
9. PRODUCT WARRANTIES
We offer warranties of various lengths to our customers, depending on the specific product sold. The warranties require us to repair or replace non-performing products during the warranty period at no cost to the customer. At the time revenue is recognized for products covered by warranties, we record a liability for estimated costs that may be incurred under our warranties. The costs are estimated based on historical experience, any specific warranty problems that have been identified and recovery of secondary warranty cost from component suppliers. The amounts shown below are presented net of any expected cost recovery from suppliers. Although historical warranty costs have been within our expectations, there can be no assurance that future warranty costs will not exceed historical amounts. We regularly evaluate the adequacy of the warranty liability and adjust the balance as necessary.
Changes in our product warranty liability for the years ended October 1, 2016 and October 3, 2015 are as follows:
10. REVOLVING CREDIT FACILITY
In May 2015, we renewed our revolving credit facility from a bank. As part of the renewal, we extended the line for three years until April 30, 2018. At our request, the maximum principal amount we can borrow at any one time was reduced to $5.0 million. There is no longer an unused commitment fee charged for the credit facility. The previously included covenant that restricted dividend payments to 50% of net income was eliminated.
The credit agreement is unsecured and accrues interest at a variable rate equal to 30-day LIBOR plus a margin ranging from 85 to 165 basis points, depending on our leverage ratio (as defined in the credit agreement). The interest rate, including the margin of 85 basis points, was 1.2795% in January 2016, which was the last time we had an outstanding balance due on the line of credit. Interest-only payments are required monthly. We have pledged to grant the bank a security interest in our accounts, instruments, and chattel paper upon its request in the event of a default as defined in the credit agreement. Our obligations under the credit agreement are guaranteed by Span-Canada.
The credit facility includes financial covenants relating to tangible net worth and leverage ratios, and restricts mergers and acquisitions, assets sales, indebtedness, liens and capital expenditures without prior written consent of or waiver by the lending bank. Also, our subsidiary is not restricted in its ability to pay dividends or make distributions to us. Violation of loan covenants could result in the acceleration of the term of the credit agreement. The lending bank waived any event of default in connection with (1) our regular quarterly dividend payments of $1.8 million during fiscal year 2015, which represented 46% of our net income for the fiscal year and (2) the special dividend of $1.00 per share declared in November 2014 and paid on January 7, 2015. The bank also granted a consent dated September 29, 2015 to our repurchase of an aggregate of 261,310 shares of Company common stock at a price of $17.49 per share from Robert Johnston, a former director of the Company, and his affiliate, The Jerry Zucker Revocable Trust.
We paid approximately $5,000, $6,000 and $13,000 of interest expense in 2016, 2015 and 2014, respectively. No amounts were outstanding under the credit facility at October 1, 2016.
11. DEFERRED COMPENSATION
We are obligated to make fixed payments of approximately $114,000 per year to our founder and former chief executive officer and his ex-wife pursuant to a retirement agreement. The payments will be made for the longer of the executive’s remaining life or his ex-wife’s remaining life, if she survives him. We have fully accrued the present value of the expected payments due over the combined life expectancy of the executive and his ex-wife. We recognized expenses of approximately $27,000 in 2016, $32,000 in 2015 and $37,000 in 2014, related to this agreement.
12. EQUITY COMPENSATION
In January 2007, the Board adopted the 2007 Equity Incentive Plan (“2007 Plan”), which was approved by our shareholders in February 2007. The 2007 Plan authorizes the Board to grant stock-based compensation awards to our officers, directors and key employees for up to 250,000 shares of Company common stock. Awards may be in the form of restricted stock, non-restricted stock, restricted stock units, options or stock appreciation rights (SARs). Total awards under the 2007 Plan may not exceed 250,000 shares, of which no more than 75,000 shares may be in the form of restricted stock, non-restricted stock or restricted stock units. The per share exercise prices of options or SARs granted under the 2007 Plan must be no less than the fair market value of a share on the grant date. The terms and conditions of each award may be set by the Board or a committee of the Board. The 2007 Plan will expire on December 31, 2016 unless terminated earlier in accordance with the 2007 Plan.
In March 1997, the Board adopted the 1997 Stock Option Plan (“1997 Plan”). The 1997 Plan authorized the Board to grant options to our key officers and employees for up to 200,000 shares of our common stock. Options granted under the 1997 Plan were generally granted at the fair market value on the date of grant. These options become exercisable and vest at the greater of 1,000 shares per year or 20% of the grant. Options expire 10 years from the date of grant for continuing employees, or three months after termination of employment for employees who leave the Company. The 1997 Plan expired by its terms on October 20, 2007. The expiration of the 1997 Plan does not affect options outstanding under the 1997 Plan, but no further options can be granted under the 1997 Plan.
Shown below is a summary of activity under the Company’s two stock option plans.
Shown below is a summary of stock options outstanding and exercisable at fiscal year-end 2016.
13. 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 our deferred tax liabilities and assets as of October 1, 2016 and October 3, 2015 are as follows:
We made cash income tax payments, net of refunds, of approximately $2,267,000, $524,000 and $1,904,000 in fiscal years 2016, 2015 and 2014, respectively.
Federal, state and foreign income tax provisions consist of the following:
Income tax expense differs from the amounts computed by applying the statutory U.S. federal tax rate to income before income taxes as follows:
We have adopted the provisions under ASC Topic 740, “Income Taxes” (“ASC 740”) which require that a position taken or expected to be taken in a tax return be recognized in the consolidated financial statements when it is more likely than not (i.e., a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon settlement. We recognize accrued interest and penalties related to uncertain tax positions as a component of income tax expense in our consolidated financial statements. We are not aware of any uncertain tax positions as of October 1, 2016 and October 3, 2015. In the normal course of business, we are subject to examination by taxing authorities. We do not expect to be subject to U.S. federal, state or local income tax examinations by tax authorities in filing jurisdictions for the years before tax year 2012 and Canadian tax examinations before the tax year 2012.
Span-America files income tax returns in the U.S. and various state and local jurisdictions. Span-Canada files separate income tax returns in Canada on an annual basis. The resulting foreign income taxes and any applicable U.S. or foreign tax implications of intercompany transactions will be accounted for within the consolidated financial reporting of income taxes, per the requirements of ASC Topic 740.
A provision has not been made for U.S. or additional foreign taxes on $2,718,000 of undistributed earnings of our foreign subsidiary. Those earnings have been and will continue to be reinvested. These earnings could become subject to additional tax if they were remitted as dividends, if foreign earnings were loaned to Span-America or a U.S. affiliate, or if we sold our stock in the Span-Canada subsidiary. It is not practicable to estimate the amount of additional tax that might be payable on the foreign earnings.
14. EARNINGS PER SHARE OF COMMON STOCK
The following table sets forth the computation of basic and diluted earnings per share of common stock.
15. EMPLOYEE BENEFITS AND INCENTIVE PLANS
We have a 401(k) plan available to employees meeting eligibility requirements. We match a percentage of employee contributions, with certain limitations. Our 401(k) matching contributions amounted to approximately $205,000, $188,000 and $184,000, for the 2016, 2015 and 2014 fiscal years, respectively.
16. RELATED-PARTY TRANSACTIONS
The company repurchased 249,310 shares of its common stock for approximately $4.36 million on October 1, 2015 from The Jerry Zucker Revocable Trust, an affiliate of former director Robert B. Johnston. On October 9, 2015, in fiscal year 2016, we repurchased 12,000 shares of our common stock for approximately $210,000 from former director Robert B. Johnston. The total repurchase of 261,310 shares represented approximately 9% of the outstanding shares prior to the transaction. Our lending bank granted a consent dated September 29, 2015 to these repurchases.
17. MAJOR CUSTOMERS
The largest of our medical customers are distributors who sell our products to acute care hospitals and long-term care facilities throughout the United States and Canada. Sales to one customer were 17% of total net sales in fiscal 2016 and 2014 and 18% of total net sales in fiscal 2015.
We have a business relationship with other customers to distribute certain of our consumer products, which are part of our custom products segment. Sales to a former customer amounted to 6% of total net sales in 2016 and 10% of total net sales in fiscal 2015. Sales to another consumer customer amounted to 18%, 7% and 16% of total net sales in fiscal 2016, 2015 and 2014, respectively.
See Note 18 for further information about sales to major customers.
18. OPERATIONS AND INDUSTRY SEGMENTS AND GEOGRAPHIC AREAS
For management and reporting purposes, we divide our business into two segments: medical and custom products. This industry segment information corresponds to the markets in the United States, Canada and other countries for which we manufacture and distribute our various products. The following table summarizes certain information on industry segments:
Total sales by industry segment include sales to unaffiliated customers as reported in our statements of income. In calculating operating profit, non-allocable general corporate expenses, interest expense, other income and income taxes are not included, but certain corporate operating expenses incurred for the benefit of all segments are included on an allocated basis.
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 and cash surrender value of life insurance.
Included in the consolidated balance sheet at October 1, 2016 and October 3, 2015, are the net assets of Span-Canada’s operations located in a single facility in Canada, which totaled approximately $11,000,000 and $10,000,000, respectively. See Item 1A. “Risk Factors” above for more information on risks involved in our international operations.
We have several customers whose sales represent significant portions of sales in their respective business segments. Sales to one of our medical customers were 24% of net medical sales in fiscal 2016 and fiscal 2015 and 22% of net medical sales in fiscal 2014. Sales to another medical customer accounted for 11% of net medical sales in fiscal years 2016, 2015 and 2014. In the custom products segment, sales to one customer accounted for 57% of net custom products sales in fiscal 2016, 29% in fiscal 2015 and 66% in fiscal 2014. Sales to a former custom products customer were 19% of net custom products sales in fiscal 2016 and 40% of net custom products sales in fiscal 2015.
The manufacturing employees of our Span-Canada subsidiary, representing 18% of our workforce, are subject to a Collective Agreement with a union that expires October 31, 2018.
19. OPERATING LEASES
We lease truck equipment in South Carolina. In addition, we lease a 15,000 square foot distribution facility in Utah for $7,500 a month. The Utah facility lease is cancellable by either party with 60 days’ notice. Both leases require us to pay certain insurance and maintenance costs.
Rental expense for all operating leases was $404,000 in fiscal 2016, $373,000 in fiscal 2015, and $375,000 in fiscal 2014.
We have a five-year commitment to lease old M.C. Healthcare’s 50,000 square foot manufacturing and showroom facility in Beamsville, Ontario at CAD $278,000 for the first two years and then increasing ratably to CAD $295,000 for the final year ending in December 2021.
20. COMMITMENTS AND CONTINGENCIES
We are committed to minimum purchases of $700,000 of Selan® skin care products per calendar year for each calendar year through 2020. For the fiscal years ended 2016, 2015, and 2014, purchases under this commitment were $829,000, $823,000 and $898,000, respectively. In addition to the minimum purchase requirements, we are required to pay a fee of $30,000 per year to license the Selan products.
From time to time we are defendants in legal actions involving claims arising in the normal course of business. We believe that, as a result of legal defenses and insurance arrangements with parties we believe to be financially capable, none of these actions, if determined adversely, should have a material adverse effect on our operations or financial condition.
21. QUARTERLY FINANCIAL DATA (Unaudited)
Quarterly Financial Data (Unaudited)
(Amounts in thousands, except per share data)
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this annual report (the “Evaluation Date”), and, based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures were effective at the Evaluation Date. There were no changes in our internal controls over financial reporting during the last quarter of fiscal 2016 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Disclosure controls and procedures are the Company’s controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
The management of Span-America is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Span-America’s internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
1.
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of Span-America;
2.
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of Span-America are being made only in accordance with authorizations of management and directors of Span-America; and
3.
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Span-America’s assets that could have a material adverse effect on the financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
We have assessed the effectiveness of our internal control over financial reporting as of October 1, 2016. In making this assessment, we used the 2013 framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on that assessment, we believe that as of October 1, 2016, our internal control over financial reporting is effective.
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Our report on internal control was not subject to attestation by our independent registered public accounting firm pursuant to an exemption for non-accelerated filers that permits us to provide only management’s report in this annual report.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Information required under Item 10 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 our 2016 fiscal year under the headings “Proposals to be Voted Upon - Election of Directors,” “Corporate Governance,” “Executive Officers” and “Section 16(a) Beneficial Ownership Reporting Compliance.”
Item 11.
Item 11. Executive Compensation
Information required under Item 11 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 our 2016 fiscal year under the headings “Compensation of Executive Officers,” “Corporate Governance - Director Compensation” and “Corporate Governance - Compensation Committee Interlocks and Insider Participation.”
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information under the heading “Security Ownership of Certain Beneficial Owners and Management” set forth in our definitive Proxy Statement filed or to be filed with the Securities and Exchange Commission on or prior to 120 days following the end of our 2016 fiscal year is incorporated herein by reference.
The following table summarizes information regarding our equity compensation plans as of October 1, 2016:
For additional information on our stock option plans, see Note 12 in the Notes to Consolidated Financial Statements for the year ended October 1, 2016.
Item 13.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required under Item 13 of Part III is incorporated herein by reference to portions of our definitive Proxy Statement filed or to be filed with the Securities and Exchange Commission on or prior to 120 days following the end of our 2016 fiscal year under the headings “Certain Relationships and Related Transactions” and “Corporate Governance - Director Independence.”
Item 14.
Item 14. Principal Accountant Fees and Services
The information required under Item 14 of Part III is incorporated herein by reference to portions of our definitive Proxy Statement filed or to be filed with the Securities and Exchange Commission on or prior to 120 days following the end of our 2016 fiscal year under the headings “Audit Fees,” “Audit-Related Fees,” “Tax Fees” and “All Other Fees.”
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
(a) (1) Financial Statements
The response to this portion of Item 15 is submitted under Item 8, Consolidated Financial Statements and Supplementary Data, beginning on page 43.
(2) Financial Statement Schedules
The response to this portion of Item 15 is submitted below under Item 15(c).
(3) Listing of Exhibits
2.1
Asset Purchase Agreement dated December 9, 2011 by and among the Company, Span Medical Products Canada Inc., M.C. Healthcare Products Inc., Thompson Contract Supply Company Limited and Ralph Thompson: Incorporated by reference to Exhibit 2.1 to the Company’s report on Form 8-K dated December 9, 2011, Commission File No. 0-11392. Schedules and exhibits have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A list of schedules and exhibits is set forth at the end of the table of contents in the Asset Purchase Agreement. The Company will furnish the Commission with a copy of any such schedule or exhibit supplementally upon request.
3.1
Restated Articles of Incorporation: Incorporated by reference to Exhibit 3(a) to the Company’s Registration Statement on Form S-18, Commission File No. 0-11392.
3.1.1
Articles of Amendment filed with the South Carolina Secretary of State on February 6, 1989: Incorporated by reference to Exhibit 3.1.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 28, 1991 (the “1991 10-K”), Commission File No. 0-11392.
3.1.2
Articles of Amendment filed with the South Carolina Secretary of State on March 5, 1992: Incorporated by reference to Exhibit 4.4 to the Company’s Registration Statement on Form S-2 dated May 11, 1992, Commission File No. 33-47670.
3.1.3
Articles of Amendment filed with the South Carolina Secretary of State on April 22, 1993: Incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 3, 1993.
3.2
Amended and Restated By-Laws dated February 4, 1997: Incorporated by reference to Exhibit 3.0 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 29, 1997.
3.2.1
Amendment to the Company's By-laws dated March 13, 2003: Incorporated by reference to Exhibit 3.2 to the Company's report on Form 8-K dated March 13, 2003, Commission File No. 0-11392.
3.2.2
Amendment to the Company's By-laws dated November 7, 2003: Incorporated by reference to Exhibit 3.2.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 27, 2003, Commission File No. 0-11392.
3.2.3
Amendment to the Company's By-laws dated November 12, 2014: Incorporated by reference to Exhibit 3.2.3 to the Company's report on Form 8-K dated November 18, 2014, Commission File No. 0-11392.
4.1
Specimen of Common Stock certificate: Incorporated by reference to Exhibit 1 to the Form S-8 filed on January 8, 1990, Commission File No. 33-32896.
4.2
Amended & Restated Standstill Agreement dated September 28, 2015 between the Company, Anita G. Zucker, as Trustee of The Jerry Zucker Revocable Trust dated March 20, 2007 and as successor-in-interest to Jerry Zucker, deceased, Robert B. Johnston and The InterTech Group, Inc. Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated September 28, 2015, Commission File No. 0-11392.
4.3
Exhibits 3.1 through 3.2.3 are incorporated herein by reference.
10.1*
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.
10.2*
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, Commission File No. 0-11392.
10.3*
1997 Stock Option Plan: Incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 27, 1997 (the “1997 10-K”), Commission File No. 0-11392.
10.3.1*
Amendment No. 1 to the 1997 Stock Option Plan: Incorporated by reference to Exhibit 10.14.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended October 3, 1998 (the “1998 10-K”), Commission File No. 0-11392.
10.4*
1997 Long Term Incentive Stock Option Plan: Incorporated by reference to Exhibit 10.15 to the 1997 10-K.
10.5*
Span-America Medical Systems, Inc. 2007 Equity Incentive Plan: Incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement for its 2007 Annual Meeting of Shareholders filed with the Commission on January 8, 2007, Commission File No. 0-11392.
10.6*
Severance Protection Agreement between the Company and James D. Ferguson dated July 25, 2002: Incorporated by reference to Exhibit 10.20 of the Company’s Annual Report on Form 10-K for the fiscal year ended September 28, 2002 (the “2002 10-K”), Commission File No. 000-11392.
10.7*
Severance Protection Agreement between the Company and Robert E. Ackley dated July 25, 2002: Incorporated by reference to Exhibit 10.21 of the 2002 10-K.
10.8*
Severance Protection Agreement between the Company and Richard C. Coggins dated July 25, 2002: Incorporated by reference to Exhibit 10.22 of the 2002 10-K.
10.9*
Severance Protection Agreement between the Company and James R. O’Reagan dated July 25, 2002: Incorporated by reference to Exhibit 10.23 of the 2002 10-K.
10.10*
Severance Protection Agreement between the Company and Clyde A. Shew dated July 25, 2002: Incorporated by reference to Exhibit 10.24 of the 2002 10-K.
10.11*
Severance Protection Agreement between the Company and Erick C. Herlong dated December 1, 2008: Incorporated by reference to Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the fiscal year ended October 3, 2009 (the “2009 10-K”), Commission File No. 0-11392.
10.12*
Severance Protection Agreement between the Company and Marie Sitter dated December 1, 2008: Incorporated by reference to Exhibit 10.17 of the 2009 10-K.
10.13
Distribution Agreement dated March 1, 1999 between the Company and Louisville Bedding Corporation: Incorporated by reference to Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2000, Commission File No. 0-11392.
10.13.1
Addendum to Distribution Agreement between Louisville Bedding Company and Span-America Medical Systems, Inc. dated January 1, 2002: Incorporated by reference to Exhibit 10.17 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 30, 2002, Commission File No. 0-11392.
10.13.2
Assignment & Assumption of Distribution Agreement dated May 23, 2013 among the Company, Louisville Bedding Company and Hollander Home Fashions, LLC: Incorporated by reference to Exhibit 10.1 to the Company’s report on Form 8-K dated May 29, 2013, Commission File No. 0-11392.
10.14
Amended & Restated Loan Agreement dated December 9, 2011 by and between the Company and TD Bank: Incorporated by reference to Exhibit 10.1.1 to the Company’s report on Form 8-K dated December 9, 2011, Commission File No. 0-11392.
10.14.1
Amended & Restated Revolving Note (Increase with Stepdown) dated December 9, 2011 with the Company as Borrower and TD Bank as Lender: Incorporated by reference to Exhibit 10.1.2 to the Company’s report on Form 8-K dated December 9, 2011, Commission File No. 0-11392.
10.14.2
Unlimited Guaranty dated December 9, 2011 of Span Medical Products Canada Inc. to TD Bank: Incorporated by reference to Exhibit 10.1.3 to the Company’s report on Form 8-K dated December 9, 2011, Commission File No. 0-11392.
10.14.3
Negative Pledge Agreement dated December 9, 2011 of the Company to TD Bank: Incorporated by reference to Exhibit 10.1.4 to the Company’s report on Form 8-K dated December 9, 2011, Commission File No. 0-11392.
10.14.4
Letter Agreement dated April 30, 2015 by and among TD Bank, N.A. and Span-America Medical Systems, Inc. Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated April 30, 2015, Commission File No. 0-11392.
10.14.5
First Amendment to Loan Documents dated May 27, 2015 by and between TD Bank, N.A. and Span-America Medical Systems, Inc. Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated May 27, 2015, Commission File No. 0-11392.
10.15.1
Lease dated December 9, 2011 between Span Medical Products Canada Inc. and Thompson Contract Supply Company Limited: Incorporated by reference to Exhibit 10.2 to the Company’s report on Form 8-K dated December 9, 2011, Commission File No. 0-11392.
10.15.2
Lease Amendment and Extension dated November 4, 2016 between Span Medical Products Canada Inc. and Thompson Contract Supply Company Limited.
10.16
Final Collective Agreement effective November 1, 2012 to October 31, 2018 between Span Medical Products Canada Inc. (operating under the registered business name M.C. Healthcare Products) and Sheet Metal Workers’ International Association, Local Union 540: Incorporated by reference to Exhibit 10.21 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 29, 2014, Commission File No. 0-11392.
10.17.1
License and Distribution Agreement with P.J. Noyes Company, Inc. Confidential treatment has been requested for this exhibit. Incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended April 2, 2011, Commission File No. 0-11392. Portions of this exhibit have been redacted, and the redacted portions have been separately filed with the Securities and Exchange Commission.
10.17.2
Amendment No. 1 to License and Distribution Agreement effective February 1, 2016 by and between Nipro Consumer Healthcare, Inc., d/b/a P.J. Noyes Company and Span-America Medical Systems, Inc. Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated February 2, 2016 and filed with the Commission on February 8, 2016, Commission File No. 0-11392.
10.17.3
Confirmation of Amendment No. 1 to License and Distribution Agreement dated December 21, 2016 by Trividia Manufacturing Solutions, Inc., f/k/a Nipro Consumer Healthcare, Inc.
21.1
Subsidiaries
23.1
Consent of Elliott Davis Decosimo, LLC.
31.1
Officer Certifications Pursuant to Section 302.
32.1
Officer Certifications Pursuant to Section 906.
101.INS**
XBRL Instance
101.SCH**
XBRL Taxonomy Extension Schema
101.CAL**
XBRL Taxonomy Extension Calculation
101.DEF**
XBRL Taxonomy Extension Definition
101.LAB**
XBRL Taxonomy Extension Labels
101.PRE**
XBRL Taxonomy Extension Presentation
*
Management contract or compensatory plan or arrangement.
**
XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
(b) Exhibits
The exhibits required by this section of Item 15 are attached hereto or incorporated by reference.
Financial Statement Schedules
(a) Uncollectible accounts written off
(b) Inventory disposed of
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.
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/ Thomas D. Henrion
December 23, 2016
Thomas D. Henrion
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 and Director
James D. Ferguson
(Principal Executive Officer)
/s/ Richard C. Coggins
Chief Financial Officer
Richard C. Coggins
(Principal Financial Officer)
/s/ Gwendolyn L. Randolph
Controller
Gwendolyn L. Randolph
/s/ Robert H. Dick
Director
Robert H. Dick
/s/ Thomas F. Grady, Jr.
Director
Thomas F. Grady, Jr.
/s/ Thomas D. Henrion
Director
Thomas D. Henrion
/s/ Dan R. Lee
Director
Dan R. Lee
/s/ Linda D. Norman
Director
Linda D. Norman
/s/ Terry Allison Rappuhn
Director
Terry Allison Rappuhn
/s/ Thomas J. Sullivan
Director
Thomas J. Sullivan
December 23, 2016