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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the fiscal year ended October 2, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 for the transition period
from _________ to _________.
Commission File Number 0-11392
SPAN-AMERICA MEDICAL SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
South Carolina 57-0525804
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
70 Commerce Center
Greenville, South Carolina 29615
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(Address of principal executive offices)
Registrant's telephone number, including area code: (864) 288-8877
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
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Common Stock, no par value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant computed by reference to the last price at which the stock was
sold on December 13, 1999 was $6,921,916.
The number of shares of the registrant's common stock, no par value,
outstanding as of December 13, 1999 was 2,495,400.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1999 Annual Report to Shareholders are incorporated by
reference into Parts I and II, and portions of the Company's Definitive Proxy
Statement for the annual shareholder's meeting to be held February 3, 2000 are
incorporated by reference into Part III.
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PART I
Item 1. Business
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BACKGROUND
Span-America Medical Systems, Inc. (the "Company" or "Span-America")
was incorporated under the laws of the state of South Carolina on September 21,
1970. The Company manufactures and distributes a variety of polyurethane foam
products for the medical and custom products markets.
Span-America commenced operations in 1975 as a manufacturer of
polyurethane foam patient positioners. During the next several years, the
Company expanded its product lines to produce lapidus (flat foam) and convoluted
foam mattress overlays for the wound care market. Wound care products aid in the
treatment or prevention of decubitus ulcers, commonly known as bed sores or
pressure ulcers. In the late 1970's the Company also began producing foam
products for industrial applications, primarily to utilize excess manufacturing
capacity. In 1985, the Company introduced its patented Geo-Matt mattress overlay
in the health care market, which became the Company's leading product. At the
same time, the Company began selling its mattress overlay products to retailers
throughout the United States.
The Company entered the replacement mattress segment of the pressure
ulcer care market in fiscal 1992 through the acquisition of Healthflex, Inc. The
Company is currently marketing the PressureGuard line of replacement mattresses
directly to hospitals, long-term care facilities, and home health care dealers.
The Company's long-term strategy is to become a leading health care
manufacturer specializing in wound management products used in the prevention
and treatment of pressure ulcers. Most of the Company's medical products are
currently directed toward wound care applications, and the Company is actively
seeking to develop or acquire new products which are in this market segment. The
Company also seeks to further develop and manufacture consumer and industrial
applications of its medical products.
The Company's products are distributed primarily in the United States
and to a lesser degree in several foreign countries. Total export sales during
fiscal 1999 were approximately $1.2 million or 5% of total net sales.
INDUSTRY SEGMENT DATA
The industry segment data included in Note 16 to the Company's audited
financial statements for the year ended October 2, 1999, presented on pages 20 -
22 of the 1999 Annual Report is incorporated herein by reference.
MEDICAL PRODUCTS
Span-America's principal medical products consist of support surfaces
(polyurethane foam mattress overlays, non-powered therapeutic replacement
mattresses, and powered
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therapeutic replacement mattresses), patient positioners, and seating products.
These products are marketed to all health care settings, including acute care
hospitals, long term care facilities, and home health care providers. The
company also sells these products on a limited basis in Canada. Sales of medical
products represented 65% of sales in 1999, 57% of sales in 1998, and 55% in 1997
respectively.
MATTRESS OVERLAYS. Span-America produces a variety of foam mattress
overlays, including convoluted and lapidus foam pads and its patented
Geo-Matt(R) overlay. Mattress overlays comprised approximately 27% of the
Company's total net sales in fiscal 1999. These products are designed to provide
patients with greater comfort and assist in treating patients suffering from
burns or pressure ulcers. Span-America's overlay products are mattress pads as
compared to complete mattresses and are marketed as less expensive alternatives
to generally higher priced air and water mattresses. The mattress overlays are
designed for single patient use.
The Geo-Matt mattress overlay, which was introduced in 1985, represents
the Company's single largest product in terms of revenues. Geo-Matt was designed
in conjunction with clinical studies performed by the Institute for
Rehabilitation and Research at the Baylor College of Medicine. The product's
patented design includes over 800 individual cells which are cut to exacting
tolerances on computer controlled equipment to create a sophisticated and
clinically effective mattress surface.
The Company's mattress overlays disperse body heat, increase air
circulation beneath the patient, and reduce moisture build-up in order to
prevent the development or promote the healing of pressure ulcers. Their
convoluted or geometrically contoured construction also significantly reduces
shear forces while evenly distributing the patient's body weight, thereby
minimizing the pressure that causes ulcers.
REPLACEMENT MATTRESSES. Span-America's non-powered therapeutic
replacement mattresses (as distinguished from overlays) are of two types.
Geo-Mattress(R) products are single-density or multi-layered foam mattresses
topped with the same patented Geo-Matt surface used in the Company's overlays.
These mattresses are sold as alternatives to standard innerspring and all-foam
mattresses found facility-wide in acute and long term care settings. A version
is also made specifically for use in home health care.
The Company's more complex non-powered replacement mattresses consist
of products from the PressureGuard(R) Series. The PressureGuard design was
acquired through the acquisition of Healthflex in February 1992. The original
design combines a polyurethane foam shell and static air cylinders to form a
replacement mattress that incorporates the comfort and pressure relieving
features of both mattress overlays and more sophisticated dynamic mattresses.
This original design, which the company later used as the basis for powered
versions (see below) was further refined via a complete technical upgrade of all
PressureGuard components in November 1997. In conjunction with this upgrade,
some models were renamed to better reflect their function.
In addition to the non-powered, static PressureGuard Renew(R)
(formerly PressureGuard II), the Company also offers the PressureGuard CFT(R).
This model incorporates
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patented design principles of constant force technology. First introduced as the
CustomCare mattress in June of 1995, the PressureGuard CFT is unique in that it
is a dynamic support surface that rivals very expensive powered surfaces, yet
requires no power source of any kind.
The Company's powered therapeutic replacement mattresses consist of the
remaining models in the PressureGuard Series. In November 1993, the Company
received FDA 510K marketing approval for its PressureGuard IV mattress system.
Building on the comfort and support of the original PressureGuard design,
PressureGuard IV was designed as a sophisticated, powered system for providing
pressure reduction and patient comfort, with the added ability to turn the
patient. The system was designed to automatically sense the patient's weight and
position, and to continually adjust the pressures appropriately while slowly and
quietly repositioning the patient at angles up to 30 degrees in cycles of up to
two hours. The newly upgraded version, renamed the PressureGuard Turn Select(R),
incorporates all of these capabilities, as well as several additional features.
Of particular note is a pendant-operated, microprocessor-controlled motion
system built into the mattress, instead of hanging on the bed frame as a
separate unit.
Another powered system in the PressureGuard line is the PressureGuard
APM(R), a simpler but very effective alternating pressure mattress. Originally
introduced as the DynaGuard(R), in November 1994, the APM is targeted primarily
at the home care market. The latest addition to the PressureGuard line, launched
in November 1997, is the PressureGuard Site Select(R). The Site Select includes
many of the features of the Turn Select, including the built in
microprocessor-controlled motion system. However, instead of turning the
patient, the Site Select is designed to give the caregiver the ability to
selectively adjust the pressure at particular body sites based on patient need.
Like the Turn Select, it is completely programmable through a hand-held pendant.
All of the powered products in the PressureGuard Series are sold primarily
through home health care equipment dealers for daily rental in acute, long term,
and home care settings. During fiscal 1999, replacement mattresses and related
products made up approximately 19% of total net sales.
PATIENT POSITIONERS. Span-America's specialty line of patient
positioners is sold primarily under the trademark Span-Aids(R). Span-Aids
accounted for approximately 17% of the Company's net sales in fiscal 1999. This
is the original product line of the Company and consists of over 300 different
foam items which aid in relieving the basic patient positioning problems of
elevation, immobilization, muscle contracture, foot drop and foot or leg
rotation. Span-Aids patient positioners hold the patient's body in
orthopedically correct positions, provide greater patient comfort and tend to
promote healing for long-term comatose patients or those with a flaccid or
immobilized condition. The positioners also aid in the prevention of pressure
ulcers by promoting more effective dispersion of pressure, heat and moisture.
Span-Aids are intended for single-patient use throughout the patient's entire
treatment program. Among the Span-Aids products presently marketed are abduction
pillows, body aligners, head supports, limb elevators and various foot and wrist
positioners.
Span-America's patient positioners are sold primarily to hospitals and
long-term care facilities by several national medical products distributors.
Span-Aids are believed by the Company to be one of the most effective patient
positioning devices available in the health care
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market, as compared to pillows, rolled towels and other similar materials
traditionally used by nursing personnel to position immobilized patients.
Span-Aids are constructed of open-cell polyurethane foam which allows air to
circulate next to the patient's skin, thereby reducing extensive heat and
moisture build-up.
Most Span-Aids body positioners are pressure packaged to reduce the
amount of storage space required by hospitals and other facilities which utilize
them. This patented packaging method reduces the package size by as much as 75%
while protecting the positioners from dust and contamination during
transportation and storage.
SEATING PRODUCTS. The final category of medical products made by
Span-America consists of seating cushions and related products that address the
needs of the patient when in the seated position. The Company's offerings can be
subdivided into three main types. Seating products made specifically as an aid
to wound healing include the ISCH-DISH(R) and SACRAL DISH(R) pressure relief
cushions. Seating products made for patient positioning and general pressure
management include the ISCH-DISH Thin and the Geo-Matt Contour cushion,
introduced in June 1997, which combines positioning aid with the Company's
proprietary Geo-Matt anti-shearing surface. Seating products designed to address
pressure management without additional positioning benefits include the Gel-T(R)
cushion and the Geo-Matt and Geo-Matt PRT(R) wheelchair cushions. The Gel-T is a
gel/foam combination cushion popular with elderly patients. The Geo-Matt and
Geo-Matt PRT cushions incorporate the Geo-Matt surface.
DISTRIBUTOR RELATIONSHIP. During fiscal 1999, approximately 26% of the
Company's medical products were sold to Allegiance Healthcare Corporation
("Allegiance") which distributes these products to hospitals nationwide.
Span-America has maintained a distribution relationship with Allegiance
(formerly Baxter) for 20 years. In September 1996, Baxter spun off its
healthcare distribution and cost management business to create Allegiance. In
1998, Allegiance was acquired by Cardinal Healthcare, Inc. and will continue to
function as a separate unit of Cardinal. The Company's distribution agreement
with Allegiance has been unaffected by these ownership changes, and management
expects the changes to have no negative impact on the Company's sales to
Allegiance.
CUSTOM PRODUCTS
Span-America's custom products segment includes two major product
lines: consumer products and industrial products. The Company's consumer product
line consists primarily of convoluted mattress overlays and specially designed
pillows for the consumer bedding market. In fiscal 1999, approximately 35% of
the Company's custom products were distributed through Louisville Bedding
Corporation, an international manufacturer and marketer of bedding products.
In 1990, Span-America introduced its TerryFoam(R) comfort products,
which are designed to be used on all types of outdoor furniture. Formerly
produced by contract manufacturers according to the Company's specifications,
these products are now manufactured by the Company. They are being sold and
distributed directly by Span-America to retailers nationwide.
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Span-America's industrial product line consists primarily of foam
packaging and cushioning materials. The Company also produces foam products
which are used for flotation, sound insulation and gasketing purposes. The
majority of these products are made to order according to customer
specifications instead of being made to stock. To date, most of the Company's
industrial sales have been in the specialty packaging segment of the custom
products market. The Company currently has one full-time sales representative
and several manufacturers representatives selling its foam fabrication
capabilities primarily in the Southeast. Its customers represent a wide variety
of markets, including the photographic film, durable goods, electronics and
sports equipment industries
Custom products represented approximately 35% of the Company's total
net sales in fiscal 1999 as compared to 43% in 1998 and 45% in 1997.
COMPETITION
MEDICAL. In the medical market segment, the Company faces significant
competition for sales of its foam mattress overlays. The competition for
convoluted mattress overlays is primarily based on price and delivery. For other
foam mattress overlay products (such as the Geo-Matt overlay), the competition
is based mainly on product performance and quality. However, to a lesser extent,
the competition for Geo-Matt type overlays is also based on price and delivery.
Competition with respect to the Company's Span-Aid products is primarily based
on price. However, a secondary source of competition for patient positioners
results from alternative methods such as the use of pillows and other devices to
position patients.
The Company believes that it is among the top five suppliers of foam
mattress overlays and patient positioners to the health care market. The
Company's primary competitor in the overlay and positioner markets is Sunrise
Medical.
The competition in the therapeutic replacement mattress market is based
on product performance, price and durability. Potential customers typically
select a product based on these criteria after conducting a formal clinical
evaluation of sample mattresses for periods of one to six months. A secondary
source of competition results from alternative products such as mattress
overlays which are significantly less expensive than replacement mattresses.
The market for therapeutic replacement mattresses has developed
principally during the 1990's and is currently dominated by BG Industries,
Hill-Rom, and Kinetic Concepts (KCI). BG Industries utilizes Encompass (formerly
a division of Allegiance) to distribute its mattresses primarily to hospitals.
Hill-Rom and KCI use their own sales representatives to sell directly to
hospitals, distributors, and long-term care facilities nationwide.
Most of the Company's competitors in the health care segment are larger
and have greater resources than Span-America.
CUSTOM PRODUCTS. In the custom products segment, Span-America has
encountered significant competition for its mattress pad and pillow products.
The competition is principally based on price, which is largely determined by
foam density and thickness. However,
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competition also exists due to variations in product design and packaging. There
are presently a number of companies with the manufacturing capability to produce
similar bedding products. The Company's primary competitors in this market are
Foamex and ER Carpenter, both of which are larger than Span-America. The Company
also has a number of competitors in the market for its industrial products,
including Tuscarora and UFP Technology. These competitors are larger and have
greater resources than Span-America. The competition for industrial foam
products is largely based on price. In some instances, however, design and
delivery capabilities are as important as the price of the product.
MAJOR CUSTOMERS
The Company has a business relationship with Allegiance Healthcare
Corporation to distribute certain of its medical foam products. In fiscal 1999
sales to Allegiance amounted to approximately 17% of the Company's total net
sales and approximately 26% of the Company's sales to the medical segment.
Span-America also has a relationship with Louisville Bedding Corporation to
distribute certain of its consumer foam products. Sales to Louisville Bedding
Corporation during fiscal 1999 made up approximately 12% of the Company's net
sales and approximately 35% of sales in the custom products segment.
See "Distributor Relationship" on page 4, and "Competition" on pages 5
and 6 for more information on major customers.
SEASONAL TRENDS
Some seasonality can be identified in certain of the Company's medical
and consumer foam products. However, the fluctuations have minimal effect on the
Company's operations because of offsetting trends among these product lines.
Span-America has not experienced significant seasonal fluctuations in its
industrial product line.
The most seasonal of the Company's products is the TerryFoam line of
chaise and chair pads. Demand for shipments of these products generally is
highest in January through April of each year as retail stores begin stocking
their summer merchandise. The impact of this seasonality on the Company will
depend largely on the volume of sales achieved for this product line. During
previous fiscal years, the seasonality of TerryFoam products has had only a
minor impact on the Company's operations.
PATENTS AND TRADEMARKS
The Company holds 37 federally registered trademarks, including
SPAN-AMERICA, SPAN-AIDS, GEO-MATT, SPAN-CARE, PRESSUREGUARD, and ISCH DISH.
Other federal registration applications are presently pending. The Company
believes that these trademarks are readily identifiable in their respective
markets and add value to the Company's product lines.
The Company also holds 54 United States patents and 5 foreign patents
relating to various components of its patient positioners, mattress overlays,
and replacement mattresses.
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Additional patent applications have been filed. Management believes that these
patents are important to the Company. However, while the Company has a number of
products covered by patents, there are competitive alternatives available which
are not covered by these patents. Therefore, the Company does not rely solely on
its patents to maintain its competitive position in the marketplace.
Span-America's principal patents include the patents on its
PressureGuard and CustomCare replacement mattress, its Geo-Matt overlay and its
Span-Aids patient positioners. The Company's Geo-Matt and PressureGuard patents
have remaining lives of 8 and 10 years, respectively. The Company's Span-Aids
patents have remaining lives ranging from 1 to 10 years.
RAW MATERIALS AND BACKLOG
Polyurethane foam and nylon/vinyl mattress covers and tubes account for
approximately 80% of Span-America's raw materials. In addition, the Company uses
corrugated shipping cartons, polyethylene plastic packaging material and
hook-and-loop fasteners. The Company believes that its basic raw materials are
in adequate supply and are available from many suppliers at competitive prices.
As of October 2, 1999, Span-America had unshipped orders of
approximately $1.0 million, which represents a 17% decrease compared to a
backlog of $1.2 million at fiscal year end 1998. All orders in the current
backlog will be filled in the 2000 fiscal year.
EMPLOYEES
On October 2, 1999, the Company had 174 full-time employees, including
5 officers. Of these employees, 15 were executive or management personnel, 14
were administrative and clerical personnel, 18 were sales personnel and 122 were
manufacturing employees. The Company is not a party to any collective bargaining
agreement, and has never experienced an interruption or curtailment of
operations due to labor controversy. Management believes that its relations with
its employees are good.
SUPERVISION AND REGULATION
The Federal Food, Drug and Cosmetic Act, and regulations issued or
proposed thereunder, provide for regulation by the Food and Drug Administration
(the "FDA") of the marketing, manufacture, labeling, packaging and distribution
of medical devices, including the Company's products. These regulations require,
among other things, that medical device manufacturers register with the FDA,
list devices manufactured by them, and file various types of reports. In
addition, the Company's manufacturing facilities are subject to periodic
inspections by regulatory authorities and must comply with "good manufacturing
practices" as required by the FDA and state regulatory authorities. The Company
believes that it is in substantial compliance with applicable regulations and
does not anticipate having to make any material expenditures as a result of FDA
or other regulatory requirements.
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ENVIRONMENTAL MATTERS
The Company's manufacturing operations are subject to various
government regulations pertaining to the discharge of materials into the
environment. Span-America believes that it is in compliance with applicable
regulations. The Company does not anticipate that continued compliance will have
a material effect on the Company's capital expenditures, earnings or competitive
position.
Item 2. Properties
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The Company's principal office and manufacturing facility is owned by
the Company and located in Greenville, South Carolina. This facility contains
approximately 125,000 square feet and is located on a 13-acre site.
The Company produces foam mattress overlays for the medical and
consumer markets in a 40,000 square foot facility in Norwalk, California. The
lease rate is $16,500 per month and increases annually over the term of the
lease to $17,000 per month until the lease expires in December 2000.
The South Carolina and California facilities are considered suitable
and adequate for their intended purposes.
Item 3. Legal Proceedings
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From to time the Company is a party to various legal actions arising in
the normal course of business. However, management believes that as a result of
legal defenses and insurance arrangements with parties believed to be
financially capable, there are no proceedings threatened or pending against the
Company that, if determined adversely, would have a material adverse effect on
the business or financial position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
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No matters were submitted to a vote of security holders during the
fourth quarter of the Company's 1999 fiscal year.
PART II
Item 5. Market for the Registrant's Common Stock and Related Shareholder
Matters
The stock price information contained under "Quarterly Financial Data"
within the table and the information set forth below the table on page 5 of the
Company's 1999 Annual Report is incorporated herein by reference. In addition,
the information under "Stock Information" on page 24 of the Company's 1999
Annual Report is incorporated herein by reference.
In September 1994, the Board of Directors approved a resolution
changing their annual Director's compensation from cash to stock. The following
table sets forth information about unregistered shares of common stock issued to
the Company's non-employee Directors in lieu of annual cash compensation for
their service as Directors.
#Shares of Common Fair Market Value on Aggregate
Issue Date Stock Issued Issue Date ($ Per Share) Consideration
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02/08/95 7,000 $5.125 $35,875
03/25/96 6,000 6.375 38,250
01/03/97 5,000 4.250 21,250
02/03/97 4,000 5.000 20,000
01/15/98 8,000 6.875 55,000
01/28/99 8,000 5.000 40,000
The Company did not register the shares issued to non-employee
Directors in reliance on the exemption provided by Section 4(2) of the
Securities Act of 1933, as amended, which exempts stock issued outside of a
public offering from registration requirements.
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Item 6. Selected Financial Data
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The information contained in the "Selected Financial Information" on
page 4 of the Company's 1999 Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Financial Analysis
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Management's Discussion and Financial Analysis on pages 6 through 8 of
the Company's 1999 Annual Report are incorporated herein by reference.
Item 7a. Qualitative and Quantitative Disclosures About Market Risk
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The information contained in the section titled "Market Risk" on page 8
of the Company's 1999 Annual Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
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The financial statements of the Company included on pages 9 through 22
of the Company's 1999 Annual Report are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
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Financial Disclosure
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None.
PART III
Item 10. Directors and Executive Officers of the Registrant
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Item 11. Executive Compensation
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Item 12. Security Ownership of Certain Beneficial Owners and Management
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Item 13. Certain Relationships and Related Transactions
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Information required under Items 10, 11, 12 and 13 of Part III is
incorporated herein by reference to portions of the definitive Proxy Statement
filed or to be filed with the Securities and Exchange Commission on or prior to
120 days following the end of the Company's 1999 fiscal year under the headings
"Election of Directors," "Business Experience of Nominees and Directors,"
"Executive Officers," "Compensation of Directors and Executive Officers,"
"Certain Transactions," and "Security Ownership of Certain Beneficial Owners and
Management."
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PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
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(a) (1) and (2) Financial Statements and Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate
section of this report beginning on page F-1.
(3) Listing of Exhibits
3.1 Amendment to the Company's by-laws dated April 25, 1995:
Incorporated by reference to Exhibit 3(ii) to the Company's
quarterly report on Form 10-Q for the quarter ended July 1,
1995.
4.1 Specimen of Common Stock certificate: Incorporated by
reference to Exhibit 1 to the Form S-8 filed on January 8,
1990, Commission File No. 33-32896.
4.2 The Registrant hereby agrees to furnish to the Securities and
Exchange Commission upon request a copy of any instrument with
respect to long-term debt not being registered in a principal
amount less than 10% of the total assets of the Registrant on
a consolidated basis.
10.1 Patent Assignment and Royalty Agreement between Donald C.
Spann and the Company, with letter amendment thereto:
Incorporated by reference to Exhibit 10(c) to the Form S-18
filed on June 2, 1983, Commission File No. 2-832-74-A.
10.2.1 1987 Stock Option Plan: Incorporated by reference to Exhibit
10 to the Company's Annual Report on Form 10-K for the fiscal
year ended October 2, 1987, Commission File No. 0-11392.
10.2.2 Amendment No. 1 to the 1987 Stock Option Plan: Incorporated by
reference to Exhibit 10.2.2 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.
10.3 Employee Stock Ownership Plan - Summary Plan Description:
Incorporated by reference to Exhibit 10.6 to the Company's
Annual Report on Form 10-K for the fiscal year ended September
28, 1990, Commission File No. 0-11392.
10.4.1 1991 Stock Option Plan: Incorporated by reference to Exhibit
10.6 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.
10
10.4.2 Amendment No. 1 to the 1991 Stock Option Plan: Incorporated by
reference to Exhibit 10.4.2 to the 1998 10-K.
10.5 Retirement Agreement dated February 6, 1991 between the
Company and Donald C. Spann: Incorporated by reference to
Exhibit 10.7 to the 1991 10-K.
10.6 Contract between the Company and Healthflex, Inc. dated
February 28, 1992: Incorporated by reference to Exhibit 2.1 to
the Current Report on Form 8-K (the "February 28, 1992 Form
8-K") filed by the Company with the Commission on February
28, 1992.
10.7 Contract between the Company and BriGam, Inc. dated October
16, 1992 terminating a royalty agreement: Incorporated by
reference to Exhibit 10.10 to the Company's Annual Report on
Form 10-K for the fiscal year ended October 3, 1992,
Commission File No. 0-11392.
10.8 Voluntary Resignation Agreement dated July 30, 1993 between
the Company and Donald C. Spann: Incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended July 3, 1993.
10.9 Employment Agreement dated February 28, 1992 between the
Company and John W. Wilkinson: Incorporated by reference to
the February 28, 1992 Form 8-K.
10.10 Consulting Agreement dated August 1, 1994 between the Company
and John W. Wilkinson: Incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended July 2, 1994.
10.11 Agreement for Sale and Purchase of Assets By and Among
Span-America Medical Systems, Inc., Embracing Concepts, Inc.
and Edmund K. Maier dated February 6, 1996: Incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 30, 1996.
10.12 Resignation Agreement dated September 1, 1996 between the
Company and Charles B. Mitchell: Incorporated by reference to
Exhibit 10.12 to the Company's Annual Report on Form 10-K for
the fiscal year ended September 28, 1996 (the "1996 10-K"),
Commission File No. 0-11392.
10.13 License and Distribution Agreement dated October 22, 1996
between the Company and Pillowtex Corporation: Incorporated by
reference to Exhibit 10.13 to the 1996 10-K.
10.14.1 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.
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10.14.2 Amendment No. 1 to the 1997 Stock Option Plan: Incorporated by
reference to Exhibit 10.14.2 to the 1998 10-K.
10.15 1997 Long Term Incentive Stock Option Plan: Incorporated by
reference to Exhibit 10.15 to the 1997 10-K.
13.1 1999 Annual Report to Shareholders.
23.0 Consent of Ernst and Young LLP.
27.0 Financial Data Schedule (For SEC Use Only).
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
fourth quarter of the fiscal year ended October 2, 1999.
(c) Exhibits
The exhibits required by this section of Item 14 are attached
hereto or incorporated by reference.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a
separate section of this report beginning on page F-1.
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SIGNATURES
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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 17, 1999
- --------------------------
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
--------------------------- (Principal Executive Officer)
James D. Ferguson
/s/ Richard C. Coggins Chief Financial Officer and Director
--------------------------- (Principal Financial Officer)
Richard C. Coggins
/s/ Gwendolyn L. Randolph Controller
---------------------------
Gwendolyn L. Randolph
/s/ Roy W. Black Director
---------------------------
Roy W. Black
/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/ Douglas E. Kennemore Director
---------------------------
Douglas E. Kennemore, M.D.
/s/ J. Ernest Lathem Director
---------------------------
J. Ernest Lathem, M.D.
/s/ James M. Shoemaker, Jr. Director
---------------------------
James M. Shoemaker, Jr.
December 17, 1998
13
Exhibit 13.1
Span-America 1999 Annual Report
[GRAPHIC OF SPAN-AMERICA MEDICAL SYSTEMS, INC. APPEARS HERE]
ABOUT THE COMPANY
Span-America Medical Systems, Inc. manufactures and markets a
comprehensive selection of pressure management products for the medical market,
including Geo-Matt(R), PressureGuard(R), Span+Aids(R), and Isch-Dish(R)
products. The Company also supplies custom foam and packaging products to the
consumer and industrial markets. Span-America's stock is traded on The Nasdaq
Stock Market's National Market under the symbol SPAN.
FINANCIAL SUMMARY
(Amounts in thousands, except per share and percent data)
1999 1998 % Change
- -------------------------------------------------------------------------------------------------------------------
Net sales $ 23,063 $ 28,346 -19%
Operating (loss) income (166) 1,805 -109%
Income from continuing operations 132 1,412 -91%
Earnings per share from continuing operations:
Basic 0.05 0.48 -90%
Diluted 0.05 0.47 -89%
Return on net sales from continuing operations 0.6% 5.0%
Cash and securities 4,194 3,723 13%
Current assets 10,113 11,364 -11%
Total assets 17,679 19,412 -9%
Current liabilities 2,255 2,615 -14%
Shareholder's equity 14,180 15,696 -10%
Return on ending shareholders' equity 3.5% 10.0%
Number of shares outstanding
at fiscal year end 2,495 2,820 -12%
Book value per share 5.68 5.57 2%
TABLE OF CONTENTS
Letter to Shareholders................................................ 1
Selected Financial Information........................................ 4
Quarterly Financial Data.............................................. 5
Management's Discussion and Financial Analysis........................ 6
Balance Sheets........................................................ 9
Statements of Income.................................................. 10
Statements of Shareholders' Equity.................................... 11
Statements of Cash Flows.............................................. 12
Notes to Financial Statements......................................... 13
Report of Ernst & Young LLP, Independent Auditors..................... 22
Directors and Officers................................................ 23
Corporate Data........................................................ 24
Letter To Shareholders
[GRAPHIC]
Span-America's sales and earnings were down in fiscal 1999 as a result of lower
consumer sales and weakness in the medical market. Parts of the medical market,
particularly the long-term care segment, were paralyzed for the better part of
the year by Medicare cutbacks and the implementation of the prospective payment
system. We reduced our costs in response, but our earnings declined nonetheless
because of the lower sales volume. Although our sales and earnings were below
those of last year, our financial condition remains excellent. We are committed
to growing our business, and our entire team is focused on increasing the value
of Span-America.
Net sales in fiscal 1999 declined 19% to $23.1 million from $28.3
million last year. Income from continuing operations fell 91% to $132,000, or 5
cents per diluted share, compared with $1.4 million, or 47 cents per diluted
share, in fiscal 1998. In short, the lower sales volume during the year brought
our profitability to just above breakeven. Net income, which includes income
from discontinued operations, declined 68% to $498,000, or 19 cents per diluted
share, compared with $1.6 million, or 52 cents per diluted share, in fiscal
1998.
Medical Business
Performance in our medical business was disappointing during fiscal
1999, but we fared better than many of our direct competitors. As a result, we
have strengthened our competitive position in the medical market during the
year, and we intend to seize the opportunity to build on that strength in the
new year.
Medical sales for fiscal 1999 were down 7% to $14.9 million compared
with $16.1 million last year. Operating earnings for the medical segment dropped
to $938,000 in fiscal 1999 from $2.1 million in 1998. Medical earnings were down
because of the lower sales volume and because more overhead expenses were
allocated to the medical business unit to better represent its larger part of
our total business.
We have four major product groups in our medical business: seating,
positioners, overlays, and mattresses. The clear winners in 1999 were our
mattress products. Sales of the GeoMattress(R) and PressureGuard(R) therapeutic
replacement mattresses were up 8% for the year - a solid performance considering
the turmoil in much of the medical market during the year. However, the other
side of the coin is our overlay business. Sales of overlays were down 22% in
fiscal 1999 largely because overlay demand declines with the increased use of
therapeutic mattresses. We expect the trend of lower overlay sales and higher
mattress sales to continue over the next several years. In our other medical
product lines, positioner sales were down 2% for the year while seating sales
were up 4%.
One of the biggest stories for our medical business in fiscal 1999 was
the weakness in several areas of the health care market. Long-term care
providers have been under significant pressure for most of the year due to the
implementation of Medicare's prospective payment system (PPS). The transition to
PPS has been more difficult than most expected. Of the seven largest long-term
care companies in the U.S., two filed for bankruptcy earlier this year, and most
of the others have experienced dramatic declines in their market values. Other
sectors of the health care market have also been stressed by reimbursement cuts.
Acute care hospitals and home health care providers have also felt the
pinch of Medicare spending cuts driven by the Balanced Budget Act of 1997. When
the Act was first passed, the Congressional Budget Office estimated that
Medicare spending growth would be reduced by $115 billion over five years. Now
that many of the provisions have been implemented, some analysts estimate that
the overall impact of the changes could be $200 billion. The cuts seem to have
gone deeper than expected, which has had a negative impact on many of our
customers. However, it looks like the worst of the transition may be behind us.
In the last several months, we have seen some improvement in the
medical market as our customers have adapted to the new payment environment and
medical orders have picked up. Also, there is a reasonable chance that Congress
will pass a relief package for providers who have had the most severe impact of
the
SPAN-AMERICA MEDICAL SYSTEMS,INC. 1999 ANNUAL REPORT 1
[GRAPHIC]
Balanced Budget Act. Regardless of future action by Congress or Medicare, we
believe our products are well positioned to succeed in the health care market.
They meet a basic but important need. They are highly effective at preventing
and treating pressure ulcers, yet they are low in cost. We expect the need for
these products to increase as the population ages, and we intend to be an active
participant in that growth.
In spite of the challenging market environment, we had a number of
positive developments in the medical business. In March, we introduced our
newest mattress product, GeoMattress with Wings(R). Sales of the new product
have been brisk and have exceeded our expectations. Our PressureGuard Site
Select mattress was approved for reimbursement by Medicare, which should make it
more attractive in the home health care market. We also had much success in the
area of corporate accounts during the year. We signed a five-year extension to
our Best Value supply agreement with Allegiance. We were also named for the
first time as a Best Value supplier to Source Medical, Canada's largest medical
products distributor. In addition, we signed agreements to supply our products
to two key providers in the long-term care and home care markets. We believe
these accomplishments will add to medical sales in the future.
CUSTOM PRODUCTS BUSINESS
Our custom products business had a major impact on sales and earnings
in fiscal 1999. As we reported this time last year, we discontinued sales of two
consumer foam product lines because of competitive pricing pressure. As
expected, that development caused a steep drop in sales of custom products
during the year. Sales in this segment declined $4.1 million (33%) to $8.1
million in fiscal 1999 compared with $12.2 million in 1998. About three quarters
of the sales decline was due to the discontinued consumer foam products. The
rest occurred in our TerryFoam product line and was due simply to lower demand
for those products. Although it was a tough year for the custom products
business, we are pleased to report that we are making good progress in replacing
the lost sales volume.
Earlier in the year, we entered into a marketing and distribution
agreement with Louisville Bedding Company (LBC) to sell consumer foam products.
Louisville Bedding is one of the largest manufacturers and marketers of bedding
products in the U.S. They are excited about our product lines, and we are
excited about the marketing and distribution value they bring to this new
relationship. To give you an idea of LBC's initial success, if we exclude the
discontinued product lines from fiscal 1998, our consumer foam sales in fiscal
1999 grew by $1.0 million or 49%. We expect continued growth in fiscal 2000 as
we build on our relationship with Louisville Bedding. In addition to working
with consumer foam pads and pillows, LBC will help market our TerryFoam product
lines in the new year. We look forward to combining our strengths to grow the
consumer foam part of our custom products business.
The other part of our custom products business consists of
custom-engineered foam products used in a variety of industrial applications,
formerly called our industrial segment. Sales of this product line grew 4% in
fiscal 1999 to $4.3 million. We have approximately 200 customers in this
business, the largest of which are Fuji Photo Film, Frigidaire, Perception, and
Comfortaire. We have developed an excellent reputation in this niche as a
supplier of high-quality, precision-engineered products at competitive prices.
We look for continued growth from this product line in fiscal 2000.
FINANCIAL CONDITION
In spite of our sales and earnings difficulties in fiscal 1999, we
maintained superior financial condition throughout the year. We ended the year
with cash and securities of $4.2 million and no debt of any kind. We reduced our
accounts receivable levels in tandem with lower sales levels which improved cash
flow. Also during the year, we repurchased and retired 364,600 shares (13%) of
our common stock for a total investment of $1.9 million. Combining that with our
dividend of $260,100, we returned almost
2 SPAN-AMERICA MEDICAL SYSTEMS,INC. 1999 ANNUAL REPORT
[GRAPHIC]
$2.2 million to shareholders during the year. We finished the year with a strong
equity capital base of $14.2 million, representing a book value of $5.68 per
share. In our markets, a strong financial condition is a significant competitive
advantage. Our challenge is to wisely use these resources to help the Company
grow and increase in value.
LOOKING FORWARD
Our future plans involve specific operating goals in the near term and
strategic initiatives for the longer term. Our top short-term priorities are to
achieve meaningful sales growth in both of our business units and to return the
Company to an attractive level of profitability. We have developed a detailed
business plan which will provide a good roadmap to help achieve those goals. As
always though, the key to success will be in executing the plan.
Over the longer term, our core business and primary focus will continue
in the medical market. Span-America's medical products are currently centered on
the pressure management part of the medical market. Our slice of this market is
growing and will continue to do so with an aging population. We will continue to
develop new products for our core business with an eye always toward creating a
break-through product in addition to generating a stream of fresh and innovative
product line extensions. However, we must also look for creative ways to grow
beyond our existing boundaries by providing products or services to other
related segments of the medical market. We began that task in earnest this year
as we looked for acquisitions, alliances, or licensing arrangements that could
add value to Span-America. Although we have not yet found the right fit at the
right price, we will continue our search for growth opportunities.
Our focus on the medical market will be primary but not exclusive. We
will also pursue profitable applications of our product technologies in other
markets. This is the essence of the mission for our custom products business. As
a designer and manufacturer of medical products, we have developed many core
capabilities which can be easily transferred to other markets. We will look for
opportunities to use these competencies to add value to Span-America.
The common threads running through these goals are growth and
profitability. We will pursue these objectives relentlessly. Thank you for your
investment and continued interest in Span-America. We look forward to reporting
our progress in fiscal 2000.
Sincerely,
/s/James D. Ferguson /s/Thomas D. Henrion
James D. Ferguson Thomas D. Henrion
President and CEO Chairman
SPAN-AMERICA MEDICAL SYSTEMS,INC. 1999 ANNUAL REPORT 3
Selected Financial Information
[GRAPHIC]
Five-Year Financial Summary
(Amounts in thousands, except per share, percent, and employee data)
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
For the year:
Net sales $ 23,063 $ 28,346 $ 27,695 $ 24,820 $ 24,088
Gross profit 6,344 8,499 8,428 7,394 7,649
Operating (loss) income (166) 1,805 1,833 164 856
Income from continuing operations 132 1,412 1,370 283 739
Cash flow from operations 2,202 364 4,669 (514) 1,551
Capital expenditures from
continuing operations 171 562 511 398 177
Per share:
Income from continuing operations:
Basic $ 0.05 $ 0.48 $ 0.43 $ 0.09 $ 0.23
Diluted 0.05 0.47 0.43 0.09 0.23
Cash dividends declared 0.10 0.10 0.10 0.10 0.10
At end of year:
Working capital $ 7,858 $ 8,749 $ 9,393 $ 8,180 $ 8,541
Property and equipment - net 3,460 3,822 3,773 3,669 3,801
Total assets 17,679 19,412 22,626 21,081 20,614
Long-term debt - - - - 286
Shareholders' equity 14,180 15,696 16,980 16,019 15,435
Book value per share 5.68 5.57 5.43 4.94 4.86
Number of employees -
continuing operations 174 201 187 175 172
Key ratios:
Current ratio 4.5 4.3 3.3 3.4 3.8
Return on net sales (1) 0.6% 5.0% 4.9% 1.1% 3.1%
Return on ending shareholders' equity 3.5% 10.0% 9.5% 3.4% 6.3%
Return on average total assets 2.7% 7.4% 7.4% 2.6% 4.8%
(1) Calculated using income from continuing operations.
DILUTED EARNINGS
INCOME FROM PER SHARE FROM
NET SALES CONTINUING OPERATIONS CONTINUING OPERATIONS
Dollars in Millions Dollars in Thousands Cents Per Share
1995 - $ 24.1 1995 - $ 739 1995 - $ .23
1996 - $ 24.8 1996 - $ 283 1996 - $ .09
1997 - $ 27.7 1997 - $ 1,370 1997 - $ .43
1998 - $ 28.3 1998 - $ 1,412 1998 - $ .47
1999 - $ 23.1 1999 - $ 132 1999 - $ .05
4 SPAN-AMERICA MEDICAL SYSTEMS,INC. 1999 ANNUAL REPORT
Quarterly Financial Data
[GRAPHIC]
Quarterly Financial Data
(Unaudited)
(Amounts in thousands, except per share data)
First Second Third Fourth Year
- -------------------------------------------------------------------------------------------------------------------
For Fiscal 1999
Net sales $ 5,176 $ 6,500 $ 5,620 $ 5,767 $ 23,063
Operating (loss) income (17) (36) (154) 41 (166)
Income (loss) from continuing operations 48 31 (52) 105 132
Income from discontinued operations,
net of income taxes - - 365 - 365
Net income 48 31 314 105 498
Earnings per share
Basic 0.02 0.01 0.13 0.04 0.19
Diluted 0.02 0.01 0.13 0.04 0.19
Stock price data
High 6.50 5.75 4.56 4.38 6.50
Low 4.63 4.13 3.63 3.38 3.38
For Fiscal 1998*
Net sales $ 6,354 $ 7,379 $ 7,397 $ 7,216 $ 28,346
Operating income 314 692 579 220 1,805
Income from continuing operations 271 496 431 214 1,412
Income from discontinued operations,
net of income taxes 141 13 - - 154
Net income 412 509 431 214 1,566
Earnings per share
Basic 0.13 0.17 0.15 0.08 0.53
Diluted 0.13 0.16 0.15 0.07 0.52
Stock price data
High 8.25 8.13 9.00 8.13 9.00
Low 6.13 6.88 7.19 5.13 5.13
* As restated for the sale of the contract packaging business unit. See Note 2
in Notes to Financial Statements.
The Company's common stock trades on the Nasdaq National Market tier of the
Nasdaq Stock Market under the symbol SPAN. At October 2, 1999, there were
2,495,400 common shares outstanding. As of December 1, 1999, there were
approximately 337 shareholders of record and approximately 885 beneficial
shareholders. The closing price of Span-America's stock on December 1, 1999, was
$3 3/8. In November 1991, the Board of Directors authorized a quarterly cash
dividend of $.025 per share. Future dividend payments will depend upon the
Company's earnings and liquidity position.
RETURN ON ENDING
WORKING CAPITAL BOOK VALUE PER SHARE SHAREHOLDERS' EQUITY
Dollars in Thousands Dollars Percent
1995 - $ 8,541 1995 - $ 4.86 1995 - 6.3%
1996 - $ 8,180 1996 - $ 4.94 1996 - 3.4%
1997 - $ 9,393 1997 - $ 5.43 1997 - 9.5%
1998 - $ 8,749 1998 - $ 5.57 1998 - 10.0%
1999 - $ 7,858 1999 - $ 5.68 1999 - 3.5%
SPAN-AMERICA MEDICAL SYSTEMS,INC. 1999 ANNUAL REPORT 5
Management's Discussion And Financial Analysis
[GRAPHIC]
RESULTS OF OPERATIONS FISCAL 1999 VS. 1998
SUMMARY
Net sales in fiscal 1999 declined 19% to $23.1 million compared with
$28.3 million in fiscal 1998. The primary reason for the decrease in revenues
was the discontinuance of two lines of consumer foam mattress pads in the custom
products business unit last year. This decline was compounded by a weakness in
the medical market as a result of Medicare cutbacks and the implementation of
the prospective payment system for long-term care providers.
Net income for 1999, which includes the gain on discontinued operations
discussed below, decreased 68% to $498,000 or $0.19 per diluted share compared
with $1.6 million or $0.52 per diluted share in 1998. Income from continuing
operations for fiscal 1999 fell 91% to $132,000 or $0.05 per diluted share,
compared with earnings of $1.4 million, or $0.47 per diluted share, in fiscal
1998. The Company's lower earnings were due primarily to lower sales volume.
On February 27, 1998, the Company sold substantially all of the assets
of its contract packaging business unit. The purchase price for the contract
packaging assets was $2.3 million, with $1.84 million paid in cash at closing
and the remainder financed by Span-America over five years. No gain or loss was
recorded at the time of the sale due to the uncertainty of collectibility of the
amount financed. The Company's earnings for the year ended October 2, 1999,
include a one-time gain of $365,270, net of income taxes, or $0.14 per diluted
share related to this sale. The purchasers of the business unit chose an early
payment option on an outstanding warrant and note due to the Company. Because
the Company assigned no value to the amount of the note and warrant at closing,
the early payment resulted in a one-time gain. The gain, net of taxes, is shown
as income from discontinued operations.
During the first quarter of fiscal 1999 the Company closed its consumer
foam plant and consolidated those operations into the Company's primary
manufacturing plant in Greenville, SC. As a result of this change, the Company
will now report on two business segments: medical and custom products. The
custom products segment includes those products formerly reported in the
consumer and industrial business segments.
SALES
The Company's medical sales decreased by 7% during fiscal 1999 to $14.9
million compared with $16.1 million in fiscal 1998. The decrease was the result
of lower sales volume of overlays which was partially offset by an 8% increase
in mattress sales compared with the prior year. Management expects that medical
sales will increase during fiscal 2000.
Custom product sales decreased 33% during fiscal 1999 to $8.1 million
from $12.2 million in fiscal 1998 primarily as a result of the Company's
decision to discontinue two lines of low-margin mattress pads. Approximately 20%
of the decline occurred in the TerryFoam product line and was due to lower
demand for these products. The weakness in consumer product sales was somewhat
offset by higher unit sales of industrial products, which grew 4% to $4.3
million in fiscal 1999 compared with the same period in 1998. The growth in
industrial sales was the result of new customers and continued healthy demand
from existing customers. Management believes that custom product sales in fiscal
2000 will be higher than those of fiscal 1999.
GROSS PROFIT
The Company's gross profit decreased by 25% to $6.3 million during
fiscal 1999 from $8.5 million in fiscal 1998. The gross profit margin percentage
declined to 27.5% for fiscal 1999 compared with 30.0% for fiscal 1998. The
decline in gross profit level and gross margin percentage resulted mainly from
lower sales volume during the year and, to a lesser extent, higher manufacturing
costs in early fiscal 1999 associated with closing and consolidating the
consumer foam plant. Management expects the gross margin percentage during
fiscal 2000 to increase compared with fiscal 1999.
S G & A EXPENSES
Sales and marketing expenses decreased 3% to $4.3 million, or 18.5% of
sales, in fiscal 1999 compared with $4.4 million, or 15.5% of sales, in fiscal
1998. The decline was due to lower selling expenses in the custom products
segment partially offset by higher selling expenses in the medical segment.
Management expects that total sales and marketing expenses in fiscal 2000 will
be higher than 1999 levels.
General and administrative expenses declined 2% to $2.2 million in
fiscal 1999. General and administrative expenses for 2000 are expected to be
similar to 1999 levels.
6 SPAN-AMERICA MEDICAL SYSTEMS,INC. 1999 ANNUAL REPORT
[GRAPHIC]
OTHER
Non-operating income decreased by 14% to $352,000 in fiscal 1999
compared with $410,000 in fiscal 1998. The majority of the decrease was due to
lower interest income on marketable securities. Management expects non-operating
income in fiscal 2000 to be similar to that of fiscal 1999.
During fiscal 1999, the Company paid dividends of $260,100, or 52% of
net income, for the year. This amount represented four quarterly dividends of
$0.025 per share.
The statements contained in "Results of Operations" and "Liquidity and
Capital Resources" which are not historical facts are forward-looking statements
that involve risks and uncertainties. Management wishes to caution the reader
that these forward-looking statements such as the Company's expectations for
future sales increases or expense changes compared with previous periods are
only predictions. Actual events or results may differ materially as a result of
risks and uncertainties facing the Company, including (a) the loss of a major
distributor of the company's medical or custom products, (b) the inability to
achieve anticipated sales volumes of medical or custom products, (c) changes in
relationships with large customers, (d) the impact of competitive products and
pricing, (e) government reimbursement changes in the medical market, (f) FDA
regulation of medical device manufacturing, (g) raw material cost increases,
and other risks referenced in the Company's Securities and Exchange Commission
filings. The Company disclaims any obligation to update any forward-looking
statement whether as a result of new information, future events or otherwise.
RESULTS OF OPERATIONS FISCAL 1998 VS. 1997
SUMMARY
Net sales increased 2% to $28.3 million in fiscal 1998 compared with
$27.7 million in fiscal 1997. This increase in revenues resulted from growth in
the medical segment which more than offset declines in the custom products
business unit. Income from continuing operations for fiscal 1998 rose 3% to
$1.41 million, or $0.47 per diluted share, compared with earnings of $1.37
million, or $0.43 per diluted share, in fiscal 1997. The Company's improved
earnings were due to higher sales volume, slightly lower administrative
expenses, and higher investment income.
SALES
The Company's medical sales increased by 6% during fiscal 1998 to $16.1
million compared with $15.3 million in fiscal 1997. The increase was the result
of higher volumes of the Company's foam mattresses, patient positioners, and
seating products.
Custom products sales decreased 2% during fiscal 1998 to $12.2 million
from $12.4 million in fiscal 1997. The decrease was due to lower sales volume of
private label bath mats and lower sales prices of consumer mattress pads. Sales
of industrial products increased 23% during fiscal 1998, but the increase was
not enough to offset the decline in consumer product sales.
GROSS PROFIT
The Company's gross profit increased by 1% to $8.5 million during
fiscal 1998 from $8.4 million in fiscal 1997. The gross profit margin percentage
remained at 30.0% in both years.
S G & A EXPENSES
Sales and marketing expenses increased 3% to $4.4 million, or 15.5% of
sales, in fiscal 1998 compared with $4.3 million, or 15.5% of sales, in fiscal
1997. The increases occurred in shipping, compensation, and training expenses.
General and administrative expenses declined by 1% to $2.3 million in
fiscal 1998.
OTHER
Non-operating income increased by 15% to $410,000 in fiscal 1998
compared with $358,000 in fiscal 1997. The majority of the increase was due to
higher interest income on marketable securities. During fiscal 1998, the Company
paid dividends of $297,254, or 19% of net income for the year. This amount
represented four quarterly dividends of $0.025 per share.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash from continuing operations of approximately
$2.2 million during fiscal 1999. The Company's working capital decreased by
$891,000 or 10% to $7.9 million during fiscal 1999 as a result of the repurchase
of stock as discussed below. The Company's current ratio increased to 4.5 at
October 2, 1999, from 4.3 at fiscal year end 1998.
SPAN-AMERICA MEDICAL SYSTEMS,INC. 1999 ANNUAL REPORT 7
[GRAPHIC]
Accounts receivable, net of allowances, decreased 27% to $3.5 million
at the end of fiscal 1999 compared with $4.8 million at the end of fiscal 1998.
The change was the result of lower sales levels and the collection in early
fiscal 1999 of a delinquent account from fiscal 1998. All of the Company's
accounts receivable are unsecured.
Inventory, net of reserves, increased 3% to $2.2 million at October 2,
1999, compared with $2.1 million at October 3, 1998. Management expects
inventory levels in fiscal 2000 to be similar to those of fiscal year 1999.
Net property and equipment decreased by 361,000, or 9%, during fiscal
1999. The change resulted primarily from normal depreciation expense. Management
expects capital expenditures during fiscal 2000 to be higher than those of
fiscal 1999.
The Company's trade accounts payable decreased by $270,000 (17%) to
$1.3 million from $1.5 million during fiscal 1999. The decrease was due to lower
purchases and normal monthly fluctuations in accounts payable balances. Accrued
and sundry liabilities decreased by $90,000 (8%) to $976,000 compared with $1.1
million at fiscal year end 1998. Most of the decline was due to lower income tax
payable.
In various transactions during fiscal year 1999, the Company
repurchased 364,629 shares (13%) of its common stock for approximately $1.9
million ($4.125 to $6.06 per share) in private transactions from unaffiliated
sellers. The repurchased shares were retired.
Management believes that funds on hand, funds generated from
operations, and funds available under the Company's $2.5 million unused line of
credit are adequate to finance operations and expected capital requirements
during fiscal 2000.
IMPACT OF INFLATION
Inflation was not a significant factor for the Company during fiscal
1999. Higher inflation rates could impact the Company through higher raw
material and labor costs. The Company's profit margin could be adversely
affected to the extent that the Company is unable to pass cost increases along
to its customers due to competitive conditions.
MARKET RISK
The Company's market risk exposure is the potential loss arising from
changes in interest rates and its impact on investments. As of October 2, 1999,
the Company held $3.2 million in short-term investments available for sale with
acquired maturities of less than 180 days. Short-term investments consist
primarily of high quality and highly liquid corporate commercial paper and
municipal bonds. A substantial change in overall interest rates would not have a
material effect on the financial position of the Company.
In addition, the Company's other assets at October 2, 1999, include
$1.3 million in cash value of life insurance, which is subject to market risk
related to equity pricing and interest rate changes. Management believes 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 the financial position of the Company.
YEAR 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in system failures or miscalculations causing
disruptions in operations, including, among other things a temporary inability
to process transactions, send invoices or engage in similar normal business
activities.
The Company has fully completed its assessment and remediation of all
significant information technology systems that could be affected by the year
2000. The Company has completed testing of these changes and has implemented all
changes. Based on a review of its product lines, the Company has determined that
the products it has sold and will continue to sell do not require modification
to be Year 2000 compliant.
The Company has not incurred substantive Year 2000 costs and does not
anticipate any substantive Year 2000 costs in the future.
The Company has been in contact with suppliers and major customers to
confirm that they are or will be Year 2000 compliant. The Company does not
directly interface with any significant third party vendors. To date, the
Company is not aware of any external agent with a Year 2000 issue that would
materially impact the Company's results of operations, liquidity or capital
resources. However, the Company has no means of ensuring that external agents
will be Year 2000 ready. The inability of external agents to complete their Year
2000 resolution process in a timely fashion could materially impact the Company.
The effect of non-compliance by external agents is not determinable.
Management of the Company believes it has resolved its material Year
2000 issues. In the event that unexpected Year 2000 issues arise, the Company
has contingency plans for certain critical applications. These contingency plans
involve, among other actions, manual workarounds, increasing inventories and
adjusting staffing strategies.
8 SPAN-AMERICA MEDICAL SYSTEMS,INC. 1999 ANNUAL REPORT
BALANCE SHEETS
[GRAPHIC]
October 2, October 3,
1999 1998
-----------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,029,586 $ 1,121,437
Securities available for sale (Note 4) 3,163,979 2,602,056
Accounts receivable, net of allowances of
$414,000 (1999) and $429,000 (1998) 3,494,836 4,809,352
Inventories (Note 5) 2,186,436 2,117,994
Prepaid expenses and deferred income taxes 237,866 312,929
Income tax refund due 400,000
-----------------------------------
Total current assets 10,112,703 11,363,768
Property and equipment, net (Note 6) 3,460,305 3,821,735
Cost in excess of fair value of net assets acquired,
net of accumulated amortization
of $732,919 (1999) and $585,496 (1998) 2,218,977 2,366,400
Other assets (Note 7) 1,886,608 1,860,417
-----------------------------------
$ 17,678,593 $ 19,412,320
-----------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,279,167 $ 1,549,232
Accrued and sundry liabilities (Note 8) 976,029 1,065,999
-----------------------------------
Total current liabilities 2,255,196 2,615,231
Deferred income taxes (Note 12) 190,000 33,000
Deferred compensation (Note 10) 1,053,180 1,067,681
Shareholders' equity (Note 11)
Common stock, no par value, 20,000,000 shares
authorized; issued and outstanding shares
2,495,400 (1999) and 2,820,029 (1998) 1,426,079
Additional paid-in capital 67,463
Retained earnings 14,180,217 14,202,866
-----------------------------------
Total shareholders' equity 14,180,217 15,696,408
Contingencies (Note 18)
$ 17,678,593 $ 19,412,320
-----------------------------------
See accompanying notes.
SPAN-AMERICA MEDICAL SYSTEMS,INC. 1999 ANNUAL REPORT 9
STATEMENTS OF INCOME
[GRAPHIC]
Years Ended
- -------------------------------------------------------------------------------------------------------------------
October 2, October 3, September 27,
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Net sales $ 23,062,941 $ 28,345,819 $ 27,695,397
Cost of goods sold 16,718,567 19,847,035 19,267,151
---------------------------------------------------------------
Gross profit 6,344,374 8,498,784 8,428,246
Selling and marketing expenses 4,271,180 4,405,339 4,291,179
General and administrative expenses 2,239,519 2,288,723 2,303,747
---------------------------------------------------------------
6,510,699 6,694,062 6,594,926
---------------------------------------------------------------
Operating (loss) income (166,325) 1,804,722 1,833,320
Investment income and other 351,684 410,264 357,901
---------------------------------------------------------------
Income before income taxes
and discontinued operations 185,359 2,214,986 2,191,221
Provision for income taxes (Note 12) 53,000 803,000 821,000
---------------------------------------------------------------
Income from continuing operations 132,359 1,411,986 1,370,221
Income from discontinued operations,
net of income taxes of $201,000 (1999),
$91,000 (1998) and $146,000 (1997) (Note 2) 365,270 153,530 241,695
---------------------------------------------------------------
Net income $ 497,629 $ 1,565,516 $ 1,611,916
---------------------------------------------------------------
Earnings per share of common stock (Note 3)
Income from continuing operations:
Basic $ 0.05 $ 0.48 $ 0.43
Diluted $ 0.05 $ 0.47 $ 0.43
Income from discontinued operations,
net of income taxes:
Basic $ 0.14 $ 0.05 $ 0.08
Diluted $ 0.14 $ 0.05 $ 0.07
---------------------------------------------------------------
Net income:
Basic $ 0.19 $ 0.53 $ 0.51
Diluted $ 0.19 $ 0.52 $ 0.50
---------------------------------------------------------------
Dividends per common share $ 0.10 $ 0.10 $ 0.10
Weighted average shares outstanding:
Basic 2,580,986 2,931,362 3,188,397
Diluted 2,601,429 3,038,350 3,223,927
See accompanying notes.
10 SPAN-AMERICA MEDICAL SYSTEMS,INC. 1999 ANNUAL REPORT
STATEMENTS OF SHAREHOLDERS' EQUITY
[GRAPHIC]
Common Stock Additional Guaranteed
--------------------- Paid-in Retained ESOP
Shares Amount Capital Earnings Obligation Total
- -------------------------------------------------------------------------------------------------------------------
Balance at September 28, 1996 3,241,042 $ 4,516,895 $ 145,834 $ 11,642,930 $ (286,344)$ 16,019,315
Net income for the 1997 fiscal year 1,611,916 1,611,916
ESOP termination (42,875) (193,670) (92,674) 286,344 -
Common stock purchased and retired (113,303) (542,343) (542,343)
Common stock issued to Directors 9,000 41,250 41,250
Common stock issued based on Healthflex
acquisition agreement 31,474 169,613 169,613
Cash dividends paid or declared -
($.10 per share) (320,242) (320,242)
------------------------------------------------------------------------
Balance at September 28, 1997 3,125,338 3,991,745 53,160 12,934,604 - 16,979,509
Net income for the 1998 fiscal year 1,565,516 1,565,516
Common stock purchased and retired (361,309) (2,797,416) (2,797,416)
Common stock issued to Directors 8,000 55,000 55,000
Common stock issued on exercise of
stock options 48,000 176,750 176,750
Tax benefits for stock options exercised 14,303 14,303
Cash dividends paid or declared
($.10 per share) (297,254) (297,254)
------------------------------------------------------------------------
Balance at October 3, 1998 2,820,029 1,426,079 67,463 14,202,866 - 15,696,408
Net income for the 1999 fiscal year 497,629 497,629
Common stock purchased and retired (364,629) (1,604,329) (67,463) (260,142) (1,931,934)
Common stock issued to Directors 8,000 40,000 40,000
Common stock issued on
exercise of stock options 32,000 138,250 138,250
Cash dividends paid or declared
($.10 per share) (260,136) (260,136)
------------------------------------------------------------------------
Balance at October 2, 1999 2,495,400 - - $ 14,180,217 - $ 14,180,217
------------------------------------------------------------------------
See accompanying notes.
SPAN-AMERICA MEDICAL SYSTEMS,INC. 1999 ANNUAL REPORT 11
STATEMENTS OF CASH FLOWS
[GRAPHIC]
Years Ended
- -------------------------------------------------------------------------------------------------------------------
October 2, October 3, September 27,
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Operating activities:
Net income $ 497,629 $ 1,565,516 $ 1,611,916
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 532,394 641,504 767,925
Amortization 253,891 252,676 311,267
Gain on disposal of business (365,270)
Provision for losses on accounts receivable 134,000 217,000
Provision for deferred income taxes 233,000 (257,000) (247,000)
Gains on sale and disposal of property,
plant and equipment (40,463)
Increase in cash value of life insurance (124,136) (105,044) (4,954)
Deferred compensation (14,501) (6,717) (82,884)
Changes in operating assets and liabilities:
Accounts receivable 1,198,593 108,796 716,834
Inventory (68,442) (123) 387,308
Prepaid expenses and other assets (75,815) 134,337 (5,225)
Income tax refund due 400,000 (400,000)
Accounts payable and accrued expenses (399,035) (1,569,873) 1,037,753
----------------------------------------------------------------
Net cash provided by operating activities 2,202,308 364,072 4,669,477
Investing activities:
Sale of contract packaging business 566,270 1,842,300
Purchases of marketable securities (1,710,000) (3,577,696) (4,241,072)
Proceeds from sales of marketable securities 1,130,000 4,465,382 1,962,226
Purchases of property, plant and equipment (170,964) (625,502) (554,935)
Proceeds from sale of property, plant,
and equipment 45,000
Payments for other assets (55,645) (34,673) (51,663)
----------------------------------------------------------------
Net cash (used for) provided by investing activities (240,339) 2,069,811 (2,840,444)
Financing activities:
Dividends paid (260,136) (297,254) (320,242)
Purchase and retirement of common stock (1,931,934) (2,797,416) (542,343)
ESOP termination (286,344)
Common stock issued upon exercise of options 138,250 176,750
----------------------------------------------------------------
Net cash used for financing activities (2,053,820) (2,917,920) (1,148,929)
----------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (91,851) (484,037) 680,104
Cash and cash equivalents at beginning of year 1,121,437 1,605,474 925,370
----------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,029,586 $ 1,121,437 $ 1,605,474
----------------------------------------------------------------
See accompanying notes.
12 SPAN-AMERICA MEDICAL SYSTEMS,INC. 1999 ANNUAL REPORT
NOTES TO FINANCIAL STATEMENTS
[GRAPHIC]
NOTES TO FINANCIAL STATEMENTS
OCTOBER 2, 1999
1.SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company manufactures and distributes replacement mattresses,
mattress overlays, patient positioners and seating cushions for the medical
market and pillows, cushions, mattress pads and various foam products for the
custom products market throughout the United States and Canada. Accounts
receivable potentially expose the Company to concentration of credit risk, as
defined by Statement of Financial Accounting Standard No. 105, "Disclosure of
Information about Financial Instruments with Off-Balance Sheet Risk and
Financial Instruments with Concentration of Credit Risk." The Company provides
credit in the normal course of business and performs ongoing credit evaluations
on certain of its customers' financial condition, but generally does not require
collateral to support such receivables. The Company also establishes an
allowance for doubtful accounts based upon factors surrounding the credit risk
of specific customers, historical trends and other information.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out
method) or market.
DEPRECIATION
Depreciation is computed using the straight-line method. Estimated
useful lives for buildings and land improvements range from 15 to 35 years. The
estimated useful lives of all other property and equipment range from 3 years to
15 years. For income tax purposes, principally all depreciation is computed
using accelerated methods.
INTANGIBLES
Intangible assets are amortized using the straight-line method. Costs
of patents are amortized over periods ranging from 10 to 17 years, and
trademarks are amortized over periods of 5 or 10 years. Costs in excess of the
fair value of net assets acquired are amortized over 30-year and 10-year
periods. Accumulated amortization of intangible assets at October 2, 1999 and
October 3, 1998 was approximately $1,526,000 and $1,272,000, respectively. The
Company continually reviews the recoverability of the carrying value of these
assets in accordance with Statement of Financial Accounting Standard No. 121
"Accounting for the Impairment of Long-Lived Assets and for Assets to be
Disposed Of" ("SFAS 121"). The Company also reviews 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.
REVENUE RECOGNITION
Revenue is recognized by the Company when goods are shipped and title
passes to the customer.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash and cash
equivalents, accounts receivable, cash value of life insurance, securities
available for sale, accounts payable, and debt approximate their fair values.
The fair values of the Company's securities available for sale are based on
quoted market prices, where available, or quoted market prices of financial
instruments with similar characteristics.
EARNINGS PER COMMON SHARE
Earnings per common share are computed based on the weighted average
number of shares outstanding during each period in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share."
FISCAL YEAR
The Company's fiscal year ends on the Saturday nearest to September 30.
The 1999, 1998 and 1997 fiscal years were 52, 53 and 52-week years,
respectively.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The Company
maintains a centralized cash management program whereby its excess cash balances
are invested in commercial paper and are considered cash equivalents. At times,
cash balances in the Company's accounts may exceed federally insured limits.
SPAN-AMERICA MEDICAL SYSTEMS,INC. 1999 ANNUAL REPORT 13
[GRAPHIC]
1.SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
In accordance with SFAS No. 109, the liability method is used in
accounting for income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities, and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Although these estimates are based on management's knowledge
of current events and actions it may undertake in the future, they may
ultimately differ from actual results.
RECENT PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." This standard
establishes accounting and reporting standards for all derivatives, including
those imbedded in other contracts and hedging activities. The Financial
Accounting Standards Board subsequently issued SFAS 137 "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement 133." This statement delayed the effective date of SFAS 133
for one year effective for fiscal years beginning after June 15, 2000.
Management anticipates that adoption of this standard will have no material
effect on the Company's financial condition or results of operations.
2. SALE OF CONTRACT PACKAGING BUSINESS UNIT
On February 27, 1998, the Company sold substantially all of the assets
of its contract packaging business unit. The purchase price for the contract
packaging assets was $2.3 million, with $1.84 million paid in cash at closing
and the remainder financed by Span-America over five years. No gain or loss was
recorded at the time of the sale due to the uncertainty of collectibility of the
amount financed.
The Company's earnings for the year ended October 2, 1999, include a
one-time gain of $365,270, net of income taxes, or $0.14 per diluted share
related to this sale. The purchasers of the business unit chose an early payment
option on an outstanding warrant and note due to the Company. Because the
Company assigned no value to the amount of the note and warrant at closing, the
early payment resulted in a one-time gain. The gain, net of taxes, is shown as
income from discontinued operations.
Operating results of the discontinued contract packaging operations are
as follows:
1999 1998 1997
- -----------------------------------------------------------------------------
Net sales - $3,170,055 $6,420,292
Income before income taxes - 244,530 387,695
Gain on sale of business unit $566,270 - -
Provision for income taxes 201,000 91,000 146,000
- -----------------------------------------------------------------------------
Income from discontinued
operations $365,270 $153,530 $241,695
- -----------------------------------------------------------------------------
14 SPAN-AMERICA MEDICAL SYSTEMS,INC. 1999 ANNUAL REPORT
[GRAPHIC]
3. EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings per share in accordance with SFAS 128, "Earnings Per Share."
1999 1998 1997
- --------------------------------------------------------------------------------
Numerator for basic and diluted
earnings per share:
Income from
continuing operations $ 132,359 $1,411,986 $1,370,221
Income from discontinued
operations, net of income taxes 365,270 153,530 241,695
- --------------------------------------------------------------------------------
Net income $ 497,629 $1,565,516 $1,611,916
- --------------------------------------------------------------------------------
Denominator:
Denominator for
basic earnings
per share weighted average shares 2,580,986 2,931,362 3,188,397
Effect of dilutive securities:
Employee and board stock options 20,443 106,988 35,530
- --------------------------------------------------------------------------------
Denominator
for diluted earnings per share:
Adjusted weighted average shares
and assumed conversions 2,601,429 3,038,350 3,223,927
- --------------------------------------------------------------------------------
Income per share from continuing
operations:
Basic $0.05 $0.48 $0.43
Diluted $0.05 $0.47 $0.43
Income per share from discontinued
operations, net of income
taxes:
Basic $0.14 $0.05 $0.08
Diluted $0.14 $0.05 $0.07
- --------------------------------------------------------------------------------
Net income:
Basic $0.19 $0.53 $0.51
Diluted $0.19 $0.52 $0.50
- --------------------------------------------------------------------------------
SPAN-AMERICA MEDICAL SYSTEMS,INC. 1999 ANNUAL REPORT 15
[GRAPHIC]
4. SECURITIES AVAILABLE FOR SALE
Securities available for sale are carried at the lower of aggregate
cost which approximates market. The Company had no unrealized holding gains or
losses during fiscal years 1999, 1998 or 1997.
The components of securities available for sale are as follows:
1999 1998
------------------------------------------------------------------------------------
Commercial paper variable rate demand notes $3,163,979 $2,095,611
Municipal bonds - 506,445
------------------------------------------------------------------------------------
$3,163,979 $2,602,056
------------------------------------------------------------------------------------
5. INVENTORIES
The components of inventories are as follows:
1999 1998
------------------------------------------------------------------------------------
Raw materials $1,440,327 $1,568,262
Finished goods 746,109 549,732
------------------------------------------------------------------------------------
$2,186,436 $2,117,994
------------------------------------------------------------------------------------
6. PROPERTY AND EQUIPMENT
Property and equipment, at cost, is summarized by major classification as follows:
1999 1998
------------------------------------------------------------------------------------
Land $ 317,343 $ 317,343
Land improvements 240,016 240,016
Buildings 3,700,111 3,642,151
Machinery and equipment 5,351,931 5,242,846
Furniture and fixtures 517,552 517,552
Vehicles 9,520 9,520
Leasehold improvements 66,006 66,006
------------------------------------------------------------------------------------
10,202,479 10,035,434
Less accumulated depreciation 6,742,174 6,213,699
------------------------------------------------------------------------------------
$ 3,460,305 $ 3,821,735
------------------------------------------------------------------------------------
7. OTHER ASSETS
Other assets consist of the following:
1999 1998
------------------------------------------------------------------------------------
Patents and trademarks, net of accumulated
amortization of $793,223 in 1999 and
$686,755 in 1998 $ 491,871 $ 542,695
Cash value of life insurance 1,347,627 1,223,491
Other 47,110 94,231
------------------------------------------------------------------------------------
$1,886,608 $1,860,417
------------------------------------------------------------------------------------
8. ACCRUED AND SUNDRY LIABILITIES
Accrued and sundry liabilities consist of the following:
1999 1998
------------------------------------------------------------------------------------
Salaries and other compensation $ 391,139 $ 405,045
Federal and state income taxes - 108,457
Payroll taxes accrued and withheld 78,056 76,502
Property taxes 99,002 121,858
Medical insurance 79,572 23,402
Warranty reserve 173,872 175,332
Customer deposits 113,497 76,599
Royalties 33,524 60,319
Other 7,367 18,485
------------------------------------------------------------------------------------
$ 976,029 $1,065,999
------------------------------------------------------------------------------------
16 SPAN-AMERICA MEDICAL SYSTEMS,INC. 1999 ANNUAL REPORT
[GRAPHIC]
9. BORROWINGS
At October 2, 1999, the Company had available an unused revolving line
of credit with a bank for unsecured short-term borrowings up to $2,500,000. The
line of credit expires February 1, 2000, and is renewable annually at the bank's
discretion.
The Company paid no interest expense in fiscal years 1999, 1998 or
1997.
10. DEFERRED COMPENSATION
The Company is obligated to make payments under a retirement agreement
to its founder and former chief executive officer over his remaining life. The
Company has fully accrued the present value of the expected payments due over
the executive's estimated life expectancy. The Company recognized expenses of
approximately $93,000 in 1999, $95,000 in 1998 and $96,000 in 1997 related to
this agreement.
11. SHAREHOLDERS' EQUITY
In March 1987, the Board of Directors adopted the 1987 Stock Option
Plan ("1987 Plan"). The 1987 Plan authorized the Board to grant options to key
officers and employees of the Company for up to 200,000 shares of the Company's
common stock. Options granted under the 1987 Plan were granted at the fair
market value on the date of grant. The outstanding options become exercisable
and vested at the rate of 20% of the total grant per year. Vested options expire
10 years from the date of grant for continuing employees, or three months after
termination for employees who leave the Company. The 1987 Plan was terminated on
March 31, 1997. The termination does not affect options outstanding under the
plan, but no further options can be granted under the 1987 Plan.
In November 1991, the Board adopted the 1991 Stock Option Plan ("1991
Plan"). The 1991 Plan authorized the Board to grant options of up to 200,000
shares of the Company's common stock to officers and key employees and 50,000
shares to directors who are neither officers nor key employees of the Company.
Options granted under the 1991 Plan are generally granted at the fair market
value on the date of grant. Options granted under the 1991 Plan become
exercisable and vested at the greater of 1,000 shares per year or 20% of the
grant. All other terms and conditions of the 1991 Plan are similar to the 1987
Plan.
In March 1997, the Board adopted the 1997 Stock Option Plan ("1997
Plan"). The 1997 Plan authorized the Board to grant options of up to 200,000
shares of the Company's common stock to officers and key employees of the
Company. All other terms and conditions of the 1997 Plan are similar to the 1991
Plan.
SPAN-AMERICA MEDICAL SYSTEMS,INC. 1999 ANNUAL REPORT 17
11. Shareholders' Equity (Continued)
A summary of activity under the Company's three stock option plans is
as follows.
Outstanding Exercisable
---------------------- ---------------------
Weighted Weighted
Average Average
Shares Ex. Price Ex. Price
Available # Shares Per Share # Shares Per Share
- ---------------------------------------------------------------------------------------------------
Balance at 9/28/96 156,000 215,000 $ 4.91 134,000 $ 4.52
Fiscal Year 1997
----------------
Granted (126,800) 126,800 4.13
Exercised - - -
Forfeited 25,000 (25,000) 5.14
- ---------------------------------------------------------------------------------------------------
Balance at 9/27/97 54,200 316,800 4.58 154,800 4.61
Fiscal Year 1998
----------------
Shares authorized 200,000 - -
Granted (44,000) 44,000 7.09
Exercised - (48,000) 3.68
Forfeited 1,000 (1,000) 8.38
- ---------------------------------------------------------------------------------------------------
Balance at 10/3/98 211,200 311,800 5.06 145,800 5.14
Fiscal Year 1999
----------------
Granted - - -
Exercised - (32,000) 4.32
Forfeited 51,000 (51,000) 5.57
Plan terminated (9,000) - -
- ---------------------------------------------------------------------------------------------------
Balance at 10/2/99 253,200 228,800 $ 5.05 119,800 $ 5.30
===================================================================================================
A summary of stock options outstanding and exercisable at fiscal year
end 1999 is shown below.
Outstanding Exercisable
----------------------------------- --------------------
Weighted Wtd. Avg. Weighted
Average Remaining Average
Range of Ex. Price Contract Ex. Price
Exercise Prices # Shares Per Share Life (Yrs) # Shares Per Share
- ---------------------------------------------------------------------------------------------------
$ 3.75 - $ 4.81 124,800 $ 4.12 6.8 44,400 $ 4.20
5.00 - 6.88 62,000 5.49 5.3 56,000 5.49
7.09 - 8.38 42,000 7.19 8.0 19,400 7.29
- ---------------------------------------------------------------------------------------------------
$ 3.75 - $ 8.38 228,800 $ 5.05 6.6 119,800 $ 5.30
===================================================================================================
Tax benefits arising from the difference in market value between the
date of grant and the date of issuance of common stock upon exercise are
recorded as credits to additional paid-in capital.
In March 1997 the Board of Directors approved the 1997 Long-Term
Incentive Stock Option Plan for certain executives of the Company based on
achievement of specified financial goals by fiscal year end 1999. As of October
2, 1999, the Company has accrued $24,000 for these incentives based on current
estimates of financial goals.
The Company accounts for and will continue to account for stock options
under Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees." The application of Financial Accounting Standards Board Statement
No. 123 "Accounting for Stock Based Compensation," which was adopted in 1997,
would not materially affect net income and and earnings per share for the 1999,
1998 and 1997 fiscal years.
18 SPAN-AMERICA MEDICAL SYSTEMS, INC. 1999 ANNUAL REPORT
12. Income Taxes
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax liabilities and assets as of October 2,
1999, and October 3, 1998, are as follows:
1999 1998
- ---------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation $ 522,000 $ 504,000
Intangible assets 29,000 64,000
Other 44,000 43,000
- ---------------------------------------------------------------------------------------------------
Total deferred tax liabilities 595,000 611,000
Deferred tax assets:
Deferred compensation 361,000 373,000
Accrued expenses 78,000 134,000
Deferred gain on sale - 162,000
Other 90,000 99,000
- ---------------------------------------------------------------------------------------------------
Total deferred tax assets 529,000 768,000
Net deferred tax
liabilities (assets) $66,000 $(157,000)
===================================================================================================
The Company received income tax refunds, net of payments of
approximately $239,000 in fiscal 1999. The Company made income tax payments, net
of refunds, of approximately $1,678,000, and $1,064,000, in fiscal 1998 and
1997, respectively.
Federal and state income tax provisions consist of the following:
1999 1998 1997
- ---------------------------------------------------------------------------------------------------
Current:
Federal $(161,000) $ 946,000 $964,000
State (19,000) 114,000 104,000
- ---------------------------------------------------------------------------------------------------
(180,000) 1,060,000 1,068,000
Deferred:
Federal 207,000 (224,000) (223,000)
State 26,000 (33,000) (24,000)
- ---------------------------------------------------------------------------------------------------
233,000 (257,000) (247,000)
- ---------------------------------------------------------------------------------------------------
Total income tax
expense on earnings
from continuing
operations 53,000 803,000 821,000
Tax expense of discontinued
operations 201,000 91,000 146,000
- ---------------------------------------------------------------------------------------------------
Income tax expense $254,000 $ 894,000 $967,000
===================================================================================================
SPAN-AMERICA MEDICAL SYSTEMS, INC. 1999 ANNUAL REPORT 19
12. Income Taxes (Continued)
Income tax expense differs from the amounts computed by applying the
Federal tax rate to income before income taxes as follows:
1999 1998 1997
- ---------------------------------------------------------------------------------------------------
Computed tax at the
statutory rate $45,000 $753,000 $745,000
Increases (decreases):
State income taxes,
net of federal tax benefit 19,000 55,000 54,000
Tax-exempt investment
income (31,000) (48,000) (22,000)
Other, net 20,000 43,000 44,000
- ---------------------------------------------------------------------------------------------------
Income tax expense $53,000 $803,000 $821,000
===================================================================================================
13. Employee Benefit and Incentive Plans
The Company has an employee savings and investment plan (401(k) plan)
available to the Company's employees meeting eligibility requirements. The
Company matches a percentage of the employee contributions, with certain
limitations. Contributions by the Company amounted to approximately $104,000,
$93,000, and $63,000 for the 1999, 1998, 1997 fiscal years, respectively.
14. Related-Party Transactions
The Company paid approximately $59,000 in 1999, $53,000 in 1998,
$51,000 in 1997 in legal fees to a firm having a member who is also a director
of the Company.
15. Major Customers
The Company has a business relationship with a customer to distribute
certain of its medical products to hospitals throughout the United States. Sales
generated by this customer amounted to approximately 17% of net sales in 1999,
15% in 1998, and 16% in 1997.
The Company has a business relationship with other customers to
distribute certain of its consumer products. Sales to one of these customers for
the 1998 and 1997 fiscal years amounted to approximately 15% and 19% of the
Company's net sales, respectively. Sales to another of these customers amounted
to 12% of net sales in 1999.
16. Operations and Industry Segments
During the first quarter of 1999 the Company closed its consumer foam
plant and consolidated those operations into the Company's primary manufacturing
plant in Greenville, SC. As a result of this change, the Company will now report
on two segments of business: medical and custom products. The custom products
segment includes those products formerly reported in the consumer and industrial
business segments. This industry segment information corresponds to the markets
in the United States for which the Company manufactures and distributes its
polyurethane foam and packaging products and therefore complies with the
requirements of SFAS 131 "Disclosures about Segments of an Enterprise and
Related Information."
20 SPAN-AMERICA MEDICAL SYSTEMS, INC. 1999 ANNUAL REPORT
The following table summarizes certain information on industry
segments:
1999 1998 1997
- ---------------------------------------------------------------------------------------------------
Net sales:
Medical $14,937,942 $16,146,008 $15,266,832
Custom products 8,124,999 12,199,811 12,428,565
- ---------------------------------------------------------------------------------------------------
Total $23,062,941 $28,345,819 $27,695,397
- ---------------------------------------------------------------------------------------------------
Operating profit:
Medical 937,570 2,067,740 1,969,382
Custom products (744,206) 187,044 152,437
- ---------------------------------------------------------------------------------------------------
Total 193,364 2,254,784 2,121,819
Corporate expense (359,689) (450,062) (288,499)
Other income 351,684 410,264 357,901
- ---------------------------------------------------------------------------------------------------
Income before income taxes and
discontinued operations $ 185,359 $2,214,986 $ 2,191,221
- ---------------------------------------------------------------------------------------------------
Identifiable assets:
Medical $8,010,564 $8,135,341 $ 7,993,192
Custom products 4,123,123 5,925,304 5,064,785
Contract packaging 3,344,575
Corporate 5,544,906 5,351,675 6,223,762
- ---------------------------------------------------------------------------------------------------
$17,678,593 $19,412,320 $22,626,314
- ---------------------------------------------------------------------------------------------------
Depreciation and amortization expenses:
Medical $500,658 $ 450,473 $ 419,074
Custom products 284,741 312,098 255,986
Corporate 886 1,335 1,680
- ---------------------------------------------------------------------------------------------------
786,285 763,906 676,740
Other - discontinued operations 130,274 402,452
- ---------------------------------------------------------------------------------------------------
$786,285 $894,180 $1,079,192
- ---------------------------------------------------------------------------------------------------
Capital expenditures:
Medical $ 109,090 $ 243,565 $ 181,042
Custom products 61,874 318,251 329,655
- ---------------------------------------------------------------------------------------------------
170,964 561,816 510,697
Other - discontinued operations 63,686 44,238
- ---------------------------------------------------------------------------------------------------
$170,964 $625,502 $554,935
- ---------------------------------------------------------------------------------------------------
Total sales by industry segment include sales from unaffiliated
customers, as reported in the Company's 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, marketable securities, and cash surrender value of life
insurance.
SPAN-AMERICA MEDICAL SYSTEMS, INC. 1999 ANNUAL REPORT 21
16. Operations and Industry Segments (Continued)
The Company has several customers whose sales represent a significant
portion of sales in their respective business segments. Sales to one of these
customers were in excess of 26% in 1999 and 1998, and 29% in 1997 of net sales
in the medical segment. Sales to another customer accounted for 34% of net sales
in the custom products segment in 1998 and 41% in 1997. Sales to another
customer accounted for 35% of 1999 net sales in the custom products segment.
17. Operating Leases
The Company leases truck equipment and manufacturing and warehousing
facilities in South Carolina and California. All of the leases require the
Company to pay insurance and maintenance costs.
Rental expense for all operating leases was $209,000 in 1999, $343,000
in 1998, and $346,000 in 1997.
Future minimum lease payments under noncancelable operating leases with
initial terms of one year or more at October 2, 1999, were $202,500 for the 2000
fiscal year, and $51,000 for the 2001 fiscal year.
18. Contingencies
From time to time the Company is a defendant in legal actions involving
claims arising in the normal course of business. The Company believes that, as a
result of legal defenses, insurance arrangements and indemnification provisions
with the parties believed to be financially capable, none of these actions
should have a material effect on its operations or its financial condition.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Shareholders and Board of Directors
Span-America Medical Systems, Inc.
We have audited the accompanying balance sheets of Span-America Medical
Systems, Inc. as of October 2, 1999 and October 3, 1998 and the related
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended October 2, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Span-America Medical
Systems, Inc., at October 2, 1999 and October 3, 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
October 2, 1999, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Greenville, SC
October 27, 1999
22 SPAN-AMERICA MEDICAL SYSTEMS, INC. 1999 ANNUAL REPORT
DIRECTORS AND OFFICERS
[GRAPHIC]
DIRECTORS
Thomas D. Henrion
Chairman of the Board
President and Chief Executive Officer
EquiSource, LLC
Louisville, Kentucky
James D. Ferguson
President and Chief Executive Officer
Roy W. Black
Retired Vice Chairman
Johnson and Johnson Professional, Inc.
Retired Vice President
Johnson and Johnson International, Inc.
Boston, Massachusetts
Richard C. Coggins
Chief Financial Officer
Treasurer and Secretary
Robert H. Dick
President
R. H. Dick & Company, Inc.
Argyle, NY
Thomas F. Grady, Jr.
Vice President
International Paper
Montvale, New Jersey
Douglas E. Kennemore, M.D.
Neurosurgeon
Greenville, South Carolina
J. Ernest Lathem, M.D.
Retired Urological Surgeon
Greenville, South Carolina
James M. Shoemaker, Jr.
Member
Wyche, Burgess, Freeman & Parham, P.A.
Greenville, South Carolina
OFFICERS
James D. Ferguson
President and Chief Executive Officer
Robert E. Ackley
Vice President - Operations
Richard C. Coggins
Chief Financial Officer
Treasurer and Secretary
Melinda J. Gage
Vice President - Human Resources
Clyde A. Shew
Vice President - Medical Sales
SPAN-AMERICA MEDICAL SYSTEMS, INC. 1999 ANNUAL REPORT 23
CORPORATE DATA
[GRAPHIC]
CORPORATE OFFICE
Span-America Medical Systems, Inc.
70 Commerce Center
Greenville, South Carolina 29615
(864) 288-8877
Mailing Address:
P.O. Box 5231
Greenville, South Carolina 29606
Web Site:
www.spanamerica.com
STOCK INFORMATION
The common stock of Span-America Medical Systems, Inc. trades on the National
Market tier of the Nasdaq Stock Market under the symbol SPAN.
STOCK TRANSFER AGENT
American Stock Transfer & Trust Company
40 Wall Street, 46th Floor
New York, New York 10005
(800) 937-5449
Inquiries regarding stock transfers, lost certificates, or address changes
should be directed to the Stock Transfer Agent at the address above.
GENERAL COUNSEL
Wyche, Burgess, Freeman & Parham, P.A.
P.O. Box 728
Greenville, South Carolina 29602
AUDITORS
Ernst & Young LLP
P.O. Box 10647
Greenville, South Carolina 29603
SHAREHOLDER INQUIRIES
AND AVAILABILITY OF FORM
10-K REPORT
A copy of the Company's Annual Report on Form 10-K for the year ended October 2,
1999, is available without charge to shareholders upon written request from the
following:
Secretary
Span-America Medical Systems, Inc.
P.O. Box 5231
Greenville, South Carolina 29606
24 SPAN-AMERICA MEDICAL SYSTEMS, INC. 1999 ANNUAL REPORT
SPAN-AMERICA
MEDICAL SYSTEMS, INC.
70 Commerce Center, Greenville, South Carolina 29615
Telephone: 864-288-8877. Fax: 864-288-8692
Annual Report on Form 10-K
Items 14(a)(1) and (2), (c) and (d)
List of Financial Statements and Financial Statement Schedules
Certain Exhibits
Financial Statement Schedules
Year Ended October 2, 1999
Span-America Medical Systems, Inc.
Greenville, South Carolina
F-1
Span-America Medical Systems, Inc.
Form 10-K - Item 14(a)(1) and (2)
List of Financial Statements and Financial Statement Schedules
The following financial statements of Span-America Medical Systems, Inc.
included in the annual report of the registrant to its shareholders for the year
ended October 2, 1999 are incorporated by reference in Item 8:
Balance Sheets - October 2, 1999 and October 3, 1998.
Statements of Income - Years ended October 2, 1999, October 3, 1998,
and September 27, 1997.
Statements of Shareholders' Equity - Years ended October 2, 1999,
October 3, 1998, and September 27, 1997.
Statements of Cash Flows - Years ended October 2, 1999, October 3,
1998, and September 27, 1997.
Notes to Financial Statements - October 2, 1999.
The following financial statement schedule of Span-America Medical Systems, Inc.
is included in Item 14(d):
Schedule VIII - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
F-2
Schedule VIII - Valuation and Qualifying Accounts
Span-America Medical Systems, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D. COL. E
ADDITIONS
- ------------------------------------------------------------------------------------------------------------------------------------
Description Balance at (1) (2) Balance at
Beginning of Charged to Costs Charged to Other Deductions- End of
Period and Expenses Accounts - Describe Describe Period
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended October 2, 1999
Deducted from asset accounts:
Reserve for uncollectible accounts $262,000 $134,000 $ 70,000(a) $326,000
Reserve for discounts 167,000 179,000 258,000(c) 88,000
-------- -------- -------- -------- --------
Totals $429,000 $313,000 $0 $328,000 $414,000
======== ======== ======== ======== ========
Year Ended October 3,1998
Deducted from asset accounts:
Reserve for uncollectible accounts $368,000 $106,000(a) $262,000
Reserve for discounts 242,000 75,000(c) 167,000
-------- -------- -------- -------- --------
Totals $610,000 $0 $0 $181,000 $429,000
======== ======== ======== ======== ========
Year Ended September 27, 1997
Deducted from asset accounts:
Reserve for uncollectible accounts $205,000 $227,000 $ 64,000(a) $368,000
Reserve for discounts 174,000 68,000(b) 242,000
-------- -------- -------- -------- --------
Totals $379,000 $227,000 $ 68,000 $ 64,000 $610,000
======== ======== ======== ======== ========
(a) Uncollectible accounts written off.
(b) Net increase in sales discounts charged to income as a reduction of sales.
(c) Net decrease in sales discounts charged to income as a reduction of sales.
F-3