10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

  X    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended July 2, 2016

OR

___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From ________ to ________

Commission File Number 0-11392

SPAN-AMERICA MEDICAL SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)

South Carolina	57-0525804
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)

70 Commerce Center

 Greenville, South Carolina 29615     

(Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number, including area code: (864) 288-8877

Not Applicable   

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter 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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   X   No___

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ___               Accelerated filer ___                  Non-accelerated filer    X                      Smaller reporting company___

                                  (Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ___ No   X  

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date.

Common Stock, No Par Value – 2,755,625 shares as of August 15, 2016

INDEX

SPAN-AMERICA MEDICAL SYSTEMS, INC.

 

PART I.     FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements (Unaudited)
	Consolidated Balance Sheets – July 2, 2016 and October 3, 2015	3
	Consolidated Statements of Comprehensive Income – Three and nine months ended July 2, 2016 and June 27, 2015	4
	Consolidated Statements of Cash Flows – Nine months ended July 2, 2016 and June 27, 2015	5
	Notes to Consolidated Financial Statements – July 2, 2016	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	20
Item 4.	Controls and Procedures	22
PART II.    OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 6.	Exhibits	23
SIGNATURES		24

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PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

Span-America Medical Systems, Inc.

Consolidated Balance Sheets

	July 2, 2016			October 3, 2015
	(Unaudited)			(Note)
ASSETS
Current assets:
Cash and cash equivalents	$	3,231,435		$	1,224,026
Accounts receivable, net of allowances of $143,000 (July 2, 2016) and $148,000 (Oct. 3, 2015)		5,926,248			7,813,773
Inventories - Note 3		8,108,632			8,746,039
Deferred income taxes		351,000			351,452
Prepaid expenses		975,408			411,528
Total current assets		18,592,723			18,546,818
Property, plant and equipment, net - Note 4		4,272,230			4,536,104
Goodwill		3,968,841			3,930,282
Intangibles, net - Note 5		2,064,138			2,214,762
Other assets - Note 6		2,745,968			2,953,656
	$	31,643,900		$	32,181,622
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	2,318,840		$	4,035,333
Accrued and sundry liabilities		2,680,649			3,120,111
Total current liabilities		4,999,489			7,155,444
Deferred income taxes		349,969			348,479
Deferred compensation		311,282			375,939
Total long-term liabilities		661,251			724,418
Total liabilities		5,660,740			7,879,862
Commitments and contingencies - Note 10
Shareholders' equity:
Common stock, no par value, 20,000,000 shares authorized; issued and outstanding shares 2,734,468 (July 2, 2016) and 2,737,468 (Oct. 3, 2015)		169,380			-
Additional paid-in capital		-			-
Retained earnings		28,163,034			26,848,299
Accumulated other comprehensive loss		(2,349,254	)		(2,546,539	)
Total shareholders' equity		25,983,160			24,301,760
	$	31,643,900		$	32,181,622

Note: The Balance Sheet at October 3, 2015 has been derived from the audited financial statements at that date.

The accompanying notes are an integral part of these consolidated financial statements.

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Span-America Medical Systems, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)

	Three Months Ended						Nine Months Ended
	July 2, 2016			June 27, 2015			July 2, 2016			June 27, 2015
Net sales	$	15,347,377		$	15,813,474		$	51,652,188		$	46,567,766
Cost of goods sold		9,693,582			10,372,903			35,324,256			30,696,346
Gross profit		5,653,795			5,440,571			16,327,932			15,871,420
Selling and marketing expenses		2,697,970			2,717,470			7,844,102			8,090,610
Research and development expenses		276,553			281,798			845,717			877,726
General and administrative expenses		1,193,092			1,123,101			3,435,288			3,316,021
		4,167,615			4,122,369			12,125,107			12,284,357
Operating income		1,486,180			1,318,202			4,202,825			3,587,063
Non-operating income (expense):
Foreign currency (loss) gain		(67,025	)		65,154			410			263,103
Interest expense		-			-			(5,144	)		(6,285	)
Other		64			(821	)		(7,371	)		45,417
Net non-operating income (expense)		(66,961	)		64,333			(12,105	)		302,235
Income before income taxes		1,419,219			1,382,535			4,190,720			3,889,298
Provision for income taxes		484,000			420,000			1,355,000			1,183,000
Net income		935,219			962,535			2,835,720			2,706,298
Other comprehensive income (loss), after tax:
Foreign currency translation gain (loss)		73,724			207,013			197,285			(920,598	)
Comprehensive income	$	1,008,943		$	1,169,548		$	3,033,005		$	1,785,700
Net income per share of common stock - Note 8:
Basic	$	0.34		$	0.32		$	1.04		$	0.91
Diluted		0.34			0.32			1.03			0.90
Dividends per common share (1)	$	0.16		$	0.15		$	0.48		$	1.45
Weighted average shares outstanding:
Basic		2,734,468			2,991,192			2,729,743			2,976,994
Diluted		2,758,503			3,017,536			2,755,161			3,006,430

The accompanying notes are an integral part of these consolidated financial statements.

(1) Dividends per common share for the nine months ended June 27, 2015 include a special dividend of $1.00 per share paid on January 7, 2015.

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Span-America Medical Systems, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended
	July 2, 2016			June 27, 2015
Operating activities:
Net income	$	2,835,720		$	2,706,298
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		902,022			917,544
Provision for losses on accounts receivable		(7,051	)		41,956
Loss (Gain) on sale and disposal of equipment and patents		7,686			(45,850	)
Loss on disposal of other assets		3,863			-
Increase in cash value of life insurance		(106,036	)		(110,567	)
Deferred compensation		(64,657	)		(61,138	)
Stock compensation expense		-			19,978
Changes in operating assets and liabilities:
Accounts receivable		1,913,099			(1,860,815	)
Inventories		690,735			546,957
Prepaid expenses and other assets		11,811			326,793
Accounts payable and accrued and sundry liabilities		(2,226,846	)		1,525,254
Net cash provided by operating activities		3,960,346			4,006,410
Investing activities:
Purchases of property and equipment		(391,567	)		(505,085	)
Proceeds from sale of equipment and patents		-			47,339
Payments for other assets		(71,548	)		(65,592	)
Net cash used for investing activities		(463,115	)		(523,338	)
Financing activities:
Dividends paid		(1,311,105	)		(4,302,391	)
Proceeds of long-term debt		2,900,000			-
Repayment of long-term debt		(2,900,000	)		-
Purchase and retirement of common stock		(209,880	)		-
Common stock issued upon exercise of options		-			180,708
Net cash used for financing activities		(1,520,985	)		(4,121,683	)
Effect of exchange rates on cash		31,163			(67,633	)
Increase (Decrease) in cash and cash equivalents		2,007,409			(706,244	)
Cash and cash equivalents at beginning of period		1,224,026			6,865,931
Cash and cash equivalents at end of period	$	3,231,435		$	6,159,687

The accompanying notes are an integral part of these consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

July 2, 2016

1. SIGNIFICANT ACCOUNTING POLICIES

Span-America Medical Systems, Inc. (the “Company,” “we,” or “Span-America”), located in Greenville, SC, has prepared the accompanying unaudited consolidated financial statements in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In our opinion, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended July 2, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending October 1, 2016. The unaudited Consolidated Financial Statements appearing in this Quarterly Report should be read in conjunction with the audited Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 3, 2015. Our accounting policies are consistent with those described in our Significant Accounting Policies in the Form 10-K, including but not limited to those set forth below.

Our wholly-owned subsidiary, Span Medical Products Canada Inc. (“Span-Canada”), a British Columbia corporation, located in Beamsville, Ontario, Canada, is operated under the registered business name M.C. Healthcare Products (“M.C. Healthcare”). In addition, we use the name “Span-U.S.” in this report to refer to the original U.S. operations of Span-America prior to the acquisition of the assets of M.C. Healthcare Products Inc.

Principles of Consolidation

The consolidated financial statements include the accounts of Span-U.S. and Span-Canada, its wholly-owned subsidiary. Significant inter-entity accounts and transactions have been eliminated.

Foreign Currency Translation

Span-Canada uses the Canadian dollar as its functional currency. The assets and liabilities of Span-Canada are translated into U.S. dollars at the quarter-end exchange rate. Revenues and expenses are translated at weighted average exchange rates. The resulting translation adjustments are recorded as a separate component of shareholders’ equity in “Accumulated Other Comprehensive Loss.”

Revenue Recognition

We recognize revenue when title and risk of loss pass to the customer and collection is reasonably assured. Our sales prices are fixed at the time revenue is recognized.

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Recently Issued Accounting Standards

In November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-07, "Balance Sheet Classification of Deferred Taxes (Topic 740)." Current guidance requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position; however, the new guidance requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.  Early adoption is permitted. The Company is currently assessing the potential impact of this new accounting pronouncement on the Company's statement of financial position.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires the lessee to recognize assets and liabilities for leases with lease terms of more than twelve months. For leases with a term of twelve months or less, the Company is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. Further, the standard also requires a finance lease to recognize both an interest expense and an amortization of the associated expense. Operating leases generally recognize the associated expense on a straight line basis. ASU 2016-02 requires the Company to adopt the standard using a modified retrospective approach and adoption beginning on January 1, 2019. The Company is currently evaluating the impact that ASU 2016-02 will have on its financial position, results of operations and cash flows.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our financial statements upon adoption.

Stock-Based Compensation

We measure and recognize compensation expense for all stock-based payments at fair value. Stock-based payments include stock option grants. We grant options to purchase common stock to some of our employees under various plans at prices equal to the market value of the stock on the dates the options are granted. New shares of common stock are issued upon share option exercise. We do not have treasury stock. We have not made any stock option grants since fiscal year 2011.

2. FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table summarizes information on the fair value measurement of certain Company assets as of July 2, 2016 and October 3, 2015 grouped by the categories prescribed by the FASB:

	Total		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Cash value of life insurance policies:
July 2, 2016	$	2,649,228		-	$	2,649,228		-
October 3, 2015		2,543,192		-	$	2,543,192		-

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3. INVENTORIES

	July 2, 2016			October 3, 2015
Raw materials	$	6,030,040		$	5,455,942
Work in process		573,294			338,296
Finished goods		2,110,298			3,521,801
Reserve for obsolescence		(605,000	)		(570,000	)
	$	8,108,632		$	8,746,039

4. PROPERTY AND EQUIPMENT

	July 2, 2016			October 3, 2015
Land	$	469,718		$	469,718
Land improvements		486,698			486,698
Buildings		6,991,245			6,941,084
Machinery and equipment		9,489,664			9,241,581
Furniture and fixtures		507,251			487,856
Construction in process		97,511			85,329
Automobiles		24,075			9,520
		18,066,162			17,721,786
Less accumulated depreciation		(13,793,932	)		(13,185,682	)
	$	4,272,230		$	4,536,104

5. INTANGIBLES

	July 2, 2016			October 3, 2015
Patents and trademarks	$	2,241,298		$	2,203,673
Trade names		348,998			342,416
Non-competition agreements		152,932			150,048
Customer relationships		2,565,329			2,516,952
		5,308,557			5,213,089
Less accumulated amortization		(3,244,419	)		(2,998,327	)
Net intangibles	$	2,064,138		$	2,214,762

Changes in the balances shown for trade names, non-competition agreements and customer relationships result solely from foreign currency fluctuations.

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6. OTHER ASSETS

	July 2, 2016		October 3, 2015
Cash value of life insurance policies - Note 2	$	2,649,228	$	2,543,192
Other		96,740		410,464
	$	2,745,968	$	2,953,656

7. PRODUCT WARRANTIES

We offer warranties of various durations to our customers, depending on the specific product sold. The warranties require us to repair or replace non-performing products during the warranty period at no cost to the customer. At the time revenue is recognized for products covered by warranties, we record a liability for estimated costs that may be incurred under our warranties. The costs are estimated based on historical experience, including any specific warranty problems that have been identified and recovery of secondary warranty cost from component suppliers.  The amounts shown below are presented net of any expected cost recovery from suppliers. Although historical warranty costs have been within our expectations, there can be no assurance that future warranty costs will not exceed historical amounts. We regularly evaluate the adequacy of the warranty liability and adjust the balance as necessary.

Changes in our product warranty liability for the nine months ended July 2, 2016 and June 27, 2015 are as follows:

	Nine Months Ended
	July 2, 2016			June 27, 2015
Accrued liability at beginning of period	$	291,980		$	257,860
Increase in reserve		186,090			197,850
Repairs and replacements		(163,025	)		(164,681	)
Accrued liability at end of period	$	315,045		$	291,029

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8. EARNINGS PER SHARE OF COMMON STOCK

The following table sets forth the computation of basic and diluted earnings per share of our common stock.

	Three Months Ended				Nine Months Ended
	July 2, 2016		June 27, 2015		July 2, 2016		June 27, 2015
Numerator for basic and diluted earnings per share:
Net income	$	935,219	$	962,535	$	2,835,720	$	2,706,298
Denominator:
Denominator for basic earnings per share:
Weighted average shares		2,734,468		2,991,192		2,729,743		2,976,994
Effect of dilutive securities:
Employee stock options		24,035		26,344		25,418		29,436
Denominator for diluted earnings per share:
Adjusted weighted average shares and assumed conversions		2,758,503		3,017,536		2,755,161		3,006,430
Net income per share of common stock:
Basic	$	0.34	$	0.32	$	1.04	$	0.91
Diluted	$	0.34	$	0.32	$	1.03	$	0.90

9. OPERATIONS AND INDUSTRY SEGMENTS

For management and reporting purposes, we divide our business into two segments: Medical and Custom Products. This industry segment information corresponds to the markets in the United States and Canada for which we manufacture and distribute our various products.

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The following table summarizes certain information on industry segments:

	Three Months Ended						Nine Months Ended
	July 2, 2016			June 27, 2015			July 2, 2016			June 27, 2015
Net sales:
Medical	$	11,529,818		$	11,663,716		$	33,894,632		$	35,602,295
Custom products		3,817,559			4,149,758			17,757,556			10,965,471
	$	15,347,377		$	15,813,474		$	51,652,188		$	46,567,766
Operating profit (loss):
Medical	$	1,404,014		$	1,404,066		$	4,135,116		$	4,404,386
Custom products		284,745			89,762			643,965			(255,893	)
		1,688,759			1,493,828			4,779,081			4,148,493
Corporate expense		(202,579	)		(175,626	)		(576,256	)		(561,430	)
Other income (expense)		(66,961	)		64,333			(12,105	)		302,235
Income before income taxes	$	1,419,219		$	1,382,535		$	4,190,720		$	3,889,298

Total sales by industry segment include sales to unaffiliated customers as reported in our consolidated statements of comprehensive 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 both segments are included on an allocated basis.

10. COMMITMENTS AND CONTINGENCIES

From time to time we are defendants in legal actions involving claims arising in the normal course of business. We believe that, as a result of legal defenses and insurance arrangements with parties we believe to be financially capable, none of these actions, if determined adversely, should have a material adverse effect on our operations or financial condition.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The statements contained in this Quarterly Report that are not historical facts are forward-looking statements that involve risks and uncertainties. We wish to caution the reader that these forward-looking statements, such as our expectations for future sales and earnings results or future expense changes compared with previous periods, are only predictions. These forward-looking statements may be generally identified by the use of forward-looking words and phrases, such as “will,” “intends,” “would,” “estimates,” “continues,” “may,” “believes,” “anticipates,” “should,” “optimistic,” “could be” and “expects,” and are based on our current expectations or beliefs concerning future events that involve risks and uncertainties. Actual events or results may differ materially as a result of risks and uncertainties facing our Company, including Span-Canada, as described in (a) “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended October 3, 2015, (b) other risks referenced in our Securities and Exchange Commission filings or (c) other unanticipated risks. We disclaim any obligation to update publicly any forward-looking statement, whether as a result of new information, future events or otherwise.

RESULTS OF OPERATIONS

Overview

Summary – Third Quarter Fiscal 2016 vs. Third Quarter Fiscal 2015

● Total sales decreased by 3% to $15.3 million compared with $15.8 million due to lower sales volume in both our medical and custom products segments.

● Our gross profit increased by 4% to $5.7 million, or 36.8% of net sales, compared with $5.4 million, or 34.4% of net sales, as a result of improved margins in the custom products segment.

● Operating profit increased by 13% to $1.5 million compared with $1.3 million because of higher margins in the custom products segment.

● Net non-operating income decreased by 204% due to expense of $67,000 compared with income of $64,000 due primarily to foreign currency losses from our Canadian operations as a result of the strengthening of the Canadian dollar vs. the U.S. dollar.

● Net income decreased by 3% to $935,000 compared with $963,000 because of the decrease in non-operating income described above.

● Earnings per share increased by 6% to $0.34 per diluted share compared with $0.32 per diluted share because of a 9% reduction in the average number of shares outstanding as a result of our share repurchases near the end of fiscal 2015.

Summary – First Nine Months Fiscal 2016 vs. First Nine Months Fiscal 2015

● Net sales increased 11% to $51.7 million compared with $46.6 million primarily as a result of a seasonal promotion of consumer products in the first quarter of fiscal 2016, which did not occur in the first nine months of fiscal 2015.

● Custom products sales increased by 62% to $17.8 million compared with $11.0 million primarily as a result of the seasonal promotion described above.

● Sales in the medical segment decreased 5% to $33.9 million compared with $35.6 million primarily because of lower sales volumes from our beds and in-room furnishing products.

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● Our gross profit increased by 3% to $16.3 million compared with $15.9 million due to higher sales volume and improved margins in the custom products segment.

● Our gross margin percentage decreased to 31.6% compared with 34.1% due to a change in sales mix, which was shifted toward the lower-margin custom products segment because of the seasonal promotion of consumer products completed in the first quarter of fiscal 2016.

● Operating profit increased by 17% to $4.2 million compared with $3.6 million because of higher sales volume and improved margins in the custom products segment combined with a slight reduction in overall operating expenses.

● Net non-operating income decreased by 104% to expense of $12,000 compared with income of $302,000 due primarily to a significant reduction in foreign currency gains from our Canadian operations as a result of the strengthening of the Canadian dollar vs. the U.S. dollar.

● Net income increased by 5% to $2.8 million, or $1.03 per diluted share, compared with $2.7 million, or $0.90 per diluted share, because of the combination of the factors described above.

Medical Sales – Third Quarter Fiscal 2016

Total medical sales decreased 1% in the third quarter to $11.5 million compared with $11.7 million in the same quarter last year. The third quarter decrease in medical sales was the result of lower sales levels of medical beds and in-room furnishing products from our Span-Canada business. Span-Canada sales decreased by 21% to $2.6 million in the third quarter of fiscal 2016 compared with $3.3 million in the same quarter last year due to relatively weak demand for beds and in-room furnishing products.

Among our pressure management product lines, sales increased by 7% to $8.9 million compared with $8.4 million in the third quarter last fiscal year. Sales of therapeutic support surfaces, our largest medical product line, were up by 8% to $6.3 million compared with $5.9 million in the third quarter last fiscal year. Sales of our other pressure management product lines as a group increased 4% to $2.6 million in the third quarter of fiscal 2016 as compared to $2.5 million in the same quarter of fiscal 2015. This sales growth was broad-based, coming from several customers and product lines. In general, we saw above-average demand for our medical pressure management products in the third quarter of fiscal 2016. Our levels of inquiries from customers and quoting activities in the market for beds and support surfaces have continued to be relatively high, which could be an indicator of increased demand for these products in future periods.

Medical Sales – Year-to-Date Fiscal 2016

Medical segment sales in the first nine months of fiscal 2016 decreased by 5%, or $1.7 million, to $33.9 million compared with $35.6 million in the first nine months of fiscal 2015. The year-to-date decrease in medical sales occurred mainly among sales of our Span-Canada products, which were down by 19% to $7.6 million compared with $9.3 million in the first nine months of last fiscal year. The decrease in Span-Canada sales in the first nine months of fiscal 2016 was caused by relatively weak demand for our medical beds compared with the same period last year, as well as several significant orders that occurred in the first nine months last fiscal year that were not repeated in the first nine months this year.

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Sales in our pressure management medical product lines, which include all medical products except medical beds and in-room furnishing products from Span-Canada, remained level at $26.3 million during the first nine months of fiscal 2016 compared with the first nine months of fiscal 2015. Sales of therapeutic support surfaces, our largest product line, increased by 2% to $18.7 million in the first nine months of fiscal 2016 compared with $18.5 million in the same period of fiscal 2015. Sales of all other pressure management product lines as a group were down by 3% to $7.6 million in the first nine months of fiscal 2016 compared with $7.8 million in the first nine months of fiscal 2015.

Custom Products Sales – Third Quarter Fiscal 2016

Our custom products segment consists of two product lines: consumer bedding products and specialty industrial products. Total sales in the custom products segment decreased by 8% to $3.8 million in the third quarter of fiscal 2016 compared with $4.1 million in the third quarter of fiscal 2015. The largest part of the custom products segment is our consumer business, where sales decreased by 12% to $2.8 million in the third quarter of fiscal 2016 compared with $3.1 million in the third quarter of fiscal 2015. The decrease in consumer sales was caused primarily by the loss of the large consumer customer that we previously announced in April 2016. We added a new retail customer for our consumer products during the third quarter, which partly offset the lost business.

In the other part of the custom products segment, sales of our industrial products were up by 6% in the third quarter of fiscal 2016 to $1.1 million compared with $1.0 million in the third quarter of fiscal 2015. Most of the industrial products sales growth came from customers in the packaging and watersports sectors of our industrial market.

Custom Products Sales – Year-to-Date Fiscal 2016

Sales in the custom products segment for the first nine months of fiscal 2016 increased by 62% to $17.8 million compared with $11.0 million in the first nine months of last fiscal year. The sales increase came entirely from our consumer bedding products, where sales increased 85% to $14.8 million in the first nine months of fiscal 2016 compared with $8.0 million in the same period last fiscal year. The increase in consumer sales came primarily from a seasonal promotion of bedding products in the first quarter of fiscal 2016, new customer business that began in May 2016 and an increase in online sales of consumer products.

Sales of industrial products remained level at $2.9 million in the first nine months of fiscal 2016 compared with the same period last fiscal year as sales gains in the second and third quarters of fiscal 2016 offset a sales decrease in the first quarter of fiscal 2016.

Gross Profit

Our gross profit increased by 4% to $5.7 million during the third quarter of fiscal 2016 compared with $5.4 million in the third quarter last fiscal year. In addition, our gross margin percentage increased in the third quarter to 36.8% compared with 34.4% in the same quarter last fiscal year. The increases in gross profit level and margin came primarily from the custom products segment and were the result of improved margins within our consumer product lines. We have taken a number of actions to improve the profitability in our custom products business.

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For the year-to-date in fiscal 2016, our total gross profit increased 3% to $16.3 million compared with $15.9 million in the same period of fiscal 2015 due to higher sales volume and improved margins in our consumer business. However, our gross margin percentage for the first nine months of fiscal 2016 decreased to 31.6% from 34.1% in the same period of fiscal 2015. The decrease in gross margin percentage was caused by a less profitable overall sales mix and a decline in medical sales. As a result of the large sales volume from the seasonal promotion of consumer products in the first quarter of fiscal 2016, our sales mix in the first nine months of this year was shifted significantly toward the lower-margin consumer business. Consumer sales accounted for 29% of total sales in the first nine months of fiscal 2016 compared with only 17% in the first nine months of fiscal 2015. Our consumer products have historically had much lower gross margins than our medical products. In addition to the change in overall sales mix, medical sales in the first nine months this fiscal year decreased by 5%, which contributed to a 2% decline in our medical gross profit level.

Selling, Research & Development and Administrative Expenses

Selling and marketing expenses decreased by 1% to $2.7 million in the third quarter of fiscal 2016 compared with the same quarter in fiscal 2015, generally reflecting the comparative medical sales results during the two quarters. For the first nine months of fiscal 2016, selling and marketing expenses decreased by 3% to $7.8 million compared with $8.1 million in the first nine months of fiscal 2015. The year-to-date expense declines occurred mostly in the categories of commissions and shipping costs at Span-Canada and lower marketing expenses in our custom products segment.

Research and development expenses decreased 2% to $277,000 during the third quarter of fiscal 2016 compared with $282,000 in the third quarter of fiscal 2015. For the year-to-date in fiscal 2016, research and development expenses decreased 4% to $846,000 compared with $878,000 in the same period of fiscal 2015. The decreases in research and development expenses for both the third quarter and fiscal year-to-date periods were mainly due to changes in the use of independent contractor services for testing or for specific parts of design projects. These are normal period-to-period fluctuations and do not indicate a strategic or long-term reduction in our product development efforts.

General and administrative expenses increased by 6% to $1.2 million in the third quarter of fiscal 2016 compared with $1.1 million in the third quarter of fiscal 2015. For the year-to-date in fiscal 2016, general and administrative expenses increased 4% to $3.4 million compared with $3.3 million in the same period of fiscal 2015. The increases in general and administrative expenses for the quarter and fiscal year-to-date were due primarily to higher incentive and other compensation costs, a building maintenance project and relatively small increases in a number of administrative expense line items.

Operating Income

Operating income for the third quarter of fiscal 2016 increased by 13% to $1.5 million compared with $1.3 million in the third quarter of fiscal 2015. Likewise, operating income for the first nine months of fiscal 2016 increased by 17% to $4.2 million compared with $3.6 million in the first nine months of fiscal 2015. The increases in operating income for the third quarter and first nine months of fiscal 2016 were the result of improved margins in the custom products segment in both periods, higher sales volume in the custom products segment in the year-to-date period, an increase in sales of medical pressure management products in the third quarter of fiscal 2016 and a decrease in total selling, marketing and R&D expenses during both periods.

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Non-Operating Income and Expenses

Net non-operating income in the third quarter of fiscal 2016 decreased by 204% to an expense of $67,000 compared with income of $64,000 in the third quarter last fiscal year due to foreign currency exchange losses related to our operations in Canada.

For the first nine months of fiscal 2016, net non-operating income decreased 104% to a net expense of $12,000 compared with income of $302,000 in the first nine months of fiscal 2015. The decrease was caused by two main factors. First, our foreign currency gain decreased 100% for the year-to-date in fiscal 2016 to just $400 compared with $263,000 in the same period of fiscal 2015. The drop in foreign currency gain was caused by the strengthening of the Canadian dollar versus the U.S. dollar during the first nine months of fiscal 2016 compared with the weakening of the Canadian dollar vs. the U.S. dollar during the same period in fiscal 2015. Second, the first nine months of fiscal 2015 included a one-time net gain on the sale of assets of $46,000, primarily related to the sale of assets associated with the Secure I.V. business that was discontinued several years ago.

Net Income and Dividends

Net income for the third quarter of fiscal 2016 decreased by 3% to $935,000 compared with $963,000 in the third quarter of fiscal 2015 due to the decrease in net non-operating income described above. Earnings per share for the third quarter increased by 6% to $0.34 per diluted share compared with $0.32 per diluted share in the third quarter last fiscal year because of the previously announced stock repurchase approved by the Board of Directors in late September 2015. The repurchase is discussed in more detail below under “Liquidity and Capital Resources” and “Issuer Purchases of Equity Securities.”

Net income for the first nine months of fiscal 2016 increased by 5% to $2.8 million, or $1.03 per diluted share, compared with $2.7 million, or $0.90 per diluted share, for the same period in fiscal 2015. The increase in net income for the first nine months of fiscal 2016 was mainly the result of strong sales growth and margin improvements within our custom products segment and lower overall operating expenses. The increase in earnings per share resulted from the increase in net income combined with a reduction in the number of shares outstanding as a result of stock repurchases near the end of fiscal 2015.

During the first nine months of fiscal 2016, we paid dividends of $1.3 million, or 46% of net income for the period, which consisted of three regular quarterly dividends of $0.16 per share. During the first nine months of fiscal 2015, we paid dividends of $4.3 million, or 159% of net income for the period, which consisted of three regular quarterly dividends of $0.15 per share and one special dividend of $1.00 per share.

After the close of this year’s third fiscal quarter, the Board declared a regular quarterly cash dividend of $0.16 per share payable on September 7, 2016, to shareholders of record on August 16, 2016.

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Our revolving credit agreement previously included a covenant that restricted dividend payments to 50% of net income, but that covenant was eliminated from the renewed agreement in May 2015. However, prior to this credit agreement renewal, the lending bank waived any event of default in connection with the $1.00 per share special dividend paid during the second quarter of fiscal 2015. See the discussion below under “Liquidity and Capital Resources” regarding the current terms and conditions of our revolving credit agreement.

Outlook

We expect total sales and earnings in the fourth quarter of fiscal 2016 to be similar to those of the fourth quarter of fiscal 2015. We believe medical sales will improve slightly over last year’s fourth quarter based on recent trends and current orders received. Consumer sales are expected to be lower in the fourth quarter of fiscal 2016 compared with last year’s fourth quarter due to the loss of the large consumer account that we announced in April 2016.

We expect that our earnings per share during the remainder of fiscal year 2016 will benefit from the Board’s authorization in September 2015 to repurchase approximately 9% of the Company’s outstanding shares. The repurchase of 261,310 shares from former director Robert Johnston and his affiliate, The Jerry Zucker Revocable Trust, was completed in early October 2015. The repurchase reduced our number of shares outstanding, and as a result, will be accretive to our per share earnings for the remainder of fiscal year 2016.

LIQUIDITY AND CAPITAL RESOURCES

Cash provided by operations during the first nine months of fiscal 2016 declined by 1% to $3.96 million from $4.0 million in the first nine months of fiscal 2015. The main reason for the slight decrease in operating cash flow was the combination of changes in our working capital accounts during the first nine months of fiscal 2016 compared with the same period last year. The net increase in our working capital accounts during the first nine months of fiscal 2016 was $149,000 less than the net working capital account increase during the same period of fiscal 2015. Our primary uses of cash during the first nine months of fiscal 2016 were dividend payments of $1.3 million, capital expenditures of $392,000 and stock repurchases of $210,000.

Working capital increased by 19% to $13.6 million at the end of the third quarter of fiscal 2016 compared with $11.4 million at fiscal year-end 2015. Likewise, the current ratio at the end of the third quarter of fiscal 2016 increased to 3.7 from 2.6 at fiscal year-end 2015. The increases in working capital and current ratio were caused primarily by a $1.7 million (43%) reduction in accounts payable and the $439,000 (14%) reduction in accrued liabilities from fiscal year-end 2015 to the end of the third quarter of fiscal 2016. The reduction in accounts payable was related to the seasonal promotion of consumer bedding products completed in the first quarter of fiscal 2016, which temporarily increased accounts payable at fiscal year-end 2015 because of raw material and other purchases related to the seasonal promotion. The reduction of accrued liabilities was the result of the normal timing of payments of income taxes and property taxes, which were accrued during fiscal year 2015.

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Accounts receivable, net of allowances, decreased by $1.9 million, or 24%, to $5.9 million at the end of the third quarter of fiscal 2016 compared with $7.8 million at the end of fiscal 2015. The decrease was the result of lower sales levels during the third quarter of fiscal 2016 compared with the fourth quarter of fiscal 2015. Our average collection time for trade accounts receivable during the first nine months of fiscal 2016 was 41.1 days compared with 41.0 days for the full fiscal year 2015. All accounts receivable of Span-U.S. and Span-Canada are unsecured. However, certain receivables of Span-Canada are insured under the terms of an insurance policy.

Inventory decreased by $637,000, or 7%, to $8.1 million at the end of the third quarter of fiscal 2016 compared with $8.7 million at fiscal year-end 2015. The decrease in inventory occurred primarily in the categories of consumer raw materials and finished goods and was related almost entirely to the seasonal promotion described above. Inventory turns, calculated using annualized cost of sales and average inventory balances, were 5.6 times for the first nine months of fiscal 2016 compared with 5.3 times for the full year of fiscal 2015. The increase in inventory turns during the first nine months of fiscal 2016 was caused by the seasonal promotion of consumer products, which was completed in the first quarter of fiscal 2016.

From the end of our 2015 fiscal year to the end of the third quarter of fiscal 2016:

● Prepaid expenses increased by $564,000, or 137%, to $975,000 due primarily to the payment of a refundable deposit on a performance bond related to a bid to provide beds and therapeutic support surfaces to a government customer;

● Net property and equipment decreased by $264,000, or 6%, to $4.3 million primarily as a net result of depreciation expense of $660,000, equipment purchases of $392,000 and foreign currency translation adjustments;

● Net intangibles decreased by $151,000, or 7%, to $2.1 million primarily as a result of amortization expenses of $242,000 and foreign currency translation adjustments that resulted from the U.S.-Canadian currency conversion;

● Other assets decreased by $208,000, or 7%, to $2.7 million as a result of a decrease in deposits on raw material purchases;

● Accounts payable decreased by $1.7 million, or 43%, to $2.3 million primarily as the result of the seasonal promotion of consumer products described above. Our accounts payable level at fiscal year-end 2015 was higher than usual because of purchases associated with the seasonal promotion;

● Accrued and sundry liabilities decreased by $439,000, or 14%, to $2.7 million due primarily to payments for income taxes and property taxes during the first nine months of fiscal 2016.

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At July 2, 2016, we had no outstanding balance under our revolving credit facility. The maximum principal amount we can borrow at any one time under our revolving credit agreement is $5.0 million with a maturity date of April 30, 2018. The credit facility is currently unsecured and accrues interest at a variable rate equal to 30-day LIBOR plus a margin ranging from 85 to 165 basis points, depending on our leverage ratio (as defined in the credit agreement). The interest rate, including the margin of 85 basis points, was 1.2795% in January 2016, which was the last time we had an outstanding balance due on the line of credit. Interest-only payments are required monthly. We have pledged to grant the lending bank a security interest in our accounts, instruments and chattel paper upon its request in the event of a default as defined in the credit agreement. Our obligations under the credit agreement are guaranteed by our subsidiary, Span-Canada.

The credit facility includes financial covenants relating to tangible net worth and leverage ratios, and restricts mergers and acquisitions, asset sales, indebtedness, liens and capital expenditures. Violation of loan covenants could result in acceleration of the term of the agreement. The lending bank waived any event of default in connection with the Johnston/Zucker stock repurchase described below and elsewhere in this report. We were in compliance with all other loan covenants in the credit facility as of July 2, 2016.

The Company has repurchased a total of 433,593 shares of its common stock from the beginning of the repurchase programs in November 2007 through the end of the third quarter of fiscal year 2016. This represents 15.6% of the Company’s outstanding shares at the beginning of the repurchase program. Since October 9, 2015, there have been no remaining shares available to be repurchased under previously authorized share repurchase programs. Please see Item 2 below under the heading “Issuer Purchases of Equity Securities” for more information on our stock repurchase programs.

We believe that funds on hand, funds generated from operations and funds available under our revolving credit facility are adequate to finance our operations and expected capital requirements during fiscal 2016 and for the foreseeable future.

OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangements.

IMPACT OF INFLATION AND COST OF RAW MATERIALS

Inflation was low in the United States and Canada during the first nine months of our fiscal year 2016 and was consequently a minor factor in our operations for the year-to-date period. If the rate of inflation accelerated, the largest effect on the Company would likely be increases in cost of goods sold, primarily in the cost of raw materials, which is our single largest cost category. We would attempt to mitigate any such higher costs, but we can give no assurance that higher costs could be fully offset by sales price increases, expense reductions or other operational changes. See Item 3 “Quantitative and Qualitative Disclosures about Market Risk” below for more information on the cost of our raw materials.

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FOREIGN CURRENCY EXCHANGE

Span-Canada, operating under the name “M.C. Healthcare Products,” uses the Canadian dollar as its functional currency. We are subject to exchange rate fluctuations, which vary based on volume and currency market conditions. These exchange rate fluctuations will cause foreign exchange gains and losses, which could be material to our results of operations depending on currency market conditions and the timing and levels of our business activities in the U.S and Canada. For the first nine months of fiscal year 2016, our foreign currency exchange gain was $400 compared with a gain of $263,000 in the first nine months of fiscal 2015. The decrease in foreign currency gain was caused by the strengthening of the Canadian dollar versus the U.S. dollar during the first nine months of fiscal 2016 compared with the opposite trend during the same period of fiscal 2015.

Exchange rate fluctuations may also impact the competitive price position of our products manufactured in the U.S. and sold in Canada, which is our primary market outside the U.S. The appreciation of the U.S. dollar relative to the Canadian dollar makes our U.S.-origin products more expensive in Canadian dollar terms compared to similar products manufactured in Canada.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to financial market risk in four areas: commodity price risk, cash value of life insurance, our credit facility and foreign currency exchange rates. Commodity price risk could affect our operations primarily through our purchase of raw materials used in our manufacturing processes. The cost of polyurethane foam, our primary raw material, is indirectly influenced by oil prices. However, other market factors also affect foam prices, including the available supply of component chemicals, demand for related products from domestic and international manufacturers, competition among domestic suppliers, our purchase volumes and regulatory requirements. Consequently, it is difficult for us to accurately predict the impact that future inflation and other factors might have on the cost of polyurethane foam, our largest-volume raw material. If the cost of polyurethane foam increased significantly, and if we were unable to offset the cost increase through sales price increases or other expense reductions, our earnings could be materially negatively affected.

Recent reductions in oil prices and subsequent increases have to date had no material impact on our cost of polyurethane foam or other raw materials. In addition, we do not have any indication at the present as to whether or how the recent oil price changes will impact our raw material costs.

As of July 2, 2016, our other assets included $2.6 million in cash value of life insurance, which is subject to market risk related to equity pricing and interest rate changes. The cash value is generated from life insurance policies that are being used as the funding vehicle for a retirement program for Span-America’s founder and former chairman and his ex-wife. The cash value is invested in a combination of fixed income life insurance contracts and a portfolio of mutual funds managed by an insurance company. The fixed income contracts are similar to fixed income bond funds and are therefore subject to interest rate and company risk. The mutual fund portfolios invest in common stocks and bonds in accordance with their individual investment objectives. These portfolios are exposed to stock market, company and interest rate risks similar to comparable mutual funds. We believe that substantial fluctuations in equity markets and interest rates and the resulting changes in cash value of life insurance would not have a material adverse effect on our financial position. During the first nine months of fiscal 2016, the cash value of life insurance increased by 4%, creating after-tax income of approximately $104,000.

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Our credit facility accrues interest at a variable rate equal to 30-day LIBOR plus a margin ranging from 85 to 165 basis points depending on our then-applicable leverage ratio (as defined in the credit facility). Interest is payable monthly. The interest rate, including the margin of 85 basis points, was 1.2795% in January 2016, the last time we had an outstanding balance due on the line of credit. A material increase in interest rates could have a negative impact on our financial condition and earnings to the extent that we had significant outstanding borrowings under the facility. The degree of impact would vary depending on the level of the borrowings. We had $1.0 million outstanding under our credit facility as of January 2, 2016, which was used to partially fund the increase in working capital related to the seasonal promotion of consumer products described above. However, this outstanding balance was repaid in full by the end of January 2016. Assuming a constant level of debt of $1.0 million for an entire fiscal year, a 100 basis point increase in the interest rate on the outstanding loan balance would increase our interest expense by $10,000 per year.

As a result of the M.C. Healthcare asset acquisition, we own assets in Canada and manufacture and sell products in Canada in addition to the U.S. We are therefore subject to realized and unrealized gains or losses on foreign currency translation activities related to our operations. We do not currently hedge our foreign exchange risks because our foreign exchange transactions occur infrequently and in relatively small amounts since our revenues and costs are incurred in both U.S. and Canadian dollars. Our foreign exchange risk could increase if the exchange rates between the U.S. and Canadian dollars became more volatile.

Most of our Span-Canada operating costs and liabilities are denominated in Canadian dollars. Span-Canada sales are denominated in the currency of the country in which they occur. Accordingly, material changes in the Canadian-U.S. dollar exchange rate may significantly impact our revenues and costs and the value of our assets and liabilities. The magnitude and direction of this impact primarily depends on our production and sales volume, the proportion of our production and sales that occur in Canada, the proportion of our financial liabilities denominated in Canadian dollars and the magnitude, direction and duration of changes in the Canadian-U.S. dollar exchange rate. Increases in the value of the Canadian dollar versus the U.S. dollar reduce our earnings, which are reported in U.S. dollar terms. Assets and liabilities are translated into U.S. dollars at the quarter-end exchange rate. Revenues and expenses are translated at weighted average exchange rates. Based on our levels of assets and liabilities in Canada as of July 2, 2016, for every 1% increase in the value of a Canadian dollar compared to a U.S. dollar our total assets would have increased by approximately $107,000, and our total liabilities would have increased by approximately $7,000 for a net change of approximately $100,000. For the first nine months of fiscal year 2016, our net foreign currency exchange gain was $400 compared with a net foreign currency exchange gain of $263,000 in the first nine months of fiscal 2015. The decrease in net realized foreign currency exchange gain in the first nine months of fiscal 2016 compared with the first nine months of fiscal 2015 was the result of the strengthening of the Canadian dollar relative to the U.S. dollar during the first nine months of fiscal 2016 compared with the weakening of the Canadian dollar relative to the U.S. dollar during the same period in fiscal 2015.

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ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of July 2, 2016, and, based on their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures were effective as of July 2, 2016. There were no changes in the Company’s internal control over financial reporting during our fiscal quarter ended July 2, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Disclosure controls and procedures are the Company’s controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

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PART II. OTHER INFORMATION

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ISSUER PURCHASES OF EQUITY SECURITIES

We announced on November 28, 2007 that the Board authorized the Company to repurchase up to 138,772 shares of its common stock. On February 11, 2009, the Board expanded the repurchase program by 100,000 shares, bringing the total number of authorized shares to 238,772. In September 2015, the Board authorized the repurchase of 261,310 shares of common stock from former director Robert Johnston and his affiliate, The Jerry Zucker Revocable Trust (the “Johnston/Zucker shares”). Immediately prior to the repurchase of the Johnston/Zucker shares, the Company had a total of 66,489 remaining shares available to be repurchased under the plans authorized in 2007 and 2009. The Board therefore used the remaining previously authorized shares and authorized an additional 194,821 shares (261,310 – 66,489) to complete the Johnston/Zucker share repurchase. After the completion of the Johnston/Zucker share repurchase, there were no remaining shares available to be repurchased under the previously authorized plans.

The Johnston/Zucker share repurchase was completed in two transactions on two different dates. The first transaction for 249,310 shares was completed on October 1, 2015, which occurred during our 2015 fiscal year that ended on October 3, 2015. The second transaction for 12,000 shares was completed on October 9, 2015 and was part of our first quarter of fiscal year 2016. Including the Johnston/Zucker repurchases and prior stock repurchases under the existing repurchase program, the Company has repurchased a total of 433,593 shares of its common stock since beginning the repurchase program in November 2007, or 15.6% of the outstanding shares at the beginning of the repurchase program.

The Company did not repurchase any shares of its common stock during the third quarter of fiscal year 2016.

Our credit facility restricts stock repurchases; however, the lending bank waived these restrictions in connection with the stock repurchases described above. See the description of these restrictions under Part I – Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources, which description is incorporated herein by reference.

ITEM 6. EXHIBITS

31.1	Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act.
31.2	Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act.
32.1	Chief Executive Officer certification pursuant to Section 906 of the Sarbanes-Oxley Act.
32.2	Chief Financial Officer certification pursuant to Section 906 of the Sarbanes-Oxley Act.

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101.INS**	XBRL Instance
101.SCH**	XBRL Taxonomy Extension Schema
101.CAL**	XBRL Taxonomy Extension Calculation
101.DEF**	XBRL Taxonomy Extension Definition
101.LAB**	XBRL Taxonomy Extension Labels
101.PRE**	XBRL Taxonomy Extension Presentation

**     XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

SIGNATURES

Pursuant to the requirements 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. 

/s/ Richard C. Coggins

Richard C. Coggins 

Chief Financial Officer 

/s/ James D. Ferguson

James D. Ferguson

President and Chief Executive Officer

Date: August 16, 2016

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EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, James D. Ferguson, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Span-America Medical Systems, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 16, 2016	/s/ James D. Ferguson
	James D. Ferguson
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Richard C. Coggins, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Span-America Medical Systems, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 16, 2016	/s/ Richard C. Coggins
	Richard C. Coggins
	Chief Financial Officer

EX-32.1

Exhibit 32.1

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350)

The undersigned, certifies that to the best of his knowledge: (1) the Quarterly Report on Form 10-Q of Span-America Medical Systems, Inc. (the “Company”), for the period ended July 2, 2016 (the “Periodic Report”), which accompanies this certification fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and (2) the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.

The foregoing certification is made solely for purposes of § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350) and no person shall be entitled to rely upon the foregoing certification for any other purpose. The undersigned expressly disclaims any obligation to update the foregoing certification except as required by law.

   /s/ James D. Ferguson

James D. Ferguson

President and Chief Executive Officer

Date: August 16, 2016

EX-32.2

Exhibit 32.2

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350)

The undersigned, certifies that to the best of his knowledge: (1) the Quarterly Report on Form 10-Q of Span-America Medical Systems, Inc. (the “Company”), for the period ended July 2, 2016 (the “Periodic Report”), which accompanies this certification fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and (2) the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.

The foregoing certification is made solely for purposes of § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350) and no person shall be entitled to rely upon the foregoing certification for any other purpose. The undersigned expressly disclaims any obligation to update the foregoing certification except as required by law.

   /s/ Richard C. Coggins

Richard C. Coggins

Chief Financial Officer

Date: August 16, 2016

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Document And Entity Information - shares	9 Months Ended
	Jul. 02, 2016	Aug. 15, 2016
Document Information [Line Items]
Entity Registrant Name	SPAN AMERICA MEDICAL SYSTEMS INC
Entity Central Index Key	0000718924
Trading Symbol	span
Current Fiscal Year End Date	--10-01
Entity Filer Category	Non-accelerated Filer
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Entity Common Stock, Shares Outstanding (in shares)		2,755,625
Document Type	10-Q
Document Period End Date	Jul. 02, 2016
Document Fiscal Year Focus	2016
Document Fiscal Period Focus	Q3
Amendment Flag	false

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Consolidated Balance Sheets (Current Period Unaudited) - USD ($)	Jul. 02, 2016	Oct. 03, 2015
Current assets:
Cash and cash equivalents	$ 3,231,435	$ 1,224,026	[1]
Accounts receivable, net of allowances of $143,000 (July 2, 2016) and $148,000 (Oct. 3, 2015)	5,926,248	7,813,773	[1]
Inventories - Note 3	8,108,632	8,746,039	[1]
Deferred income taxes	351,000	351,452	[1]
Prepaid expenses	975,408	411,528	[1]
Total current assets	18,592,723	18,546,818	[1]
Property, plant and equipment, net - Note 4	4,272,230	4,536,104
Goodwill	3,968,841	3,930,282	[1]
Intangibles, net - Note 5	2,064,138	2,214,762	[1]
Other assets - Note 6	2,745,968	2,953,656	[1]
	31,643,900	32,181,622	[1]
Current liabilities:
Accounts payable	2,318,840	4,035,333	[1]
Accrued and sundry liabilities	2,680,649	3,120,111	[1]
Total current liabilities	4,999,489	7,155,444	[1]
Deferred income taxes	349,969	348,479	[1]
Deferred compensation	311,282	375,939	[1]
Total long-term liabilities	661,251	724,418	[1]
Total liabilities	5,660,740	7,879,862	[1]
Common stock, no par value, 20,000,000 shares authorized; issued and outstanding shares 2,734,468 (July 2, 2016) and 2,737,468 (Oct. 3, 2015)	169,380		[1]
Additional paid-in capital			[1]
Retained earnings	28,163,034	26,848,299	[1]
Accumulated other comprehensive loss	(2,349,254)	(2,546,539)	[1]
Total shareholders' equity	25,983,160	24,301,760	[1]
	$ 31,643,900	$ 32,181,622	[1]

[1] The Balance Sheet at October 3, 2015, has been derived from the audited financial statements at that date.

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Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - USD ($)	Jul. 02, 2016	Oct. 03, 2015	[1]
Allowance for doubtful accounts	$ 143,000	$ 148,000
Common stock, par value (in dollars per share)	$ 0	$ 0
Common stock, authorized (in shares)	20,000,000	20,000,000
Common stock, issued (in shares)	2,734,468	2,737,468
Common stock, outstanding (in shares)	2,734,468	2,737,468

[1] The Balance Sheet at October 3, 2015, has been derived from the audited financial statements at that date.

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Consolidated Statements of Comprehensive Income (Unaudited) - USD ($)		3 Months Ended		9 Months Ended
		Jul. 02, 2016	Jun. 27, 2015	Jul. 02, 2016	Jun. 27, 2015
Net sales		$ 15,347,377	$ 15,813,474	$ 51,652,188	$ 46,567,766
Cost of goods sold		9,693,582	10,372,903	35,324,256	30,696,346
Gross profit		5,653,795	5,440,571	16,327,932	15,871,420
Selling and marketing expenses		2,697,970	2,717,470	7,844,102	8,090,610
Research and development expenses		276,553	281,798	845,717	877,726
General and administrative expenses		1,193,092	1,123,101	3,435,288	3,316,021
		4,167,615	4,122,369	12,125,107	12,284,357
Operating income		1,486,180	1,318,202	4,202,825	3,587,063
Non-operating income (expense):
Foreign currency (loss) gain		(67,025)	65,154	410	263,103
Interest expense				(5,144)	(6,285)
Other		64	(821)	(7,371)	45,417
Net non-operating income (expense)		(66,961)	64,333	(12,105)	302,235
Income before income taxes		1,419,219	1,382,535	4,190,720	3,889,298
Provision for income taxes		484,000	420,000	1,355,000	1,183,000
Net income		935,219	962,535	2,835,720	2,706,298
Other comprehensive income (loss), after tax:
Foreign currency translation gain (loss)		73,724	207,013	197,285	(920,598)
Comprehensive income		$ 1,008,943	$ 1,169,548	$ 3,033,005	$ 1,785,700
Net income per share of common stock:
Basic (in dollars per share)		$ 0.34	$ 0.32	$ 1.04	$ 0.91
Diluted (in dollars per share)		0.34	0.32	1.03	0.90
Dividends per common share (1) (in dollars per share)	[1]	$ 0.16	$ 0.15	$ 0.48	$ 1.45
Weighted average shares outstanding:
Basic (in shares)		2,734,468	2,991,192	2,729,743	2,976,994
Diluted (in shares)		2,758,503	3,017,536	2,755,161	3,006,430

[1] Dividends per common share for the nine months ended June 27, 2015 include a special dividend of $1.00 per share paid on January 7, 2015.

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Consolidated Statements of Cash Flows (Unaudited) - USD ($)	9 Months Ended
	Jul. 02, 2016		Jun. 27, 2015
Operating activities:
Net income	$ 2,835,720		$ 2,706,298
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	902,022		917,544
Provision for losses on accounts receivable	(7,051)		41,956
Loss (Gain) on sale and disposal of equipment and patents	7,686		(45,850)
Loss on disposal of other assets	3,863
Increase in cash value of life insurance	(106,036)		(110,567)
Deferred compensation	(64,657)		(61,138)
Stock compensation expense			19,978
Changes in operating assets and liabilities:
Accounts receivable	1,913,099		(1,860,815)
Inventories	690,735		546,957
Prepaid expenses and other assets	11,811		326,793
Accounts payable and accrued and sundry liabilities	(2,226,846)		1,525,254
Net cash provided by operating activities	3,960,346		4,006,410
Investing activities:
Purchases of property and equipment	(391,567)		(505,085)
Proceeds from sale of equipment and patents			47,339
Payments for other assets	(71,548)		(65,592)
Net cash used for investing activities	(463,115)		(523,338)
Financing activities:
Dividends paid	(1,311,105)		(4,302,391)
Proceeds of long-term debt	2,900,000
Repayment of long-term debt	(2,900,000)
Purchase and retirement of common stock	(209,880)
Common stock issued upon exercise of options			180,708
Net cash used for financing activities	(1,520,985)		(4,121,683)
Effect of exchange rates on cash	31,163		(67,633)
Increase (Decrease) in cash and cash equivalents	2,007,409		(706,244)
Cash and cash equivalents at beginning of period	1,224,026	[1]	6,865,931
Cash and cash equivalents at end of period	$ 3,231,435		$ 6,159,687

[1] The Balance Sheet at October 3, 2015, has been derived from the audited financial statements at that date.

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Note 1 - Significant Accounting Policies

9 Months Ended

Jul. 02, 2016

Notes to Financial Statements

Significant Accounting Policies [Text Block]

1. SIGNIFICANT ACCOUNTING POLICIES

Span-America Medical Systems, Inc. (the “Company,” “we,” or “Span-America”), located in Greenville, SC, has prepared the accompanying unaudited consolidated financial statements in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In our opinion, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended July 2, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending October 1, 2016. The unaudited Consolidated Financial Statements appearing in this Quarterly Report should be read in conjunction with the audited Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 3, 2015. Our accounting policies are consistent with those described in our Significant Accounting Policies in the Form 10-K, including but not limited to those set forth below.

Our wholly-owned subsidiary, Span Medical Products Canada Inc. (“Span-Canada”), a British Columbia corporation, located in Beamsville, Ontario, Canada, is operated under the registered business name M.C. Healthcare Products (“M.C. Healthcare”). In addition, we use the name “Span-U.S.” in this report to refer to the original U.S. operations of Span-America prior to the acquisition of the assets of M.C. Healthcare Products Inc.

Principles of Consolidation

The consolidated financial statements include the accounts of Span-U.S. and Span-Canada, its wholly-owned subsidiary. Significant inter-entity accounts and transactions have been eliminated.

Foreign Currency Translation

Span-Canada uses the Canadian dollar as its functional currency. The assets and liabilities of Span-Canada are translated into U.S. dollars at the quarter-end exchange rate. Revenues and expenses are translated at weighted average exchange rates. The resulting translation adjustments are recorded as a separate component of shareholders’ equity in “Accumulated Other Comprehensive Loss.”

Revenue Recognition

We recognize revenue when title and risk of loss pass to the customer and collection is reasonably assured. Our sales prices are fixed at the time revenue is recognized.

Recently Issued Accounting Standards

In November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-07, "Balance Sheet Classification of Deferred Taxes (Topic 740)." Current guidance requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position; however, the new guidance requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.  Early adoption is permitted. The Company is currently assessing the potential impact of this new accounting pronouncement on the Company's statement of financial position.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires the lessee to recognize assets and liabilities for leases with lease terms of more than twelve months. For leases with a term of twelve months or less, the Company is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. Further, the standard also requires a finance lease to recognize both an interest expense and an amortization of the associated expense. Operating leases generally recognize the associated expense on a straight line basis. ASU 2016-02 requires the Company to adopt the standard using a modified retrospective approach and adoption beginning on January 1, 2019. The Company is currently evaluating the impact that ASU 2016-02 will have on its financial position, results of operations and cash flows.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our financial statements upon adoption.

Stock-Based Compensation

We measure and recognize compensation expense for all stock-based payments at fair value. Stock-based payments include stock option grants. We grant options to purchase common stock to some of our employees under various plans at prices equal to the market value of the stock on the dates the options are granted. New shares of common stock are issued upon share option exercise. We do not have treasury stock. We have not made any stock option grants since fiscal year 2011.

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Note 2 - Fair Value of Financial Instruments

9 Months Ended

Jul. 02, 2016

Notes to Financial Statements

Fair Value Disclosures [Text Block]

2

. FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table summarizes information on the fair value measurement of certain Company assets as of July 2, 2016 and October 3, 2015 grouped by the categories prescribed by the FASB:

	Total		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Cash value of life insurance policies:
July 2, 2016	$	2,649,228		-	$	2,649,228		-
October 3, 2015		2,543,192		-	$	2,543,192		-

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Note 3 - Inventories

9 Months Ended

Jul. 02, 2016

Notes to Financial Statements

Inventory Disclosure [Text Block]

3. INVENTORIES

	July 2, 2016			October 3, 2015
Raw materials	$	6,030,040		$	5,455,942
Work in process		573,294			338,296
Finished goods		2,110,298			3,521,801
Reserve for obsolescence		(605,000	)		(570,000	)
	$	8,108,632		$	8,746,039

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Note 4 - Property and Equipment

9 Months Ended

Jul. 02, 2016

Notes to Financial Statements

Property, Plant and Equipment Disclosure [Text Block]

4

. PROPERTY AND EQUIPMENT

	July 2, 2016			October 3, 2015
Land	$	469,718		$	469,718
Land improvements		486,698			486,698
Buildings		6,991,245			6,941,084
Machinery and equipment		9,489,664			9,241,581
Furniture and fixtures		507,251			487,856
Construction in process		97,511			85,329
Automobiles		24,075			9,520
		18,066,162			17,721,786
Less accumulated depreciation		(13,793,932	)		(13,185,682	)
	$	4,272,230		$	4,536,104

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Note 5 - Intangibles

9 Months Ended

Jul. 02, 2016

Notes to Financial Statements

Intangible Assets Disclosure [Text Block]

5

. INTANGIBLES

	July 2, 2016			October 3, 2015
Patents and trademarks	$	2,241,298		$	2,203,673
Trade names		348,998			342,416
Non-competition agreements		152,932			150,048
Customer relationships		2,565,329			2,516,952
		5,308,557			5,213,089
Less accumulated amortization		(3,244,419	)		(2,998,327	)
Net intangibles	$	2,064,138		$	2,214,762

Changes in the balances shown for trade names, non-competition agreements and customer relationships result solely from foreign currency fluctuations.

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Note 6 - Other Assets

9 Months Ended

Jul. 02, 2016

Notes to Financial Statements

Other Assets Disclosure [Text Block]

6

. OTHER ASSETS

	July 2, 2016		October 3, 2015
Cash value of life insurance policies - Note 2	$	2,649,228	$	2,543,192
Other		96,740		410,464
	$	2,745,968	$	2,953,656

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Note 7 - Product Warranties

9 Months Ended

Jul. 02, 2016

Notes to Financial Statements

Product Warranty Disclosure [Text Block]

7

. PRODUCT WARRANTIES

We offer warranties of various durations to our customers, depending on the specific product sold. The warranties require us to repair or replace non-performing products during the warranty period at no cost to the customer. At the time revenue is recognized for products covered by warranties, we record a liability for estimated costs that may be incurred under our warranties. The costs are estimated based on historical experience, including any specific warranty problems that have been identified and recovery of secondary warranty cost from component suppliers.  The amounts shown below are presented net of any expected cost recovery from suppliers. Although historical warranty costs have been within our expectations, there can be no assurance that future warranty costs will not exceed historical amounts. We regularly evaluate the adequacy of the warranty liability and adjust the balance as necessary.

Changes in our product warranty liability for the nine months ended July 2, 2016 and June 27, 2015 are as follows:

	Nine Months Ended
	July 2, 2016			June 27, 2015
Accrued liability at beginning of period	$	291,980		$	257,860
Increase in reserve		186,090			197,850
Repairs and replacements		(163,025	)		(164,681	)
Accrued liability at end of period	$	315,045		$	291,029

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Note 8 - Earnings Per Share of Common Stock

9 Months Ended

Jul. 02, 2016

Notes to Financial Statements

Earnings Per Share [Text Block]

8

. EARNINGS PER SHARE OF COMMON STOCK

The following table sets forth the computation of basic and diluted earnings per share of our common stock.

	Three Months Ended				Nine Months Ended
	July 2, 2016		June 27, 2015		July 2, 2016		June 27, 2015
Numerator for basic and diluted earnings per share:
Net income	$	935,219	$	962,535	$	2,835,720	$	2,706,298
Denominator:
Denominator for basic earnings per share:
Weighted average shares		2,734,468		2,991,192		2,729,743		2,976,994
Effect of dilutive securities:
Employee stock options		24,035		26,344		25,418		29,436
Denominator for diluted earnings per share:
Adjusted weighted average shares and assumed conversions		2,758,503		3,017,536		2,755,161		3,006,430
Net income per share of common stock:
Basic	$	0.34	$	0.32	$	1.04	$	0.91
Diluted	$	0.34	$	0.32	$	1.03	$	0.90

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Note 9 - Operations and Industry Segments

9 Months Ended

Jul. 02, 2016

Notes to Financial Statements

Segment Reporting Disclosure [Text Block]

9

. OPERATIONS AND INDUSTRY SEGMENTS

For management and reporting purposes, we divide our business into two segments: Medical and Custom Products. This industry segment information corresponds to the markets in the United States and Canada for which we manufacture and distribute our various products.

The following table summarizes certain information on industry segments:

	Three Months Ended						Nine Months Ended
	July 2, 2016			June 27, 2015			July 2, 2016			June 27, 2015
Net sales:
Medical	$	11,529,818		$	11,663,716		$	33,894,632		$	35,602,295
Custom products		3,817,559			4,149,758			17,757,556			10,965,471
	$	15,347,377		$	15,813,474		$	51,652,188		$	46,567,766
Operating profit (loss):
Medical	$	1,404,014		$	1,404,066		$	4,135,116		$	4,404,386
Custom products		284,745			89,762			643,965			(255,893	)
		1,688,759			1,493,828			4,779,081			4,148,493
Corporate expense		(202,579	)		(175,626	)		(576,256	)		(561,430	)
Other income (expense)		(66,961	)		64,333			(12,105	)		302,235
Income before income taxes	$	1,419,219		$	1,382,535		$	4,190,720		$	3,889,298

Total sales by industry segment include sales to unaffiliated customers as reported in our consolidated statements of comprehensive 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 both segments are included on an allocated basis.

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Note 10 - Commitments and Contingencies

9 Months Ended

Jul. 02, 2016

Notes to Financial Statements

Commitments and Contingencies Disclosure [Text Block]

1

0

. COMMITMENTS AND CONTINGENCIES

From time to time we are defendants in legal actions involving claims arising in the normal course of business. We believe that, as a result of legal defenses and insurance arrangements with parties we believe to be financially capable, none of these actions, if determined adversely, should have a material adverse effect on our operations or financial condition.

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Significant Accounting Policies (Policies)

9 Months Ended

Jul. 02, 2016

Accounting Policies [Abstract]

Consolidation, Policy [Policy Text Block]

Principles of Consolidation

The consolidated financial statements include the accounts of Span-U.S. and Span-Canada, its wholly-owned subsidiary. Significant inter-entity accounts and transactions have been eliminated.

Foreign Currency Transactions and Translations Policy [Policy Text Block]

Foreign Currency Translation

Span-Canada uses the Canadian dollar as its functional currency. The assets and liabilities of Span-Canada are translated into U.S. dollars at the quarter-end exchange rate. Revenues and expenses are translated at weighted average exchange rates. The resulting translation adjustments are recorded as a separate component of shareholders’ equity in “Accumulated Other Comprehensive Loss.”

Revenue Recognition, Policy [Policy Text Block]

Revenue Recognition

We recognize revenue when title and risk of loss pass to the customer and collection is reasonably assured. Our sales prices are fixed at the time revenue is recognized.

New Accounting Pronouncements, Policy [Policy Text Block]

Recently Issued Accounting Standards

In November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-07, "Balance Sheet Classification of Deferred Taxes (Topic 740)." Current guidance requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position; however, the new guidance requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.  Early adoption is permitted. The Company is currently assessing the potential impact of this new accounting pronouncement on the Company's statement of financial position.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires the lessee to recognize assets and liabilities for leases with lease terms of more than twelve months. For leases with a term of twelve months or less, the Company is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. Further, the standard also requires a finance lease to recognize both an interest expense and an amortization of the associated expense. Operating leases generally recognize the associated expense on a straight line basis. ASU 2016-02 requires the Company to adopt the standard using a modified retrospective approach and adoption beginning on January 1, 2019. The Company is currently evaluating the impact that ASU 2016-02 will have on its financial position, results of operations and cash flows.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our financial statements upon adoption.

Share-based Compensation, Option and Incentive Plans Policy [Policy Text Block]

Stock-Based Compensation

We measure and recognize compensation expense for all stock-based payments at fair value. Stock-based payments include stock option grants. We grant options to purchase common stock to some of our employees under various plans at prices equal to the market value of the stock on the dates the options are granted. New shares of common stock are issued upon share option exercise. We do not have treasury stock. We have not made any stock option grants since fiscal year 2011.

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Note 2 - Fair Value of Financial Instruments (Tables)

9 Months Ended

Jul. 02, 2016

Notes Tables

Fair Value, Assets Measured on Recurring and Nonrecurring Basis [Table Text Block]

	Total		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Cash value of life insurance policies:
July 2, 2016	$	2,649,228		-	$	2,649,228		-
October 3, 2015		2,543,192		-	$	2,543,192		-

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Note 3 - Inventories (Tables)

9 Months Ended

Jul. 02, 2016

Notes Tables

Schedule of Inventory, Current [Table Text Block]

	July 2, 2016			October 3, 2015
Raw materials	$	6,030,040		$	5,455,942
Work in process		573,294			338,296
Finished goods		2,110,298			3,521,801
Reserve for obsolescence		(605,000	)		(570,000	)
	$	8,108,632		$	8,746,039

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Note 4 - Property and Equipment (Tables)

9 Months Ended

Jul. 02, 2016

Notes Tables

Property, Plant and Equipment [Table Text Block]

	July 2, 2016			October 3, 2015
Land	$	469,718		$	469,718
Land improvements		486,698			486,698
Buildings		6,991,245			6,941,084
Machinery and equipment		9,489,664			9,241,581
Furniture and fixtures		507,251			487,856
Construction in process		97,511			85,329
Automobiles		24,075			9,520
		18,066,162			17,721,786
Less accumulated depreciation		(13,793,932	)		(13,185,682	)
	$	4,272,230		$	4,536,104

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Note 5 - Intangibles (Tables)

9 Months Ended

Jul. 02, 2016

Notes Tables

Schedule of Finite-Lived Intangible Assets [Table Text Block]

	July 2, 2016			October 3, 2015
Patents and trademarks	$	2,241,298		$	2,203,673
Trade names		348,998			342,416
Non-competition agreements		152,932			150,048
Customer relationships		2,565,329			2,516,952
		5,308,557			5,213,089
Less accumulated amortization		(3,244,419	)		(2,998,327	)
Net intangibles	$	2,064,138		$	2,214,762

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Note 6 - Other Assets (Tables)

9 Months Ended

Jul. 02, 2016

Notes Tables

Schedule of Other Assets, Noncurrent [Table Text Block]

	July 2, 2016		October 3, 2015
Cash value of life insurance policies - Note 2	$	2,649,228	$	2,543,192
Other		96,740		410,464
	$	2,745,968	$	2,953,656

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Note 7 - Product Warranties (Tables)

9 Months Ended

Jul. 02, 2016

Notes Tables

Schedule of Product Warranty Liability [Table Text Block]

	Nine Months Ended
	July 2, 2016			June 27, 2015
Accrued liability at beginning of period	$	291,980		$	257,860
Increase in reserve		186,090			197,850
Repairs and replacements		(163,025	)		(164,681	)
Accrued liability at end of period	$	315,045		$	291,029

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Note 8 - Earnings Per Share of Common Stock (Tables)

9 Months Ended

Jul. 02, 2016

Notes Tables

Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]

	Three Months Ended				Nine Months Ended
	July 2, 2016		June 27, 2015		July 2, 2016		June 27, 2015
Numerator for basic and diluted earnings per share:
Net income	$	935,219	$	962,535	$	2,835,720	$	2,706,298
Denominator:
Denominator for basic earnings per share:
Weighted average shares		2,734,468		2,991,192		2,729,743		2,976,994
Effect of dilutive securities:
Employee stock options		24,035		26,344		25,418		29,436
Denominator for diluted earnings per share:
Adjusted weighted average shares and assumed conversions		2,758,503		3,017,536		2,755,161		3,006,430
Net income per share of common stock:
Basic	$	0.34	$	0.32	$	1.04	$	0.91
Diluted	$	0.34	$	0.32	$	1.03	$	0.90

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Note 9 - Operations and Industry Segments (Tables)

9 Months Ended

Jul. 02, 2016

Notes Tables

Schedule of Segment Reporting Information, by Segment [Table Text Block]

	Three Months Ended						Nine Months Ended
	July 2, 2016			June 27, 2015			July 2, 2016			June 27, 2015
Net sales:
Medical	$	11,529,818		$	11,663,716		$	33,894,632		$	35,602,295
Custom products		3,817,559			4,149,758			17,757,556			10,965,471
	$	15,347,377		$	15,813,474		$	51,652,188		$	46,567,766
Operating profit (loss):
Medical	$	1,404,014		$	1,404,066		$	4,135,116		$	4,404,386
Custom products		284,745			89,762			643,965			(255,893	)
		1,688,759			1,493,828			4,779,081			4,148,493
Corporate expense		(202,579	)		(175,626	)		(576,256	)		(561,430	)
Other income (expense)		(66,961	)		64,333			(12,105	)		302,235
Income before income taxes	$	1,419,219		$	1,382,535		$	4,190,720		$	3,889,298

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Note 2 - Fair Value Measurement of Assets (Details) - USD ($)	Jul. 02, 2016	Oct. 03, 2015
Fair Value, Inputs, Level 2 [Member]
Cash value of life insurance policies	$ 2,649,228	$ 2,543,192
Cash value of life insurance policies	$ 2,649,228	$ 2,543,192

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Note 3 - Components of Inventories (Details) - USD ($)	Jul. 02, 2016	Oct. 03, 2015
Raw materials	$ 6,030,040	$ 5,455,942
Work in process	573,294	338,296
Finished goods	2,110,298	3,521,801
Reserve for obsolescence	(605,000)	(570,000)
	$ 8,108,632	$ 8,746,039	[1]

[1] The Balance Sheet at October 3, 2015, has been derived from the audited financial statements at that date.

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Note 4 - Property and Equipment (Details) - USD ($)	Jul. 02, 2016	Oct. 03, 2015
Land	$ 469,718	$ 469,718
Land improvements	486,698	486,698
Buildings	6,991,245	6,941,084
Machinery and equipment	9,489,664	9,241,581
Furniture and fixtures	507,251	487,856
Construction in process	97,511	85,329
Automobiles	24,075	9,520
	18,066,162	17,721,786
Less accumulated depreciation	(13,793,932)	(13,185,682)
	$ 4,272,230	$ 4,536,104

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Note 5 - Intangibles (Details) - USD ($)	Jul. 02, 2016	Oct. 03, 2015
Patents and trademarks	$ 2,241,298	$ 2,203,673
Trade names	348,998	342,416
Non-competition agreements	152,932	150,048
Customer relationships	2,565,329	2,516,952
	5,308,557	5,213,089
Less accumulated amortization	(3,244,419)	(2,998,327)
Net intangibles	$ 2,064,138	$ 2,214,762

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Note 6 - Other Assets (Details) - USD ($)	Jul. 02, 2016	Oct. 03, 2015
Cash value of life insurance policies - Note 2	$ 2,649,228	$ 2,543,192
Other	96,740	410,464
	$ 2,745,968	$ 2,953,656	[1]

[1] The Balance Sheet at October 3, 2015, has been derived from the audited financial statements at that date.

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Note 7 - Changes in Product Warranty Liability (Details) - USD ($)	9 Months Ended
	Jul. 02, 2016	Jun. 27, 2015
Accrued liability at beginning of period	$ 291,980	$ 257,860
Increase in reserve	186,090	197,850
Repairs and replacements	(163,025)	(164,681)
Accrued liability at end of period	$ 315,045	$ 291,029

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Note 8 - Basic and Diluted Earnings Per Share (Details) - USD ($)	3 Months Ended		9 Months Ended
	Jul. 02, 2016	Jun. 27, 2015	Jul. 02, 2016	Jun. 27, 2015
Numerator for basic and diluted earnings per share:
Net income	$ 935,219	$ 962,535	$ 2,835,720	$ 2,706,298
Denominator for basic earnings per share:
Weighted average shares (in shares)	2,734,468	2,991,192	2,729,743	2,976,994
Effect of dilutive securities:
Employee stock options (in shares)	24,035	26,344	25,418	29,436
Weighted average shares outstanding:
Adjusted weighted average shares and assumed conversions (in shares)	2,758,503	3,017,536	2,755,161	3,006,430
Net income per share of common stock:
Basic (in dollars per share)	$ 0.34	$ 0.32	$ 1.04	$ 0.91
Diluted (in dollars per share)	$ 0.34	$ 0.32	$ 1.03	$ 0.90

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Note 9 - Operations and Industry Segments (Details Textual)	9 Months Ended
	Jul. 02, 2016
Number of Reportable Segments	2

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Note 9 - Information on Industry Segments (Details) - USD ($)	3 Months Ended		9 Months Ended
	Jul. 02, 2016	Jun. 27, 2015	Jul. 02, 2016	Jun. 27, 2015
Medical [Member] | Operating Segments [Member]
Net sales	$ 11,529,818	$ 11,663,716	$ 33,894,632	$ 35,602,295
Operating profit	1,404,014	1,404,066	4,135,116	4,404,386
Custom Products [Member] | Operating Segments [Member]
Net sales	3,817,559	4,149,758	17,757,556	10,965,471
Operating profit	284,745	89,762	643,965	(255,893)
Operating Segments [Member]
Net sales	15,347,377	15,813,474	51,652,188	46,567,766
Operating profit	1,688,759	1,493,828	4,779,081	4,148,493
Corporate, Non-Segment [Member]
Corporate expense	(202,579)	(175,626)	(576,256)	(561,430)
Operating profit	1,486,180	1,318,202	4,202,825	3,587,063
Corporate expense	4,167,615	4,122,369	12,125,107	12,284,357
Other income (expense)	(66,961)	64,333	(12,105)	302,235
Income before income taxes	$ 1,419,219	$ 1,382,535	$ 4,190,720	$ 3,889,298