SPAN AMERICA MEDICAL SYSTEMS INC

We announced on May 1, 2017 that we have entered into an agreement and plan of merger (the “Merger Agreement”) to be acquired by Savaria Corporation, an Alberta, Canada corporation ("Savaria") (TSX:SIS).  The Merger Agreement calls for an indirect wholly-owned subsidiary of Savaria to acquire Span-America by way of an all-cash tender offer for $29 per share, or approximately $80.2 million, followed by a merger in which such subsidiary will acquire all of the remaining shares not purchased in the tender offer (other than shares owned by us, Savaria or any stockholder who validly exercises any applicable dissenters’ rights).  The transaction is expected to close in the second calendar quarter of 2017.  The Board of Directors of Span-America unanimously approved the Merger Agreement and the transactions contemplated thereby.  The transaction is subject to customary closing conditions, including receipt of two-thirds of Span-America's shares on a fully diluted basis in a tender offer to Span-America's shareholders.  All of the members of Span-America's board of directors and its senior officers have entered into tender support agreements with Savaria committing, subject to certain conditions and exceptions, to tender (without a right of withdrawal) all of their Span-America shares, constituting in aggregate approximately 15.9% of its outstanding shares (excluding shares receivable upon the exercise of vested and exercisable options).  Following the successful completion of the tender offer, the Merger Agreement requires Savaria to cause to be acquired all remaining shares not tendered in the tender offer (other than shares owned by us, Savaria or any stockholder who validly exercises any applicable dissenters’ rights) through a second-step merger at the same price per share as that payable under the offer.

  Examples of such statements in this discussion include without limitation statements regarding the planned completion of the tender offer and the merger described above. These forward-looking statements are subject to a number of risks and uncertainties. Actual events or results may differ materially as a result of risks and uncertainties facing our Company, including Span-Canada. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are: (a) uncertainties as to the percentage of Span-America's stockholders tendering their shares in the tender offer, (b) the possibility that competing offers will be made, (c) the possibility that various closing conditions for the tender offer or the merger may not be satisfied or waived, including that a governmental entity may prohibit or delay the consummation of the merger, (d) the effects of disruption caused by the transaction making it more difficult to maintain relationships with employees, vendors and other business partners, (e) the risk that stockholder or other litigation in connection with the tender offer or the merger may result in significant costs of defense, indemnification and liability, (f) the “Risk Factors” described in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended October 1, 2016, (g) other risks referenced in our Securities and Exchange Commission filings or (h) 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   Savaria Corporation Tender Offer and Merger. We announced on May 1, 2017 that we have entered into an agreement and plan of merger (the “Merger Agreement”) to be acquired by Savaria Corporation, an Alberta, Canada corporation ("Savaria") (TSX:SIS).  The Merger Agreement calls for an indirect wholly-owned subsidiary of Savaria to acquire Span-America by way of an all-cash tender offer for $29 per share, or approximately $80.2 million, followed by a merger in which such subsidiary will acquire all of the remaining shares not purchased in the tender offer (other than shares owned by us, Savaria or any stockholder who validly exercises any applicable dissenters’ rights).  The transaction is expected to close in the second calendar quarter of 2017.  The Board of Directors of Span-America unanimously approved the Merger Agreement and the transactions contemplated thereby.  The transaction is subject to customary closing conditions, including receipt of two-thirds of Span-America's shares on a fully diluted basis in a tender offer to Span-America's shareholders.  All of the members of Span-America's board of directors and its senior officers have entered into tender support agreements with Savaria committing, subject to certain conditions and exceptions, to tender (without a right of withdrawal) all of their Span-America shares, constituting in aggregate approximately 15.9% of its outstanding shares (excluding shares receivable upon the exercise of vested and exercisable options).  Following the successful completion of the tender offer, the Merger Agreement requires Savaria to cause to be acquired all remaining shares not tendered in the tender offer (other than shares owned by us, Savaria or any stockholder who validly exercises any applicable dissenters’ rights) through a second-step merger at the same price per share as that payable under the offer.  Please see Span-America’s current report on Form 8-K dated May 1, 2017 and filed with the SEC on May 1, 2017 for more information about this proposed transaction.         Additional Information. The tender offer referred to in this quarterly report has not yet commenced. This quarterly report does not constitute an offer to purchase or the solicitation of an offer to sell any securities. At the time the tender offer is commenced, Savaria and its merger subsidiary (“Merger Sub”) intend to file with the SEC a Tender Offer Statement on Schedule TO containing an offer to purchase, a form of letter of transmittal and other documents relating to the tender offer, and we intend to file with the SEC a Solicitation/Recommendation Statement on Schedule 14D-9 with respect to the tender offer. Savaria, Merger Sub and Span-America intend to mail these documents to our stockholders. Our stockholders are advised to read the Schedule TO (including the offer to purchase, the related letter of transmittal and the other offer documents) and the Schedule 14D-9, as each may be amended or supplemented from time to time, and any other relevant documents filed with the SEC when they become available, before making any decision with respect to the tender offer because these documents will contain important information about the proposed transaction and the parties thereto. Company stockholders and investors may obtain free copies of the Schedule TO and Schedule 14D-9, as each may be amended or supplemented from time to time, and other documents filed by the parties (when available) at the SEC’s website at www.sec.gov.

Savaria Corporation Tender Offer and Merger. We announced on May 1, 2017 that we have entered into an agreement and plan of merger (the “Merger Agreement”) to be acquired by Savaria Corporation, an Alberta, Canada corporation ("Savaria") (TSX:SIS).  The Merger Agreement calls for an indirect wholly-owned subsidiary of Savaria to acquire Span-America by way of an all-cash tender offer for $29 per share, or approximately $80.2 million, followed by a merger in which such subsidiary will acquire all of the remaining shares not purchased in the tender offer (other than shares owned by us, Savaria or any stockholder who validly exercises any applicable dissenters’ rights).  The transaction is expected to close in the second calendar quarter of 2017.  The Board of Directors of Span-America unanimously approved the Merger Agreement and the transactions contemplated thereby.  The transaction is subject to customary closing conditions, including receipt of two-thirds of Span-America's shares on a fully diluted basis in a tender offer to Span-America's shareholders.  All of the members of Span-America's board of directors and its senior officers have entered into tender support agreements with Savaria committing, subject to certain conditions and exceptions, to tender (without a right of withdrawal) all of their Span-America shares, constituting in aggregate approximately 15.9% of its outstanding shares (excluding shares receivable upon the exercise of vested and exercisable options).  Following the successful completion of the tender offer, the Merger Agreement requires Savaria to cause to be acquired all remaining shares not tendered in the tender offer (other than shares owned by us, Savaria or any stockholder who validly exercises any applicable dissenters’ rights) through a second-step merger at the same price per share as that payable under the offer.  Please see Span-America’s current report on Form 8-K dated May 1, 2017 and filed with the SEC on May 1, 2017 for more information about this proposed transaction.

Net income for the second quarter of fiscal 2017 increased by 126% to $1.7 million, or $0.62 per diluted share, compared with $758,000, or $0.28 per diluted share, in the second quarter last fiscal year. Net income for the first six months of fiscal 2017 increased by 41% to $2.7 million, or $0.97 per diluted share, compared with $1.9 million, or $0.69 per diluted share, for the same period in fiscal 2016. The increases in net income and earnings per share were the result of higher sales volume in the medical segment, a more profitable sales mix and the non-recurring gain from life insurance proceeds described above. Excluding the gain from life insurance proceeds of $0.26 per diluted share, diluted earnings per share for the second quarter of fiscal 2017 would have been $0.35 per share, a 25% increase compared with $0.28 per share in the second quarter of fiscal 2016.

  Cash provided by operations during the first half of fiscal 2017 decreased by 24% to $1.5 million compared with $1.9 million in the first half of fiscal 2016. The decrease in cash flow from operations was caused by a less favorable change in working capital accounts in the first half of fiscal 2017 compared with the same period in fiscal 2016, which was related to the seasonal promotion of consumer products that took place in the first half of fiscal 2016. Our balances in inventories and accounts payable were higher than usual at the beginning of fiscal year 2016 because of the in-process seasonal promotion.  Those inventory and accounts payable balances returned to normal levels by the end of the second quarter of fiscal 2016, creating larger-than-usual changes in those accounts during the first half of fiscal 2016.  The changes in our inventory and accounts payable balances during the first half of fiscal 2017 represent normal monthly fluctuations and were primarily caused by monthly sales volume changes.  The changes in accounts receivable balances in both periods were not affected by the promotion because the promotion-related receivables were invoiced and collected during the first six months of fiscal 2016 and were therefore not on the beginning or ending balance sheets for the first half of fiscal 2016.  Consequently, the changes in accounts receivable balances in both periods were related almost entirely to monthly sales fluctuations. Our primary uses of cash during the first six months of fiscal 2017 were dividend payments of $882,000 and capital expenditures of $317,000.