ACQUISITIONS

9 Months Ended

Sep. 30, 2011

ACQUISITIONS

ACQUISITIONS

NOTE 6.  ACQUISITIONS

On May 4, 2010, we acquired all of the intellectual property and assets, excluding cash and receivables, of Trivirix Corporation, Milaca, MN from Silicon Valley Bank for cash of $403,000.  The fair value of assets acquired included $303,000 in inventory and $100,000 in property and equipment.  This operation specializes in design, manufacturing and post-production services of complex electronic and electromechanical medical devices for diagnostic, analytical and other life-science applications.  This acquisition expanded our capabilities and expertise serving medical electronics manufacturers.  The acquisition was accounted for as a business combination and results of operations for Milaca since the date of acquisition are included in the consolidated financial statements.

On January 1, 2011, we completed the purchase of Winland Electronics, Inc. assets and certain liabilities relating to their EMS operations located in Mankato, MN.  Winland is a designer and manufacturer of custom electronic control products and systems.  This purchase provided needed manufacturing capacity, particularly for supporting medical and industrial customers with printed circuit board assemblies and higher-level builds.  The acquisition was accounted for as a business combination and results of operations since the date of acquisition are included in the consolidated financial statements.

We paid $1,042,389 in cash at closing, $212,233 on July 1, 2011 and $250,000 on October 1, 2011.  As provided for in the purchase agreement, our July 1, 2011 required payment of $250,000 was reduced by $37,767 for acquired accounts receivable which were deemed uncollectible in the second quarter and assigned back to Winland.  As part of the acquisition we also agreed to purchase from Winland a minimum of $2,200,000 of inventory to be consumed over a period of 24 months.  We have exceeded this minimum requirement as of September 30, 2011.

We also agreed to manufacture certain products for Winland’s remaining proprietary monitoring devices business unit.  For the nine months ended September 30, 2011, sales to Winland were approximately $2,100,000.  We also signed a six year agreement to lease office and manufacturing space at 1950 Excel Drive, Mankato, Minnesota, 56001, and sublease 1,924 square feet back to Winland for one year.  Net rent expense under this operating lease for the three and nine months ended September 30, 2011 was approximately $65,000 and $196,000, respectively, and is included in cost of good sold.

The following table presents the allocation of the acquisition cost to the assets acquired and liabilities assumed, based on their estimated fair values at the time of the acquisition:

Accounts receivable	$	1,914,723
Property, plant and equipment	2,451,000
Accounts payable assumed	(1,772,334		)
Lease payoff	(259,385		)
Net assets acquired	$	2,334,004
Cash Paid at Closing	1,042,389
Due to Winland	500,000
Purchase price	1,542,389
Bargain purchase gain	791,615
Net assets acquired	$	2,334,004

We recognized a $791,615 bargain purchase gain related to the excess fair value over the purchase price for the assets acquired in the first quarter.

The table below reflects our unaudited pro forma combined results of operations as if the acquisition had taken place as of January 1, 2010:

	Pro Forma		Pro Forma
	Three Months Ended		Nine Months Ended
	September 30, 2010		September 30, 2010
	(unaudited)		(unaudited)
Net Sales	$	29,497,000	$	83,996,000
Income from Continuing Operations	$	50,000	$	221,000
Net Income	$	22,000	$	31,000
Basic Income per Common Share	$	0.01	$	0.01

Combined results for the two companies for the three and nine months ended September 30, 2010 were adjusted for the following in order to create the unaudited proforma results in the table above:

· Additional rent expense of approximately $65,000 per quarter for the lease of the facility from Winland, offset by building depreciation of $21,000 per quarter,

· Additional depreciation expense of approximately $40,000 per quarter resulting from the adjustment of property and equipment to their fair values,

· Tax benefit of approximately $65,000 and $208,000 using an effective tax rate of 38% for the three and nine months ended September 30, 2010.

· The impact of these adjustments on outstanding shares of 2,742,992 was to decrease proforma income per share by $0.04 and $0.12 for the three and nine months ended September 30, 2010.

The pro forma unaudited results do not purport to be indicative of the results which would have been obtained had the acquisition been completed as of the beginning of the earliest period presented.  In addition they do not include any benefits that may result from the acquisition due to synergies that may be derived from the elimination of any duplicative costs.