Note 2. Acquisition Of M .C. Healthcare Products Inc .

3 Months Ended

Dec. 31, 2011

Note 2. Acquisition Of M .C. Healthcare Products Inc . Disclosure

Note 2. Acquisition Of M .C. Healthcare Products Inc .

2.    ACQUISITION OF M.C. HEALTHCARE PRODUCTS INC.

On December 9, 2011, we acquired, through a new wholly-owned subsidiary, substantially all of the assets of M.C. Healthcare Products Inc. (MCHP) for $9,692,831, including cash of $7,897,335 at the time of closing and a $354,496 post-closing working capital adjustment, payable in January 2012, plus 100,000 shares of Span-America common stock valued at $1,441,000.  MCHP manufactures hospital bed frames and related products.  We funded the acquisition through a combination of cash on hand, proceeds of sale of securities available for sale and proceeds of $6.5 million from our revolving credit facility.   The preliminary allocation of the total consideration to the fair value of the assets acquired and liabilities assumed resulted in accounts receivable of $1.80 million, inventories of $2.05 million, prepaid assets of $50,000, equipment of $300,000 and accounts payable and other current liabilities of $1.08 million.  No cash was acquired.  The excess of the consideration transferred over the net tangible and intangible assets is reflected as goodwill of $6.55 million.  We are in the process of reviewing MCHP's financial statement classifications for conformity with Span-America's classifications.  As a result of this review, it may be necessary to make additional reclassifications to the consolidated information of MCHP on a prospective basis.  We will operate MCHP under the registered business name M.C. Healthcare Products, a division of Span Medical Products Canada Inc. (Span-Canada), which is a newly-formed British Columbia corporation and wholly-owned subsidiary of Span-America Medical Systems, Inc.  Span-Canada will operate the business from MCHP’s 50,000 square foot manufacturing and showroom facility in Beamsville, Ontario under a five-year lease agreement for approximately $260,000 per year, with an option to buy or continue the lease at the end of the lease term.  Span-Canada continues to employ all 54 former MCHP employees under substantially the same terms and conditions as they were employed by MCHP, with the exception of the president and majority shareholder who retired.  MCHP’s manufacturing employees are represented by the Sheet Metal Workers’ International Association, Local Union #540.  Span-Canada, by operation of Canadian labor law, assumed MCHP’s responsibilities under its collective agreement with the union and is the successor employer for purposes of that agreement.

For the period from December 9, 2011, the date of the acquisition, through December 31, 2011, M.C. Healthcare contributed net revenues of $1,042,000 and operating income of $14,000.  These results are included in the Consolidated Financial Statements.