Note 2 - Acquisition of M.C. Healthcare Products Inc.

3 Months Ended

Mar. 31, 2012

Mergers, Acquisitions and Dispositions Disclosures [Text Block]

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 approximately $9,800,000, including cash of approximately $7,900,000 at the time of closing and a $400,000 post-closing working capital adjustment, paid in January 2012, plus 100,000 shares of Span-America common stock valued at approximately $1,400,000.  MCHP manufactures medical bed frames and related products primarily for the long-term care market.  We funded the acquisition through a combination of cash on hand, proceeds of sale of securities available for sale and proceeds of approximately $6,500,000 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 $1,800,000, inventories of $2,200,000, prepaid assets of $50,000, equipment of $300,000, accounts payable and other current liabilities of $1,100,000 and intangibles of $4,000,000.  No cash was acquired.  The excess of the consideration transferred over the net tangible and intangible assets is reflected as goodwill of $2,500,000.  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/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 March 31, 2012, M.C. Healthcare contributed net revenues of approximately $5,975,000 and operating income of approximately $1,115,000.  These results are included in the Consolidated Financial Statements.

If the purchase had occurred on October 2, 2011, pro-forma net revenues of the combined company for the six months ended March 31, 2012 would have been approximately $43,817,000 and would have resulted in pro-forma net income of approximately $3,081,000 or pro-forma net income per diluted share of $1.06.  See Form 8-K/A filed on February 24, 2012 for additional information.

The following table is a reconciliation of the carrying amount of goodwill resulting from the M.C. Healthcare asset acquisition at the beginning and ending of the quarter ended March 31, 2012.

Goodwill at January 1, 2012	$	6,529,885
Adjustment to increase inventories to fair market value		(160,281	)
Adjustment to allocate total consideration to other intangibles based on preliminary valuation		(3,971,748	)
Increase in foreign currency exchange rate		127,503
Goodwill at March 31, 2012	$	2,525,359