BUSINESS ACQUISITION

12 Months Ended

Dec. 31, 2011

BUSINESS ACQUISITION

BUSINESS ACQUISITION

NOTE 9 BUSINESS ACQUISITION

        On May 4, 2010, we acquired all of the intellectual property and assets, excluding cash and receivables, of Trivirix Corporation, Milaca, MN for cash of $403,000. The fair value of assets acquired included $303,000 in inventories 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 expands our capabilities and expertise serving medical electronics manufacturers. The acquisition has been 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 certain assets and certain liabilities relating to Winland Electronics, Inc.'s EMS operations (Winland) 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 inventories to be consumed over a period of 24 months. We have exceeded this minimum requirement as of December 31, 2011.

        We also agreed to manufacture certain products for Winland's remaining proprietary monitoring devices business unit. For the year ended December 31, 2011, sales to Winland were approximately $2,700,000. Accounts receivable outstanding from Winland was approximately $424,000 at December 31, 2011. 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 through December 31, 2011. This sublease is now month to month. Net rent expense under this operating lease for the year ended December 31, 2011 was approximately $253,000 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
Purchase price		1,542,389
Bargain purchase gain	$	791,615

        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 For the Year Ended December 31, 2010 (unaudited)
Net Sales	$	114,473,000
Loss from Continuing Operations	$	(291,000	)
Net Loss	$	(0.11	)
Basic Loss per Common Share	$	(0.11	)

        Combined results for the two companies for the year ended December 31, 2010 were adjusted for the following in order to create the unaudited proforma results in the table above:

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  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,

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

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  Elimination of inventory obsolescence charges of approximately $297,000 as we did not acquire Winland's inventory as part of the acquisition,

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  Tax benefit of approximately $489,000 using an effective tax rate of 38 percent,

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  The impact of these adjustments on outstanding shares of 2,742,389 was to decrease proforma loss per share by $0.29.

        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.