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Acquisition of Elcom Technologies, Inc.
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Apr. 30, 2012
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| Acquisition of Elcom Technologies, Inc. | 11. Acquisition of Elcom Technologies, Inc.
On February 21, 2012, the Company purchased 74.88% of the capital stock of Elcom. Prior to the acquisition, the Company had a minority ownership interest of 25.12% of the capital stock of Elcom. After the acquisition, the Company owned 100% and changed the subsidiary’s name to FEI-Elcom Tech, Inc. The Company acquired Elcom as, in addition to its own product line, Elcom provides design and technical support for the Company’s satellite business, which accounts for a significant amount of the Company’s consolidated revenue. For the acquisition, the Company paid approximately $4.1 million to the shareholders for their shares of common stock and an additional $910,000 to certain selling shareholders to settle their outstanding debt with Elcom. In addition the Company had notes due from Elcom with a book value of approximately $1.7 million which was forgiven as an additional investment in Elcom. Based on the amounts paid to the Elcom shareholders, the Company determined that the fair value of Elcom at the date of acquisition was approximately $7.9 million. The Company’s determination of the fair value of Elcom at the date of acquisition included an adjustment for a control premium of 15% based on the total value at the date of acquisition.
The fair value of Elcom at the date of the transaction was allocated to $4.6 million of net tangible assets, deferred taxes of $2.6 million, and approximately $700,000 of intangible assets, including goodwill of approximately $400,000. None of the goodwill is expected to be deductible for income tax purposes.
The FEI-Elcom transaction is considered a “step acquisition” by generally accepted accounting principles. Such an acquisition required the Company to remeasure its previously held equity interest in Elcom and adjust it to fair value. The difference between the fair value of the Company’s ownership in Elcom and the Company’s carrying value of its investment resulted in the recognition of a gain of approximately $730,000.
Prior to the acquisition of Elcom, the Company recorded its share of Elcom’s income or loss on the equity method. In addition, periodically the Company measured the market value of Elcom based on comparisons to comparable companies as well as Elcom’s forecasts of future financial results. For the year ended April 30, 2012, in addition to its equity share in the income or loss of Elcom during the year, the Company determined that its investment was impaired and recorded impairment charges in the amount $350,000. No impairment charges were recorded during the year ended April 30, 2011.
During the fiscal years ended April 30, 2012 and 2011, prior to the acquisition of Elcom, the Company acquired technical services from Elcom in the aggregate amount of approximately $16,000 and $317,000, respectively; sold product to Elcom in the amount of approximately $5,000 and $133,000, respectively; and the Company recorded interest income on notes to Elcom in the amount of approximately $87,000 and $90,000, respectively.
The estimated fair value of Elcom has been allocated as follows.
The Company incurred approximately $230,000 in acquisition related costs applicable to the transaction during the fiscal year. These expenses are included in selling and administrative expenses in the Company’s Consolidated Statements of Income
Theaccompanying consolidated statements of income for the years ended April 30, 2012 include the results of operations of FEI-Elcom since February 21, 2012 and include revenue of $840,000 and an operating loss of $700,000. The pro forma financial information set forth below is based upon the Company’s historical consolidated statements of income for the years ended April 30, 2012 and 2011, adjusted to give effect to the acquisition of FEI-Elcom as if it had occurred at the beginning of each of the periods presented. The fiscal year 2011 financial information includes the results of operations of FEI-Elcom for the period April 1, 2010 to March 31, 2011.
The pro forma financial information is presented for informational purposes only and may not be indicative of what actual results of operations would have been had the acquisition occurred on May 1, 2011 or 2010, nor does it purport to represent the results of operations for future periods. The pro forma results of operations do not include the gain on the Company’s original investment of $730,000 or the impairment of the Company’s investment in Elcom during fiscal year 2012.
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