NOTE H - ACQUISITION OF ELCOM TECHNOLOGIES, INC.

9 Months Ended

Jan. 31, 2013

Business Combination Disclosure [Text Block]

NOTE H – ACQUISITION OF ELCOM TECHNOLOGIES, INC.

On February 21, 2012, the Company purchased 74.88% of the capital stock of Elcom Technologies, Inc. (“Elcom” and after the acquisition “FEI-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 fair 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 was accounted for as a “step acquisition” in accordance with generally accepted accounting principles.  Accordingly, the Company remeasured its previously held equity interest in Elcom and adjusted 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 at the date of the acquisition during the fourth quarter of fiscal year 2012.

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.  During the nine and three months ended January 31, 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 the collectibility of the notes receivable may be reduced.  Accordingly, the Company recorded an investment impairment charge in the amount $200,000 and an additional $150,000 allowance against the notes receivable.

During the nine and three months ended January 31, 2012, prior to the acquisition of Elcom, the Company sold product to Elcom in the amount of $4,000 and acquired technical services from Elcom in the aggregate amount of approximately $16,000 and zero, respectively, and recorded interest income on notes to Elcom in the amount of approximately $75,000 and $32,000, respectively.

The accompanying consolidated statements of income for the nine and three months ended January 31, 2013 include the results of operations of FEI-Elcom.  The pro forma financial information set forth below is based upon the Company’s historical consolidated statements of income for the nine and three months ended January 31, 2012, adjusted to give effect to the acquisition of FEI-Elcom as if it had occurred at the beginning of the fiscal year.  The financial information includes the results of operations of FEI-Elcom for the nine month period from April 1, 2011 to December 31, 2011 and for the three month period from October 1, 2011 to December 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, 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.

	Pro forma
	(unaudited)
	Nine months		Three months
	Periods ended January 31, 2012
	(in thousands except per share data)
Revenues	$	53,299	$	17,462
Operating profit	$	4,058	$	984
Net income	$	2,538	$	554
Earnings per share- basic	$	0.31	$	0.07
Earnings per share- diluted	$	0.30	$	0.07