Acquisition

On February 23, 2016, we completed the acquisition of TeleCommunication Systems, Inc. ("TCS"), pursuant to the Agreement and Plan of Merger, dated as of November 22, 2015 (the "Merger Agreement"), among Comtech, TCS and Typhoon Acquisition Corp., a Maryland corporation and a direct, wholly owned subsidiary of Comtech ("Merger Sub"). TCS is now a wholly-owned subsidiary of Comtech.

The acquisition has an aggregate purchase price for accounting purposes of $340,432,000 (also referred to as the transaction equity value) and an enterprise value of $423,629,000. The fair value of consideration transferred in connection with the TCS acquisition was $280,535,000 in cash, which is net of $59,897,000 of cash acquired. We funded the acquisition (including transaction and merger related expenditures) and repaid $134,101,000 of debt assumed in connection with the acquisition by redeploying a significant amount of our combined cash and cash equivalents, with the remaining funds coming from a $400,000,000 Secured Credit Facility (the "Secured Credit Facility"), which is discussed further in Note (8) - "Secured Credit Facility."

The purchase price includes the final estimated fair value of contingent liabilities associated with TCS' intellectual property matters and the warranty obligations for TCS' 911 call handling software, which are discussed in more detail in Note (6) "Accrued Expenses and Other Current Liabilities" and Note (14)(b) "Commitments and Contingencies - Legal Proceedings and Other Matters." These estimated fair values reflect market participant assumptions, as required by FASB ASC 805 "Business Combinations" and do not reflect our settlement position or amounts we actually have paid or may pay in the future.

We have incurred transaction and merger related expenditures which include significant amounts primarily for: (i) change-in-control payments, (ii) severance, (iii) costs associated with establishing our Secured Credit Facility, and (iv) professional fees for financial and legal advisors for both Comtech and TCS. For the fiscal year ended July 31, 2016, acquisition plan expenses were $21,276,000 and primarily related to the TCS acquisition. There were no such transaction and merger related expenses during fiscal 2018 or 2017. As discussed in prior SEC filings, we had embarked on a focused acquisition plan which culminated with the closing of the acquisition of TCS on February 23, 2016.

The unaudited pro forma financial information in the table below for the fiscal year ended July 31, 2016 is presented as if Comtech's acquisition of TCS had occurred on August 1, 2014, and combines Comtech’s historical statement of operations for the fiscal year ended July 31, 2016 (which includes TCS' results of operations since the acquisition date of February 23, 2016) with TCS' historical statement of operations for the trailing five months ended December 31, 2015 and TCS' historical statement of operations for the stub period beginning January 1, 2016 and ended February 23, 2016. TCS' historical statement of operations for the trailing five months ended December 31, 2015 was derived by taking TCS' historical results of operations for the calendar year ended December 31, 2015 and deducting TCS' historical results of operations for the seven months ended July 31, 2015.



	(Unaudited)
	For the Fiscal Year Ended
	July 31, 2016
Net sales	$	611,241,000
Net loss	(30,750,000		)
Basic net loss per share	(1.81		)
Diluted net loss per share	(1.81		)

The pro forma financial information is not indicative of the results of operations that would have been achieved if the acquisition and cash paid had taken place as of August 1, 2014. The pro forma financial information includes adjustments for:


•	The elimination of historical sales between Comtech and TCS of $8,601,000.


•	The reduction to capitalized software amortization of $2,566,000, related to the difference between the historical value and the estimated fair value of TCS' capitalized software.


•	The elimination of acquisition plan expenses of $36,212,000, due to the assumption that all of the acquisition plan expenses were incurred on August 1, 2014.


•	The incremental amortization expense of $7,113,000, associated with the increase in acquired other intangible assets.


•	The increase in interest expense of $2,339,000, due to the assumed August 1, 2014 repayment of TCS' legacy debt and related new borrowings under our Secured Credit Facility which was utilized to partially fund the TCS acquisition.


•	The reduction to interest income of $577,000, due to the assumed cash payments relating to the TCS acquisition.


•	The related adjustment to the provision for income taxes, based on Comtech’s effective tax rate for the period.