ACQUISITIONS

The Company has completed multiple acquisitions since it began operations in August 2008. The acquisitions were made to increase the Company’s skill sets and to create sufficient critical mass to be able to serve as prime contractor on significant contracts. All of the acquisitions resulted in the Company recording goodwill and other intangibles. The goodwill was a result of the acquisitions focusing on acquiring cleared personnel to expand our presence with our main customers. The value of having that personnel generated the majority of the goodwill from the transactions and drove much of the purchase price in addition to other identified intangibles including contracts, customer relationships, contract rights and intellectual property. Several of the acquisitions involved issuance of Company common stock. The stock price for acquisition accounting was determined by the fair value on the acquisition date.

Details of the acquisitions completed since January 1, 2011 are outlined below:

JKA Technologies, Inc.

On March 31, 2011, the Company acquired all of the outstanding stock of JKA Technologies, Inc. (“JKA”) for $11.3 million in cash and 200,643 shares of KEYW common stock valued at $12.28 per share, for a total purchase price of approximately $14 million. The Company has recorded $2.7 million of intangibles exclusively related to acquired contracts that have an estimated life of 3 years. This was an acquisition of a Qualified Subchapter S Subsidiary which allows the transaction to be treated as an asset acquisition for tax purposes, thereby allowing the Company to amortize goodwill over 15 years for tax reporting. The goodwill is not amortizable for GAAP reporting.

JKA was founded in 2002 and is headquartered in Columbia, MD. JKA offers a broad range of mission critical cyber superiority solutions and support including network engineering, information assurance, and systems and software engineering. JKA had approximately 65 employees at the time of acquisition, of whom approximately 60 have security clearances at the highest level.

Forbes Analytic Software, Inc.

On May 2, 2011, the Company acquired all of the outstanding stock of Forbes Analytic Software, Inc. (“FASI”) for $15.2 million in cash and 171,970 shares of KEYW common stock valued at $11.30 per share, for a total purchase price of approximately $16.7 million. The Company has recorded $2.8 million of intangibles exclusively related to acquired contracts that have an estimated life of 3 years. In conjunction with the transaction, the Company has made a 338(h)10 election that treats the transaction as an asset purchase for tax purposes, thereby permitting the Company to amortize the goodwill over 15 years for tax reporting. The goodwill is not amortizable for GAAP reporting.

FASI was founded in 1989 and is headquartered in Leesburg, VA. FASI offers a broad range of mission critical cyber superiority solutions and support including high-end software development, systems and software engineering and integration, and full lifecycle software support, from research and development to operations and maintenance. FASI had approximately 47 employees at the time of acquisition, of whom approximately 40 have security clearances at the highest level.

Flight Landata, Inc.

On August 5, 2011, the Company acquired Flight Landata, Inc. (“FLD”) and its wholly owned subsidiary FLI-HI, LLC for $35.2 million in cash. The goodwill and intangible assets associated with this acquisition are not deductible for tax purposes, however the identified intangible assets are amortized under US GAAP. The Company has recorded $21.7 million of intangibles related to acquired contracts, technology, and customer relationships. These assets will be amortized over estimated useful lives of 24 – 29 months.

FLD was founded in 1991 and is headquartered in North Andover, MA. FLD is a highly regarded provider of agile airborne Intelligence Surveillance and Reconnaissance (ISR) solutions and Micro Terrain Intelligence to the U.S. Defense Department and the Warfighter with significant operations in overseas theaters. FLD had approximately 28 employees at the time of acquisition, of whom 2 have security clearances.

National Semiconductor Corporation

On December 16, 2011, the Company acquired certain government contracting assets from National Semiconductor Corporation (“TI”) for $2.0 million in cash and $2.0 million in contingent consideration. The Company has recognized $1.5 million of goodwill and $2.5 million of intangibles associated with this transaction. Eighteen fully-cleared personnel joined the Company as part of this acquisition.

Poole and Associates, Inc.

On October 1, 2012, the Company acquired Poole and Associates, Inc. for $116.0 million in cash and 794,913 shares of KEYW common stock valued at $12.58 per share for a total purchase price of $126.0 million adjusted for working capital targets as defined in the purchase agreement. The goodwill and intangible assets associated with this acquisition are not deductible for tax purposes, however the identified intangible assets are amortized under US GAAP. The Company has recorded $21.7 million of intangible assets related to acquired contracts, contract based rights and trade name. These assets will be amortized over periods from 2 - 5 years.

Poole was founded in 1999 and is headquartered in Annapolis Junction, MD. Poole provides systems engineering, software development, program management, and technical support to the intelligence community as well as bringing several prime contracts to the Company. Poole had approximately 152 employees at the time of acquisition, of whom 124 have security clearances at the highest level.

Sensage, Inc

On October 12, 2012, the Company acquired Sensage, Inc. and its wholly owned subsidiary Sensage International, Inc for $15.0 million in cash and 713,151 shares of KEYW stock value at $12.62 for a total initial purchase price of $24.0 million as adjusted for working capital targets as defined in the purchase agreement. There was additional consideration consisting of up to $7.5 million of KEYW common stock and $3.0 million of the cash contingent upon Sensage meeting certain revenue targets for the second half of 2012. Based on the actual performance during the earn-out period, an additional $78,000 of cash was paid to Sensage shareholders from the earn-out. The goodwill and intangibles are not deductible for tax purposes, however the identified intangible assets are amortized under US GAAP. The Company has recorded $8.5 million of intangible assets related to acquired customer relationships, intellectual property and trade name. These assets will be amortized over periods ranging from 1 - 5 years.

Sensage was founded in 2001 and is headquartered in Redwood City, CA. Sensage provides system incident event management software through its proprietary solution and brings commercial software experience to the Company. Sensage had approximately 35 employees at the time of acquisition most of whom were not cleared at any level.

Other Acquisitions

During the fourth quarter of 2012, subsequent to the above acquisitions, the Company acquired the assets of Rsignia, Inc. and Dilijent solutions, LLC ("Dilijent") in two separate asset transactions. The total consideration paid for these two purchases was $7.0 million and equity, valued at $4.8 million, consisting of 316,231 shares of KEYW common stock and warrants to purchase another 158,116 shares at $12.65. Neither of these acquisitions are considered material to the financial results of KEYW and are not included in the pro forma tables below for that reason.

The total purchase price paid for the acquisitions described above have been allocated as follows (in thousands):



	JKA		FASI		FLD		TI		Poole		Sensage		Rsigna/Dilijent

Cash	$	8	$	452	$	4,614	$	—	$	4,412	$	1,948	$	(6	)
Current assets, net of cash acquired	2,934		2,413		5,126		—		7,278		8,995		801
Fixed assets	87		14		3,875		—		755		61		123
Intangibles	2,680		2,775		21,741		2,500		21,709		8,498		6,001
Goodwill	9,097		14,155		10,607		1,500		110,928		9,630		5,837
Other assets	—		—		—		—		29		54		—
Total Assets Acquired	14,806		19,809		45,963		4,000		145,111		29,186		12,756
Current liabilities	1,079		2,661		944		2,000		8,045		6,700		1,333
Long-term obligations	—		—		9,787		—		9,140		—		—
Total Liabilities Assumed	1,079		2,661		10,731		2,000		17,185		6,700		1,333
Net Assets Acquired	$	13,727	$	17,148	$	35,232	$	2,000	$	127,926	$	22,486	$	11,423
Net Cash Paid	$	11,255	$	14,753	$	30,618	$	2,000	$	113,545	$	11,246	$	6,601
Equity Issued	2,464		1,943		—		—		9,969		9,292		4,828
Actual Cash Paid	$	11,263	$	15,205	$	35,232	$	2,000	$	117,957	$	13,194	$	6,595

All acquisitions were accounted for using the acquisition method of accounting. Results of operations for each acquired entity are included in the consolidated financial statements from the date of each acquisition. Each of the acquisitions outlined above complements the Company's strategic plan to expand its classified intelligence offerings into the national security marketplace. These acquisitions provide the Company with access to key customers, security clearances and technical expertise. The Sensage, Rsignia, and Dilijent acquisitions also provided expertise and product offerings in the commercial software market. As a result of these factors, the Company was willing to pay a purchase price that resulted in recording goodwill as part of the purchase price allocation.

The tables below summarize the unaudited pro forma income statements for 2012 and 2011 assuming these acquisitions had been completed on the first day of the earliest period presented. These pro forma statements do not include any adjustments that may have resulted from synergies between the acquisitions, intercompany transactions, or for amortization of intangibles other than during the period the acquired entities were part of the Company. The 2011 activity for JKA, FASI and FLD includes the financial activity in 2011 prior to acquisition. The 2012 activity for Poole and Sensage represents the financial activity in 2012 prior to acquisition. Activity for the TI, Rsignia, and Dilijent acquisitions are not included for any period presented due to their immateriality individually and in aggregate.



	For the Year Ended December 31, 2011 (In thousands)
	JKA			FASI			FLD		KEYW		Poole ⁽¹⁾		Sensage			Total

Revenue	$	3,381		$	3,903		$	17,282	$	190,587	$	40,587	$	11,858		$	267,598
Cost of Revenues	1,659			2,258			8,317		133,950		29,337		2,490			178,011
Gross Profit	1,722			1,645			8,965		56,637		11,250		9,368			89,587
Operating Expenses	1,844			3,611			3,124		54,809		9,064		9,639			82,091
Operating (Loss) Income	(122		)	(1,966		)	5,841		1,828		2,186		(271		)	7,496
Non-operating (Income) Expense	(2		)	39			214		1,075		—		419			1,745
(Loss) Income before Taxes	(120		)	(2,005		)	5,627		753		2,186		(690		)	5,751
Tax Expense	—			—			2,257		218		866		2			3,343
Net (Loss) Income	$	(120	)	$	(2,005	)	$	3,370	$	535	$	1,320	$	(692	)	$	2,408


(1)	Poole's financials are for the year ended March 31, 2012.



	For the Year Ended December 31, 2012 (In thousands)
	Poole		Sensage			KEYW			Total

Revenue	$	42,321	$	6,820		$	243,520		$	292,661
Cost of Revenues	32,173		2,281			159,727			194,181
Gross Profit	10,148		4,539			83,793			98,480
Operating Expenses	7,387		7,654			80,600			95,641
Operating Income (Loss)	2,761		(3,115		)	3,193			2,839
Non-operating Expense	2		357			2,264			2,623
Income (Loss) before Taxes	2,759		(3,472		)	929			216
Tax Expense (Benefit)	1,425		—			(86		)	1,339
Net Income (Loss)	$	1,334	$	(3,472	)	$	1,015		$	(1,123	)