10-K 1 v159572_10k.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-K

 (Mark One)
     x        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2009
OR

     ¨      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 000-02324

Aeroflex Incorporated 

(Exact name of registrant as specified in its charter)

Delaware
 
11-1974412
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)

35 South Service Road, Plainview, New York
 
11803
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code:   (516) 694-6700

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:   None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes ¨    No x

Indicate by check mark if the registrant is not required to file reports pursuant to Rule 13 or Section 15(d) of the Exchange Act.   Yes ¨   No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x   No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ¨   No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K x.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of  “large accelerated filer,”  “accelerated filer” and “smaller reporting company”  in Rule 12b-2 of the Exchange Act.
(Check one):
 
Large accelerated filer ¨
 
Accelerated filer  ¨
   
Non-accelerated filer  x (Do not check if a smaller reporting company)
 
Smaller reporting company  ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes ¨     No x

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked prices of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.  There is no public market for the common equity of the registrant.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date (applicable only to corporate registrants).  Common Stock, par value $.10 per share; outstanding as of September 1, 2009 – 1,000 shares.

Documents incorporated by reference:  None.

 
 

 

TABLE OF CONTENTS

       
Page
         
   
PART I
   
         
Item 1.
 
Business
 
2
Item 1A.
 
Risk Factors
 
19
Item 1B.
 
Unresolved Staff Comments
 
33
Item 2.
 
Properties
 
33
Item 3.
 
Legal Proceedings
 
33
Item 4.
 
Submission of Matters to a Vote of Security Holders
 
34
         
   
PART II
   
         
Item 5.
 
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
35
Item 6.
 
Selected Financial Data
 
35
Item 7.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
40
Item 7A.
 
Quantitative and Qualitative Disclosures About Market Risk
 
59
Item 8.
 
Financial Statements and Supplementary Data
 
60
Item 9.
 
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
114
Item 9A(T).
 
Controls and Procedures
 
114
Item 9B.
 
Other Information
 
115
         
   
PART III
   
         
Item 10.
 
Directors, Executive Officers, and Corporate Governance
 
115
Item 11.
 
Executive Compensation
 
118
Item 12.
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
130
Item 13.
 
Certain Relationships and Related Transactions, and Director Independence
 
132
Item 14.
 
Principal Accounting Fees and Services
 
133
         
   
PART IV
   
         
Item 15.
 
Exhibits, Financial Statement Schedules
 
135

 
- 1 -

 

PART I

In this Form 10-K, unless the context requires otherwise, references to (i) “we,” “our,” “the Company” or “us” refer, as applicable, to Aeroflex Incorporated and its subsidiaries, (ii) the term “parent” refers to AX Holding Corp., which owns 100% of our capital stock, (iii) the term “parent LLC” refers to VGG Holding LLC, which owns 100% of the parent, (iv) the term “Veritas Capital” refers to The Veritas Capital Fund III, L.P., (v) the term “Golden Gate” refers to Golden Gate Private Equity, Inc., (vi) the term “GS Direct” refers to GS Direct, L.L.C., (vii) the term “Sponsors” refers collectively to affiliates of or funds managed by Veritas Capital, Golden Gate and GS Direct, and (viii) and “fiscal” year refers to the twelve months ended June 30 of the applicable year.  For example, “fiscal 2009” refers to our fiscal year ended June 30, 2009.  On August 15, 2007, we were acquired by our parent pursuant to an agreement and plan of merger, or merger agreement.  In the Form 10-K, we refer to this transaction as the “Acquisition” or the “Merger.”

ITEM 1.   BUSINESS

Company Overview

We are a leading provider of highly specialized microelectronics and test and measurement equipment, primarily to the global aerospace and defense and broadband communications markets. We also design application-specific integrated circuits, or ASICs, for CT scan equipment for the medical industry. Founded in 1937, we have developed a substantial intellectual property portfolio that includes more than 150 patents, extensive know-how, years of collaborative research and development with our customers and a demonstrated history in space, validating the high quality performance of our products. We believe that the combination of our leading market positions, complementary portfolio of products, years of experience and engineering capabilities provides us with a competitive advantage and enables us to deliver high performance, high value products to our customers.
 
Our business is characterized by the breadth and diversity of our product offerings, customer base, applications and end markets. We believe that we currently have significant market positions in the following product categories in which we compete: (i) RadHard “fabless” semiconductors, (ii) high performance mixed-signal ASICs, (iii) military radio test equipment and (iv) avionics test equipment. We offer a broad array of products, including custom and standard ICs such as databuses, transceivers, microcontrollers and microprocessors, globally to a diverse group of high quality customers. Our customers include the five prime defense contractors (Boeing, General Dynamics, Lockheed Martin, Northrop Grumman and Raytheon), as well as the U.S. Government, BAE, Cisco, Nokia, Motorola and Teradyne. In fiscal 2009, our largest customer represented approximately 9% of our net sales.
 
We believe there are high barriers to entry to the markets in which we compete due to the need for specialized design and development expertise and patents and the significant costs for customers to switch vendors. We often design and develop applications through a collaborative process whereby we provide “spec’d” (customer specified) products to our customers.

 
- 2 -

 

As indicated in the tables below, our products are sold to customers who are located primarily in the United States, Europe, Middle East and Asia/Australia and who compete predominantly in the aerospace and defense and the broadband communications markets.
 
Net Sales by Customer Location
 
Fiscal
2009
   
Fiscal
2008
   
Fiscal
2007
 
United States
    59 %     54 %     59 %
Europe and the Middle East
    23 %     24 %     26 %
Asia/Australia
    16 %     20 %     14 %
Other Regions
    2 %     2 %     1 %

Net Sales by End Market
 
Fiscal
2009
   
Fiscal
2008
   
Fiscal
2007
 
Aerospace and Defense
    65 %     59 %     60 %
Broadband Communications
    26 %     30 %     27 %
Other (Primarily CT Scan and Automotive)
    9 %     11 %     13 %

We became a public company in 1981, becoming subject to the requirements to file periodic and other reports with the SEC.  On August 15, 2007, we were acquired by our parent company pursuant to an agreement and plan of merger, and, as a result, became a “private” company.  Commencing as of January 21, 2009, the date of effectiveness of our registration statement relating to our exchange offering of our 11.75% senior notes due February 15, 2015 (which we sometimes refer to in this Form 10-K as the “Notes”), we again became subject to SEC public reporting requirements.
 
Headquartered in Plainview, New York, we conduct our operations from 18 facilities in the United States, the United Kingdom, France, China and Sweden and employ approximately 2,700 employees as of June 30, 2009.
 
Our Segments

We combine our proprietary technologies with advanced fabrication and manufacturing processes to design, engineer, manufacture and market a diverse range of products through two primary business segments: Aeroflex Microelectronic Solutions, or AMS, and Aeroflex Test Solutions, or ATS. Our business benefits from the diversity provided by our two operating segments with respect to customers, geographies and industries, which limits our exposure to any specific end market, customer or technology.  The sales and operating profits of our two industry segments and the identifiable assets attributable to each segment for each of the three fiscal years in the period ended June 30, 2009 are set forth in Note 19 of Notes to Consolidated Financial Statements.
 

 
- 3 -

 

 
AMS
 
ATS
 
Leading provider of RadHard and other ICs and
modules for the aerospace and defense and the
broadband communications markets
 
Leading provider of next generation, specialty test and
measurement systems for the wireless, military,
aerospace and avionics markets
       
    % of Net
Sales for
Fiscal
2009
48%
 
52%
       
       
    % of
Gross Profit
for Fiscal
2009
47%
 
53%
       
       
Products
•  RF and microwave components
 
•  Wireless test equipment
 
•  High-reliability datacom/standard and application
 
•  Avionics test equipment
 
        specific MCMs
 
•  Military radio test equipment
 
•  RadHard fabless semiconductors
 
•  Private mobile radio test equipment
 
•  Non-RadHard fabless semiconductors
 
•  General purpose test equipment
 
•  Integrated microwave assemblies
 
•  Synthetic test equipment
 
•  High-performance mixed signal ASICs
 
•  Third party testing services and other (including
 
•  Class K/power management
 
        automotive)
 
•  High-reliability aerospace motion control
   
       
Competitive
•  Leadership positions in specialty microelectronic
 
•  Leadership positions in specialty
Advantages
        niches within satellite, broadband
 
        communications test niches, including military/
 
        communications and CT scan markets
 
        private mobile radio, broadband/wireless and
 
•  Focus on large and growing markets requiring
 
        commercial and military avionics markets
 
        specialized, highly qualified solutions
 
•  Focus on delivering advanced testing
 
•  High-performance, high-reliability products
 
        technologies to large and growing markets
 
•  Pioneer in RF and microwave design and
        development
 
•  Key patents in RF, wireless design and expertise in
        frequency synthesis
 
•  Proprietary technologies
 
•  Integrated hardware/software design focus
 
•  State-of-the-art fabless semiconductor
 
•  State-of-the-art manufacturing processes
 
        production capability of scale
 
•  Pioneer in synthetic testing market
 
•  Established long-term customer relationships
 
•  Established long-term customer relationships
 
•  High switching costs
   
 
Aeroflex Microelectronic Solutions
 
AMS is a leading designer and manufacturer of high-performance, high-reliability specialty microelectronics products for satellite, aerospace and defense applications. Satellite components are continually bombarded by energetic plasmas and other forms of radiation in space which can degrade the performance of these electronic components. Our RadHard products are of significant importance to our customers because they are specifically designed to tolerate high radiation-level environments and have proven high performance qualities and a demonstrated history in space. We believe our extensive knowledge of analog, mixed signal and digital semiconductor technology, from the device level to the design and assembly of complete subsystems, enables us to deliver high performance, high value products to our customers.
 
We operate under a “fabless” semiconductor manufacturing model, outsourcing substantially all semiconductor fabrication activities to commercial foundries, which we believe significantly reduces our capital expenditures and labor costs and enhances our ability to respond quickly, with scalability, to changes in technology and customer demands. We purchase our semiconductors from a variety of foundries, which utilize our proprietary design specifications and packaging techniques to manufacture our RadHard products. We test our RadHard products in our in-house radiation simulation testing chamber.

 
- 4 -

 

In order to help meet the requirements demanded by our customers, AMS’ Plainview, New York, and Colorado Springs, Colorado, facilities are space certified and qualified by the DSCC and have been manufacturing Class K products for defense and aerospace programs for over 15 years. Class K device manufacturing provides high quality and reliability for electronic parts through a number of specifications, standards and test methods. The additional requirements that define Class K address the specific needs of space users and are intended to provide more confidence to the customers that the device is of the highest initial quality and that any defective parts have been removed.
 
AMS offers a broad range of complementary products that provide connectivity among products, including custom and standardized ICs, programmable logic devices, sub-assemblies, multi-function modules, microcontrollers, microprocessors, databuses, transceivers and complex RF and microwave microelectronics that are used in satellites, communications systems and avionics systems for aircraft and missiles. AMS also designs and manufactures application-specific, high performance analog and mixed signal semiconductors for use in medical, industrial, security and intelligent sensors. Our products are used in over 100 aerospace and defense platforms, including the WGS Satellites, NPOESS, ADHF Satellites, F-16’s modular mission computer, the 777 airliner’s databus, the B-1 flight controls upgrade and the THAAD program, and are widely used in the broadband communications industry and in the medical, industrial and security markets.
 
For fiscal 2009, AMS generated $287.5 million of net sales and $134.2 million of gross profit.
 
Aeroflex Test Solutions
 
ATS is a leading designer, developer, manufacturer and service provider of a broad line of specialized test and measurement equipment. ATS has hardware and software expertise across the aerospace and defense and broadband communications markets and has garnered specific expertise in leading-edge communications standards. ATS products include avionics, communications and general purpose test equipment, instruments and systems which enable our customers to design, build, deploy and manage their products and technologies.
 
ATS believes that its key strengths include its strong reputation in RF synthesizers, its extensive offering of testing and measurement products and its early stage development in synthetic testing. ATS is a leader in RF and wireless test equipment, with particular capability in WiMax, LTE and EDGE protocols. Our position in RF technology is supported by key intellectual property in the area of high-speed RF synthesis. We believe ATS synthesizers cover all communication frequencies, and that ATS’ proprietary technology enables its products to generate the clean and fast RF signals. With the expected growth of RF testing, increasing numbers of wireless communications equipment will be procured and will require sophisticated testing beforehand. We are poised to take advantage of this growth, as we currently supply an extensive line of wireless test equipment to test RF components.
 
As technology continues to evolve and “next generation” broadband communications, military and commercial avionics and two-way communications protocols are introduced, equipment manufacturers and network providers require test and measurement products that are compatible with the new technologies as well as products that work with older generation equipment. In addition, wireless companies need test equipment for all stages of development: research and development and conformance testing; production testing; installation and commissioning; monitoring and optimization; and service and maintenance. We have garnered specific expertise in advanced RF and additional wireless technology and have geared our research and development and product development toward such next-generation technologies. Over the years, we have been developing advanced solutions for our customers and providing a comprehensive collection of test and measurement equipment for all stages of the network life-cycle.
 
ATS is an early-stage entrant in the developing area of synthetic testing, which we believe has significant growth potential as a new market for test equipment in the commercial and military communications arenas. Synthetic test systems test several attributes through one “box” and can take multiple complex measurements simultaneously, producing the desired results several times faster than traditional “rack and stack” systems.

 
- 5 -

 

ATS’ specialty test product portfolio includes wireless test equipment, frequency synthesizers, military radio test equipment, synthetic test equipment, avionics test equipment and other general purpose test equipment. Our products are used by wireless service providers and equipment manufacturers to test wireless handsets and base stations; by radio manufacturers and military, police, fire and emergency response units to test handheld radio units; by satellite manufacturers to test satellite-based communications systems; by avionics manufacturers to design, manufacture, test and maintain both commercial and military avionics systems; and for spectrum analysis and production testing.
 
For fiscal 2009, ATS generated $311.8 million of net sales and $150.9 million of gross profit.
 
Industry Overview

Our products predominantly serve the aerospace and defense market and the broadband communications market. In addition, our products serve two key growth markets: the CT scan market and the synthetic test market.
 
Aerospace and Defense
 
The aerospace and defense market has experienced significant growth in recent years.  Within the aerospace and defense market, our customers predominately fall into four end-markets: (i) defense electronics; (ii) satellite (primarily military); (iii) military communications (for example, military radio SINCGARS); and (iv) military/civilian avionics (systems for military and commercial aircraft).
 
Defense Electronics Market
 
The current defense budget cycle trend began in the mid-1990s under the Clinton Administration. It was driven by the need to modernize the military, which was faced with a significant block of obsolete equipment developed in the 1970s. In addition, after the first Gulf War, there was a desire to transform the military to the next generation of technology. Defense electronics spending has outperformed the broader defense investment budget throughout the current defense spending cycle. The primary driver has been the “digitization” of the U.S. military.
 
Macro trends that we believe continue to favor us include the “war on terror,” the long-term trend for increased use of electronics in existing platforms and the drive to create a global infrastructure network for the U.S. Department of Defense.
 
Satellite Market
 
The satellite community’s needs are diverse and consist of two primary segments: commercial (large fixed satellite service providers, such as INTELSAT) and government, which consists of civilian (national/international space agencies, such as NASA) and military (Department of Defense, intelligence agencies and foreign militaries). While our customers are predominately within the military government sub-segment, through our RadHard ICs and MCMs, we have significant access to both the commercial and civilian government satellite markets. Currently, we are benefiting from a trend toward increased spending on military satellite programs and expected growth in the overall satellite market over the next several years as defense spending remains strong and intelligence initiatives, including those related to homeland security and classified applications, continue to drive increased satellite technology development and production.
 
Government satellite demand originates from both countries that have an established domestic space industry and a record of using satellite technology (e.g., the United States, Europe, China, Japan and India) and countries that have just recently entered the satellite industry by acquiring operations and scientific satellites and developing their own industrial capabilities to manufacture them (e.g., Israel, Brazil and South Korea). Civilian government satellite demand is fueled by increased research funding on global climate changes, Mars explorations and “Return to the Moon” initiatives. Military satellite growth is being driven primarily by the United States through a focus on maintaining U.S. space superiority, recapitalization of Cold War space assets, military demand for more bandwidth and the need for next-generation technology requiring higher power and more processing needs.

 
- 6 -

 

Many of the military and aerospace programs run by incumbent prime contractors, such as Hughes, Loral and Raytheon, continue to outsource their high-reliability micro-components to more specialized companies such as us. In an effort to reduce their own production costs and ensure state-of-the-art performance capabilities, satellite manufacturers are outsourcing an increasing amount of their component and subsystems production to global suppliers of high-reliability RadHard semiconductors and devices. We expect to continue to benefit from this trend toward outsourcing and the movement from component-level outsourcing towards production of MCMs and board and system-level products, which represent a significantly larger proportion of satellite component costs. As a result, our strategy is to continue to increase our revenue share at the customer level and move up the “value chain”.
 
As a result of the growing satellite market, we believe that the demand for RadHard chips will increase. Satellite components are continually bombarded by energetic plasmas and other forms of radiation which can degrade the performance of these electronic components. Military space and avionics are expected to be the key net sales growth drivers as a result of:
 
 
increased outsourcing by the defense prime contractors and system houses driven by cost-cutting initiatives;
 
 
performance and need to assure supplier viability;
 
 
growth in high-end military satellites with increasing RadHard requirements; and
 
 
strong “aftermarket” electronic upgrade sales in the near term due to program delays resulting in the need to upgrade or enhance existing platforms and systems.
 
Military Communications Market
 
One key area of the military communications market is military radio. Demand is currently being driven by U.S. operations abroad, particularly in Iraq and Afghanistan. Presently, the predominant form of military radio is the SINCGARS system. SINCGARS provides U.S. military personnel with a reliable, secure, easily maintained Combat Net Radio that handles voice and data. Active military operations continue to generate a large requirement for deployable radios. The demand for more capable and effective communication systems has fueled the development of the U.S. military’s next generation multi-service tactical radio for Army FCS, the Joint Tactical Radio System (JTRS). JTRS is a software-defined radio that is expected to be adopted for field use by 2010.

Replacements and upgrades to the current, aging SINCGARS radio system and the eventual roll-out of the JTRS platform are expected to drive demand in the military radio test market. Additional delays in the transition to the JTRS platform are expected to result in even more SINCGARS spending, which demands one test set for approximately every 300 SINCGARS units. In addition, there is a trend for consolidating military testing, requiring the development of a new technology allowing a single testing platform to test multiple types of radios. These drivers are expected to continue to create growth opportunities for the military radio test market.
 
Military and Commercial Avionics Market
 
Demand for avionics test systems is driven by upgrades in military and commercial avionics technologies, such as electronics warfare, control and display systems and emerging homeland defense. The military avionics market is currently experiencing budget pressure on new programs due to escalating unit costs, despite strong overall demand driven by continued military operations in Iraq and Afghanistan. Due to the strain on defense spending, older legacy programs are being kept alive instead of deploying replacements. As a result, the average aircraft age is expected to increase, creating the need for more upgrades. New fighter programs and maintenance and upgrades on older platforms are expected to continue to drive the military avionics market.
 
- 7 -

 
The commercial avionics market continues to experience the effects of the post-9/11 impact on the consumer airline industry, poor economic conditions, as well as potentially high fuel prices. Due to the prevalence of bankruptcy, efficiency and cost reductions have become top priorities for both low-cost and legacy carriers. Older passenger aircraft are being retired in deference to more efficient aircraft such as the Boeing 787. As the carriers return to profitability, they are expected to increase upgrades and replacements, driving demand for commercial avionics.
 
Broadband Communications
 
The broadband communications market is expected to continue to grow, as demand for high-speed access to the internet increases. Growth in the volume of communications traffic and increasing demand for services such as multimedia that require higher data rates and consequently consume greater bandwidth have resulted in more extensive use of the frequency spectrum and are driving the electronics industry to develop more creative and efficient uses of available frequency spectrum. With the continued deployment of next generation wireless infrastructure, we anticipate that equipment spending in the broadband communications market will remain strong. In the coming years, we also expect significant broadband growth in emerging markets. Growth in the broadband communications market is expected to drive increased expenditures on infrastructure. Within the broadband communications market, our customers predominately fall into the wireless communications end-market.
 
Wireless Communications
 
The desire for more sophisticated, high speed wireless services, satellite radio and television communications and greater bandwidth is helping to fuel the demand for high-speed wireless data services and newer technologies are enabling wireless exchange of data at broadband speeds. Fast growing international wireless markets, particularly in Asia, are also driving next generation infrastructure and equipment spending. ATS maintains strong relationships with leading global wireless equipment vendors and we believe that we are well-positioned to benefit from growing spending levels in these markets. Wireless communications test equipment is produced for base stations and air interfaces, mobile stations, electronic meters and other wireless communications equipment.
 
RF communications is a sub-segment of wireless communications and a significant area in which we compete. In addition to being a leader in RF test equipment, we also offer a range of RF products. The total available market for RF products is anticipated to expand as developing markets continue to emerge and as data-intensive networks enable new applications, such as music players, gaming and video services. Higher data rate handsets that offer higher functionality often contain multiple radios, thereby increasing the market for RF products. Multiple-input, multiple-output technology, which is used in several future standards to increase data rates, is also expected to increase the RF content of the phone. At the same time, lower-tier handsets that are optimized for emerging markets are driving new subscriber growth, which is also increasing the market for RF products. We believe that we are well-positioned to take advantage of this growth as we currently supply an extensive line of wireless test equipment to test RF components and we have garnered specific expertise in advanced RF and additional wireless technology and have focused our research and development and product development toward such next-generation technologies.

 
- 8 -

 

Growth Markets
 
CT Scan Market
 
We are also utilizing our expertise in mixed-signal ASICs in CT scan equipment for the medical industry into new markets and new applications. CT scanning equipment is heavily reliant on high-performance semiconductors and other electronic components. Mixed-signal ASICs are high-quality, high performance products that extract low-level signals in high noise environments. When embedded into CT medical imaging machines, this translates to better image quality and lower doses of radiation per scan. We believe these benefits, coupled with the decreasing costs per channel, will eventually help drive growth for the overall CT scan market. The trend toward decreasing costs per channel will translate into strong growth in the number of potential uses of CT technology outside of medical environments, including security screening and non-destructive test equipment. Suppliers of ASICs into CT scan machines are expected to directly benefit from the market expansion of such technology. In addition, advances in CT scan technology, growth in procedure volume and demand for CT imaging equipment from more diverse markets like clinical trials, a growing outpatient market, and increased government healthcare expenditures are expected to result in an expansion of the CT scan.
 
Synthetic Test Market
 
We are an early entrant in the area of synthetic testing, which we believe has significant growth potential as a relatively new market for test equipment. The synthetic testing market can be categorized into three areas: (i) satellite test, (ii) Transmit/Receive module test and (iii) military test, which is the largest. A synthetic test system replaces the traditional “rack and stack” system that requires a separate testing device for each attribute, with a single device that can take multiple complex measurements simultaneously and can complete a series of tests several times faster than a traditional system. The synthetic test standard has been adopted by many other leading commercial market vendors.
 
The U.S. Department of Defense and U.S. Navy, which instituted NxTest, are responsible for the emergence and growth of synthetic testing. The NxTest initiative aims to minimize the size of the test system, thereby reducing hardware and consequently the cost of the system. Synthetic testing also addresses obsolescence issues and provides additional flexibility for easy upgrades.
 
Our Competitive Strengths

Leading Proprietary Technology Platforms
 
Our history of technological innovation and product performance has made us a leading supplier to our customers. Our team of 800 engineers work with customers to develop customized solutions and we currently possess a portfolio of more than 150 patents. We pioneered the development of fabless high reliability RadHard technology and have a history of designing and manufacturing field-tested solutions that meet our military and commercial customers’ stringent performance requirements. Our design and production platform combines design expertise, proprietary intellectual property and a reliable, efficient fabrication/manufacturing process that includes our “fabless” semiconductor manufacturing model. In addition, AMS is taking a leading role in expanding the market for CT scan applications through our ASIC product offerings. ATS holds key intellectual property and specialized knowledge in RF and wireless technology with a focus on leading edge communication protocols. ATS is also a leader in developing synthetic test equipment and has proven expertise in avionics and private mobile radio test equipment.
 
Strong, Defensible Market Positions
 
Our proven product performance and long-standing customer relationships have established us as one of the leading suppliers in the majority of the markets in which we compete. Our microelectronics products are key components in over 100 aerospace and defense platforms, and we believe we are the sole source or primary supplier for many of the products that we supply.
 
High Barriers to Entry and Customer Switching Costs
 
We are an experienced and well-respected supplier to the aerospace and defense and broadband communications industries.  Additionally, we possess a portfolio of over 150 highly specialized patents and our products are often designed into, or “spec’d”, into a customer’s production design, which creates significant switching costs for our customers. Furthermore, strict product performance requirements, Department of Defense certification and proven experience in the harsh operating environment of space create high barriers to entry for new market entrants. The malfunction of a component can lead to the loss of a valuable satellite or missile, causing the industry’s customers to require proven product performance and reliability before specifying inclusion of a vendor’s components into a satellite or missile program’s design. Our expertise and product performance are demonstrated by our receipt of Class K certification from the DSCC (Defense Supply Center Columbus), a distinction we have held for over 15 years.

 
- 9 -

 
 
Growing and Diverse End Markets
 
We serve a diverse group of customers who compete in several end markets. Each of our broad end markets contains several specialized niche markets, each possessing attractive growth dynamics.
 
 
·
Aerospace and Defense.  We are well positioned to gain from increased defense electronics spending and believe that our product niche helps to insulate us from defense budget cuts. Most of AMS’ sales to the U.S. government are for its RadHard high reliability components that are used in a multitude of devices including satellites, missiles and airplanes. There is a strong pipeline of business for both military avionics and classified satellite programs that we believe will help our business to remain stable and profitable even through a challenging federal budget cycle. Spending on defense electronics is the primary driver of our net sales and has historically been stable and growing irrespective of movements in the defense budget. In addition to positive growth trends in defense electronics, we also benefit from strong growth trends in the satellite industry.
 
 
·
Broadband Communications.  Global demand for mobile communication services and for real-time access to diverse types of data continues to increase, which has led to rapid adoption of a wide variety of advanced wireless and wired electronic systems to which our products are critical (e.g., cellular telephones and broadband access). Next-generation technologies are expected to enable new applications, increase RF complexity and require greater RF semiconductor content. In addition, an increasing number of automotive, industrial, military, homeland security, scientific and medical applications use RF, microwave and millimeterwave technology to perform detection, measurement and imaging functions. The wireless communications industry has grown rapidly as a result of the worldwide adoption of mobile phones. In addition, subscribers typically upgrade when replacing phones. As a result of which we believe the complexity of phones will likely continue to increase, requiring even more semiconductor content and testing.
 
 
·
CT Scan.  We are a leader in the production of mixed-signal ASICs for the medical CT scan market. We believe that the current high level of performance (i.e., superior image quality with low doses of radiation) and decreasing cost per channel will eventually help drive new applications for ASICs outside traditional medical imaging applications and into areas such as security screening and non-destructive testing equipment. We expect to benefit directly from the future expansion of the overall CT scan market due to our leading market share for mixed-signal ASICs in the medical CT scan market.
 
Increasing Electronic Content per Satellite and Trend Towards Outsourcing
 
We benefit directly from the increasing electronic and systems-level content of military systems, particularly within the satellite end market. As we have utilized our intellectual property to move up the “value chain” from producing semiconductors and components to board-level and system-level products, the content we provide on each satellite has increased. From fiscal 2004 to 2006, our average dollar content per satellite was $2.5 million while from fiscal 2007 to 2009, our average dollar content per satellite was approximately $4.7 million.
 
In addition, in an effort to reduce their own production costs and ensure state-of-the-art performance capabilities, satellite manufacturers are outsourcing an increasing amount of their component and subsystems production to global suppliers of high-reliability RadHard semiconductors and devices. Previously, satellite manufacturers primarily outsourced lower cost semiconductor components, but they are now moving towards outsourcing a broader range of component production, including board-level and system-level products that contain significantly more silicon content and represent a larger percentage of component cost. We expect to continue to benefit from this trend towards outsourcing in the future and will seek to increase our content per satellite.

 
- 10 -

 

Strong Historical Financial Performance and Free Cash Flow Generation
 
From fiscal 2003 to fiscal 2009, we increased net sales by a compounded annual growth rate, or CAGR, of 15.0%.  Our “fabless” semiconductor manufacturing process and assembly operations allow us to maintain a low level of capital expenditures (i.e., 3.1%, 2.2% and 3.1% as a percentage of net sales for fiscal 2007, 2008 and 2009, respectively) and lower labor costs. Historically, our capital expenditure needs have increased due to our growth via acquisitions and not as a result of maintenance and replacement requirements. Our low capital expenditure level has resulted in significant operating cash flow.
 
Diverse, High Quality Customer Base
 
We have strong and long-standing relationships with top-tier defense, aerospace and broadband customers, including a significant number of defense-related technology companies. Our close customer relationships have enabled us to engage in collaborative product development over multi-year product life-cycles, build our intellectual property portfolio and develop critical product and end-market expertise, resulting in higher switching costs for our customers. We believe our long track record of design successes with our customers further benefits our ability to: (i) solidify our position as a sole source or primary supplier of products to customers across a wide array of programs; (ii) enjoy long multi-year platform relationships; (iii) maximize the effectiveness of our research and development spending; and (iv) minimize our customers’ product development time. Our customers include the five prime defense contractors (Boeing, General Dynamics, Lockheed Martin, Northrop Grumman and Raytheon), as well as BAE, Cisco, Nokia, Motorola and Teradyne. Our products are used by customers in various aerospace and defense and broadband communications programs, providing us with increased revenue diversification and stability. In fiscal 2009, our largest customer represented approximately 9% of our net sales, demonstrating the diversity of our customer base. In addition to our diverse product base, we believe that we are well-positioned in domestic and international growth markets and believe that our geographic and product diversification helps to reduce the risk associated with the volatility of any one particular region or market segment.
 
Strong and Experienced Management Team
 
We are led by an experienced, stable and well respected management team. Since 1991, we have integrated 26 acquisitions. We have increased net sales from $62.7 million in fiscal 1991 to $599.3 million in fiscal 2009, a CAGR of 13.4%. Our management team has an average of nearly 30 years in the industry and nearly 15 years with us.
 
Our Business Strategy

We generate sales and cash flow from the sale of microelectronic and test solution products into the aerospace and defense and broadband communications markets. We believe that the key to our future success is a focus on performance, design and manufacturing innovation and continuing to strengthen our long-term customer relationships. To implement our strategy, we intend to do the following:
 
 
·
Leverage technology and sole source or primary supplier status with customers.  Our proprietary technology and strong relationships with our diverse customer base are key drivers of our continued growth. We have a history of providing value to our customers through differentiated products, which are often critical to their end products, and we possess over 150 patents. We have leveraged our proprietary technology and experience to become, in our belief, the sole source or primary supplier on many of the products that we supply.   Further, our products are often “spec’d” into our customers’ product designs. We seek to work with our customers through every aspect of their design processes as they develop new technology platforms, delivering precisely engineered products to our customers’ specifications.

 
- 11 -

 

 
·
Continue to focus on our “fabless” semiconductor manufacturing operations.  Our expertise is in the state-of-the-art design and engineering of highly specialized microelectronics. Unlike certain of our competitors who have invested in captive semiconductor fabrication facilities, AMS pioneered the use of third-party foundries to produce space qualified, high reliability RadHard ICs. This “fabless” operating model significantly reduces our required capital investment and labor costs and is a key component of our industry-leading capital efficiency. In addition, it allows us to quickly respond to changes in technology and customer product requirements. For the fiscal year ended June 30, 2009, capital expenditures were only 3.1% of our net sales.

 
·
Increased focus on new product development.  We continue to allocate research and development spending toward new products serving large and/or growing markets. We endeavor to introduce new products to the market that allow us to move up to more profitable systems and products. We have transitioned from providing simple components, such as semiconductors, to more integrated products, including board-level and system-level products. Examples of recent new products include ASICs, satellite power subsystems and microwave/RF modules and receivers. For the fiscal year ended June 30, 2009, we invested 11.7% of our net sales into self-funded research and development efforts. Examples of new product opportunities that we are pursuing are the CT scan market and the synthetic test market.

CT scanning equipment is heavily reliant on high performance semiconductors and other electronic components, including mixed-signal ASICs, to produce high quality imaging with low doses of radiation per scan.  We believe that these benefits, coupled with decreasing production costs, will help drive growth of the overall CT scan market outside of the traditional medical environments and into markets such as security screening and non-destructive test equipment.

We are also an early entrant in the area of synthetic testing, which has significant growth potential as a relatively new market for test equipment. The U.S. Department of Defense and U.S. Navy, which instituted the next-generation automatic test system program “NxTest,” are responsible for the emergence and growth of synthetic testing. The NxTest initiative aims to minimize the size of the test system, thereby reducing hardware and consequently the cost of the system. Synthetic testing also addresses obsolescence issues and provides additional flexibility for easy upgrades.

 
·
Focus on cost management.  We plan to continue to improve our fixed cost position by critically examining the profitability of our operations and consolidating operations across facilities where operational synergies exist. In fiscal 2006, we implemented a plan to restructure our European businesses by consolidating a majority of our U.K. manufacturing operations into our Stevenage, England facility. In fiscal 2008, we continued to restructure our U.K. operations by further rationalizing duplicative research and development and selling, general and administrative activities, which resulted in the closure of our Burnham, England facility and relocation of its operations to Stevenage, England. In May 2008, we sold our radar system development and manufacturing business, or the Radar Division, which had been operating at a significant loss.  We will continue to examine our operations for opportunities to further reduce costs, divest non-strategic businesses, increase cash flow and improve our margins.
 
 
·
Capitalize on shifting defense budget allocations.  We are well-positioned to gain from increases in defense electronic spending. Since the beginning of the Iraq war, the defense industry has increased spending on electronics, intelligence gathering operations, satellites and homeland security. If current defense spending on training and procurement were to be reduced, we believe we would continue to benefit from a significant pipeline of business and re-allocation of spending to defense electronics for both military avionics and classified satellite programs that produce stable sales and cash flow. Furthermore, we believe the digitization and networking of the U.S. military and the upgrading of old platforms will continue to drive defense electronics spending growth, even in the face of declining overall defense industry spending.
 
- 12 -

 
 
·
Strategic acquisitions.  We will continue to seek accretive acquisitions that provide complementary products and services, enhance our intellectual property and customer base, and provide entry into high-growth adjacent markets. We view our acquisition strategy as an extension of our research and development and marketing efforts. Recent strategic acquisitions in both the AMS and ATS segments have broadened and strengthened our product offering and technology portfolio. Since 2002, we have acquired 12 businesses and plan to opportunistically continue our disciplined approach to seeking accretive acquisitions.  For instance:
 
 
·
In April 2007, we acquired MicroMetrics, Inc., which is a design and full service manufacturer of both standard and application specific RF/Microwave diodes and semiconductor devices.

 
·
In October 2007, we purchased 40% of the outstanding stock of Test Evolution Corporation, which develops and manufactures digital, analog and RF semiconductor automated test equipment.

 
·
In June 2008, we acquired Gaisler Research AB, which is a provider of integrated circuit software products and services to European space system suppliers, plus other U.S., Japanese and Russian space system agencies.

 
·
In March 2009, we acquired VI Technology, Inc., which designs and manufactures independent automated test systems.

 
·
In June 2009, we acquired Airflyte Electronics, which designs and manufactures custom-engineered slip rings for high-performance applications.

Products Offered
 
Aeroflex Microelectronic Solutions
 
AMS products provide end users in the aerospace and defense, broadband communications and medical equipment markets with high-precision, high-reliability semiconductors for mission-critical applications. AMS’ broad product portfolio has a longstanding, field-tested history of reliable performance, and is often designed into customers’ product designs.
 
AMS products, especially RadHard semiconductors, are essential components in government and commercial satellites. These satellites require high-performance and high-reliability components to function properly while simultaneously enduring harsh conditions. In order to meet the requirements demanded by our customers, AMS’ Plainview, NY and Colorado Springs, CO facilities are space certified, and they have been manufacturing Class K products for defense and aerospace programs for over 15 years. AMS products include RF components, high-reliability datacom, standard and application specific MCMs, RadHard fabless semiconductors, automotive, non-RadHard fabless semiconductors, integrated microwave assemblies, high-performance mixed signal ASICs, Class K/power management and high-reliability aerospace motion control.
 
Satellite manufacturing companies are increasingly outsourcing their component and subsystems production to global suppliers of high-reliability RadHard semiconductors and devices, such as us. Previously, these satellite companies primarily outsourced lower cost semiconductor components and MCMs, but have begun to outsource a broader range of component production, including board-level and system-level products which contain significantly more silicon content and represent a larger percentage of overall system cost. As we have utilized our intellectual property to move up from producing semiconductors and components to higher-value board-level and system-level products, the content we provide on each satellite has increased. From fiscal 2004 to 2006, our average dollar content per satellite was $2.5 million while from fiscal 2007 to 2009, our average dollar content per satellite was approximately $4.7 million.  We believe that we will continue to benefit from the trend toward outsourcing and the movement from component-level outsourcing toward production of MCMs and board-level and system-level products, which represent a significantly larger proportion of satellite component bill of materials.

 
- 13 -

 

AMS products are sold into the aerospace, defense and satellite markets to top-tier industry original equipment manufacturers (“OEMs”), and their sub-tier suppliers. AMS products are used in remote sensing, communications and motion control for GEO, Medium Earth Orbiting and Low Earth Orbiting satellites. Radio Frequency Microwave (RFMW) products are also used in military radar, airborne and ground based communication systems, Electronic Warfare programs, Identification Friend or Foe programs and Guidance/Command/Control/Communications programs across multiple platforms.
 
AMS products also serve two of the three major global providers of CT scanning equipment. AMS’ mixed-signal ASICs are high-quality, high-performance products that extract low-level signals in high-noise environments. When embedded into CT medical imaging machines, this translates to better image quality and lower doses of radiation per scan. We believe these benefits, coupled with the decreasing costs per channel, will help drive growth for the overall CT scan market. The trend toward decreasing costs per channel has translated into strong growth in the number of potential uses of CT technology outside of medical environments, including security screening and non-destructive test equipment. As a key supplier of mixed signal ASICs into CT medical machines, we believe that we are well-positioned to benefit from an increase in the market for this technology.
 
Aeroflex Test Solutions
 
ATS’ products include avionics, communications and general purpose test equipment, instruments and systems which enable our customers to design, build, deploy and manage their products and technologies.
 
ATS’ avionic test solutions are used in the design, manufacture, test and maintenance of commercial, civil and military avionics systems. As a leader in avionic testing solutions, ATS equipment provides the stimulus and signals necessary for certification, verification, fault finding and diagnostics of avionics systems on the ground. We also provide customized avionics test solutions to support manual and automatic test equipment for manufacturing, repair and ground support operations.
 
Our military communications testing systems are primarily used by the U.S. military to test complex voice and data frequency hopping radios and accessories. Our ruggedized packaging makes the system suitable for depot and field maintenance shops.
 
ATS has over 50 years of experience in providing radio test set solutions. We are the leading provider of Terrestrial Trunked Radio (TETRA) and Project 25 (P25) radio test equipment used by major manufacturers, installers, operators and repairers worldwide.  TETRA is the global standard for Private Mobile Radio (PMR), used particularly by emergency services, public transport and utilities. P25 is a standard for digital radio communications for use by federal, state/province and local public safety agencies in North America to enable them to communicate with other agencies and mutual aid response teams in emergencies.
 
We also offer a wide selection of cellular test sets addressing both mobile and base station test applications across an array of wireless standards. Research and development applications include protocol stack development, system integration and interoperability testing.
 
We also create testing solutions for 3G infrastructure developers and 3G network operators to assist them in debugging new network features, interoperability analysis, regression testing, network stress testing, acceptance testing, quality of service analysis and network performance optimization.
 
Research and Development
 
As of June 30, 2009, we had approximately 800 engineers conducting research and development activities at 17 of our facilities.

 
- 14 -

 
 
Our research and development efforts primarily involve engineering and design relating to:
 
 
·
developing new products;
 
 
·
improving existing products;
 
 
·
adapting existing products to new applications; and
 
 
·
developing prototype components to bid on specific programs.
 
We emphasize research and development efforts for products in both the AMS and ATS divisions. In AMS, we have geared our research and development capabilities toward continually introducing new, high value products, including the planned introduction of power subsystems and microwave/RF Modules and microreceivers between 2007 and 2009, enabling us to increase the number of our products embedded into modern satellites. In ATS, we are developing technologies that are used in the next generation of wireless infrastructure. Our research and development consists of self-funded research and development as well as research and development we conduct in collaboration with or on behalf of our customers.
 
Certain product development and similar costs are recoverable under contractual arrangements and those that are not recoverable are expensed in the year incurred. We invested $70.1 million in self funded research and development for fiscal 2009, $82.1 million for fiscal 2008 and $76.7 million for fiscal 2007.
 
Our Customers
 
AMS addresses value-added specialty markets requiring application-specific, custom engineered, high-performance microelectronic solutions. The division has strong relationships with the five prime defense contractors (Boeing, General Dynamics, Lockheed Martin, Northrop Grumman and Raytheon) as well as with several major defense-related technology companies, including Honeywell. AMS customers also include OEMs such as BAE, Cisco and Phillips.
 
ATS addresses value-added specialty markets requiring application specific, custom engineered, high-performance testing solutions. The division has strong relationships with several major defense-related technology companies, including Lockheed Martin, Northrop Grumman and Teradyne. ATS customers also include OEMs such as AT&T, Nokia, Motorola and Sprint.
 
Certain of our customers, such as BAE and Honeywell, are also our competitors due to their in-house capabilities. On a consolidated basis, our largest customer represented approximately 9% of our fiscal 2009 net sales.
 
Government Sales
 
Approximately 37% of sales for fiscal 2009 were to agencies of the U.S. government or to prime defense contractors or subcontractors of the U.S. government. These government contracts have been awarded either on a bid basis or after negotiation. These contracts generally provide for fixed prices and have customary provisions for termination at the convenience of the government without cause.
 
Marketing
 
We employ a team-based sales approach to assist our personnel to closely manage relationships at multiple levels of the customer’s organization, including management, engineering and purchasing personnel. This integrated sales approach involves a team consisting of a senior executive, a business development specialist and members of our engineering department. Our use of experienced engineering personnel as part of the sales effort enables close technical collaboration with our customers during the design and qualification phase of new technologies and equipment. We believe that this is critical to the integration of the product into the customer’s equipment. Manufacturers’ representatives and independent sales representatives are also used as needed. As of June 30, 2009, we had approximately 200 sales people employed domestically and internationally.

 
- 15 -

 

Backlog
 
We include in backlog firm purchase orders or contracts providing for the delivery of products and services. Our business has experienced strong growth in our backlog. As of June 30, 2009, our order backlog was approximately $271.9 million, of which approximately 80% was scheduled to be delivered on or before June 30, 2010. Approximately 51% of our backlog as of June 30, 2009 represented commercial contracts and approximately 49% of this backlog represented firm contracts with agencies of the U.S. government or prime defense contractors or subcontractors of the U.S. government. Generally, government contracts are cancelable with payment to us of amounts which we have spent under the contract together with a reasonable profit, if any, while commercial contracts are not cancelable.
 
As of June 30, 2008, our order backlog was approximately $251.0 million.  Approximately 59% of this backlog represented commercial contracts and approximately 41% of this backlog represented firm contracts with agencies of the U.S. government or prime defense contractor or subcontractors of the U.S. government.
 
Competition
 
For all of our products, we compete primarily on the basis of both performance and price.
 
AMS primarily competes with large defense-related technology providers, including BAE and Honeywell. In addition, AMS competes with a small number of specialty semiconductor providers, including Actel, Hittite Microwave Corporation and ILC/Data Devices Corporation. We believe we are one of the largest focused providers of specialty microelectronics to our targeted markets and that we are the leading global fabless platform of scale in RadHard semiconductors.   In addition, we believe our specialized expertise in RadHard technology, RF and microwave design and development and fabrication expertise provides us with a differentiated technology and pricing position versus our most direct competitors. We characteristically maintain close and longstanding relationships with our customers and maintain sole-source/primary supplier positions with many of our customers. We believe there are high barriers to entry into the markets in which we compete due to the need for specialized design and development expertise and patents and the significant costs for customers to switch vendors. We design and develop applications often through a collaborative process whereby we provide “spec’d” products to our customers.
 
ATS primarily competes with Agilent and a small number of specialty test and measurement providers, including Anite, Anritsu, Rohde & Schwarz and Spirent. We believe our specialized expertise in high performance RF and wireless testing equipment and our focus on delivery of advanced testing platforms and optimized manufacturing capability provide us with a differentiated position versus our most direct competitors.  We believe we continue to maintain the largest installed base of any of our competitors in the specialized test categories in which we compete, including many sole source/primary supplier positions with customers such as Teradyne, Lockheed Martin, and Raytheon.
 
We also experience significant competition from the in-house capabilities of our current and potential customers, such as BAE and Honeywell.
 
Patents and Trademarks
 
In order to protect our intellectual property rights, we rely on a combination of patent, trade secret, copyright and trademark laws and employee and third-party nondisclosure agreements. We consider the protection of our patents, proprietary technology and trademarks to be an important element of our business. We also limit access to and distribution of our proprietary information. While we believe that in the aggregate our patents and trademarks are important to our operations, we do not believe that one or any group of them is so important that its termination would materially affect us.

 
- 16 -

 

Manufacturing
 
We operate under a “fabless” semiconductor manufacturing model, outsourcing substantially all semiconductor fabrication activities to commercial foundries, which significantly reduces our capital expenditures and labor costs and enhances our ability to respond quickly with scalability to changes in technology and customer demands. We purchase our semiconductors from a variety of foundries, which utilize our proprietary design specifications and packaging techniques to manufacture our RadHard products. We test our RadHard products in our in-house radiation simulation testing chamber.
 
We manufacture products for aerospace and defense programs in compliance with stringent military specifications. Most of our manufacturing plants are ISO-9001 certified, and our Plainview, New York, Hauppauge, New York, and Colorado Springs, Colorado, facilities are also certified to the more stringent AS9100 standard.
 
AMS has 11 primary manufacturing facilities throughout the United States and China. AMS’ largest facility, Colorado Springs, CO, designs and develops our RadHard solutions in addition to a broad range of products for avionics and space applications. AMS manufactures advanced MCMs for airborne, space, shipboard, ground based and commercial avionics and telecommunications systems in its Plainview, New York, facility. The remaining facilities focus on RFMW and aerospace motion control solutions.
 
ATS has 8 primary manufacturing facilities throughout the United States, Great Britain and France. Its largest facility, Wichita, KS, designs and develops a wide range of test instrumentation for military radio and avionics. ATS’ Stevenage, England facility focuses on wireless systems test technologies and also provides test solutions with expertise in signal generators, signal analyzers, microwaves and automatic test equipment. The remaining facilities focus on synthetic testing solutions and other broadband communications testing equipment.
 
Many of the component parts we use in our products are purchased, including semiconductors, transformers, and amplifiers. Although we have several sole source arrangements, all the materials and components we use, including those purchased from a sole source, are readily available and are or can be purchased in the open market. We have no long-term purchase commitments and no supplier provided more than 10% of our raw materials during fiscal 2009.
 
Seasonality

Although our business is not affected by seasonality, historically our revenues and earnings increase sequentially from quarter to quarter within a fiscal year, but the first quarter is typically less than the previous year’s fourth quarter.

Our Employees
 
As of June 30, 2009, we had approximately 2,700 employees, of whom 1,300 were employed in a manufacturing capacity, and 1,400 were employed in engineering, sales, administrative or clerical positions. Approximately 90 of our employees are covered by a collective bargaining agreement. The collective bargaining agreement expires September 30, 2010. We believe that our employee relations are satisfactory.
 
Regulation
 
Our operations are subject to various federal, state, local, and foreign environmental laws, ordinances and regulations that limit discharges into the environment, establish standards for the handling, generation, use, emission, release, discharge, treatment, storage and disposal of, or exposure to, hazardous materials, substances and waste, and require cleanup of contaminated soil and groundwater. These laws, ordinances and regulations are complex, change frequently and have tended to become more stringent over time. Many of them provide for substantial fines and penalties, orders (including orders to cease operations) and criminal sanctions for violations. They may also impose liability for property damage and personal injury stemming from the presence of, or exposure to, hazardous substances.

 
- 17 -

 

We believe that we are in material compliance with all environmental laws, do not anticipate any material expenditure to meet current or pending environmental requirements, and generally believe that our processes and products do not present any unusual environmental concerns. We are unaware of any existing, pending, or threatened contingent liability that may have a material adverse effect on our ongoing business operations.
 
Our operations are also governed by laws and regulations relating to workplace safety and worker health.  We believe we are in material compliance with these laws and regulations and do not believe that future compliance with such laws and regulations will have a material adverse effect on our results of operations or financial condition. We also believe that we are in material compliance with all applicable labor regulations.
 
We are subject to International Traffic in Arms Regulation, or ITAR.  ITAR requires export licenses from the U.S. Department of State for products shipped outside the U.S. that have military or strategic applications.  In this connection, we have filed certain Voluntary Disclosures with the Directorate of Defense Trade Controls, U.S. Department of State, describing possible inadvertent violations (see Item 3.  Legal Proceedings).

The Company is involved in various other ITAR related matters, including some recently identified with the prior practices of a recently acquired business, which may warrant disclosure with the U.S. Department of State.  Although we are in the process of addressing these matters, we cannot assure you that we will be able to adequately correct all possible ITAR violations.  Compliance with the directives of the U.S. Department of State may result in substantial legal and other expenses and the diversion of management time.  In the event that a determination is made that we have violated ITAR with respect to any matters, we may be subject to substantial monetary penalties that we are unable to quantify at this time, and/or suspension or revocation of our export privileges and criminal sanctions, which may adversely affect our business, results of operations and financial condition.

Government Contracting Regulations

Because we have contracts with the federal government and its agencies, we are subject to audit from time to time for our compliance with government regulations by various agencies, including the Defense Contract Audit Agency (“DCAA”). The DCAA reviews the adequacy of, and a contractor’s compliance with, its internal control systems and policies, including the contractor’s purchasing, property, estimating, compensation and management information systems. The DCAA has the right to perform audits on our incurred costs on all contracts on a yearly basis. An adverse finding under a DCAA audit could result in the disallowance of our costs under a government contract, termination of a government contract, forfeiture of profits, suspension of payments, fines and suspension and prohibition from doing business with the U.S. government. In the event that an audit by the DCAA results in disallowance of our costs under a contract, we have the right to appeal the findings of the audit under applicable dispute resolution provisions. Approval of submitted yearly contract incurred costs can take from one to three years from the date of submission of the contract costs.
Other governmental agencies, including the Defense Securities Service and the Defense Logistics Agency, may also, from time to time, conduct inquiries or investigations regarding a broad range of our activities.
 
Our principal products or services do not require any governmental approval, except for the requirement that we obtain export licenses for certain of our products.
 
Available Information

We file reports with the SEC.  The public may read and copy any materials filed by us with the SEC at the SEC’s public reference room at 450 Fifth Street, NW, Washington, D.C., 20549.  The public may obtain information about the operation of the SEC’s public reference rooms by calling the SEC at 1-800-SEC-0330.  The SEC also maintains an internet site at www.sec.gov that contains reports, proxy and information statements and other information about issuers like us that file electronically with the SEC.

 
- 18 -

 

In addition, we make available free of charge on our website at www.aeroflex.com our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) under the Exchange Act as soon as reasonably practical after we electronically file such material with, or furnish it to, the SEC.

ITEM 1A.   RISK FACTORS

Risks Relating to Our Business
 
A global recession and continued credit tightening could adversely affect us.
 
The current global recession and continued credit tightening, including failures of financial institutions, have initiated unprecedented government intervention in the U.S., Europe and other regions of the world.  To some extent, our sales have been adversely affected.  If these concerns continue or worsen, our customers could experience financial difficulties and as a result modify, delay or cancel plans to purchase our products or services or become unable to make payment to us for amounts due and owing. In addition, our suppliers could experience credit or other financial difficulties that could result in delays in their ability to supply us with necessary raw materials, components or finished products. These conditions may make it extremely difficult for our customers, our suppliers and us to accurately forecast and plan future business activities and could result in an asset impairment.  The occurrence of any of these factors could have an adverse effect on our business, financial condition and results of operations.  For example, in the fourth quarter of 2009 we wrote-off approximately $41.2 million of goodwill and other intangible assets related to our RFMW reporting unit.

Instability in financial markets could adversely affect our ability to access capital markets.

In recent years, the volatility and disruption in the capital and credit markets have reached unprecedented levels.  If these conditions continue or worsen, there can be no assurance that we will not experience a material adverse effect on our ability to borrow money, including under our Senior Secured Credit Facility, or have access to capital, if needed.  Although our lenders have made commitments to make funds available to us in a timely fashion, our lenders may be unable or unwilling to lend money.  In addition, if we determine that it is appropriate or necessary to raise capital in the future, the future cost of raising funds through the debt or equity markets may be more expensive or those markets may be unavailable.  If we were unable to raise funds through debt or equity markets, it could materially and adversely affect our business, financial condition and results of operations.

If we are unable to implement our business strategy, our future results could be adversely affected.

Our future results of operations will depend in significant part on the extent to which we can implement our business strategy, which depends on our ability to successfully operate each component of our business. Our ability to execute our business strategy is subject to a number of factors, many of which are beyond our control, including those set forth in these “Risk Factors.” If we are unable to successfully implement our strategy, our business, financial condition and results of operations could be adversely affected.

Our industry is highly competitive.

We operate in a highly competitive industry. Current and prospective customers for our products evaluate our capabilities against the merits of our direct competitors. For all of our products, we compete primarily on the basis of both performance and price. Some of our competitors are well-established and have greater market share and manufacturing, financial, research and development and marketing resources than we do. We also compete with emerging companies that are attempting to sell their products in specialized markets, and with the internal capabilities of many of our significant customers, including Honeywell and BAE. There can be no assurance that we will be able to maintain our current market share with respect to any of our products. A loss of market share to our competitors could have a material adverse effect on our business, results of operations and financial condition. In addition, a significant portion of our contracts, including those with the federal government and commercial customers, are subject to commercial bidding, both upon initial issuance and recompetition. If we are unable to successfully compete in the bidding process or if we fail to obtain renewal, our business, results of operations and financial condition could be adversely affected.

 
- 19 -

 

Dependence on contract fabrication of semiconductors and outsourcing other portions of our business may adversely affect our ability to bring products to market and damage our reputation.

As part of our efforts to minimize the amount of required capital investment in facilities, equipment and labor and increase our ability to quickly respond to changes in technology and customer requirements, we outsource our semiconductor fabrication processes and certain other manufacturing functions to third parties. If these third parties fail to perform their obligations in a timely manner or at satisfactory quality and cost levels, our ability to bring products to market and our reputation could suffer and our costs could increase. For example, during a market upturn, our contract manufacturers may be unable to meet our demand requirements, which may preclude us from fulfilling our customers’ orders on a timely basis. The ability of these manufacturers to perform is largely outside of our control.

Our industry is characterized by rapid technological change, and if we cannot continue to develop, manufacture and market innovative products that meet customer requirements for performance and reliability, we may lose market share and our net sales may suffer.

The process of developing new high technology products is complex and uncertain, and failure to keep apace of technological development, to develop or obtain appropriate intellectual property and to anticipate customers’ changing needs and emerging technological trends accurately could significantly harm our results of operations. We must make long-term investments and commit significant resources before knowing whether our predictions will eventually result in products that the market will accept. We must accurately forecast volumes, mix of products and configurations that meet customer requirements, and we may not succeed.
 
Our intellectual property rights may be inadequate to protect our business.
 
Our patents are of significant importance to us. In addition, we rely on our trademarks, trade secrets, proprietary know-how and concepts. We attempt to protect our intellectual property rights, both in the United States and in foreign countries, through a combination of patent, trademark and trade secret laws, as well as third-party nondisclosure and assignment agreements. Because of the differences in foreign trademark, patent and other laws concerning proprietary rights, our intellectual property rights may not receive the same degree of protection in foreign countries as they would in the United States. Our failure to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business, results of operations and financial condition.
 
We have applied for patent protection relating to certain existing and proposed products, processes and services. While we generally apply for patents in those countries where we intend to make, have made, use or sell patented products, we may not accurately predict all of the countries where patent protection will ultimately be desirable. If we fail to timely file a patent application in any such country, we may be precluded from doing so at a later date. Furthermore, we cannot assure you that any of our patent applications will be approved. We also cannot assure you that the patents issued as a result of our foreign patent applications will have the same scope of coverage as our United States patents. The patents we own could be challenged, invalidated or circumvented by others and may not be of sufficient scope or strength to provide us with any meaningful protection or commercial advantage. Further, we cannot assure you that competitors will not infringe our patents, or that we will have adequate resources to enforce our patents.
 
Some of our proprietary technology may have been developed under, or in connection with, U.S. government contracts or other federal funding agreements. With respect to technology developed under such federal funding agreements, the U.S. government may retain a nonexclusive, non-transferable, irrevocable, paid-up license to use the technology on behalf of the United States throughout the world. In addition, the U.S. government may obtain additional rights to such technology, or our ability to exploit such technology may be limited.

 
- 20 -

 
 
We rely on our trademarks, trade names and brand names to distinguish our products and services from the products and services of our competitors, and have registered or applied to register many of these trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products and services, which could result in loss of brand recognition, and could require us to devote resources marketing new brands. Further, we cannot assure you that we will have adequate resources to enforce our trademarks.
 
We also rely on unpatented proprietary technology. It is possible that others will independently develop the same or similar technology or otherwise obtain access to our unpatented technology. To protect our trade secrets and other proprietary information, we require employees, consultants, advisors and collaborators to enter into confidentiality agreements. We cannot assure you that these agreements will provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information. If we are unable to maintain the proprietary nature of our technologies, we could be materially adversely affected.
 
If third parties claim that we infringe upon or misappropriate their intellectual property rights, our net sales, gross margins and expenses could be adversely affected.
 
We face the risk of claims that we have infringed or misappropriated third parties’ intellectual property rights. Any claims of patent or other intellectual property infringement, even those without merit, could:
 
 
be expensive and time consuming to defend;
 
 
cause us to cease making or using products that incorporate the challenged intellectual property;
 
 
require us to redesign, reengineer or rebrand our products, if feasible;
 
 
divert management’s attention and resources; and
 
 
require us to enter into licensing agreements in order to obtain the right to use a third party’s intellectual property.
 
Any licensing agreements, if required, may not be available to us on acceptable terms or at all.  A successful claim of infringement against us could result in our being required to pay significant damages, enter into costly license agreements, or stop the sale of certain products, which could adversely affect our net sales, gross margins and expenses and harm our future prospects.
 
Many patent applications in the United States are maintained in secrecy for a period of time after they are filed, and therefore there is a risk that we could adopt a technology without knowledge of a pending patent application, which technology would infringe a third party patent once that patent is issued.
 
We rely on sales to federal government entities under prime contracts and subcontracts. A loss or reduction of such contracts, a failure to obtain new contracts or a reduction of sales under such contracts could have a material adverse effect on our business.
 
We derived approximately 37% of our net sales for fiscal 2009 from contracts with the federal government and its agencies or subcontracts with prime government contractors. The loss or significant curtailment of any of our significant government contracts or subcontracts, or failure to exercise renewal options or enter into new contracts or subcontracts, could have a material adverse effect on our business, results of operations and financial condition.  Continuation and the exercise of renewal options on our existing government contracts and subcontracts and new government contracts and subcontracts are, among other things, contingent upon the availability of adequate funding for the various federal government agencies with which we and prime government contractors do business. Changes in federal government spending could directly affect our financial performance. Among the factors that could impact federal government spending and which would reduce our federal government contracting business are:

 
- 21 -

 
 
 
a significant decline in, or reapportioning of, spending by the federal government;
 
 
changes, delays or cancellations of federal government programs or requirements;
 
 
the adoption of new laws or regulations that affect companies that provide services to the federal government;
 
 
federal government shutdowns or other delays in the government appropriations process;
 
 
curtailment of the federal government’s use of third-party service firms;
 
 
changes in the political climate, including with regard to the funding or operation of the services we provide; and
 
 
general economic conditions.
 
While U.S. defense spending has increased significantly in recent years due to greater homeland security and foreign military commitments, these defense spending levels may not be sustainable, particularly with the Iraq-related work. If the current presidential administration were to reorder its budgetary priorities resulting in a general decline in U.S. defense spending, it could cause federal government agencies to reduce their purchases under contracts, exercise their rights to terminate contracts in whole or in part, to issue temporary stop work orders or decline to exercise options to renew contracts, all of which could harm our operations and significantly reduce our future revenues.

Federal government contracts may be terminated by the federal government at any time prior to their completion and contain other unfavorable provisions, which could lead to unexpected loss of sales and reduction in backlog.
 
Under the terms of federal government contracts, the federal government may unilaterally:
 
 
terminate or modify existing contracts;
 
 
reduce the value of existing contracts through partial termination;
 
 
delay the payment of our invoices by government payment offices;
 
 
audit our contract-related costs; and
 
 
suspend us from receiving new contracts pending resolution of any alleged violations of procurement laws or regulations.
 
The federal government can terminate or modify any of its contracts with us or its prime contractors either for its convenience, or if we or its prime contractors default, by failing to perform under the terms of the applicable contract. A termination arising out of our default could expose us to liability and have a material adverse effect on our ability to compete for future contracts and subcontracts. If the federal government or its prime contractors terminate and/or materially modify any of our contracts or if any applicable options are not exercised, our failure to replace sales generated from such contracts would result in lower sales and could adversely affect our earnings, which could have a material adverse effect on our business, results of operations and financial condition.
 
Our backlog as of June 30, 2009 was approximately $271.9 million, of which approximately 49% represented firm contracts with agencies of the U.S. government or prime defense contractors or subcontractors of the U.S. government. There can be no assurance that any of the contracts comprising our backlog will result in actual sales in any particular period or that the actual sales from such contracts will equal our backlog estimates. Furthermore, there can be no assurance that any contract included in our estimated backlog that generates sales will be profitable.

 
- 22 -

 
 
Our business could be adversely affected by a negative audit or other actions, including suspension or debarment, by the federal government.
 
As a federal government contractor, we must comply with and are affected by laws and regulations relating to the formation, administration and performance of government contracts. These laws and regulations affect how we do business with the federal government and our prime government contractors, and in some instances, impose added costs on our business. Federal government agencies routinely audit and investigate government contractors. These agencies review each contractor’s contract performance, cost structure and compliance with applicable laws, regulations and standards. Such agencies also review the adequacy of, and a contractor’s compliance with, its internal control systems and policies, including the contractor’s purchasing, property, estimating, compensation and management information systems. Any costs found to be improperly allocated to a specific contract will not be reimbursed.
 
In addition, government contract payments received by us for allowable direct and indirect costs are subject to adjustment after audit by government auditors and repayment to the government if the payments exceed allowable costs as defined in the government contracts.
 
As a federal government contractor, we are subject to an increased risk of investigations, criminal prosecution, civil fraud, whistleblower lawsuits and other legal actions and liabilities to which companies with solely commercial customers are not subject, the results of which could have a material adverse effect on our operations. If we were suspended or prohibited from contracting with the federal government generally, or any significant federal government agency specifically, if our reputation or relationship with federal government agencies were impaired or if the federal government otherwise ceased doing business with us or significantly decreased the amount of business it does with us, our business, results of operations and financial condition could be materially adversely affected.
 
Our federal government contracts are subject to competitive bidding, both upon initial issuance and recompetition.  If we are unable to successfully compete in the bidding process or if we fail to receive renewal, it could have a material adverse effect on our business, results of operations and financial condition.
 
A significant portion of our federal government contracts are awarded through a competitive bidding process, including upon renewal, and we expect that this will continue to be the case. There often is significant competition and pricing pressure as a result of this process.
 
The competitive bidding process presents a number of risks such as:
 
 
we must expend substantial funds and time to prepare bids and proposals for contracts, which could detract attention from other parts of our business;
 
 
we may be unable to estimate accurately the resources and cost that will be required to complete any contract we win, which could result in substantial cost overruns; and
 
 
we may encounter expense and delay if our competitors protest or challenge awards of contracts to us, and any such protest or challenge could result in a requirement to resubmit bids on modified specifications or in termination, reduction or modification of the awarded contract.
 
The government contracts for which we compete typically have multiple option periods, and if we fail to win a contract, we generally will be unable to compete again for that contract for several years. If we fail to win new contracts or to receive renewal contracts upon recompetition, such failure could have a material adverse effect on our business, results of operations and financial condition.

 
- 23 -

 
 
Certain of our products may be controlled by the International Traffic in Arms Regulations (“ITAR”), which may adversely affect our business and financial condition.

We are subject to International Traffic in Arms Regulation, or ITAR.  ITAR requires export licenses from the U.S. Department of State for products shipped outside the U.S. that have military or strategic applications.  In this connection, we have filed certain Voluntary Disclosures with the Directorate of Defense Trade Controls, U.S. Department of State, describing possible inadvertent violations (see Item 3.  Legal Proceedings).

The Company is involved in various other ITAR related matters, including some recently identified with the prior practices of a recently acquired business, which may warrant disclosure with the U.S. Department of State.  Although we are in the process of addressing these matters, we cannot assure you that we will be able to adequately correct all possible ITAR violations.  Compliance with the directives of the U.S. Department of State may result in substantial legal and other expenses and the diversion of management time.  In the event that a determination is made that we have violated ITAR with respect to any matters, we may be subject to substantial monetary penalties that we are unable to quantify at this time, and/or suspension or revocation of our export privileges and criminal sanctions, which may adversely affect our business, results of operations and financial condition.

We are subject to unanticipated market conditions that could adversely affect our available working capital and financial position.
 
We hold investments that consist of certain auction rate securities, or ARS. Beginning in February 2008, auctions for the resale of ARS have ceased to reliably support the liquidity of these securities. We cannot be certain that liquidity will be restored in the foreseeable future or at all. We may not be able to access cash by selling these securities for which there is insufficient demand without a loss of principal until a future auction for these investments is successful, a secondary market emerges, they are redeemed by their issuer or they mature. These securities are classified as non-current assets. In addition, the value of such investments could potentially be impaired on a temporary or other-than-temporary basis. If it is determined that the value of the investment is impaired on an other-than-temporary basis, we would be required to write down the investment to its fair value and record a charge to earnings for the amount of the impairment. As of June 30, 2009, we held ARS with a par value of $19.9 million and a fair value of $17.7 million.
 
Our failure to detect unknown defects in our products could materially harm our relationship with customers, our reputation and our business.
 
Defects could be found in our existing or new products. These defects could result in significant product liability or warranty claims. In addition, any defects found in our products could result in a loss of sales or market share, failure to achieve market acceptance, injury to our reputation, indemnification claims, litigation, increased insurance costs and increased service costs, any of which could discourage customers from purchasing our products and materially harm our business.
 
General economic conditions could adversely affect our net sales, gross margins and expenses.
 
Our net sales and gross margins depend on the overall demand for microelectronic products and testing solutions, in the product and service segments in which we compete. Weaker demand for our products and services caused by economic weakness may result in decreased sales, earnings levels or growth rates and problems with the saleability of inventory and realizability of customer receivables. In the past, we have observed effects of global economic downturns in many areas of our business. Delays or reductions in spending for our products could have a material adverse effect on our business, results of operations and financial condition.

 
- 24 -

 
 
As part of our business strategy, we may complete acquisitions or divest non-strategic businesses and product lines and undertake restructuring efforts. These actions could adversely affect our business, results of operations and financial condition.
 
As part of our business strategy, we engage in discussions with third parties regarding, and enter into agreements relating to, acquisitions, ventures and divestitures in order to manage our product and technology portfolios and further our strategic objectives. We also continually look for ways to increase the profitability of our operations through restructuring efforts and to consolidate operations across facilities where synergies exist. In order to pursue this strategy successfully, we must identify suitable acquisition, alliance or divestiture candidates, complete these transactions, some of which may be large and complex, and integrate acquired companies. Integration and other risks of acquisitions can be more pronounced for larger and more complicated transactions, or if multiple acquisitions are pursued simultaneously.
 
The integration of acquisitions may make the completion and integration of subsequent acquisitions more difficult. However, if we fail to identify and complete these transactions, we may be required to expend resources to internally develop products and technology or may be at a competitive disadvantage or may be adversely affected by negative market perceptions, which may have an adverse effect on our business, results of operations and financial condition.
 
Acquisitions may require us to integrate different company cultures, management teams and business infrastructures and otherwise manage integration risks. Even if an acquisition is successfully integrated, we may not receive the expected benefits of the transaction.
 
A successful sale or divestiture depends on various factors, including our ability to effectively transfer assets and liabilities, contracts, facilities and employees to the purchaser, identify and separate the intellectual property to be divested from the intellectual property that we wish to keep and reduce fixed costs previously associated with the divested assets of the business.
 
Managing acquisitions and divestitures requires varying levels of management resources, which may divert management’s attention from our other business operations. Acquisitions, including abandoned acquisitions, also may result in significant costs and expenses and charges to earnings.
 
Restructuring activities may result in business disruptions and may not produce the full efficiency and cost reduction benefits anticipated. Further, the benefits may be realized later than expected and the cost of implementing these measures may be greater than anticipated. If these measures are not successful, we may need to undertake additional cost reduction efforts, which could result in future charges. Moreover, we could experience business disruptions with customers and elsewhere if our cost reduction and restructuring efforts prove ineffective and our ability to achieve our other strategic goals and business plans as well as our business, results of operations and financial condition could be adversely affected.
 
In order to be successful, we must retain and motivate key employees, and failure to do so could seriously harm us.
 
In order to be successful, we must retain and motivate executives and other key employees, including those in managerial, technical, marketing and information technology support positions. In particular, our product generation efforts depend on hiring and retaining qualified engineers. Attracting and retaining skilled workers and qualified sales representatives is also critical to us. Experienced management and technical, marketing and support personnel in the microelectronics and test solutions industries are in demand and competition for their talents is intense. Employee retention may be a particularly challenging issue following acquisitions or divestitures since we also must continue to motivate employees and keep them focused on our strategies and goals, which may be particularly difficult due to the potential distractions related to integrating the acquired operations or divesting businesses to be sold.

 
- 25 -

 
 
We may be required to make significant payments to members of our management in the event their employment with us is terminated.
 
We are a party to employment agreements with each of Leonard Borow, our President and Chief Executive Officer, John Buyko, our Executive Vice President and President of our AMS division, John Adamovich, our Chief Financial Officer and Senior Vice President, Charles Badlato, our Vice President-Treasurer, and Carl Caruso, our Vice President-Manufacturing. In the event we terminate the employment of any of these executives, or in certain cases, if such executives terminate their employment with us, such executives will be entitled to receive certain severance and related payments. The aggregate amount payable by us to Messrs. Borow, Buyko, Adamovich, Badlato and Caruso upon the termination of their respective employment with us is $10.0 million.
 
Our operating results may fluctuate significantly on a quarterly basis.
 
Our sales and other operating results have fluctuated significantly in the past, and we expect this trend will continue. Factors which affect our results include:
 
 
the timing, cancellation or rescheduling of customer estimates, orders and shipments;
 
 
the pricing and mix of products sold;
 
 
our ability to obtain components and subassemblies from contract manufacturers and suppliers;
 
 
variations in manufacturing efficiencies; and
 
 
research and development and new product introductions.
 
Many of these factors are beyond our control. Our performance in any one fiscal quarter is not necessarily indicative of any financial trends or future performance.
 
We are exposed to foreign currency exchange rate risks that could adversely affect our business, results of operations and financial condition.
 
We are exposed to foreign currency exchange rate risks that are inherent in our sales commitments, anticipated sales, and assets and liabilities that are denominated in currencies other than the U.S. dollar. For fiscal 2009, sales of our products to foreign customers accounted for approximately 41% of our net sales. In addition, a portion of our product and component manufacturing, along with key suppliers, are located outside of the United States. Failure to sufficiently hedge or otherwise manage foreign currency risks properly could adversely affect our business, results of operations and financial condition.
 
Our operations are subject to business interruptions and casualty losses.
 
Our business is subject to numerous inherent risks, particularly unplanned events such as inclement weather, explosions, fires, terrorist acts, other accidents, equipment failures and transportation interruptions. While our insurance coverage could offset losses relating to some of these types of events, our business, results of operations and financial condition could be materially adversely impacted to the extent any such losses are not covered by our insurance.
 
Compliance with and changes in environmental, health and safety laws regulating the present and past operations of our business and the business of predecessor companies could increase the costs of producing our products and expose us to environmental claims.
 
Our business is subject to numerous federal, state, local and foreign laws and regulations concerning environmental, health and safety matters, including those relating to air emissions, wastewater discharges and the generation, handling, use, storage, transportation, treatment and disposal of, or exposure to, hazardous substances. Violations of such laws and regulations can lead to substantial fines and penalties and other civil or criminal sanctions. We incur costs associated with compliance with these laws and regulations and we face risks of additional costs and liabilities including those related to the investigation and remediation of, or claims for personal injuries or property damages associated with, past or present contamination, at current as well as former properties utilized by us and at third-party disposal sites, regardless of fault or the legality of the original activities that led to such contamination.

 
- 26 -

 
 
In addition, future developments, such as changes in laws and regulations or the enforcement thereof, more stringent enforcement or interpretation thereof and claims for property damage or personal injury could cause us to incur substantial losses or expenditures. Although we believe we are materially compliant with all applicable current laws and regulations, any new or modified laws or regulations, or the discovery of any currently unknown non-compliance or contamination, could increase the cost of producing our products, thereby adversely impacting our business, results of operations and financial condition.
 
We rely on our information technology systems to manage numerous aspects of our business and a disruption of these systems could adversely affect our business.
 
Our information technology, or IT, systems are an integral part of our business and a serious disruption to our IT systems could significantly limit our ability to manage and operate our business efficiently, which in turn could materially adversely impact our business, results of operations and financial condition. We depend on our IT systems for scheduling, sales order entry, purchasing, materials management, accounting and production functions. Our IT systems also allow us to ship products to our customers on a timely basis, maintain cost-effective operations and provide a high level of customer service. Some of our systems are not fully redundant, and our disaster recovery planning does not account for all eventualities.
 
In the event that certain of our customers encounter financial difficulties and fail to pay us, it could adversely affect our business, results of operations and financial condition.
 
We manufacture products to customer specifications and generally purchase raw materials in response to customer orders. In addition, we may commit significant amounts of capital to maintain inventory in anticipation of customer orders. In the event that our customers for whom we maintain inventory experience financial difficulties, we may be unable to sell such inventory at its current profit margin, if at all. In such an event, our gross margins would decline. In addition, if the financial condition of a significant portion of our customer base deteriorates, resulting in an impairment of their ability to pay us amounts owed in respect of a significant amount of outstanding receivables, our financial condition would be adversely affected.
 
Due to the international nature of our business, political or economic changes could harm our future sales, expenses and financial condition.
 
Our future sales, costs and expenses could be adversely affected by a variety of international factors, including:
 
 
changes in a country’s or region’s political or economic conditions;
 
 
longer accounts receivable cycles;
 
 
trade protection measures;
 
 
unexpected changes in regulatory requirements;
 
 
differing technology standards and/or customer requirements; and
 
 
import or export licensing requirements, which could affect our ability to obtain favorable terms for components or lead to penalties or restrictions.

 
- 27 -

 
 
For fiscal 2009, sales of our products to foreign customers accounted for approximately 41% of our net sales. As of June 30, 2009, we employed over 720 employees overseas. In addition, a portion of our product and component manufacturing, along with key suppliers, is located outside of the United States, and also could be disrupted by some of the international factors described above.
 
Efforts to comply with the Sarbanes-Oxley Act of 2002 will involve significant expenditures, and non-compliance with the Sarbanes-Oxley Act may adversely affect us.
 
The Sarbanes-Oxley Act of 2002 and the related rules and regulations promulgated by the Securities and Exchange Commission that are applicable to us as a result of registering the Notes in January 2009, have increased the scope, complexity and cost of our corporate governance, reporting and disclosure practices.  We could experience greater outside and internal costs as a result of our continuing efforts to comply with the Sarbanes-Oxley Act.
 
We were not required to comply with the requirements of Section 404 of the Sarbanes-Oxley Act for the fiscal year ended June 30, 2009; however, compliance is required for fiscal 2010. We believe that we will be able to timely meet our obligations under Section 404 and that our management will be able to certify as to the effectiveness of our internal control over financial reporting. However, we may identify significant deficiencies or material weaknesses that we cannot remedy in a timely manner. In such event, we may be unable to receive a positive attestation from our independent registered public accounting firm with respect to our internal control over financial reporting.

Risks Related to The Notes and Our Indebtedness

Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our obligations.

We have a significant amount of indebtedness. As of June 30, 2009, we had $889.3 million of debt outstanding, including approximately $515.8 million of secured debt under our senior secured credit facility, $225.0 million of principal amount of senior unsecured notes (i.e., the “Notes”) and $147.5 million of subordinated unsecured debt under our senior subordinated unsecured credit facility. Additionally, at June 30, 2009 we were able to borrow an additional $50.0 million under the revolving portion of our senior secured credit facility.
 
Our substantial indebtedness could have important consequences. For example, it could:
 
 
make it more difficult for us to satisfy our obligations , including with respect to the Notes;
 
 
increase our vulnerability to general adverse economic and industry conditions;
 
 
require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;
 
 
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
 
 
place us at a competitive disadvantage compared to our competitors that have less debt; and
 
 
limit our ability to borrow additional funds.
 
In addition, our senior secured credit facility bears interest at variable rates.  As of June 30, 2009, we have $515.8 million outstanding under the term-loan portion of our senior secured credit facility, the un-hedged portion which is subject to variable interest rates. Each change of 1% in interest rates would result in a $584,000 change in our annual interest expense on the un-hedged portion of the term-loan borrowings.

 
- 28 -

 
 
Despite current indebtedness levels, we and our subsidiaries may still be able to incur substantially more debt, which could further exacerbate the risks associated with our substantial leverage.

We and our subsidiaries may be able to incur substantial additional indebtedness in the future. The terms of our debt allow us to incur substantial amounts of additional debt, subject to certain limitations. The revolving portion of our senior secured credit facility permits borrowing of up to $50.0 million thereunder, and these borrowings would be effectively senior to the Notes to the extent of the value of the assets securing such indebtedness.  If new indebtedness is added to our and our subsidiaries' current debt levels, the related risks that we and they now face would intensify.

To service our indebtedness and other obligations, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.
 
Our ability to make payments on and to refinance our indebtedness and to fund working capital needs and planned capital expenditures, will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive and other factors that are beyond our control.
 
Our business may not generate sufficient cash flow from operations and future borrowings may not be available to us under our senior secured credit facility or otherwise in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness on or before the maturity thereof. We may not be able to refinance any of our indebtedness on commercially reasonable terms or at all.
 
In addition, if for any reason we are unable to meet our debt service obligations, we would be in default under the terms of our agreements governing our outstanding debt. If such a default were to occur, the lenders under our senior secured credit facility could elect to declare all amounts outstanding under our senior secured credit facility immediately due and payable, and the lenders would not be obligated to continue to advance funds to us. In addition, if such a default were to occur, any amounts then outstanding under our senior subordinated unsecured credit facility or subordinated unsecured notes would become immediately due and payable. If the amounts outstanding under these debt agreements are accelerated, our assets may not be sufficient to repay in full the money owed to our debt holders, including holders of the Notes.
 
The right to receive payments on the Notes is effectively subordinated to the rights of our and the guarantors’ existing and future secured creditors.
 
Holders of our secured indebtedness and the secured indebtedness of the guarantors of our indebtedness will have claims that are prior to the claims of the holders of the Notes to the extent of the value of the assets securing that other indebtedness. Notably, we and our subsidiaries, including the guarantors, are parties to our senior secured credit facility, which is secured by liens on substantially all of our assets and the assets of the guarantors and a pledge of all of our capital stock and all of the capital stock of our domestic subsidiaries. The Notes are effectively subordinated to all of our secured indebtedness. In the event of any distribution or payment of our assets or any pledged capital stock in any foreclosure, dissolution, winding-up, liquidation, reorganization or other bankruptcy proceeding, holders of secured indebtedness will have prior claims to those of our assets and any pledged capital stock that constitute their collateral. Holders of the Notes will participate ratably with all other holders of our unsecured indebtedness that is deemed to be of the same class as the Notes and potentially with all of our other general creditors, based upon the respective amounts owed to each holder or creditor, in our remaining assets. In any of the foregoing events, there may not be sufficient assets to pay amounts due on the Notes. As a result, holders of the Notes may receive less, ratably, than holders of secured indebtedness.

 
- 29 -

 
 
If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the Notes.
 
Any default under the agreements governing our indebtedness, including a default under our senior secured credit facility or our senior subordinated unsecured credit facility that is not waived by the required lenders, and the remedies sought by the holders of such indebtedness, could make us unable to pay principal, premium, if any, and interest on the Notes and substantially decrease the market value of the Notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness (including our senior secured credit facility and our senior subordinated unsecured credit facility), we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under our senior secured credit facility could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may in the future need to seek to obtain waivers from the required lenders under our senior secured credit facility, our senior subordinated unsecured credit facility or other debt that we may incur in the future to avoid being in default. If we breach our covenants under our senior secured credit facility or our senior subordinated unsecured credit facility and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under our senior secured credit facility and/or our senior subordinated unsecured credit facility, the lenders could exercise their rights as described above, and we could be forced into bankruptcy or liquidation. If we are unable to repay debt, lenders having secured obligations, such as the lenders under our senior secured credit facility, could proceed against the collateral securing the debt. Because the Indenture governing the Notes, our senior secured credit facility and our senior subordinated unsecured credit facility have customary cross-default provisions, if the indebtedness under the Notes, our senior secured credit facility, our senior subordinated unsecured credit facility, or any of our other debt is accelerated, we may be unable to repay or finance the amounts due.
 
The Indenture governing the Notes, our senior secured credit facility and our senior subordinated unsecured credit facility will impose significant operating and financial restrictions, which may prevent us from capitalizing on business opportunities and taking some actions.
 
The Indenture governing the Notes, our senior secured credit facility and our senior subordinated unsecured credit facility and contain customary restrictions on our activities, including covenants that restrict us and our restricted subsidiaries from:
 
 
incurring additional indebtedness and issuing disqualified stock or preferred stock;
 
 
making certain investments or other restricted payments;
 
 
paying dividends and making other distributions with respect to capital stock, or repurchasing, redeeming or retiring capital stock or subordinated debt;
 
 
selling or otherwise disposing of our assets;
 
 
creating liens on our assets;
 
 
consolidating or merging with, or acquiring, another business, or selling or disposing of all or substantially all of our assets; and
 
 
entering into transactions with our affiliates.
 
The restrictions in the Indenture governing the Notes, our senior secured credit facility and our senior subordinated unsecured credit facility and may prevent us from taking actions that we believe would be in the best interest of our business, and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted. We also may incur future debt obligations that might subject us to additional restrictive covenants that could affect our financial and operational flexibility. We may not be granted waivers or amendments to these agreements if for any reason we are unable to comply with these agreements, and we may not be able to refinance our debt on terms acceptable to us, or at all. The breach of any of these covenants and restrictions could result in a default under the Indenture governing the Notes, our senior secured credit facility and our senior subordinated unsecured credit facility. An event of default under our debt agreements would permit some of our lenders to declare all amounts borrowed from them to be due and payable.

 
- 30 -

 
 
We may not have the ability to raise the funds necessary to finance any change of control offer required by the Indenture governing the Notes.
 
Upon the occurrence of certain kinds of change of control events, we will be required to offer to repurchase outstanding Notes at 101% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase. However, it is possible that we will not have sufficient funds at the time of the change of control to make the required repurchase of the Notes or that restrictions in our senior secured credit facility will not allow such repurchases. Our failure to purchase the tendered Notes would constitute an event of default under the Indenture governing the Notes which, in turn, would constitute a default under our senior secured credit facility and, if the lenders accelerate the debt under our senior secured credit facility, a default under our senior subordinated unsecured credit facility. In addition, the occurrence of a change of control would also constitute an event of default under our senior secured credit facility. A default under our senior secured credit facility would result in a default under the Indenture and under our senior subordinated unsecured credit facility, if the lenders accelerate the debt under our senior secured credit facility.
 
Moreover, our senior secured credit facility restricts, and any future indebtedness we incur may restrict, our ability to repurchase the Notes, including following a change of control event. As a result, following a change of control event, we would not be able to repurchase the Notes unless we first repay all indebtedness outstanding under our senior secured credit facility and any of our other indebtedness that contains similar provisions, or obtain a waiver from the holders of such indebtedness to permit us to repurchase the Notes. We may be unable to repay all of that indebtedness or obtain a waiver of that type. Any requirement to offer to repurchase the outstanding Notes may therefore require us to refinance our other outstanding debt, which we may not be able to do on commercially reasonable terms, if at all. These repurchase requirements may also delay or make it more difficult for others to obtain control of us.
 
Federal and state statutes allow courts, under certain specific circumstances, to void guarantees and/or require note holders to return payments received from guarantors.
 
Under current federal bankruptcy law and comparable provisions of state fraudulent transfer or fraudulent conveyance laws, a guarantee may be voided or cancelled, or claims in respect of a guarantee may be subordinated to all other debts of that guarantor if, among other things, the guarantor, at the time it incurred the indebtedness evidenced by its guarantee:
 
 
issued the guarantee with the intent to delay, hinder or defraud present or future creditors; or
 
 
received less than reasonably equivalent value or fair consideration for the incurrence of such guarantee; and either
 
 
was insolvent or rendered insolvent by reason of such incurrence; or
 
 
was engaged, or about to engage, in a business or transaction for which the guarantor’s remaining assets constituted unreasonably small capital; or
 
 
intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature (as all of the foregoing terms are defined in or interpreted under the fraudulent transfer or conveyance statutes); or
 
 
was a defendant in an action for money damages, or had a judgment for money damages docketed against it (if, in either case, after final judgment the judgment is unsatisfied).

 
- 31 -

 
 
In addition, any payment by that guarantor pursuant to its guarantee could be voided and required to be returned to the guarantor, or to a fund for the benefit of the creditors of the guarantor.
 
A court likely would find that a guarantor did not receive reasonably equivalent value or fair consideration in exchange for its guarantee if the value received by the guarantor were found to be disproportionately small when compared with its obligations under the guarantee or, put differently, it did not benefit, directly or indirectly, from the issuance of the Notes. The measures of insolvency for purposes of fraudulent transfer or conveyance laws will vary depending upon the particular law applied in any proceeding to determine whether a fraudulent transfer or conveyance has occurred. Generally, however, a guarantor would be considered insolvent if:
 
 
the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all of its assets; or
 
 
if the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or
 
 
it could not pay its debts as they become due.
 
On the basis of historical financial information, recent operating history and other factors, we believe that each guarantor, after giving effect to its guarantee of the Notes, will not be insolvent, will not have unreasonably small capital for the business in which it is engaged and will not have incurred debts beyond its ability to pay such debts as they mature. We cannot assure you, however, as to what standard a court would apply in making these determinations or that a court would agree with our conclusions in this regard.
 
The Notes are structurally subordinated to all obligations of our non-guarantor subsidiaries.
 
The Notes are not guaranteed by any of our current or future foreign subsidiaries. As a result of this structure, the Notes are structurally subordinated to all indebtedness and other obligations, including trade payables, of our non-guarantor subsidiaries. The effect of this subordination is that, in the event of a bankruptcy, liquidation, dissolution, reorganization or similar proceeding involving a non-guarantor subsidiary, the assets of that subsidiary cannot be used to pay the holders of the Notes until all other claims against that subsidiary, including trade payables, have been fully paid. As of June 30, 2009, the aggregate total assets (based on book value) of our non-guarantor subsidiaries were $241 million, representing approximately 18% of our total assets. In addition, 23% of our total liabilities were attributable to our non-guarantor subsidiaries as of June 30, 2009.  For fiscal 2009, 29% of our net sales was attributable to our non-guarantor subsidiaries. For fiscal 2009, our non-guarantor subsidiaries had income from continuing operations of $17.8 million.
 
Our controlling equity holders may take actions that conflict with the interests of the holders of our debt.
 
Substantially all of the voting power of our equity is held by the Sponsors. Accordingly, they control the power to elect our directors and officers, to appoint new management and to approve all actions requiring the approval of the holders of our equity, including adopting amendments to our constituent documents and approving mergers, acquisitions or sales of all or substantially all of our assets. The directors have the authority, subject to the terms of our debt, to issue additional indebtedness or equity, implement equity repurchase programs, declare dividends and make other such decisions about our equity.
 
In addition, the interests of our controlling equity holders could conflict with the interests of the holders of our debt. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of our controlling equity holders might conflict with the interests of our debt holders. Our controlling equity holders also may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investments, even though such transactions might involve risks to the holders of our debt.

 
- 32 -

 
 
ITEM 1B.   UNRESOLVED STAFF COMMENTS

None.

ITEM 2.    PROPERTIES

Our headquarters are located in Plainview, Long Island, New York, where we have approximately 90,000 square feet of space, including manufacturing space, that is utilized by both AMS and ATS. The following table sets forth information concerning the significant properties owned or leased by us.
 
       
Approximate
   
Expiration of
 
Location
 
Owned/Leased
 
Square Footage
   
Lease
 
                 
AMS Segment Properties
               
Ann Arbor, Michigan
 
Owned
    32,000    
N/A
 
Colorado Springs, Colorado
 
Owned
    102,000    
N/A
 
Frederick, Maryland
 
Leased
    32,000    
2011
 
Gothenburg, Sweden
 
Leased
    5,000    
2011
 
Hauppauge, Long Island, New York
 
Leased
    47,000    
2010
 
Londonderry, New Hampshire
 
Leased
    43,000    
2012
 
Lawrence, Massachusetts
 
Leased
    57,000    
2014
 
Nanjing, China
 
Leased
    22,000    
2009
 
Naples, Florida
 
Leased
    41,000    
2013
 
Plainview, Long Island, New York
 
Owned
    69,000    
N/A
 
Plainview, Long Island, New York
 
Leased
    21,000    
2013
 
Sunnyvale, California
 
Leased
    20,000    
2012
 
Whippany, New Jersey
 
Owned
    57,000    
N/A
 
                   
ATS Segment Properties
                 
Austin, Texas
 
Leased
    10,000    
2010
 
Cambridge, England
 
Leased
    14,000    
2011
 
Cupertino, California
 
Leased
    16,000    
2014
 
Elancourt, France
 
Leased
    14,000    
2010
 
Lenexa, Kansas
 
Leased
    54,000    
2015
 
Plainview, Long Island, New York
 
Owned
    69,000    
N/A
 
Plainview, Long Island, New York
 
Leased
    21,000    
2013
 
Powell, Ohio
 
Leased
    20,000    
2011
 
Stevenage, England
 
Owned
    142,000    
N/A
 
Wichita, Kansas
 
Owned
    156,000    
N/A
 
 
We believe that our facilities are adequate for our current and presently foreseeable needs and that we will be able to renew or replace our expiring leases on our rental properties on commercially reasonable terms.

ITEM 3.   LEGAL PROCEEDINGS

In March 2005, we sold the net assets of our shock and vibration control device manufacturing business (“VMC”).  Under the terms of the sale agreements, we retained certain liabilities relating to adverse environmental conditions that existed at the premises occupied by VMC as of the date of sale.  We recorded a liability for the estimated remediation costs related to adverse environmental conditions that existed at the VMC premises when it was sold.  The accrued environmental liability at June 30, 2009 is $1.3 million, of which $322,000 is expected to be paid within one year.

 
- 33 -

 

During the quarter ended March 31, 2007, we became aware that certain RadHard bidirectional multipurpose transceivers sold by us since 1999 may have been subject to the licensing jurisdiction of the U.S. Department of State in accordance with the ITAR. Accordingly, we filed a Voluntary Disclosure with the Directorate of Defense Trade Controls, Department of State, describing the details of the possible inadvertent misclassification. Simultaneously, we filed a Commodity Jurisdiction request providing detailed information and data supporting our contention that the product is not subject to ITAR and requesting a determination that such product is not ITAR controlled. On November 15, 2007, we were informed that the U.S. Department of State had determined in response to our Commodity Jurisdiction request, that the product is subject to the licensing jurisdiction of the U.S. Department of State in accordance with ITAR. We requested reconsideration of this determination. On February 7, 2008, we filed an addendum to the above referenced Voluntary Disclosure advising the Directorate of Defense Trade Controls that other products sold by us, similar in nature to the transceiver described above, may also be subject to the ITAR. The Directorate of Defense Trade Controls agreed to extend our time to file such addendum to the Voluntary Disclosure until a decision was rendered with respect to our request for reconsideration of the determination in connection with the above-referenced Commodity Jurisdiction request. On August 5, 2008, we received a letter from the Office of Defense Trade Controls Compliance (“DTCC”) requesting that we provide documentation and/or information relating to our compliance initiatives after November 15, 2007 as well as the results of any product reviews conducted by us, and indicating that a civil penalty against us could be warranted in connection with this matter following the review of such materials. We have provided all of the materials and documentation requested by the DTCC.  Our request for reconsideration was denied by the Directorate of Defense Trade Controls on August 19, 2008 which determined that the product is subject to the licensing jurisdiction of the Department of State in accordance with ITAR. Accordingly, on September 18, 2008, we filed an addendum to our Voluntary Disclosure identifying other products that may have been subject to the licensing jurisdiction of the U.S. Department of State in accordance with the ITAR but were inadvertently misclassified.  At this time it is not possible to determine whether any fines or other penalties will be asserted against us or the materiality of any outcome.

The Company is involved in various other ITAR related matters, including some recently identified with the prior practices of a recently acquired business, which have been disclosed, or may warrant disclosure, with the U.S. Department of State.  Although we are in the process of addressing these matters, we cannot assure you that we will be able to adequately correct all possible ITAR violations. Compliance with the directives of the U.S. Department of State may result in substantial legal and other expenses and the diversion of management time.  In the event that a determination is made that we have violated ITAR with respect to any matters, we may be subject to substantial monetary penalties that we are unable to quantify at this time, and/or suspension or revocation of our export privileges and criminal sanctions, which may adversely affect our business, results of operations and financial condition.

An amended class action complaint was filed against us and the Predecessor Entity’s board of directors on June 20, 2007 in the Supreme Court of the State of New York, Nassau County. The complaint alleges that the board breached its fiduciary duties to our stockholders (i) by issuing a preliminary proxy statement on June 5, 2007 that was issued in connection with seeking stockholder approval of the Merger and (ii) in approving certain amendments, that were allegedly beyond the scope of our corporate powers, to our SERP and the employment agreements of defendants Harvey R. Blau, our then Chairman and Chief Executive Officer, and Leonard Borow, our then President and Chief Operating Officer and currently, the Successor Entity’s President and Chief Executive Officer. We have reached a settlement with the plaintiffs and have accrued an insignificant liability for the settlement.

We are also involved in various other claims and legal actions that arise in the ordinary course of business. We do not believe that the ultimate resolution of any of these actions will have a material adverse effect on our financial position, results of operations, liquidity or capital resources.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

 
- 34 -

 

PART II

ITEM 5.
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Not applicable.

Holders

As of September 1, 2009, there was one record holder of our common stock.

Dividends

We have never declared or paid any cash dividends on our common stock.  We currently intend to retain any future earnings for use in the operation and development of our business, for acquisitions and to repay our debt.  We do not intend to declare or pay any cash dividends on our common stock in the foreseeable future.

Equity Compensation Plan Information as of June 30, 2009

Not applicable.

Issuer Purchases of Equity Securities

None

ITEM 6.   SELECTED FINANCIAL DATA

As part of the Merger, we entered into the various financing arrangements described herein and, as a result, we now have a different capital structure than that which existed prior to the Merger.  Accordingly, the results of operations for periods subsequent to the consummation of the Merger and related financing transactions (Successor Entity) will not necessarily be comparable to prior periods (Predecessor Entity).

 
- 35 -

 

   
(Successor Entity)
   
(Successor Entity)
   
(Predecessor Entity)
 
                                       
         
Period
   
Period
                     
         
August 15,
   
July 1,
                     
   
Year
   
2007
   
2007
                     
   
Ended
   
through
   
through
   
Years Ended June 30,
 
   
June 30,
   
June 30,
   
August 14,
                     
   
2009
   
2008
   
2007
   
2007
   
2006
     
2005
 
   
(In thousands)
 
                                       
Operations Statement Data:
                                     
                                       
Net sales
  $ 599,336     $ 604,991     $ 38,221     $ 593,146     $ 546,243       $ 452,984  
                                                   
Income (loss) from continuing operations
    (76,688 )     (100,604 )     (14,408 )     8,794       33,748         17,430  
                                                   
Discontinued operations, net
    -       (4,821 )     (2,508 )     (3,868 )     (5,652 )       (389 )
                                                   
Cumulative effect of a change in accounting principle, net
    -       -       -       -       (1,137 )
(1)
    -  
                                                   
Net income (loss)*
    (76,688 )     (105,425 )     (16,916 )     4,926       26,959         17,041  

*
We have not presented earnings (loss) per share data because all 1,000 shares of common stock outstanding at June 30, 2009 and 2008are held by one shareholder.

(1)
The cumulative effect of a change in accounting principle relates to the adoption of FASB Interpretation No. 47, effective June 30, 2006, including the recording of a fixed asset and an asset retirement obligation liability for certain leases of $2.4 million each and $1.6 million accumulated depreciation, and an after tax charge of $1.1 million.

The comparability of the selected financial data provided above is effected by, among other things, certain accounting changes, business combinations and dispositions, which are more completely described in the notes to our consolidated financial statements appearing elsewhere herein.

 
- 36 -

 

The following data in the table below effects the comparability of the results of operations for each of the periods shown:

   
(All items shown in this table are before income taxes)
 
                                     
         
August 15,
   
July 1,
                   
   
Fiscal Year
   
2007
   
2007
   
Fiscal Year
   
Fiscal Year
   
Fiscal Year
 
   
Ended
   
to
   
to
   
Ended
   
Ended
   
Ended
 
   
June 30,
   
June 30,
   
August 14,
   
June 30,
   
June 30,
   
June 30,
 
   
2009
   
2008
   
2007
   
2007
   
2006
   
2005
 
   
Successor
   
Successor
   
Predecessor
   
Predecessor
   
Predecessor
   
Predecessor
 
   
Entity
   
Entity
   
Entity
   
Entity
   
Entity
   
Entity
 
   
(In thousands)
 
                                     
Amortization of acquired intangibles
  $ 62,962     $ 73,076     $ 1,692     $ 13,006     $ 13,778     $ 8,896  
Share based compensation
    1,955       3,123       214       4,084       6,652       -  
Restructuring charges
    4,102       6,995       3,778       2,840       3,214       3,124  
Company sale transaction and merger related expenses
    4,283       36,585       5,036       30,584       -       -  
Impairment of goodwill and other intangibles
    41,225       -       -       -       -       -  
Acquired in-process R&D costs
    1,665       24,975       -       -       -       2,974  
Current period impact of acquisition related adjustments (inventory, depreciation and deferred revenue)
    5,149       45,578       57       -       1,088       840  
Development contract loss accrual
    -       -       -       -       3,946       -  
Interest expense
    83,823       74,658       275       672       608       895  

 
- 37 -

 

   
(Successor
   
(Successor
                         
   
Entity)
   
Entity)
   
(Predecessor Entity)
 
                                     
         
Period
   
Period
                   
         
August 15,
   
July 1,
                   
   
Year
   
2007
   
2007
                   
   
Ended
   
through
   
through
   
Years Ended June 30,
 
   
June 30,
   
June 30,
   
August 14,
                   
   
2009
   
2008
   
2007
   
2007
   
2006
   
2005
 
   
(In thousands except ratios)
 
                                     
Balance Sheet Data (at end of period):
                                   
Working capital (1)
  $ 221,406     $ 220,855     $ 218,072     $ 201,603     $ 199,780     $ 161,749  
Total Assets
    1,361,597       1,478,999       682,776       674,396       633,391       589,849  
                                                 
Long-term debt (including current portion)
    889,348       878,811       3,554       3,583       4,165       4,824  
Stockholders' equity
    159,760       276,648       506,622       510,697       487,670       443,980  
                                                 
Cash Flow Data:
                                               
Cash flows from (used in) operating activities
    54,457       8,910       11,293       20,802       36,697       36,611  
                                                 
Cash flows from (used in) investing activities
    (36,213 )     (1,162,376 )     8,406       (19,113 )     (42,553 )     (117,646 )
                                                 
Cash flows from (used in) financing activities
    (5,914 )     1,209,045       12,619       (793 )     3,748       (4,039 )
                                                 
Other Financial Data:
                                               
EBITDA (unaudited)(2)
  $ 76,229     $ 28,159     $ (17,302 )   $ 64,543     $ 85,267     $ 56,300  
                                                 
Adjusted EBITDA (unaudited)(3)
  $ 145,340                                          
                                                 
Ratio of earnings to fixed charges (4)
    *       *       *       9.8 x     15.4 x     8.6 x
 


*
The deficit of earnings to fixed charges was $92.0 million for the year ended June 30, 2009, $139.5 million for the period August 15, 2007 through June 30, 2008 and $21.2 million for the period July 1, 2007 through August 14, 2007.

(1) 
 Working capital is defined as current assets less current liabilities.

(2) 
 As used herein, “EBITDA” represents income (loss) from continuing operations plus (i) interest expense, (ii) provision for income taxes and (iii) depreciation and amortization.

We have included information concerning EBITDA in this report because we believe that such information is used by certain investors, securities analysts and others as one measure of an issuer’s performance and historical ability to service debt.  In addition, we use EBITDA when interpreting operating trends and results of operations of our business.  EBITDA is also widely used by us and others in our industry to evaluate and to price potential acquisition candidates.  EBITDA is a non-GAAP financial measure and should not be considered as an alternative to, or more meaningful than, earnings from operations, cash flows from operations or other traditional GAAP indications of an issuer’s operating performance or liquidity.

 
- 38 -

 

The use of EBITDA has limitations as an analytical tool, and you should not consider this measure in isolation, or as a substitute for analysis of our results as reported under GAAP.

The following table is a reconciliation of income (loss) from continuing operations to EBITDA for the periods indicated:
 
   
(Successor
   
(Successor
                         
   
Entity)
   
Entity)
   
(Predecessor Entity)
 
                                     
         
Period
   
Period
                   
         
August 15,
   
July 1,
                   
   
Year
   
2007
   
2007
                   
   
Ended
   
through
   
through
   
Years Ended June 30,
 
   
June 30,
   
June 30,
   
August 14,
                   
   
2009
   
2008
   
2007
   
2007
   
2006
   
2005
 
   
(In thousands)
 
                                     
Income (loss) from continuing operations
  $ (76,688 )   $ (100,604 )   $ (14,408 )   $ 8,794     $ 33,748     $ 17,430  
                                                 
Interest expense
    83,823       74,658       275       672       608       895  
                                                 
Provision (benefit) for income taxes
    (15,332 )     (38,927 )     (6,831 )     24,935       20,540       13,663  
                                                 
Depreciation and amortization
    84,426       93,032       3,662       30,142       30,371       24,312  
                                                 
EBITDA (unaudited)
  $ 76,229     $ 28,159     $ (17,302 )   $ 64,543     $ 85,267     $ 56,300  

(3)     The calculation of Adjusted EBITDA is based on the definitions in our debt agreements and is not defined under U.S. GAAP.  Our use of the term Adjusted EBITDA may vary from others in our industry.  Adjusted EBITDA is not a measure of operating income (loss), performance or liquidity under U.S. GAAP and is subject to important limitations.  A reconciliation of EBITDA is as follows:

 
- 39 -

 

   
Year Ended
 
   
June 30, 2009
 
       
   
(Successor Entity)
 
   
(In thousands)
 
       
EBITDA (unaudited)
  $ 76,229  
         
Non-cash purchase accounting adjustments
    2,749  
         
Merger related expenses
    4,283  
         
Restructuring costs (a)
    4,102  
         
Share based compensation (b)
    1,955  
         
Impairment of goodwill and other intangibles
    41,225  
         
Other defined items (c)
    14,797  
         
Adjusted EBITDA (unaudited)
  $ 145,340  

(a)  Primarily reflects costs associated with the reorganization of our U.K. operations.
(b) Reflects non-cash share-based employee compensation expense under the provisions of SFAS 123(R), Share-Based Payments.
(c) Reflects other adjustments required in calculating our debt covenant compliance such as pro  forma adjusted EBITDA for companies acquired during the year and other non-cash charges.

(4)
In calculating the ratio of earnings to fixed charges, earnings consist of income from continuing operations before income taxes plus fixed charges.  Fixed charges consist of interest expense, amortization of deferred financing costs and one-third of rent expense that we believe to be representative of the interest factored in those rentals.


ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This Report contains "forward-looking statements." All statements other than statements of historical fact are "forward-looking" statements for purposes of the U.S. federal and state securities laws. These statements may be identified by the use of forward looking terminology such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "might," "plan," "potential," "predict," "should" or "will" or the negative thereof or other variations thereon or comparable terminology. In particular, statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance contained in this Report under the headings “Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" are forward-looking statements.

We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors, including those discussed in this Report under the headings "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. Some of the key factors that could cause actual results to differ from our expectations include:

 
- 40 -

 

 
adverse developments in general business, economic and political conditions domestically or internationally;

 
our ability to remain competitive in the markets we serve;
 
 
our failure to comply with regulations such as ITAR and any changes in regulations;
 
 
our inability to continue to develop, manufacture and market innovative products and services that meet customer requirements for performance and reliability;
 
 
our exposure to foreign currency exchange rate risks;
 
 
our exposure to auction rate securities and the impact this exposure has on our liquidity;
 
 
our failure to realize anticipated benefits from completed acquisitions, divestitures or restructurings, or the possibility that such acquisitions, divestitures or restructurings could adversely affect us;
 
 
the loss of key employees;
 
terrorist acts or acts of war; and

other risks and uncertainties, including those listed under the caption "Risk Factors."

Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in this Report are made only as of the date hereof.

Overview

We are a leading provider of highly specialized microelectronics and test and measurement equipment, primarily to the global aerospace and defense and broadband communications markets. We also design application specific integrated circuits (“ASICs”) for CT scan equipment for the medical industry. Founded in 1937, we have developed a substantial intellectual property portfolio that includes more than 150 patents, extensive know-how, years of collaborative research and development with our customers and a demonstrated history in space, validating the high quality performance of our products. We believe that the combination of our leading market positions, complementary portfolio of products, years of experience and engineering capabilities provides us with a competitive advantage and enables us to deliver high performance, high value products to our customers.

The Acquisition

On August 15, 2007, we were acquired by our parent pursuant to an agreement and plan of merger, or merger agreement.  In the Form 10-K, we refer to this transaction as the “Acquisition” or the “Merger.”

The Acquisition was funded by:

 
·
equity investments in the parent of approximately $378.4 million by affiliates of, or funds managed by, The Veritas Capital Fund III, L.P., Golden Gate Private Equity, Inc. and GS Direct, L.L.C. (the “Sponsors”) and certain members of our management;

 
·
borrowings under a senior secured credit facility, consisting of $525.0 million under our term loan facility;

 
- 41 -

 
 
·
borrowings under an exchangeable senior unsecured credit facility, consisting of a $225.0 million term loan facility; and

 
·
borrowings under an exchangeable senior subordinated unsecured credit facility, consisting of a $120.0 million term loan facility.

On September 21, 2007, we entered into a $120.0 million senior subordinated unsecured credit facility to refinance the $120.0 million exchangeable senior subordinated unsecured credit facility.  On August 7, 2008, we entered into a $225.0 million senior unsecured credit facility to refinance the $225.0 million exchangeable senior unsecured credit facility.  On January 21, 2009, the SEC declared effective our exchange offer registration statement, which resulted in an exchange of securities pursuant to which the unregistered unsecured senior notes were exchanged for publicly registered 11.75% unsecured senior notes due February 15, 2015 with substantially identical terms as the exchanged notes.

Selected Factors Affecting Our Future Results of Operations

Our future results of operations will be affected by the following factors, which may cause our results of operations to differ from those discussed under “Results of Operations.” These are not all of the factors that may affect our future results of operations.

Acquisition Related Adjustments. In the fiscal year ended June 30, 2009, we recorded a charge of $1.7 million for acquired in-process research and development costs and expensed $668,000 and $416,000 related to an inventory acquisition adjustment and a deferred revenue acquisition adjustment, respectively.  In the fiscal year ended June 30, 2008 we recorded a charge of $25.0 million for acquired in-process research and development costs and expensed $39.0 million and $2.5 million related to an inventory acquisition adjustment and a deferred revenue acquisition adjustment, respectively.

Company Sale Transaction Expenses.  In the fiscal year ended June 30, 2008, we incurred company sale transaction costs of $36.2 million consisting primarily of Merger related change of control, severance and other compensation payments, a lawsuit settlement charge and legal and other professional fees.  There were no comparable costs for the fiscal year ended June 30, 2009.

Results of Operations

Refer to Notes 1 and 3 to our consolidated financial statements for details concerning the Company’s August 15, 2007 acquisition by affiliates of or funds managed by the Sponsors and certain members of our management and the basis upon which such consolidated financial statements are presented. For comparative purposes, in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, we combined the Predecessor period from July 1, 2007 to August 14, 2007 with the Successor period from August 15, 2007 to June 30, 2008 to form the fiscal year ended June 30, 2008. This combination is not a GAAP presentation. However, we believe this presentation is useful to the reader as a comparison to the Successor period for the fiscal year ended June 30, 2009.

 
- 42 -

 

The following table sets forth our historical results of operations as a percentage of net sales for the periods indicated below:
         
Non-GAAP
                   
         
combined
                   
         
Predecessor
                   
   
Successor
   
and Successor
   
Successor
   
Predecessor
   
Predecessor
 
               
Period
   
Period
       
   
Fiscal
   
Fiscal
   
August 15,
   
July 1,
   
Fiscal
 
   
Year
   
Year
   
2007
   
2007
   
Year
 
   
Ended
   
Ended
   
through
   
through
   
Ended
 
   
June 30,
   
June 30,
   
June 30,
   
August 14,
   
June 30,
 
   
2009
   
2008
   
2008
   
2007
   
2007
 
                               
Net sales
    100.0 %     100.0 %     100.0 %     100.0 %     100.0 %
Costs of sales
    52.4       58.4       58.3       59.8       52.1  
Gross profit
    47.6       41.6       41.7       40.2       47.9  
                                         
Operating expenses:
                                       
Selling, general and administrative costs
    21.4       21.8       20.0       49.8       21.8  
Research and development costs
    11.7       12.8       11.6       31.9       12.9  
Amortization of acquired intangibles
    10.5       11.6       12.1       4.4       2.2  
Acquired in-process research and development costs
    0.3       3.9       4.1       -       -  
Company sale transaction expenses
    -       5.6       5.4       9.7       5.2  
Impairment of goodwill and other intangibles
    6.9       -       -       -       -  
Total operating expenses
    50.8       55.7       53.2       95.8       42.1  
                                         
Operating income (loss)
    (3.2 )     (14.1 )     (11.5 )     (55.6 )     5.8  
                                         
Other income (expense), net
    (12.2 )     (10.9 )     (11.6 )     -       (0.1 )
Income (loss) from continuing operations before income taxes
    (15.4 )     (25.0 )     (23.1 )     (55.6 )     5.7  
Provision (benefit) for income taxes
    (2.6 )     (7.2 )     (6.5 )     (17.9 )     4.2  
                                         
Income (loss) from continuing operations
    (12.8 )     (17.8 )     (16.6 )     (37.7 )     1.5  
Discontinued operations
    -       (1.1 )     (0.8 )     (6.6 )     (0.7 )
Net income (loss)
    (12.8 )%     (18.9 )%     (17.4 )%     (44.3 )%     0.8 %

Statements of Operations

Management evaluates the operating results of the Company’s two segments based upon pre-tax operating income, before costs related to restructuring, lease termination charges, amortization of acquired intangibles, share-based compensation, acquired in-process research and development costs, Company Sale Transaction expenses, merger related expenses and the impact of any acquisition related adjustments.
 
 
- 43 -

 
 
         
Non-GAAP
                   
         
Combined
                   
         
Predecessor
                   
   
Successor
   
and Successor
   
Successor
   
Predecessor