News Column

API TECHNOLOGIES CORP. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

July 9, 2014

Introduction

This section is provided as a supplement to, and should be read in conjunction with, our unaudited Consolidated Financial Statements and accompanying Notes thereto included in this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the year ended November 30, 2013 to help provide an understanding of our financial condition, changes in financial condition and results of our operations.

As discussed below, we sold Data Bus and Sensors. The results of Data Bus and Sensors are presented as discontinued operations for all periods presented.

Business Overview of API Technologies Corp.

General

We design, develop and manufacture high reliability RF/Microwave, Power, and Security solutions to the defense, aerospace, industrial, satellite, and commercial end markets. We own and operate several state-of-the-art manufacturing facilities in the United States, the United Kingdom, Canada, China and Mexico. Our customers, which include defense and commercial, outsource some of their electronic components, subsystems, and solutions requirements to us as a result of our technical expertise, capabilities, and our extensive product and solutions offerings.

Operating through our three segments, Systems, Subsystems & Components (SSC), Electronic Manufacturing Services (EMS) and Secure Systems & Information Assurance (SSIA), we are positioned as a differentiated solution provider to U.S. and U.S. friendly governments, military, defense, aerospace and homeland security contractors, and leading industrial and commercial firms. With a focus on high-reliability products for critical applications, our solutions portfolio spans RF/microwave and microelectronics, electromagnetics, power products, and security products. We also offer a wide range of electronic manufacturing services from prototyping to high volume production and secure communication products, including ruggedized computers and peripherals, network security appliances, and TEMPEST Emanation prevention products.

On March 21, 2014, we entered into Amendment No. 2 to Credit Agreement (the "Amendment No. 2"), by and among the Company, as borrower, the lenders party thereto and Guggenheim Corporate Funding, LLC, as administrative agent (the "Agent"). Amendment No. 2 amends the Credit Agreement, dated as of February 6, 2013, by and among the Company, as borrower, the lenders party thereto and Agent (as amended, supplemented or modified from time to time, the "Term Loan Agreement") to provide for an incremental term loan facility in an aggregate principal amount equal to $55 million (the "Incremental Term Loan Facility"). The Incremental Term Loan Facility is subject to substantially the same terms and conditions, including the applicable interest rate and the maturity date of February 6, 2018, as the $165 million term loan facility provided upon the initial closing of the Term Loan Agreement. In addition, Amendment No. 2 amends the Term Loan Agreement to reduce the minimum interest coverage ratio and increase the maximum leverage ratio, among other things.

The proceeds of the Incremental Term Loan Facility were used (i) to pay in full the amounts due under a Credit Agreement (the "Revolving Loan Agreement"), by and among the Company and certain of its U.S. subsidiaries, as borrowers, the lenders from time to time party thereto and Wells Fargo Bank, National Association, as administrative agent and U.K. security trustee, which Revolving Loan Agreement was then terminated; (ii) to redeem all 26,000 shares of the Company's Series A Mandatorily Redeemable Preferred Stock that were outstanding (as described below); (iii) to pay fees, costs and expenses associated with the Incremental Term Loan Facility and related transactions; and (iv) for general corporate purposes.

As of March 21, 2014, we redeemed all 26,000 shares of our Series A Mandatorily Redeemable Preferred Stock that were outstanding. We paid the holder of the Series A Mandatorily Redeemable Preferred Stock an aggregate of $27.6 million to effect the redemption. Following redemption, all shares of Series A Mandatorily Redeemable Preferred Stock were cancelled and such shares were returned to authorized but undesignated shares of preferred stock.

On December 31, 2013, we completed the sale and leaseback (the "Sale/Leaseback") of the Company's facility located in State College, Pennsylvania. We sold the facility to an unaffiliated third party for a gross purchase price of approximately $15,500 and will lease the property from the buyer for approximately $1,279 per year, subject to annual adjustments. We used $14,200 of the proceeds of the Sale/Leaseback to prepay a portion of our outstanding indebtedness under the Term Loan Agreement.

On July 5, 2013, we entered into an agreement (the "APA") with ILC Industries, LLC ("Parent") and Data Device Corporation, a Delaware corporation and a wholly owned subsidiary of Parent (the "Purchaser") pursuant to which we sold to the Purchaser certain assets comprising the Company's data bus business ("Data Bus") in the U.S. and the U.K., including substantially all of the assets of the Company's wholly owned subsidiary, National Hybrid, Inc., a New York corporation (the "Asset Sale"). The Purchaser paid us approximately $32.15 million in cash for the assets, after certain adjustments based on closing inventory values as set forth in the APA and customary indemnification provisions. Substantially all of the proceeds from the Asset Sale were used to repay certain of our outstanding debt.

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On April 17, 2013 we sold all of the issued and outstanding shares of capital stock or other equity interests of Spectrum Sensors and Controls, Inc., a Pennsylvania corporation ("Sub 1"), Spectrum Sensors and Controls, LLC, a California limited liability company ("Sub 2"), and Spectrum Sensors and Controls, Inc., an Ohio corporation ("Sub 3" and together with Sub 1 and Sub 2, "Sensors"), for gross cash proceeds of approximately $51.35 million. Of this amount, $1.5 million was placed into an escrow account for 12 months to secure any indemnification claims made by the purchaser against the sellers, API and Spectrum Control, Inc. ("Spectrum"), a wholly owned subsidiary of API.

On February 6, 2013, we refinanced substantially all of our indebtedness. We entered into (i) the "Term Loan Agreement; and (ii) the Revolving Loan Agreement, which provided for a $50.0 million revolving borrowing base credit facility, with a $10.0 million subfacility (or the Sterling equivalent) for a revolving borrowing base credit facility that was available to certain of our United Kingdom subsidiaries, a $10.0 million sub-facility for letters of credit and a $5.0 million sub-facility for swingline loans. The proceeds of both loan facilities were used to refinance and pay in full our existing credit facility under a Credit Agreement by and among the lenders from time to time party thereto and Morgan Stanley Senior Funding, Inc., as administrative agent, lead arranger and sole book-runner, to payoff the term loan facility with Lockman Electronics Holdings Limited, and to pay fees, costs and expenses associated with the refinancing. As discussed above, the Revolving Loan Agreement was repaid and terminated in March 2014.

Commencing in 2010, we began various cost reduction initiatives to rationalize the number of our facilities and personnel, which has resulted in us consolidating certain parts of our manufacturing operations. During the year ended November 30, 2013, we also began the consolidation of certain parts of our Ottawa, Canada operations to State College, Pennsylvania. The collective impact of these changes has resulted in a net reduction of costs of approximately $43.0 million on an annualized basis.

Operating Revenues

We derive operating revenues from our three principal business segments: Systems, Subsystems & Components (SSC); Electronic Manufacturing Services (EMS); and Secure Systems & Information Assurance (SSIA). Our customers are located primarily in the United States, Canada and the United Kingdom, but we also sell products to customers located throughout the world, including NATO and European Union countries.

Systems, Subsystems & Components (SSC) Revenue includes high-performance RF/microwave, electromagnetic, power, and microelectronics solutions used in high-reliability defense, space, industrial and commercial applications, including missile defense systems, radar systems, electronic warfare systems (e.g. counter-IED RF jamming devices), unmanned air, ground and robotic systems, satellites, as well as industrial, medical, energy and telecommunications products. The main demand today for our SSC products come from various world governments, including militaries, defense organizations, commercial aerospace, space, homeland security, prime defense contractors and manufacturers of industrial products.

Electronic Manufacturing Services (EMS) Revenue includes high speed surface mount circuit card assemblies, electromechanical assemblies, system and integrated level solutions used in high-reliability defense, industrial, and commercial applications. The main demand today for our EMS products come from various defense organizations, aerospace, prime defense contractors and manufacturers of industrial, medical and commercial products.

Secure Systems & Information Assurance (SSIA) Revenue includes revenues derived from the manufacturing of TEMPEST and Emanation products, ruggedized computers and peripherals, secure access and information assurance products. The principal market for these products are the defense industries of the United States, Canada and the United Kingdom and other U.S. friendly governments, Fortune 500 companies and telecommunication service providers.

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Cost of Revenues

We conduct all of our design and manufacturing efforts in the United States, Canada, United Kingdom, Mexico and China. Cost of goods sold primarily consists of costs that were incurred to manufacturer, test and ship the products and some design costs for customer funded research and development ("R&D"). These costs include raw materials, including freight, direct labor, subcontractor services, tooling required to design and build the parts, and the cost of testing (labor and equipment) the products throughout the manufacturing process and final testing before the parts are shipped to the customer. Other costs include provision for obsolete and slow moving inventory, and restructuring charges related to the consolidation of operations.

Operating Expenses

Operating expenses consist of selling, general, administrative expenses, research and development, business acquisition and related charges and other income or expenses.

Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses include compensation and benefit costs for all employees, including sales and customer service, sales commissions, executive, finance and human resource personnel. Also included in SG&A is compensation related to stock-based awards to employees and directors, professional services for accounting, legal and tax, information technology, rent and general corporate expenditures.

Research and Development Expenses

R&D expenses represent the cost of our development efforts. R&D expenses include salaries of engineers, technicians and related overhead expenses, the cost of materials utilized in research, and additional engineering or consulting services. R&D costs are expensed as incurred.

Business Acquisition and Related Charges

Business acquisition charges primarily represent costs of engaging outside legal, accounting, due diligence, business valuation consultants and accelerated stock option expenses related to business combinations or divestitures. Related charges include costs incurred related to our efforts to consolidate operations of recently acquired and legacy businesses and expenses associated with divestitures.

Other Expenses (Income)

Other expenses (income) consists of interest expense on term loans, notes payable, operating loans and capital leases, interest income on cash and cash equivalents and marketable securities, amortization of note discounts and deferred financing costs, gains or losses on disposal of property and equipment, and gains or losses on foreign currency transactions. Other income also includes gains related to the sales of fixed assets held for sale and acquisition-related gains when net assets acquired exceed the purchase price of the business acquisition.

Backlog

Our sales backlog at May 31, 2014 was approximately $123.7 million compared to approximately $131.0 million at November 30, 2013. Our backlog figures represent confirmed customer purchase orders that we had not shipped at the time the figures were calculated. We anticipate that approximately $89.5 million of our backlog orders will be filled by May 31, 2015. We lack control over the timing of new purchase orders, as such, the backlog can increase or decrease significantly based on timing of customer purchase orders.

(dollar amounts in thousands) May 31, November 30, % 2014 2013 Change Backlog by segments: SSC $ 102,304$ 96,493 6.0 % EMS 16,187 25,028 (35.3 )% SSIA 5,202 9,489 (45.2 )% $ 123,693$ 131,010 (5.6 )%



The decrease at May 31, 2014 compared to November 30, 2013 was related to our EMS and SSIA segments as a result of lower EMS and SSIA bookings due to program timing in the six months ended May 31, 2014, partially offset by increased SSC bookings in the six months ended May 31, 2014.

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Results of Operations for the Three Months Ended May 31, 2014 and 2013

The following discussion of results of operations is a comparison of our three months ended May 31, 2014 and 2013.

Segment Operating Revenue and Adjusted EBITDA

Financial information for each of our segments is set forth in Part I- Item 1, Financial Statements (unaudited), Note 18 "Segment Information" to our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q. In deciding how to allocate resources and assess performance, our chief operating decision maker regularly evaluates the performance of our reportable segments on the basis of revenue and adjusted EBITDA. Segment adjusted EBITDA assists us in comparing our segment performance over various reporting periods because it removes from our operating results the impact of items that our management believes do not reflect our core operating performance. Our reportable segment measure of adjusted EBITDA is not a recognized measure under GAAP and should not be considered an alternative to, or more meaningful than, net income (loss) or other measures of financial performance derived in accordance with GAAP. Our segment adjusted EBITDA may not be comparable to similarly titled measures of other companies because other entities may not calculate segment adjusted EBITDA in the same manner.

Our segment Adjusted EBITDA is defined as income from continuing operations before income taxes, interest, depreciation and amortization, and excluding other items. Such items include stock-based compensation expense, non-cash inventory provisions, corporate franchise taxes, financing related costs, foreign exchange losses, reversal of contingency accruals and lease payments related to the Sale/Leaseback.

(dollar amounts in thousands) Three months ended May 31, % 2014 2013 Change Revenues by segments: SSC $ 39,272$ 42,865 (8.4 )% EMS 8,835 16,229 (45.6 )% SSIA 5,062 5,135 (1.4 )% $ 53,169$ 64,229 (17.2 )%



We recorded a 17.2% decrease in overall revenues for the three months ended May 31, 2014 over the same period in 2013. The decrease was primarily due to lower revenues in our EMS segment compared to the three months ended May 31, 2013. During the three months ended May 31, 2014, the decrease in our EMS segment revenues was due to timing of certain key defense programs and our customer's new product execution. The SSC revenues decreased primarily due to timing of certain programs as a result of funding delays, while the SSIA revenues were fairly consistent compared to the prior period.

(dollar amounts in thousands) Three months ended May 31, % 2014 2013 Change Segment Adjusted EBITDA: SSC $ 4,534$ 5,626 (19.4 )% EMS (791 ) 637 (224.2 )% SSIA 540 1,048 (48.5 )%



The SSC segment adjusted EBITDA for the three months ended May 31, 2014 was lower than the comparable period in 2013 primarily due to impact of lower revenues in the quarter ended May 31, 2014 compared to the same period last year. During the three months ended May 31, 2014, the decrease in our EMS segment adjusted EBITDA was primarily due to lower revenues in the quarter ended May 31, 2014 compared to the same period last year. The SSIA results include lower adjusted EBITDA as a result of the impact of a change in product mix in the quarter ended May 31, 2014, compared to the same period last year, as we shipped products on a contract with lower margin that is expected to be completed by August 31, 2014.

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Operating Expenses

Cost of Revenues and Gross Margin

Three months ended May 31, 2014 2013 Gross margin by segments: SSC 24.9 % 26.3 % EMS (5.1 )% 9.6 % SSIA 21.6 % 34.7 % Overall 19.6 % 22.8 %



Our combined gross margin for the three months ended May 31, 2014 decreased by approximately 3.2 percentage points compared to the three months ended May 31, 2013. Gross margin varies from period to period and can be affected by a number of factors, including product mix, production efficiency, and restructuring activities. Overall cost of revenues from continuing operations as a percentage of sales increased in the three months ended May 31, 2014 from 77.2% to 80.4% compared to the same period last year. The SSC segment cost of revenues percentage for the three months ended May 31, 2014 increased by 1.4 percentage points compared to the comparable period in 2013. The EMS segment cost of revenues increased by 14.7 percentage points compared to the same period in 2013, primarily due lower revenues in the quarter ended May 31, 2014 compared to the same period last year. The SSIA segment realized an increase in cost of revenues of 13.1 percentage points primarily due to unfavorable product mix in the quarter ended May 31, 2014, as we shipped products on a contract with lower margin. Combined restructuring costs recorded in the three months ended May 31, 2014 were approximately $0.3 million compared to approximately $0.1 million in the comparable period of 2013.

General and Administrative Expenses

General and administrative expenses decreased to approximately $5.8 million for the three months ended May 31, 2014 from $6.2 million for the three months ended May 31, 2013. The decrease is primarily a result of lower depreciation and amortization, lower stock based compensation due to forfeitures, lower professional fees and cost reductions following restructuring initiatives. As a percentage of sales, general and administrative expenses were 10.9% for the three months ended May 31, 2014, compared to 9.6% for the three months ended May 31, 2013.

The major components of general and administrative expenses are as follows:

(dollar amounts in thousands) Three months ended May 31, % of % of 2014 sales 2013 sales Depreciation and Amortization $ 2,431 4.6 % $ 2,651 4.1 % Accounting and Administration $ 1,824 3.4 % $ 2,056 3.2 % Stock based compensation $ (21 ) (0.0 )% $ 210 0.3 % Professional Services $ 445 0.8 % $ 523 0.8 %



Selling Expenses

Selling expenses decreased to approximately $3.5 million for the three months ended May 31, 2014 compared to approximately $4.1 million for the three months ended May 31, 2013. The decrease is primarily a result of lower commissions as a result of lower revenues. As a percentage of sales, selling expenses were 6.7% for the three months ended May 31, 2014, compared to 6.3% for the three months ended May 31, 2013.

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The major components of selling expenses are as follows:

(dollar amounts in thousands) Three months ended May 31, % of % of 2014 sales 2013 sales Payroll Expense - Sales $ 2,078 3.9 % $ 2,074 3.2 % Commissions $ 896 1.7 % $ 1,302 2.0 % Advertising $ 250 0.5 % $ 329 0.5 %



Research and Development Expenses

Research and development costs decreased to approximately $2.2 million for the three months ended May 31, 2014 compared to approximately $2.3 million for the three months ended May 31, 2013. As a percentage of sales, research and development expenses were 4.1% for the three months ended May 31, 2014, compared to 3.6% for the three months ended May 31, 2013.

Business acquisition and related charges

Business acquisition charges primarily represent costs of engaging outside legal, accounting, due diligence, business valuation consultants and accelerated stock option expenses related to business combinations or divestitures. For the three months ended May 31, 2014, business acquisition charges of approximately $0.1 million compared to approximately $0.6 million primarily related to the sale of the Sensors operations during the three months ended May 31, 2013.

Operating Income (loss)

We recorded an operating loss from continuing operations for the three months ended May 31, 2014 of approximately $1.9 million compared to operating income of approximately $1.1 million for the three months ended May 31, 2013. The increase in operating loss of approximately $3.0 million is primarily attributed to lower revenues and a change in product mix in the quarter, partially offset by a decrease in operating expenses.

Other Expenses (Income)

Total other expense for the three months ended May 31, 2014 amounted to approximately $12.9 million, compared to other expense of $5.4 million for the three months ended May 31, 2013.

The increase in other expense in the three month period ended May 31, 2014, compared to the comparable period in 2013 is largely attributable to the write-down of approximately $10.2 million of note discounts and deferred financing costs as a result of the refinancing of our term loans and termination of our previous revolving loans in March 2014, partially offset by lower interest expense in the quarter ended May 31, 2014, compared to the comparable period in 2013, which had lower average borrowings and lower interest rates on term loans.

Income Taxes

Income taxes from continuing operations amounted to a net expense of approximately $0.2 million for the three months ended May 31, 2014 compared to a net benefit of $0.4 million in the three months ended May 31, 2013. The expense during the three months ended May 31, 2014, is primarily due to the tax amortization of indefinite lived intangibles, and foreign and state taxes incurred during the period. The current provision is less than the statutory tax rate due to valuation allowances recorded for the deferred tax assets arising from current year losses. The prior year benefit related to the tax amortization of indefinite lived intangibles, and foreign and state taxes incurred during the period.

Income From Discontinued Operations

We had no activity in discontinued operations for the three months ended May 31, 2014, compared to net income from discontinued operations of approximately $11.4 million in the same period of fiscal 2013, which is primarily attributable to a $11.9 million gain on the sale of Sensors and operating results for Sensors and Data Bus, during the three months ended May 31, 2013.

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Net loss

We recorded a net loss for the three months ended May 31, 2014 of approximately $15.0 million, compared to net income of approximately $7.5 million for the three months ended May 31, 2013. The increase in net loss is largely due to the write-down of approximately $10.2 million of note discounts and deferred financing costs as a result of the refinancing of our term loans and termination of our previous revolving loans in the quarter ended May 31, 2014, and lower operating income, partially offset by lower interest expense from lower debt levels in the three month period ended May 31, 2014, compared to the comparable period in 2013.

Results of Operations for the Six Months Ended May 31, 2014 and 2013

The following discussion of results of operations is a comparison of our six months ended May 31, 2014 and 2013.

Segment Operating Revenue and Adjusted EBITDA

(dollar amounts in thousands) Six months ended May 31, % 2014 2013 Change Revenues by segments: SSC $ 78,932$ 82,459 (4.3 )% EMS 22,693 31,097 (27.0 )% SSIA 10,461 8,977 16.5 % $ 112,086$ 122,533 (8.5 )%



We recorded an 8.5% decrease in overall revenues for the six months ended May 31, 2014 over the same period in 2013. The decrease was due to lower revenues in our EMS and SSC segments, partially offset by higher revenues in our SSIA segment, compared to the six months ended May 31, 2013. During the six months ended May 31, 2014, the decrease in our SSC and EMS segment revenues was primarily due to timing of certain key defense programs and approximately $1.8 million reduction in revenues from transitional services to support divestitures ramped down. The SSIA revenues increased primarily due to new customer programs.

For a discussion of our definition of adjusted EBITDA, how management uses it to evaluate the performance of our reportable segments and the material limitations on its usefulness, refer to "Segment Operating Revenue and Adjusted EBITDA" on page [28]. (dollar amounts in thousands) Six months ended May 31, % 2014 2013 Change Segment Adjusted EBITDA: SSC $ 8,945$ 9,809 (8.8 )% EMS 224 808 (72.3 )% SSIA 1,608 1,853 (13.2 )%



The SSC segment adjusted EBITDA for the six months ended May 31, 2014 was lower than the comparable period in 2013 primarily due to lower revenues, including reduced revenues from transitional services related to divestitures. During the six months ended May 31, 2014, the decrease in our EMS segment adjusted EBITDA was primarily due to lower revenues, partially offset by favorable pricing, product mix and cost reductions in the six months ended May 31, 2014 compared to the same period last year. The SSIA results include lower adjusted EBITDA as a result of the impact of a change in product mix in the six months ended May 31, 2014, compared to the same period last year, as we shipped products on a contract with lower margin.

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Operating Expenses

Cost of Revenues and Gross Margin

Six months ended May 31, 2014 2013 Gross margin by segments: SSC 24.8 % 25.3 % EMS 6.0 % 8.0 % SSIA 27.1 % 36.7 % Overall 21.2 % 21.8 %



Our combined gross margin for the six months ended May 31, 2014 decreased by approximately 0.6 percentage points compared to the six months ended May 31, 2013. Gross margin varies from period to period and can be affected by a number of factors, including product mix, production efficiency, and restructuring activities. Overall cost of revenues from continuing operations as a percentage of sales increased in the six months ended May 31, 2014 from 78.2% to 78.8% compared to the same period last year. The SSC segment cost of revenues percentage for the six months ended May 31, 2014 was 75.2% compared to 74.7% in the comparable period in 2013 primarily due to lower revenues, including reduced revenues from transitional services related to divestitures. The EMS segment cost of revenues increased by 2.0 percentage points compared to the same period in 2013, primarily due to lower revenues, partially offset by improved pricing and cost reductions in the six months ended May 31, 2014 compared to the same period last year. The SSIA segment realized an increase in cost of revenues of 9.6 percentage points primarily due to unfavorable product mix in the six months ended May 31, 2014, as we shipped products on a contract with lower margin. Combined restructuring costs recorded in the six months ended May 31, 2014 were approximately $0.6 million compared to approximately $0.2 million in the comparable period of 2013.

General and Administrative Expenses

General and administrative expenses decreased to approximately $11.5 million for the six months ended May 31, 2014 from $12.8 million for the six months ended May 31, 2013. The decrease is primarily a result of lower stock based compensation due to forfeitures, lower depreciation and amortization, lower professional fees and cost reductions following restructuring initiatives. As a percentage of sales, general and administrative expenses were 10.3% for the six months ended May 31, 2014, compared to 10.4% for the six months ended May 31, 2013.

The major components of general and administrative expenses are as follows:

(dollar amounts in thousands) Six months ended May 31, % of % of 2014 sales 2013 sales Depreciation and Amortization $ 4,947 4.4 % $ 5,298 4.3 % Accounting and Administration $ 3,661 3.3 % $ 4,076 3.3 % Stock based compensation $ (69 ) (0.1 )% $ 600 0.5 % Professional Services $ 874 0.8 % $ 1,154 0.9 %



Selling Expenses

Selling expenses decreased to approximately $7.3 million for the six months ended May 31, 2014 compared to approximately $7.8 million for the six months ended May 31, 2013. The decrease is primarily a result of lower commissions as a result of lower revenues. As a percentage of sales, selling expenses were 6.5% for the six months ended May 31, 2014, compared to 6.3% for the six months ended May 31, 2013.

The major components of selling expenses are as follows:

(dollar amounts in thousands) Six months ended May 31, % of % of 2014 sales 2013 sales Payroll Expense - Sales $ 4,207 3.8 % $ 4,060 3.3 % Commissions $ 1,987 1.8 % $ 2,467 2.0 % Advertising $ 540 0.5 % $ 586 0.5 % 32



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Research and Development Expenses

Research and development costs decreased to approximately $4.2 million for the six months ended May 31, 2014 compared to approximately $4.6 million for the six months ended May 31, 2013. As a percentage of sales, research and development expenses remained consistent at 3.8% for the six months ended May 31, 2014 and 2013.

Business acquisition and related charges

Business acquisition charges primarily represent costs of engaging outside legal, accounting, due diligence, business valuation consultants and accelerated stock option expenses related to business combinations or divestitures. For the six months ended May 31, 2014, business acquisition charges were approximately $0.2 million compared to approximately $1.1 million, primarily related to the sale of Sensors operations for the six months ended May 31, 2013.

Operating Loss

We recorded an operating loss from continuing operations for the six months ended May 31, 2014 of approximately $0.4 million compared to an operating loss of approximately $0.2 million for the six months ended May 31, 2013. The increase in operating loss of approximately $0.2 million is primarily attributed to lower margin on lower revenues and a change in product mix in the quarter, partially offset by a decrease in operating expenses.

Other Expenses (Income)

Total other expense for the six months ended May 31, 2014 amounted to approximately $16.1 million, compared to other expense of $19.7 million for the six months ended May 31, 2013.

The decrease in other expense in the six month period ended May 31, 2014, compared to the comparable period in 2013 is largely attributable to lower interest expense in the six months ended May 31, 2014, as a result of lower interest rates and lower average debt levels.

Income Taxes

Income taxes from continuing operations amounted to a net expense of approximately $0.7 million for the six months ended May 31, 2014 compared to a net benefit of $0.2 million in the six months ended May 31, 2013. The expense during the six months ended May 31, 2014, is primarily due to the tax amortization of indefinite lived intangibles, and foreign and state taxes incurred during the period. The current provision is less than the statutory tax rate due to valuation allowances placed upon the deferred tax assets. The prior year benefit related to the tax amortization of indefinite lived intangibles, and foreign and state taxes incurred during the period.

Income From Discontinued Operations

We had no activity in discontinued operations for the six months ended May 31, 2014, compared to net income from discontinued operations of approximately $12.8 million in the same period of fiscal 2013, which is primarily attributable to a $11.9 million gain on the sale of Sensors and operating results for Sensors and Data Bus during the six months ended May 31, 2013.

Net loss

We recorded a net loss for the six months ended May 31, 2014 of approximately $17.1 million, compared to a net loss of approximately $7.0 million for the six months ended May 31, 2013. The increase in net loss is largely due to the gain on the sale of Sensors, which reduced the net loss in the six months ended May 31, 2013, partially offset by lower interest expense from lower debt levels in the six month period ended May 31, 2014, compared to the comparable period in 2013.

Liquidity and Capital Resources

Overview and Summary

Our principal sources of liquidity include cash flows from operations, funds from borrowings and existing cash on hand.

At May 31, 2014, we held cash and cash equivalents of approximately $10.6 million compared to $6.4 million at November 30, 2013. We believe that (i) our available cash and cash equivalents and (ii) future cash flows from operations will be sufficient to satisfy our anticipated cash requirements for the next twelve months, including scheduled debt repayments, lease commitments, planned

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capital expenditures, and research and development expenses. There can be no assurance, however, that unplanned capital replacements or other future events, will not require us to seek additional debt or equity financing and, if so required, that it will be available on terms acceptable to us, if at all. Any issuance of additional equity could dilute our current stockholders' ownership interests.

On March 21, 2014, we entered into Amendment No. 2, which, among other things, amends the Term Loan Agreement to provide for the Incremental Term Loan Facility. The Incremental Term Loan Facility is subject to substantially the same terms and conditions, including the applicable interest rate and the maturity date of February 6, 2018, as the $165 million term loan facility provided upon the initial closing of the Term Loan Agreement. As of March 21, 2014, we had borrowed $126.7 million under the Term Loan Agreement. As of May 31, 2014, we had borrowed $125.0 million under the Term Loan Agreement.

The proceeds of the Incremental Term Loan Facility were used (i) to pay in full and terminate the Revolving Loan Agreement; (ii) to redeem all 26,000 shares of our Series A Mandatorily Redeemable Preferred Stock that were outstanding; (iii) to pay fees, costs and expenses associated with the Incremental Term Loan Facility and related transactions; and (iv) for general corporate purposes.

Term Loan Agreement

The term loans incurred pursuant to the Term Loan Agreement, as amended, including the term loans incurred pursuant to the Incremental Term Loan Facility (collectively, the "Term Loans"), bear interest, at our option, at the base rate plus 6.50% or an adjusted LIBOR rate (based on one, two or three-month interest periods) plus 7.50%. For purposes of the Term Loan Agreement, the "base rate" means the highest of Wells Fargo Bank, National Association's prime rate, the federal funds rate plus a margin equal to 0.50% and the adjusted LIBOR rate for a 3-month interest period plus a margin equal to 1.00%.

Interest is due and payable in arrears monthly for Term Loans bearing interest at the base rate and at the end of an interest period (or at each three month interval in the case of Term Loans with interest periods greater than three months) in the case of Term Loans bearing interest at the adjusted LIBOR rate. Principal payments of the Term Loans are paid at the end of each of our fiscal quarters, with the balance of any outstanding Term Loans due and payable in full on February 6, 2018. The quarterly principal payments will amortize at 1.25% for the fiscal quarters through the end of our 2014 fiscal year, at 1.875% for the fiscal quarters through the end of our 2015 fiscal year and at 2.50% for each of the fiscal quarters thereafter.

Under certain circumstances, we are required to prepay the Term Loans upon the receipt of cash proceeds of certain asset sales, cash proceeds of certain extraordinary receipts and cash proceeds of certain debt or equity financings, and based on a calculation of annual excess cash flow. Mandatory prepayments resulting from assets sales or certain debt financings may require the payment of certain prepayment premiums.

The Term Loans are secured by a security interest in substantially all of the assets owned by the Company and the subsidiary guarantors.

The Term Loan Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the Company and its subsidiaries' ability to, among other things, incur indebtedness, grant liens, dispose of assets and pay dividends or make distributions to stockholders, in each case subject to customary exceptions for a term loan of this size and type.

Pursuant to the Term Loan Agreement, we are required to maintain compliance with an interest coverage ratio and a leverage ratio and to limit our annual capital expenditures to $4.0 million per fiscal year (subject to carry-over rights). The interest coverage ratio is defined as the ratio of Consolidated EBITDA to cash Interest Expense (as each term as defined in the Term Loan Agreement), as at the end of each fiscal quarter. For each of the fiscal quarters during the fiscal year ending November 30, 2014, the interest coverage ratio must be not less than the ratio set forth opposite such period below:

Applicable Ratio Applicable Period 2.10.1.00 For the Test Period ending on February 28, 2014 2.10.1.00 For the Test Period ending on May 31, 2014 2.10.1.00 For the Test Period ending on August 31, 2014 2.10.1.00 For the Test Period ending on November 30, 2014



The leverage ratio is defined as the ratio of Funded Debt to Consolidated EBITDA (as each term as defined in the Term Loan Agreement), as at the end of each fiscal quarter. For each of the fiscal quarters during the fiscal year ending November 30, 2014, the leverage ratio must be not greater than the ratio set forth opposite such period below:

Applicable Ratio Test Period Ending 5.75:1.00 February 28, 2014 5.50:1.00 May 31, 2014 5.50:1.00 August 31, 2014 5.50:1.00 November 30, 2014 34



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As at May 31, 2014, the Company was in compliance with its financial covenants under the Term Loan Agreement.

The Term Loan Agreement includes customary events of default including, among other things, non-payment defaults, inaccuracy of representations and warranties, covenant defaults, cross default to material indebtedness, bankruptcy and insolvency defaults, non-compliance with ERISA laws and regulations, defaults under the security documents or guaranties, material judgment defaults, and a change of control default, in each case subject to certain exceptions for a term loan of this type. The occurrence of an event of default could result in an increased interest rate equal to 2.0% above the applicable interest rate for loans, the acceleration of our obligations pursuant to the Term Loan Agreement and an obligation of the subsidiary guarantors to repay the full amount of our borrowings under the Term Loan Agreement. If we were unable to obtain a waiver for a breach of covenant and the lenders accelerated the payment of any outstanding amounts, such acceleration may cause our cash position to deteriorate or, if cash on hand were insufficient to satisfy the payment due, may require us to obtain alternate financing to satisfy the accelerated payment. If our cash is utilized to repay any outstanding debt, we could experience an immediate and significant reduction in working capital available to operate our business.

Six Months Ended May 31, 2014 Compared to May 31, 2013

Cash generated by operating activities of approximately $2.5 million for the six months ended May 31, 2014 ("Q2 YTD FY2014") was higher than cash used by continuing operations of approximately $8.0 million for the six months ended May 31, 2013 ("Q2 YTD FY2013"). The increase in cash generated by operating activities resulted primarily from a decrease in the net cash used by changes in operating assets and liabilities during Q2 YTD FY2014. The decreased use in cash from changes in operating assets and liabilities in Q2 YTD FY2014 compared to Q2 YTD FY2013 was primarily related to changes in inventory and accounts receivable.

Cash generated by investing activities for the six months ended May 31, 2014 was approximately $17.0 million, which consisted primarily of the $15.1 million proceeds from the sale of the State College facility, $1.5 million related to the release of restricted cash from the sale of Sensors and a $1.4 million tax refund related to the SenDEC acquisition, partially offset by the acquisition of fixed and intangible assets of $1.0 million. Cash generated by investing activities for the six months ended May 31, 2013 consisted of approximately $49.2 million from the sale of Sensors and the release of $0.7 million held in restricted cash for the Commercial Microwave Technology, Inc. ("CMT") final payment, partially offset by $1.5 million related to an escrow for the sale of Sensors, $1.3 million related to the acquisition of fixed and intangible assets and $0.6 million related to the final payment of the CMT purchase price.

Cash used by financing activities for the six months ended May 31, 2014 totaled approximately $15.1 million, which resulted from the repayment of long-term debt, mainly related to term loans under the Term Loan Agreement, the repayment and termination of the Revolving Loan Agreement and the $27.6 million redemption of preferred shares, partially offset by net proceeds associated with the Revolving Loan Agreement. During the six months ended May 31, 2013 cash used by financing of approximately $52.7 million consisted mainly of repayment of term loans using a portion of the proceeds from the sale of Sensors and the repayment of certain capital lease obligations.

Contractual Obligations

In December 2013, we decreased our Term Loans by $14.2 million using a portion of the proceeds from the Sale/Leaseback and capital lease obligations increased by approximately $5.2 million. Term Loans increased by $55.0 million as a result of Amendment No. 2 in March 2014. These proceeds were principally used to repay in full our Revolving Loan Agreement and to redeem and cancel the Series A Redeemable Preferred Shares.

Critical Accounting Policies and Estimates

We describe our significant accounting policies in Note 2 and the effects of recently adopted accounting pronouncements in Note 3 to the unaudited consolidated financial statements in Item 1 of this Report. There were no significant changes in our accounting policies or critical accounting estimates that are discussed in our Annual Report on Form 10-K for the year ended November 30, 2013.

Off-Balance Sheet Arrangements

During the year ended November 30, 2013 and the three months ended May 31, 2014, the Company did not have any off-balance sheet arrangements.

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FORWARD-LOOKING STATEMENTS

This document and the documents incorporated in this document by reference contain forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact contained in this document and the materials accompanying this document are forward-looking statements.

The forward-looking statements are based on the beliefs of management, as well as assumptions made by and information currently available to management. Frequently, but not always, forward-looking statements are identified by the use of the future tense and by words such as "believes," "expects," "anticipates," "intends," "will," "may," "could," "would," "projects," "continues," "estimates" or similar expressions. Forward-looking statements are not guarantees of future performance and actual results could differ materially from those indicated by the forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the Company or its industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by the forward-looking statements.

The forward-looking statements contained or incorporated by reference in this document are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 ("Securities Act") and Section 21E of the Exchange Act and are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. These statements include declarations regarding our plans, intentions, beliefs or current expectations.

Management wishes to caution investors that any forward-looking statements made by or on behalf of the Company are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. Among the important factors that could cause actual results to differ materially from those indicated by forward-looking statements are the risks and uncertainties described under "Risk Factors" in our Annual Report on Form 10-K for the year ended November 30, 2013 and in our other filings with the SEC. These uncertainties and other risk factors include, but are not limited to: general economic and business conditions, including without limitation, reductions in government defense spending; governmental laws and regulations surrounding various matters such as environmental remediation, contract pricing and international trading restrictions; our ability to integrate and consolidate our operations; our ability to expand our operations in both new and existing markets; the ability of our review of strategic alternatives to maximize stockholder value; the effect of growth on our infrastructure; our ability to maintain compliance with our financial covenants; and continued access to capital markets.

Management wishes to caution investors that other factors might, in the future, prove to be important in affecting the Company's results of operations. New factors emerge from time to time and it is not possible for management to predict all such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or a combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Forward-looking statements are expressly qualified in their entirety by this cautionary statement. The forward-looking statements included in this document are made as of the date of this document and management does not undertake any obligation to update forward-looking statements to reflect new information, subsequent events or otherwise.

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