** **

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,DC 20549-1004**

 

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**Form 10-Q**

 

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**(Mark One)**

** **
| **x**                                                  | **Quarterly  report pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934**  |
|--------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
| ** **                                             | ** **                                                                                               |
| **FOR  THE QUARTERLY PERIOD ENDED June 30, 2009** |
| ** **                                             |
| **or**                                                 |
| ** **                                             | ** **                                                                                               |
| **o**                                                  | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934** |

** **

**For thetransition period from             to**

** **

**CommissionFile Number 0-21681**

** **

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** **

**EFJOHNSON TECHNOLOGIES, INC.**

(Exact name of registrant as specified in its charter)

** **

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** **

| **DELAWARE**                                                    | ** ** | **47-0801192**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of

incorporation or organization) |       | (I.R.S. Employer

Identification No.) |

 

**1440CORPORATE DRIVE**

**IRVING,TEXAS 75038**

(Addressof principal executive offices and zip code)

 

**(972)819-0700**

(Registrant’stelephone number, including area code)

 

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Indicateby check mark whether the Registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.    YES  x    NO  o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor shorter period that the registrant was required to submit and post suchfiles).    Yes  o    No  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

| Large  Accelerated Filer  o          |   | Accelerated  Filer  o         |
|------------------------------------------------|--------|-----------------------------------------|
|                                           |   |                                    |
| Non-accelerated  Filer  o            |   | Smaller  Reporting Company  x |
| (Do not check if  a smaller reporting company) |   |                                    |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).    YES  o    NO  x

 

As of August 3,2009, 26,408,497 shares of the Registrant’s Common Stock were outstanding.

 

 

 

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**PART I. FINANCIAL INFORMATION**

 

**ITEM 1.  FINANCIAL STATEMENTS**

 

**EFJOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

June 30, 2009 and December 31,2008

(Unaudited and inthousands, except share and per share data)

 
| ** **                                                                                                                                                                                 | ** ** | **June 30, 2009** | ** ** | **December 31,  2008** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                 |       |                        |       |                        |       |
|                                                                                                                                                                                       |       |                        |       |                        |       |
| Current assets:                                                                                                                                                                            |       |                        |       |                        |       |
|                                                                                                                                                                                       |       |                        |       |                        |       |   |   |
| Cash and cash  equivalents                                                                                                                                                                 |       | $                           | 9,451      |                        | $          | 11,267 |   |
| Restricted cash                                                                                                                                                                            |       | 5,028                       |       | —                      |       |
| Accounts receivable,  net of allowance for returns and doubtful accounts of $1,898 and $1,969,  respectively                                                                               |       | 21,631                      |       | 18,234                      |       |
| Accounts receivable due  from related parties                                                                                                                                              |       | 376                         |       | 1,281                       |       |
| Receivables - other                                                                                                                                                                        |       | 650                         |       | 849                         |       |
| Cost in excess of  billings on uncompleted contracts                                                                                                                                       |       | 2,879                       |       | 5,116                       |       |
| Inventories, net                                                                                                                                                                           |       | 34,487                      |       | 37,322                      |       |
| Prepaid expenses                                                                                                                                                                           |       | 1,535                       |       | 1,632                       |       |
|                                                                                                                                                                                       |       |                        |       |                        |       |
| Total current assets                                                                                                                                                                       |       | 76,037                      |       | 75,701                      |       |
|                                                                                                                                                                                       |       |                        |       |                        |       |
| Property, plant and  equipment, net                                                                                                                                                        |       | 5,038                       |       | 5,996                       |       |
| Restricted cash                                                                                                                                                                            |       | —                      |       | 2,021                       |       |
| Goodwill                                                                                                                                                                                   |       | 5,126                       |       | 5,126                       |       |
| Other intangible  assets, net of accumulated amortization                                                                                                                                  |       | 8,278                       |       | 8,770                       |       |
| Other assets                                                                                                                                                                               |       | 71                          |       | 73                          |       |
| ** **                                                                                                                                                                                 |       |                        |       |                        |       |   |   |
| **TOTAL  ASSETS**                                                                                                                                                                          |       | $                           | 94,550     |                        | $          | 97,687 |   |
|                                                                                                                                                                                       |       |                        |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                              |       |                        |       |                        |       |
|                                                                                                                                                                                       |       |                        |       |                        |       |
| Current liabilities:                                                                                                                                                                       |       |                        |       |                        |       |
|                                                                                                                                                                                       |       |                        |       |                        |       |   |   |
| Current portion of  long-term debt obligations                                                                                                                                             |       | $                           | 15,823     |                        | $          | 9 |   |
| Accounts payable                                                                                                                                                                           |       | 8,670                       |       | 11,728                      |       |
| Accrued expenses                                                                                                                                                                           |       | 10,241                      |       | 10,786                      |       |
| Billings in excess of  cost on uncompleted contracts                                                                                                                                       |       | 396                         |       | 217                         |       |
| Deferred revenues                                                                                                                                                                          |       | 847                         |       | 1,235                       |       |
| Total current  liabilities                                                                                                                                                                 |       | 35,977                      |       | 23,975                      |       |
| Long-term debt  obligations, net of current portion                                                                                                                                        |       | 1                           |       | 15,006                      |       |
| Deferred income taxes                                                                                                                                                                      |       | 631                         |       | 631                         |       |
| Other liabilities                                                                                                                                                                          |       | 18                          |       | 1,106                       |       |
| ** **                                                                                                                                                                                 |       |                        |       |                        |       |
| **TOTAL  LIABILITIES**                                                                                                                                                                     |       | 36,627                      |       | 40,718                      |       |
|                                                                                                                                                                                       |       |                        |       |                        |       |
| Commitments and  contingencies                                                                                                                                                             |       |                        |       |                        |       |
| Stockholders’ equity:                                                                                                                                                                 |       |                        |       |                        |       |
| Preferred stock ($0.01  par value; 3,000,000 shares authorized; none issued)                                                                                                               |       | —                      |       | —                      |       |
|                                                                                                                                                                                       |       |                        |       |                        |       |
| Common stock ($0.01 par  value; 50,000,000 voting shares authorized, 26,543,142 and 26,336,735 issued  and outstanding as of June 30, 2009 and December 31, 2008,  respectively) |       | 262                         |       | 262                         |       |
|                                                                                                                                                                                       |       |                        |       |                        |       |
| Additional paid-in  capital                                                                                                                                                                |       | 155,584                     |       | 154,688                     |       |
| Accumulated other  comprehensive loss                                                                                                                                                      |       | (814                        | )          | (1,088                      | )          |
| Accumulated deficit                                                                                                                                                                        |       | (96,991                     | )          | (96,861                     | )          |
|                                                                                                                                                                                       |       |                        |       |                        |       |
| Treasury stock (103,255  and 18,083 shares at cost at June 30, 2009 and December 31, 2008)                                                                                       |       | (118                        | )          | (32                         | )          |
|                                                                                                                                                                                       |       |                        |       |                        |       |
| **TOTAL  STOCKHOLDERS’ EQUITY**                                                                                                                                                       |       | 57,923                      |       | 56,969                      |       |
|                                                                                                                                                                                       |       |                        |       |                        |       |
| **TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                       |       | $                           | 94,550     |                        | $          | 97,687 |   |

 

See accompanying notes tothe condensed consolidated financial statements.

 

2

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**EFJOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

For the three and sixmonths ended June 30, 2009 and 2008

(Unaudited and inthousands, except share and per share data)

 
| ** **                                       | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                       | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                       | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                             |       |                   |       | **(as restated)**    |       |   |   | **(as restated)** |   |
| Revenues                                         |       | $                      | 30,129     |                 | $          | 32,570 |   | $ | 52,558 |   | $ | 66,469 |   |
| Cost of sales                                    |       | 17,538                 |       | 21,564               |       | 32,269 |   | 44,069 |   |
|                                             |       |                   |       |                 |       |   |   |   |   |
| Gross profit                                     |       | 12,591                 |       | 11,006               |       | 20,289 |   | 22,400 |   |
|                                             |       |                   |       |                 |       |   |   |   |   |
| Operating expenses:                              |       |                   |       |                 |       |   |   |   |   |
| Research and  development, net of reimbursements |       | 3,105                  |       | 121                  |       | 6,436 |   | 3,376 |   |
| Sales and marketing                              |       | 2,433                  |       | 3,248                |       | 4,909 |   | 6,414 |   |
| General and  administrative                      |       | 5,329                  |       | 5,706                |       | 10,752 |   | 12,107 |   |
| Amortization of  intangibles                     |       | 244                    |       | 406                  |       | 490 |   | 813 |   |
| Escrow fund settlement                           |       | —                 |       | —               |       | (2,804 | ) | — |   |
| Total operating  expenses                        |       | 11,111                 |       | 9,481                |       | 19,783 |   | 22,710 |   |
|                                             |       |                   |       |                 |       |   |   |   |   |
| Income (loss) from  operations                   |       | 1,480                  |       | 1,525                |       | 506 |   | (310 | ) |
|                                             |       |                   |       |                 |       |   |   |   |   |
| Interest expense, net                            |       | (352                   | )          | (268                 | )          | (636 | ) | (449 | ) |
|                                             |       |                   |       |                 |       |   |   |   |   |
| Income (loss) before  income taxes               |       | 1,128                  |       | 1,257                |       | (130 | ) | (759 | ) |
|                                             |       |                   |       |                 |       |   |   |   |   |
| Income tax (expense)                             |       | —                 |       | —               |       | — |   | — |   |
|                                             |       |                   |       |                 |       |   |   |   |   |
| Net income (loss)                                |       | $                      | 1,128      |                 | $          | 1,257 |   | $ | (130 | ) | $ | (759 | ) |
|                                             |       |                   |       |                 |       |   |   |   |   |
| Net income (loss) per  share – Basic        |       | $                      | 0.04       |                 | $          | 0.05 |   | $ | — |   | $ | (0.03 | ) |
|                                             |       |                   |       |                 |       |   |   |   |   |
| Net income (loss) per  share – Diluted      |       | $                      | 0.04       |                 | $          | 0.05 |   | $ | — |   | $ | (0.03 | ) |
|                                             |       |                   |       |                 |       |   |   |   |   |
| Weighted average common  shares – Basic     |       | 26,540,418             |       | 26,082,124           |       | 26,462,612 |   | 26,072,017 |   |
|                                             |       |                   |       |                 |       |   |   |   |   |
| Weighted average common  shares – Diluted   |       | 27,008,582             |       | 26,406,889           |       | 26,462,612 |   | 26,072,017 |   |

 

See accompanying notes to the condensed consolidated financialstatements.

 

3

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**EFJOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

Six months ended June 30,2009 and 2008

(Unaudited and inthousands)

 
| ** **                                                                                 | ** ** | **2009**   | ** ** | **2008**          | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                                                                 | ** ** | ** ** | ** ** | **(as restated)** | ** ** |
| Cash flows from  operating activities:                                                     |       |       |       |              |       |
| Net loss                                                                                   |       | $          | (130       | )                 | $          | (759 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |       |       |       |              |       |
|                                                                                       |       |       |       |              |       |
| Provision (used) for  returns and doubtful accounts                                        |       | (71        | )          | 187               |       |
| Depreciation and  amortization                                                             |       | 1,922      |       | 2,333             |       |
| Recognition of deferred  gain                                                              |       | (47        | )          | (47               | )          |
| Stock-based  compensation                                                                  |       | 865        |       | 1,177             |       |
| Changes in operating  assets and liabilities:                                              |       |       |       |              |       |
| Accounts receivable                                                                        |       | (3,326     | )          | (7,521            | )          |
| Accounts receivable  from related parties                                                  |       | 905        |       | (895              | )          |
| Receivables - other                                                                        |       | 199        |       | (555              | )          |
| Cost in excess of  billings on uncompleted contracts                                       |       | 2,237      |       | (594              | )          |
| Inventories                                                                                |       | 2,835      |       | 2,523             |       |
| Prepaid expenses and other                                                                 |       | 97         |       | (344              | )          |
| Accounts payable                                                                           |       | (3,058     | )          | (2,356            | )          |
| Accrued and other  liabilities                                                             |       | (498       | )          | 107               |       |
| Billings in excess of  cost on uncompleted contracts                                       |       | 179        |       | 281               |       |
| Deferred revenues                                                                          |       | (388       | )          | 86                |       |
|                                                                                       |       |       |       |              |       |
| Total adjustments                                                                          |       | 1,851      |       | (5,618            | )          |
|                                                                                       |       |       |       |              |       |
| Net cash provided by  (used in) operating activities                                       |       | 1,721      |       | (6,377            | )          |
|                                                                                       |       |       |       |              |       |
| Cash flows from  investing activities:                                                     |       |       |       |              |       |
| Purchase of property,  plant and equipment                                                 |       | (472       | )          | (1,217            | )          |
| Other assets                                                                               |       | 2          |       | 277               |       |
|                                                                                       |       |       |       |              |       |
| Net cash used in  investing activities                                                     |       | (470       | )          | (940              | )          |
|                                                                                       |       |       |       |              |       |
| Cash flows from  financing activities:                                                     |       |       |       |              |       |
| Proceeds on revolving  lines of credits                                                    |       | —     |       | 6,500             |       |
| Principal payments on  revolving lines of credits                                          |       | —     |       | (6,500            | )          |
| Increase in restricted  cash related to term loan                                          |       | (3,007     | )          | —            |       |
| Principal payments on  long-term debt                                                      |       | (5         | )          | (5                | )          |
| Proceeds from issuances  of common stock                                                   |       | 31         |       | 27                |       |
| Purchase of treasury  stock                                                                |       | (86        | )          | —            |       |
| Proceeds from exercise  of stock options                                                   |       | —     |       | 17                |       |
|                                                                                       |       |       |       |              |       |
| Net cash (used in)  provided by financing activities                                       |       | (3,067     | )          | 39                |       |
|                                                                                       |       |       |       |              |       |
| Net decrease in cash  and cash equivalents                                                 |       | (1,816     | )          | (7,278            | )          |
| Cash and cash  equivalents, beginning of period                                            |       | 11,267     |       | 15,636            |       |
|                                                                                       |       |       |       |              |       |
| Cash and cash  equivalents, end of period                                                  |       | $          | 9,451      |              | $          | 8,358 |   |

 

**Supplemental Disclosure of Cash FlowInformation:**

The Company paid interest of $659 and $572 during six months ended June 30,2009 and 2008, respectively.

The Company paid income taxes of $79 and $236 during six months ended June 30,2009 and 2008, respectively.

 

See accompanying notes tothe condensed consolidated financial statements.

 

4

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**EF JOHNSON TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**Three and six months ended June 30,2009 and 2008**

**(Unaudited and in thousands, exceptshare and per share data)**

 

**1.GENERAL**

 

Thecondensed consolidated balance sheet of EF Johnson Technologies, Inc.,formerly EFJ, Inc., at December 31, 2008, presented within thisReport on Form 10-Q, has been derived from audited consolidated financialstatements at that date. The condensed consolidated financial statements as of June 30,2009 and for the three and six months ended June 30, 2009 and 2008 areunaudited. The condensed consolidated financial statements reflect all normaland recurring accruals and adjustments that, in the opinion of management, arenecessary for a fair presentation of the financial position, operating results,and cash flows for the interim periods presented in this quarterly report. Thecondensed consolidated financial statements should be read in conjunction withthe consolidated financial statements and notes thereto, together withmanagement’s discussion and analysis of financial condition and results ofoperations, contained in our Annual Report on Form 10-K for the year endedDecember 31, 2008. The results of operations and cash flows for the threeand six months ended June 30, 2009 are not necessarily indicative of theresults for any other period or the entire fiscal year ending December 31,2009.

 

At theCompany’s May 28, 2008 Annual Meeting of Stockholders, the Stockholdersapproved an amendment of the Company’s Certificate of Incorporation to changethe corporate name from EFJ, Inc. to EF Johnson Technologies, Inc.The Company’s stock is quoted on the NASDAQ Global Market under the symbol “EFJI”,and its ticker symbol did not change.

 

Unlessthe context otherwise provides, all references to “the Company”,  “we,” “us,” and “our” include EF JohnsonTechnologies, Inc., its predecessor entity and its subsidiaries, includingE.F. Johnson Company, Transcrypt International, Inc., and 3e TechnologiesInternational, Inc. on a consolidated basis. All references to “EF Johnson”refer to E.F. Johnson Company, all references to “Transcrypt” refer toTranscrypt International, Inc., and all references to “3eTI” refer to 3eTechnologies International, Inc.

 

On April 1,2009, Transcrypt International, Inc. merged into the E.F. Johnson Company.

 

**2.ORGANIZATION AND CONSOLIDATION**

 

We area provider of secure wireless solutions that are sold to: (1) domestic andforeign public safety / public service entities, (2) federal, state andlocal governmental agencies, including the Departments of Homeland Security andDefense, and (3) domestic and foreign commercial customers.  Through EFJohnson, Transcrypt and 3eTI wedesign, develop, market, and support:

 

·                  mobile and portable wireless radios;

 

·                  stationary transmitters / receivers (base stations orrepeaters);

 

·                  infrastructure equipment and systems;

 

·                  secure encryption technologies for proprietarywireless radios;

 

·                  customized wireless network centric products andsystems to the federal government primarily under government funded SmallBusiness Innovative Research (SBIR) programs; and

 

·                  niche hardware and secure software technologies forthe WLAN markets primarily in the government sector and industrial controls sectors.

 

Thecondensed consolidated financial statements include the accounts of EF JohnsonTechnologies, Inc. and our wholly-owned subsidiaries. All inter-companyaccounts and transactions have been eliminated in the consolidation.

 

Previously theCompany was organized, and reported its financial results, as a parent companywith two segments, Private Wireless Communications and SecuredCommunications.  Having recognized that the public safety/public servicemarket is moving towards convergent telecommunications solutions, the continueddemand for interoperability and the transition from analog to digitalplatforms, we reorganized the Company in January 2008 into a singlecentralized corporate structure in order to be competitive in this market.  In light of these changes, the Companyreassessed its segment reporting, and beginning with the first quarter of 2008,we have no segments to report.****

 

5

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**EF JOHNSON TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**Three and six months ended June 30,2009 and 2008**

**(Unaudited and in thousands, exceptshare and per share data)**

 

**3.RESTATEMENT**

 

In this Form 10-Q, we are restating ourpreviously reported financial results for the quarter ended June 30, 2008.In our Form 10-K for 2008, we restated our previously reported financialresults for the quarters ended September 30, 2007 and March 31, June 30,and September 30, 2008, respectively, and for the fourth quarter and yearended December 31, 2007.

 

The previously filed annual report on Form 10-Kfor 2007 and quarterly reports on Form 10-Q affected by the restatementshave not been amended and should not be relied upon.

 

On March 30, 2009, the Audit Committee (the “AuditCommittee”) of the Company’s Board of Directors concluded that, upon therecommendation of management, in consultation with Grant Thornton LLP (“GrantThornton”), the Company’s independent registered public accounting firm, theCompany’s previously issued financial statements for each of the quarters endedSeptember 30, 2007 and March 31, June 30 and September 30,2008, respectively, and for the fourth quarter and year ended December 31,2007, required restatement.

 

During the third quarter of 2007, the Company enteredinto a memorandum of understanding with one of its vendors in an effort toresolve a dispute between the parties regarding an outstanding non-tradereceivable. The agreement granted credits on future purchases to the Company,and therefore should have been accounted for by reducing the cost of futureinventory purchases, and subsequently cost of sales, over the period of theagreement, and the outstanding receivable should have been written off. Priorto the restatement, the Company recorded credits received as a result of thisagreement as collections of a receivable instead of a reduction of inventorycost. As a result, the Company wrote off this “Other Receivable” balance as ofthe third quarter of 2007, and the related credits on future purchases receivedunder this agreement are being treated as a reduction to cost of salesresulting from the lower cost basis of inventory. The write-off of thisreceivable was charged to cost of sales, as the transactions that generated thedisputed receivables related to the transfer of inventory at cost to a contractmanufacturer. Based on estimated purchases, we anticipate that approximately$2.7 million of credits remaining at December 31, 2008 will be earned overthe next two to three years pursuant to this agreement.

 

This adjustment is anon-cash adjustment in 2007 and 2008. Future purchases covered by thememorandum of understanding will have a positive impact on our gross margin andoperating income on a going forward basis. For the three and six months ended June 30,2009 we recognized $101 and $218 in credits, respectively. For the three andsix months ended June 30, 2008 we recognized $246 and $342 in credits,respectively.

 

The following tables (inthousands) summarize the net increases (decreases) for the three and six monthsended June 30, 2008. These adjustments did not change the amounts reportedas cash flows from operating, investing, or financing activities.

 
| ** **                                    | ** ** | **As previously  reported three  months ended** | ** ** | ** **     | ** ** | **Adjusted three  month ended** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------|------------|----------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | **June 30,**                               | ** ** | ** **     | ** ** | **June 30,**               | ** ** |
| ** **                                    | ** ** | **2008**                                        | ** ** | **Adjustment** | ** ** | **2008**                        | ** ** |
| Revenues                                      |       | $                                               | 32,570     |           | $          | —                          |       | $ | 32,570 |   |
| Cost of sales                                 |       | 21,810                                          |       | (246           | )          | 21,564                          |       |
| Gross profit                                  |       | 10,760                                          |       | 246            |       | 11,006                          |       |
|                                          |       |                                            |       |           |       |                            |       |
| Total operating  expenses                     |       | 9,481                                           |       | —         |       | 9,481                           |       |
| Income from operations                        |       | 1,279                                           |       | 246            |       | 1,525                           |       |
| Interest expense, net                         |       | (268                                            | )          | —         |       | (268                            | )          |
| Net income before  income taxes               |       | $                                               | 1,011      |           | $          | 246                             |       | $ | 1,257 |   |
| Income tax benefit  (expense)                 |       | —                                          |       | —         |       | —                          |       |
| Net income                                    |       | $                                               | 1,011      |           | $          | 246                             |       | $ | 1,257 |   |
| Net income per  share—basic              |       | $                                               | 0.04       |           | $          | 0.01                            |       | $ | 0.05 |   |
| Net income per  share—diluted            |       | $                                               | 0.04       |           | $          | 0.01                            |       | $ | 0.05 |   |
| Weighted average common  shares— basic   |       | 26,082,124                                      |       | 26,082,124     |       | 26,082,124                      |       |
| Weighted average common  shares— diluted |       | 26,406,889                                      |       | 26,406,889     |       | 26,406,889                      |       |

 

6

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**EF JOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**Three and six months ended June 30,2009 and 2008**

**(Unauditedand in thousands, except share and per share data)**

 

**3. RESTATEMENT (continued)**

 
| ** **                                 | ** ** | **As previously  reported six  month ended** | ** ** | ** **     | ** ** | **Adjusted six  month ended** | ** ** |
|--------------------------------------------|------------|----------------------------------------------|------------|----------------|------------|-------------------------------|------------|
| ** **                                 | ** ** | **June 30,**                            | ** ** | ** **     | ** ** | **June 30,**             | ** ** |
| ** **                                 | ** ** | **2008**                                     | ** ** | **Adjustment** | ** ** | **2008**                      | ** ** |
| Revenues                                   |       | $                                            | 66,469     |           | $          | —                        |       | $ | 66,469 |   |
| Cost of sales                              |       | 44,411                                       |       | (342           | )          | 44,069                        |       |
| Gross profit                               |       | 22,058                                       |       | 342            |       | 22,400                        |       |
|                                       |       |                                         |       |           |       |                          |       |
| Total operating  expenses                  |       | 22,710                                       |       | —         |       | 22,710                        |       |
| Loss from operations                       |       | (652                                         | )          | 342            |       | (310                          | )          |
| Interest expense, net                      |       | (449                                         | )          | —         |       | (449                          | )          |
| Net loss before income  taxes              |       | $                                            | (1,101     | )              | $          | 342                           |       | $ | (759 | ) |
| Income tax benefit  (expense)              |       | —                                       |       | —         |       | —                        |       |
| Net loss                                   |       | $                                            | (1,101     | )              | $          | 342                           |       | $ | (759 | ) |
| Net loss per  share—basic             |       | $                                            | (0.04      | )              | $          | 0.01                          |       | $ | (0.03 | ) |
| Weighted average common  shares—basic |       | 26,072,017                                   |       | 26,072,017     |       | 26,072,017                    |       |

 
| ** **                                           | ** ** | **As previously  reported June 30,** | ** ** | ** **     | ** ** | **Adjusted June 30,** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------|------------|----------------|------------|----------------------------|------------|
| ** **                                           | ** ** | **2008**                                  | ** ** | **Adjustment** | ** ** | **2008**                   | ** ** |
| **Assets**                                           |       |                                      |       |           |       |                       |       |
| Current assets:                                      |       |                                      |       |           |       |                       |       |
| Cash and cash  equivalents                           |       | $                                         | 8,358      |           | $          | —                     |       | $ | 8,358 |   |
| Accounts receivable                                  |       | 29,574                                    |       | —         |       | 29,574                     |       |
| Receivables—other                               |       | 7,157                                     |       | (3,104         | )          | 4,053                      |       |
| Cost in excess of  billings on uncompleted contracts |       | 3,869                                     |       | —         |       | 3,869                      |       |
| Inventories, net                                     |       | 31,348                                    |       | —         |       | 31,348                     |       |
| Prepaid Expenses                                     |       | 1,453                                     |       | —         |       | 1,453                      |       |
| Total current assets                                 |       | 81,759                                    |       | (3,104         | )          | 78,655                     |       |
| **TOTAL  ASSETS**                                    |       | $                                         | 121,675    |           | $          | (3,104                     | )          | $ | 118,571 |   |
|                                                 |       |                                      |       |           |       |                       |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**       |       |                                      |       |           |       |                       |       |
| **TOTAL  LIABILITIES**                               |       | 41,184                                    |       | —         |       | 41,184                     |       |
| Commitments and  contingencies                       |       |                                      |       |           |       |                       |       |
| Stockholders’ equity:                           |       |                                      |       |           |       |                       |       |
| Common stock                                         |       | 262                                       |       | —         |       | 262                        |       |
| Additional paid-in  capital                          |       | 154,577                                   |       | —         |       | 154,577                    |       |
| Accumulated other  comprehensive loss                |       | (705                                      | )          | —         |       | (705                       | )          |
| Accumulated deficit                                  |       | (73,643                                   | )          | (3,104         | )          | (76,747                    | )          |
| **TOTAL  STOCKHOLDERS’ EQUITY**                 |       | 80,491                                    |       | (3,104         | )          | 77,387                     |       |
|                                                 |       |                                      |       |           |       |                       |       |
| **TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY** |       | $                                         | 121,675    |           | $          | (3,104                     | )          | $ | 118,571 |   |

 

**4. NETINCOME (LOSS) PER SHARE**

 

Basicincome (loss) per share (“EPS”) is calculated based upon the weighted averagenumber of common shares outstanding during the period. The diluted EPScalculation reflects the potential dilution from common stock equivalents suchas stock options, stock satisfied stock appreciation rights (“SSAR’s”),restricted stock grants and restricted stock units (collectively “IncentiveShares”). For the three months ended June 30, 2009 and 2008, outstandingincentive shares with exercise prices lower than the average market price ofthe common stock for the respective periods were considered common stockequivalents and were dilutive in the calculation of the diluted weightedaverage common shares. Outstanding incentive 

 

7

----

 

**EF JOHNSON TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**Three and six months ended June 30,2009 and 2008**

**(Unauditedand in thousands, except share and per share data)**

 

shares that had exerciseprices higher than the average market price of the common stock for the periodswere considered anti-dilutive and excluded from the calculation of dilutedweighted average common shares. For the six months ended June 30, 2009 and2008, all outstanding incentive shares were considered anti-dilutive due to thenet loss for the period end.  Theoutstanding incentive shares that are considered dilutive and anti-dilutive areas follows:

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                  | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                  | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Incentive shares with  dilutive effect      |       | 468,164                |       | 324,765              |       | — |   | — |   |
| Incentive shares with  anti-dilutive effect |       | 1,312,529              |       | 985,785              |       | 1,823,742 |   | 1,256,979 |   |
| Outstanding incentive  shares               |       | 1,780,693              |       | 1,310,550            |       | 1,823,742 |   | 1,256,979 |   |

 

We use the treasury stock method to calculatediluted weighted average common shares, as if all such options were outstandingfor the periods presented.

 

**5.ACCOUNTING FOR STOCK-BASED COMPENSATION**

 

We usethe Black-Scholes option pricing model to determine the fair value of all stockoption grants and stock satisfied stock appreciation rights (“SSAR’s”)(collectively “Options”). For the three and six months ended June 30,2009, we recognized compensation expense of $0.3 million and $0.6 million,respectively, related to options and $0.1 million and $0.2 million,respectively, related to restricted stock grants and restricted stockunits.  Additionally, $0.1 million of compensationexpense was recognized related to equity grants made in the first quarter of2009 to certain named executive officers associated with performance-basedincentives earned for meeting certain operational, new product introductionsand other personal goals. For the three and six months ended June 30,2008, we recognized compensation expense of $0.4 million and $0.8 million,respectively, related to options and $0.1 million and $0.4 million,respectively, related to restricted stock grants and restricted stock units.

 

At theCompany’s May 28, 2008 Annual Meeting of Stockholders, the Stockholdersapproved an amendment to the EFJ, Inc. 2005 Omnibus Incentive CompensationPlan to increase the number of shares available for issuance pursuant to theplan by 1,500,000 shares.

 

At the Company’s May 27,2009 Annual Meeting of Stockholders, the Stockholders approved an amendment tothe EFJ, Inc. 2005 Omnibus Incentive Compensation Plan to increase themaximum number of shares of common stock that may be granted to any oneparticipant in any fiscal year from 100,000 to 350,000 shares.

 

**6.ESCROW FUND SETTLEMENT**

 

On January 13,2009, the Company entered into a Settlement Agreement and Mutual Release (the “SettlementAgreement”) settling a claim made by the Company against the escrow fundestablished in connection with the acquisition of 3eTI by the Company in2006.  Pursuant to the Agreement and Plan of Merger (the “Merger Agreement”),dated July 10, 2006, by and among the Company, 3eTI, Avanti AcquisitionCorp., Chih-Hsiang Li, as Stockholders’ Agent, and Steven Chen, James Whang,Chih-Hsiang Li and AEPCO, Inc. (as the “Principal Stockholders”), $3.6million (or ten percent (10%) of the purchase price for 3eTI) was depositedinto an escrow account at the time of closing to indemnify the Company for anyclaims under the Merger Agreement.  In August 2008, the Company madea claim against the escrow fund for damages arising out of certain allegedbreaches of representations and warranties contained in the Merger Agreement.

 

Pursuantto the terms of the Settlement Agreement, the Company received on January 16,2009, approximately $2.8 million, inclusive of interest, out of the escrowfund.  The remaining balance of the escrow fund (or approximately $1.1million, inclusive of interest) was paid out to the former stockholders of 3eTIpursuant to the terms of the Merger Agreement.  The Settlement Agreementalso contains a mutual release of liability for claims related to theacquisition of 3eTI by the Company.

 

8

----

 

**EF JOHNSON TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**Three and six months ended June 30,2009 and 2008**

**(Unauditedand in thousands, except share and per share data)**

 

Theescrow funds received as part of the settlement were recorded as a reduction ofoperating expense. The Company previously incurred research and developmentcosts in connection with the re-design, re-testing and re-certification ofcertain 3eTI products to bring them up to specifications represented to existat the acquisition date.

 

**7.INTEREST RATE SWAP AGREEMENT AND COMPREHENSIVE LOSS**

 

On July 19,2006, we entered into an interest rate swap agreement to manage interest costsand risks associated with changing interest rates, not for speculative ortrading purposes. The interest rate swap has been designated as a cash flowhedge and is recorded in the consolidated financial statements at fair value.Changes in the fair value of the swap have been recorded in AccumulatedComprehensive Loss in the balance sheet as the derivative is assessed aseffectively hedged at June 30, 2009. Changes in the fair value of the swapwould be reclassified to other income (expense) to the extent the hedginginstrument is determined to be ineffective.

 

Theinterest rate swap agreement effectively converts the variable LIBOR componentof the interest rate on the $15.0 million term loan to a fixed rate of 5.64%.Under the terms of the interest rate swap agreement, the Company will pay 5.64%and the counterparty will pay LIBOR on a monthly basis. The interest rate swapagreement terminates on June 30, 2010, the termination date of the termloan. The cumulative net unrealized loss was $0.8 million and is included inthe current portion of long-term debt obligations due to the termination dateof the interest rate swap agreement and accumulated other comprehensive loss inthe consolidated balance sheet at June 30, 2009. The following is asummary of comprehensive loss:

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|---------------------------|------------|
| ** **                                    | ** ** | **June 30,**                | ** ** | **June 30,**         | ** ** |
| ** **                                    | ** ** | **2009**                         | ** ** | **2008**                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                    | ** ** | ** **                       | ** ** | **(as restated)**         | ** ** | ** ** | ** ** | **(as restated)** | ** ** |
| Net income (loss)                             |       | $                                | 1,128      |                      | $          | 1,257 |   | $ | (130 | ) | $ | (759 | ) |
| Reclassification to  interest expense         |       | (198                             | )          | (113                      | )          | (390 | ) | (186 | ) |
| Fair value adjustment  for interest rate swap |       | 353                              |       | 515                       |       | 664 |   | 191 |   |
| Comprehensive income  (loss)                  |       | $                                | 1,283      |                      | $          | 1,659 |   | $ | 144 |   | $ | (754 | ) |

 

**8.INVENTORIES**

 

Thefollowing is a summary of inventories:

 
| ** **                  | ** ** | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|-----------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Raw materials and  supplies |       | $                           | 11,544     |                            | $          | 11,598 |   |
| Work in progress            |       | 474                         |       | 1,049                           |       |
| Finished goods              |       | 23,752                      |       | 24,673                          |       |
| Service inventories         |       | 2,853                       |       | 3,163                           |       |
|                        |       | 38,623                      |       | 40,483                          |       |
| Reserve for  obsolescence   |       | (4,136                      | )          | (3,161                          | )          |
| Total inventories           |       | $                           | 34,487     |                            | $          | 37,322 |   |

 

**9.GOODWILL AND INTANGIBLE ASSETS**

 

Ourgoodwill and intangible assets are tested for impairment annually as of December 31of each year unless events or circumstances would require an immediate review.Goodwill and intangible asset amounts are allocated to the reporting unitsbased upon amounts allocated at the time of their respective acquisition.Intangible assets, consisting of existingtechnology, customer relationships, license and covenants not-to-compete, areamortized over their useful life on a straight-line basis. Intangible assetsconsisting of trademark and trade name and certifications are not subject toamortization.

 

Weperformed fair value-based impairment tests at December 31, 2008. Uponcompletion of the impairment test, we concluded that the fair value of the 3eTIreporting unit was lower than the carrying value of the associated goodwill,certain intangibles and its trade name. Therefore, in the fourth quarter ended December 31, 2008, wereported an impairment charge of $14.9 million related to goodwill and $3.5million related to the other intangibles, including trade name, that wasrecorded in general and administrative expenses.

 

9

----

 

**EF JOHNSON TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**Three and six months ended June 30,2009 and 2008**

**(Unauditedand in thousands, except share and per share data)**

 

Noevents occurred during the six months ended June 30, 2009 and 2008,respectively, which would indicate that an impairment of such assets had takenplace as of such dates.

 

Amortizationexpense, related to intangible assets which are subject to amortization, was$0.2 and $0.4 million for the three months ended June 30, 2009 and June 30,2008, respectively. Amortization expense, related to intangible assets whichare subject to amortization, was $0.5 and $0.8 million for the six months endedJune 30, 2009 and June 30, 2008, respectively. Intangible assetsconsist of the following as of the dates indicated:

 
| ** **                                      | ** ** | **June 30, 2009** | ** **  | **December 31, 2008** | ** ** |
|-------------------------------------------------|------------|------------------------|-------------|----------------------------|------------|
| ** **                                      | ** ** | **Gross**              | ** **  | ** **                 | ** ** | **Net** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Net** | ** ** |
| ** **                                      | ** ** | **Amount**             | ** **  | **Impairment**             | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Impairment** | ** ** | **Amount** | ** ** |
|                                            |       |                   |        |                       |       |   |   |   |   |   |   |   |   |
| Intangible assets not  subject to amortization: |       |                   |        |                       |       |   |   |   |   |   |   |   |   |
| Goodwill                                        |       | $                      | 5,126       |                       | $          | — |   | $ | 5,126 |   | $ | 20,040 |   | $ | (14,914 | ) | $ | 5,126 |   |
| Trademarks                                      |       | 2,044                  |        | —                     |       | 2,044 |   | 4,364 |   | (2,320 | ) | 2,044 |   |
| Certifications                                  |       | 1,230                  |        | —                     |       | 1,230 |   | 1,230 |   | — |   | 1,230 |   |
|                                            |       | $                      |  8,400 |                       | $          | — |   | $ | 8,400 |   | $ | 25,634 |   | $ | (17,234 | ) | $ | 8,400 |   |

 
| ** **                                  | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                  | ** ** | **Gross**               | ** ** | ** **                  | ** ** | **Accumulated** | ** ** | **Net** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | **Net** | ** ** |
| ** **                                  | ** ** | **Amount**              | ** ** | **Impairment**              | ** ** | **Amortization** | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Impairment** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
|                                        |       |                    |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Intangible assets  subject to amortization: |       |                    |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Existing technology                         |       | $                       | 6,190      |                        | $          | — |   | $ | (2,943 | ) | $ | 3,247 |   | $ | 6,190 |   | $ | — |   | $ | (2,667 | ) | $ | 3,523 |   |
| Customer relationships                      |       | 3,756                   |       | —                      |       | (2,120 | ) | 1,636 |   | 4,800 |   | (1,044 | ) | (1,908 | ) | 1,848 |   |
| License                                     |       | 159                     |       | —                      |       | (159 | ) | — |   | 320 |   | (161 | ) | (159 | ) | — |   |
| Covenant not-to-compete                     |       | 400                     |       | —                      |       | (400 | ) | — |   | 400 |   | — |   | (400 | ) | — |   |
| Trademarks/Patents                          |       | 209                     |       | —                      |       | (88 | ) | 121 |   | 209 |   | — |   | (84 | ) | 125 |   |
|                                        |       | $                       | 10,714     |                        | $          | — |   | $ | (5,710 | ) | $ | 5,004 |   | $ | 11,919 |   | $ | (1,205 | ) | $ | (5,218 | ) | $ | 5,496 |   |

 

**10. NOTEPAYABLE AND LINE OF CREDIT**

 

Weamended our secured line of credit agreement with Bank of America in July 2006to retain a revolving line of credit of up to $15.0 million and include a termloan of $15.0 million (the “Loan Agreement”). The $15.0 million term loan wasfully funded and used to finance the acquisition of 3eTI dated July 10,2006. Both borrowings bear interest at a variable rate based on the LondonInterbank Offered Rate (“LIBOR”) plus a margin (“LIBOR Margin”) determined byour ratio of debt to earnings before interest, taxes, depreciation, andamortization (“EBITDA”). The LIBOR Margin was 400 basis points as of June 30,2009 and was 200 basis points at June 30, 2008. As discussed below, anamendment to theLoan Agreement was executed in March 2009 that resulted inincreased basis points and lowered the revolving line of credit to $10.0million. Interest rates of 4.32% and 4.47% were in effect at June 30, 2009and 2008, respectively. The Loan Agreement expires June 30, 2010.

 

At June 30,2009 and December 31, 2008, no borrowings had been made on the revolvingline of credit. There was $0.75 million open letters of credit under our lineof credit at June 30, 2009 and there were no open letters of credit underour line of credit at December 31, 2008. The total available remainingcredit under the line of credit was $9.3 million and $14.4 million as of June 30,2009 and December 31, 2008, respectively.

 

TheLoan Agreement provides for customary affirmative and negative covenants, includingmaintenance of corporate existence, rights, property, books and records andinsurance, compliance with contracts and laws, and certain reportingrequirements, as well as limitations on debt, liens, fundamental changes,acquisitions, transfers of assets, investments, loans, guarantees, use ofproceeds, sale-leaseback transactions and capital expenditures. In addition,the Loan Agreement contains certain financial covenants including a maximumratio of funded debt to EBITDA and a fixed charge coverage ratio. The LoanAgreement also provides for events of default that would permit the lender toaccelerate the loans upon their occurrence, including failure to make payments,breaches of representations and warranties, insolvency events, acceleration ofother indebtedness, failure to discharge judgments, material adverse effects,certain breaches of contracts, casualty losses when no or insufficientinsurance is maintained, changes of control, certain ERISA events and failureto observe covenants. As collateral for the obligations under the Loan Agreement,the Lender has a security interest in substantially all assets of theborrowers, including accounts receivable, inventories, machinery, equipment,real estate, and general intangibles.

 

Asnoted in our Form 10-K for the period ending December 31, 2008, wewere not in compliance with the financial covenants of the Loan Agreement forthe quarter ended December 31, 2008. As a result, effective March 16,2009 we executed an Amendment to the Loan Agreement whereby Bank of Americawaived such financial covenant defaults on a

 

10

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** **

**EF JOHNSON TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**Three and six months ended June 30,2009 and 2008**

**(Unaudited and in thousands, exceptshare and per share data)**

 

one-timebasis, and amended the Loan Agreement to, among other things, lower therevolving line of credit from $15.0 million to $10.0 million, revise suchfinancial covenants, add additional covenants, and to modify the advance andborrowing provisions under the Loan Agreement. In order to maintain compliancewith the terms of the Amendment, the Company pledged as additional cashcollateral for the remaining term of the term loan $3.0 million on theeffective date of the Amendment. Furthermore, beginning with the quarter endingJune 30, 2009, we are required to maintain a certain level of EBITDA,maintain certain fixed charge coverage ratio on a cumulative basis beginning April 1,2009, a minimum funded debt to EBITDA ratio on an annualized basis beginning April 1,2009 for each quarterly financial reporting period through June 30, 2010and limit capital expenditures to $2.5 million for 2009. In addition, theinterest rate on the revolving note issuable pursuant to the Loan Agreement hasbeen amended to a floating rate equal to LIBOR plus a Libor Margin ranging from2.50% to 5.00% through the term of the note based on the Company’s funded debtto EBITDA.

 

The Company was in compliance with all financial andnegative covenants at June 30, 2009.  As discussed above, compliancewith new, more restrictive financial covenants under the Loan Agreement wasrequired beginning in the Company’s second quarter.  Management has notedthat, based on current projections, if certain orders are not received andshipped in the third quarter, the Company may not meet those more restrictiveloan covenants for the third quarter.  Management’s evaluation is based onrecent experience with expected orders being temporarily delayed bycustomers.   In such event, the Company intends to attempt to obtaina waiver of noncompliance from the lender, failing which the lender coulddeclare the Company in default under the Loan Agreement and accelerate thepayment of the $15.0 million term loan, require payment of any borrowings underthe revolving line of credit and raise the interest rate an additional4%.  There can be no assurance that the Company will be able to obtainsuch waiver.

 

If the Company is not in compliance with the bankcovenants at the end of the third quarter and is unable to obtain a waiver fromsuch noncompliance, the Company, to the extent existing resources and cash fromoperations are insufficient to pay these above obligations, may need to raiseadditional funds through public or private equity or debt financing. Thesefunds may not be available, or if available, we may not be able to obtain themon terms favorable to us.

 

The term loan has been classified as current at theend of second quarter of 2009 due to its maturity date of June 30, 2010.Through the expiration of the term loan, we expect to build our cash balancesin anticipation of refinancing the term loan at maturity. As noted above, wemay need to raise additional funds through public or private equity or debtfinancing. These funds may not be available, or if available, we may not beable to obtain them on terms favorable to us.

 

**11. INCOME TAXES**

 

We did not record a tax benefit or provision for thethree and six months ended June 30, 2009 and 2008 primarily due to ourfully reserved deferred tax assets requiring no further provision for incometaxes for each respective period end. The Company has unrecognized tax benefitsof approximately $0.5 million that did not change significantly during the sixmonths ended June 30, 2009 relatingto carry forward of business credits. The adoption of FIN 48 did not result inthe recognition of additional tax liability for unrecognized income taxbenefits since the tax benefits have not been included in prior income taxreturn filings. In addition, future changes in the unrecognized tax benefitwill have no net impact on the effective tax rate due to the existence of thevaluation allowance.

 

As of June 30, 2009, we have no accrualrequirement for interest or penalties related to uncertain tax positions sincethe tax benefits have not been included in prior income tax return filings.

 

The tax years 2004-2008 remain open to examination bythe major taxing jurisdictions to which we are subject. Additionally, uponinclusion of the NOL and R&D credit carry forward tax benefits from taxyears 1996 to 2003 in future tax returns, the related tax benefit for theperiod in which the benefit arose may be subject to examination.

 

11

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** **

**EF JOHNSON TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**Three and six months ended June 30,2009 and 2008**

**(Unaudited and in thousands, exceptshare and per share data)**

 

**12. WARRANTY COSTS**

 

We provide a one-to-three year warranty onsubstantially all of our product sales, depending upon certain terms and conditionsof the sale, and estimate future warranty claims based on historical experienceand anticipated costs to be incurred over the life of the warranty. Warrantyexpense is accrued at the time of sale with an additional accrual for specificitems after the sale when their existence is known and amounts aredeterminable. A reconciliation of changes in our accrued warranty reserve as ofJune 30, 2009 is as follows:

 
| ** **                      | ** ** | **Balance at**                  | ** ** | **Charged to** | ** ** | **Deduction /** | ** ** | **Balance at**              | ** ** |
|---------------------------------|------------|---------------------------------|------------|---------------------|------------|----------------------|------------|-----------------------------|------------|
| ** **                      | ** ** | **December 31, 2008** | ** ** | **Expense**         | ** ** | **Expenditures**     | ** ** | **June 30, 2009** | ** ** |
| Allowance for  Warranty Reserve |       | $                               | 3,116      |                | 1,345      |                 | 1,206      |                        | $          | 3,255 |   |
|                                 |            |                                 |            |                     |            |                      |            |                             |            |  |  |

 

**13. FAIR VALUE OF FINANCIAL INSTRUMENTS**

 

In September 2006, theFASB issued SFAS No. 157, “Fair Value Measurements,” (SFAS 157), which iseffective for fiscal years beginning after November 15, 2007 and forinterim periods within those years. This statement defines fair value,establishes a framework for measuring fair value and expands the relateddisclosure requirements. This statement applies under other accounting pronouncementsthat require or permit fair value measurements. The statement indicates, amongother things, that a fair value measurement assumes that the transaction tosell an asset or transfer a liability occurs in the principal market for theasset or liability or, in the absence of a principal market, the mostadvantageous market for the asset or liability. SFAS 157 defines fair valuebased upon an exit price model.

 

The Company adopted the provisions of SFAS 157 as of January 1,2008 relating to financial assets and liabilities. The carrying amount of ourcurrent assets and liabilities approximates fair value because of the shortmaturity of these instruments. The carrying amount of our term loan approximatesfair value as it is based on prevailing market rates of interest.

 

The provisions of SFAS 157 relating to non-recurringnonfinancial assets and nonfinancial liabilities will be applied ascircumstances require. Non-recurring nonfinancial assets and nonfinancialliabilities include those measured at fair value in goodwill impairment testingand indefinite lived intangible assets measured at fair value for impairmenttesting.

 

The fair value of our interest rate swap agreementrepresents the amount required to settle the agreement using prevailing market ratesof interest. Interest rate swaps are measured at fair value indirectly throughmarket corroboration, for substantially the full term of the financialinstrument within Level 2 of the fair value hierarchy.

 

The following table providesthe liabilities carried at fair value measured on a recurring basis as of June 30,2009:

 
| ** **                                                 | ** ** | **Fair Value Measurements Using** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                 | ** ** | **Total Carrying  Value**                   | ** ** | **Quoted prices  in active  markets  (Level 1)** | ** ** | **Significant  other  observable  inputs  (Level 2)** | ** ** | **Significant  unobservable  inputs  (Level 3)** | ** ** |
| Interest rate  swap - liability at June 30, 2008 |       | $                                                | 705        |   | $ | — |   | $ | 705 |   | $ | — |   |
| Interest rate  swap - liability at June 30, 2009 |       | $                                                | 814        |   | $ | — |   | $ | 814 |   | $ | — |   |

 

In February 2007, theFASB issued SFAS No. 159, *“The Fair Value Option forFinancial Assets and Financial Liabilities — Including an amendment of FASBStatement No. 115,”* (SFAS 159) which is effective for fiscalyears beginning after November 15, 2007. This statement permits entitiesto choose to measure many financial instruments and certain other items at fairvalue. This statement also establishes presentation and disclosure requirementsdesigned to facilitate comparisons between entities that choose differentmeasurement attributes for similar types of assets and liabilities. Unrealizedgains and losses on items for which the fair value option is elected would bereported in earnings. We have adopted SFAS 159 and have elected not to measureany additional financial instruments and other items at fair value.

 

**14. COMMITMENTS AND CONTINGENCIES**

 

We are involved in certain legal proceedingsincidental to the normal conduct of our business. At this time, we do notbelieve that any liabilities relating to such legal proceedings are likely tobe, individually or in the aggregate, material to our business, financialcondition, results of operations or cash flows.

 

The total we have accrued in regards to all legalproceedings as of June 30, 2009 and December 31, 2008 was $0.1million.

 

12

----

 

**EF JOHNSON TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**Three and six months ended June 30,2009 and 2008**

**(Unaudited and in thousands, exceptshare and per share data)**

 

In the normal course of our business activities, weare required under certain supplier agreements and contracts with variousgovernment authorities to provide letters of credit and bonds that may be drawnupon if we fail to perform under these agreements or contracts. There was $0.75million open letters of credit under our line of credit at June 30, 2009and there were no open letters of credit under our line of credit at December 31,2008. Bonds, which expire on various dates, totaled $2.4 million on June 30,2009 and December 31, 2008. No bonds had been drawn upon at either date.

 

**15.********COSTS ASSOCIATED WITHEXIT OR DISPOSAL ACTIVITIES**

 

On November 15, 2007, the Company committed to anorganizational plan (the “Plan”) to shift from three divisions to oneintegrated corporate structure focused on secure wireless communications forgovernment and industrial customers. The Plan was expected to improveefficiencies in our operations, to reduce our infrastructure costs and tosupport a new technology roadmap driving towards a streamlined and moreeffective structure. Implementation of the Plan included senior and middlemanagement changes as well as staff reductions designed to eliminate redundantpositions and reflected the Company’s decision to consolidate operations andmove production from three locations into a centralized operations andoutsourcing program in the Dallas/Fort Worth area.

 

Costs that were directly associated with the Plan wererecorded as “restructuring costs” and were included in general andadministrative expenses. Other costs that did not qualify as restructuringcosts were classified as other operating expenses or costs of goods sold in theCompany’s consolidated statements of operations.

 

The timing of the recognition of costs associated withthis move were determined in accordance with SFAS No. 146, *Accounting for CostsAssociated with Exit or Disposal Activities**,***and other relevant guidance, that provides that a liability for a costassociated with an exit or disposal activity shall be recognized at its fairvalue in the period in which the liability is incurred. In particular,employee-related termination costs associated with the relocation are generallyrecognized ratably over the period that the employees are required to provideservices in order to earn the respective termination benefit.

 

The following table summarizes the estimates andactual exit costs incurred as of June 30, 2009:

 
| ** **                     | ** ** | **Original  amount  expected to  be incurred** | ** ** | **Additional  costs incurred** | ** ** | **Total  amount  expected to  be incurred** | ** ** | **Amount  incurred as of  December 31,  2008** | ** ** | **Amount  incurred for  the three  months ended  June 30, 2009** | ** ** | **Amount  incurred for  the six months  ended  June 30, 2009** | ** ** | **Remaining  amount to  be incurred** | ** ** |
|--------------------------------|------------|------------------------------------------------|------------|--------------------------------|------------|---------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|---------------------------------------|------------|
| One-time  termination benefits |       | $                                              | 951        |                           | $          | —                                      |       | $                                                   | 951        |                                                                  | $          | 939                                                                 |       | $                                     | —     |   | $ | 12 |   | $ | — |   |
| Other costs                    |       | 139                                            |       | 59                             |       | 198                                         |       | 198                                                 |       | —                                                                |       | —                                                              |       | —                                |       |
| Total costs                    |       | $                                              | 1,090      |                           | $          | 59                                          |       | $                                                   | 1,149      |                                                                  | $          | 1,137                                                               |       | $                                     | —     |   | $ | 12 |   | $ | — |   |
|                                |            |                                                |            |                                |            |                                             |            |                                                     |            |                                                                       |            |                                                                     |            |                                       |            |  |  |  |  |  |  |  |  |

 

The following table summarizes the beginning andending liability reserve for exit costs as of June 30, 2009:

 
| ** **                     | ** ** | **Balance at  December 31,  2007** | ** ** | **Cash  Payments** | ** ** | **Balance at  December 31,  2008** | ** ** | **Cash Payments** | ** ** | **Balance at  June 30,  2009** | ** ** |
|--------------------------------|------------|-----------------------------------------|------------|--------------------|------------|-----------------------------------------|------------|-------------------|------------|-------------------------------------|------------|
| One-time  termination benefits |       | $                                       | 575        |               | $          | 563                                     |       | $                 | 12         |                                | $          | 12 |   | $ | — |   |
| Other costs                    |       | 3                                       |       | 3                  |       | —                                  |       | —            |       | —                              |       |
| Total costs                    |       | $                                       | 578        |               | $          | 566                                     |       | $                 | 12         |                                | $          | 12 |   | $ | — |   |

 

16.**RELATED PARTYTRANSACTIONS**

 

During the three months ended June 30, 2009 and2008, DRS Technologies, Inc. (“DRS”) and its related subsidiaries acquiredapproximately $1.2 million and $5.5 million, respectively, of our products.During the six months ended June 30, 2009 and 2008, DRS and its relatedsubsidiaries acquired approximately $1.6 million and $13.6 million,respectively, of our products. Included in our account receivable balances asof June 30, 2009 and December 31, 2008 were amounts due from DRS for$0.4 million and $1.3 million, respectively. Since August 1995, MarkNewman has been the Chairman, President and Chief Executive Officer of DRS. Mr. Newmanwas appointed a director of the Company in October 2005. Effective June 5,2009, Mr. Newman resigned as a Director of the Companydue to potential conflicts of interestrelating to his position with DRS. Although the Company may continue to engagein similar business with DRS in the future, any resulting transactions after June 5,2009 would not be considered related party transactions.

 

13

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**EF JOHNSON TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**Three and six months ended June 30,2009 and 2008**

**(Unaudited and in thousands, exceptshare and per share data)**

 

**17. RECENTLY ISSUED ACCOUNTING STANDARDS**

 

In December 2007, the FASB issued SFAS No. 141(revised 2007), *Business Combination*(“SFAS 141R”), which replaces FASBStatement No. 141. SFAS 141R establishes principles and requirements forhow an acquirer recognizes and measures in its financial statements theidentifiable assets acquired, the liabilities assumed, any noncontrollinginterest in the acquirer and the goodwill acquired. The Statement alsoestablishes disclosure requirements which will enable users to evaluate thenature and financial effects of the business combination. SFAS 141R is to beapplied prospectively to business combinations for which the acquisition dateis on or after an entity’s fiscal year that begins after December 15,2008. The impact of our adoption of SFAS 141R will depend upon the nature andterms of business combinations, if any, that we consummate on or after January 1,2009.

 

In December 2007, the FASB issued SFAS No. 160,*Noncontrolling Interests in ConsolidatedFinancial Statements—an amendment of Accounting Research Bulletin No. 51*(“SFAS160”), which establishes accounting and reporting standards for ownershipinterests in subsidiaries held by parties other than the parent, the amount ofconsolidated net income attributable to the parent and to the noncontrolling interest,changes in a parent’s ownership interest and the valuation of retainednoncontrolling equity investments when a subsidiary is deconsolidated. TheStatement also establishes reporting requirements that provide sufficientdisclosures that clearly identify and distinguish between the interests of theparent and the interests of the noncontrolling owners. SFAS 160 is effective asof the beginning of an entity’s fiscal year that begins after December 15,2008. The adoption of SFAS 160 currently has no impact on our ConsolidatedFinancial Statements.

 

In March 2008, the FASB issued SFAS No. 161,*Disclosures about Derivative Instruments andHedging Activities, an amendment of FASB Statement No. 133*(“SFAS161”)*,* which requires additionaldisclosures about the objectives of using derivative instruments, the method bywhich the derivative instruments and related hedged items are accounted forunder FASB Statement No.133 and its related interpretations, and the effect ofderivative instruments and related hedged items on financial position,financial performance, and cash flows. SFAS 161 also requires disclosure of thefair values of derivative instruments and their gains and losses in a tabularformat. SFAS 161 is effective for financial statements issued for fiscal yearsand interim periods beginning after November 15, 2008, withearly adoption encouraged.  The Company adopted this standardeffective January 1, 2009. The implementation of this standard did nothave a material impact on our consolidated financial statements.

 

In April 2008, the FASB issued Staff Position No. 142-3,*Determination of the Useful Life ofIntangible Assets*(“FSP 142-3”). FSP 142-3 amends the factors thatshould be considered in developing renewal or extension assumptions used todetermine the useful life of a recognized intangible asset under SFAS No. 142,*Goodwill and Other Intangible Assets*.FSP 142-3 is effective for fiscal years beginning after December 15, 2008and interim periods within those fiscal years, requiring prospectiveapplication to intangible assets acquired after the effective date. The Companywill be required to adopt the principles of FSP 142-3 with respect tointangible assets acquired on or after January 1, 2009. Due to theprospective application requirement, the Company is unable to determine whateffect, if any, the adoption of FSP 142-3 will have on its consolidatedstatement of financial position, results of operations or cash flows.

 

In May 2008, the FASB issued SFAS No. 162,*The Hierarchy of Generally AcceptedAccounting Principles*(“SFAS 162”). SFAS 162 identifiesthe sources of accounting principles and the framework for selecting theprinciples used in the preparation of financial statements of nongovernmentalentities that are presented in conformity with generally accepted accountingprinciples (the GAAP hierarchy). SFAS 162 is effective for financialstatements issued for fiscal years and interim periods beginning after November 15,2008. Replaced by SFAS No. 168 as described below.

 

In November 2008, the FASB issued EITF Issue No. 08-7,*Accounting for Defensive Intangible Assets*(“EITF 08-7”).EITF 08-7 addresses the accounting for assets acquired in a businesscombination or asset acquisition that an entity does not intend to activelyuse, otherwise referred to as a ‘defensive asset’ EITF 08-7 requiresdefensive intangible assets to be initially accounted for as a separate unit ofaccounting and not included as part of the cost of the acquirer’s existingintangible asset(s) because it is separately identifiable. EITF 08-7also requires that defensive intangible assets be assigned a useful life inaccordance with paragraph 11 of SFAS 142 and is effective forfinancial statements issued for fiscal years beginning after December 15,2008. Due to the prospective application requirement, the Company is unable todetermine what effect, if any, the adoption of FSP 142-3 will have on itsconsolidated statement of financial position, results of operations or cashflows.

 

In April 2009, the FASB issued FSP FAS 157-4, *Determining Fair Value When the Volume and Level ofActivity for the Asset or Liability Have Significantly Decreased andIdentifying Transactions That Are Not Orderly*. This FSP providesadditional guidance for estimating fair value in accordance with FASB StatementNo. 157, *Fair Value Measurements*,when the volume and level of activity for the asset or liability havesignificantly decreased. This FSP also includes guidance on identifyingcircumstances that indicate a transaction is not orderly. This FSP emphasizesthat even if there has been a 

 

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**EF JOHNSON TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**Three and six months ended June 30,2009 and 2008**

**(Unaudited and in thousands, exceptshare and per share data)**

 

significantdecrease in the volume and level of activity for the asset or liability andregardless of the valuation technique(s) used, the objective of a fairvalue measurement remains the same. Fair value is the price that would bereceived to sell an asset or paid to transfer a liability in an orderlytransaction (that is, not a forced liquidation or distressed sale) betweenmarket participants at the measurement date under current market conditions. FSPFAS 157-4 is effective for interim and annual reporting periods ending after June 15,2009, and is applied prospectively. The Company’s adoption of FSP FAS 157-4 didnot have a material impact on its consolidated financial statements.

 

In April 2009, the FASB issued FSP FAS 107-1 andAPB 28-1, *Interim Disclosures about FairValue of Financial Instruments.* This FSP amends FASB Statement No. 107,*Disclosures about Fair Value of FinancialInstruments*, to require disclosures about fair value of financialinstruments for interim reporting periods of publicly traded companies as wellas in annual financial statements. This FSP also amends APB Opinion No. 28,*Interim Financial Reporting*, torequire those disclosures in summarized financial information at interim reportingperiods. FSP FAS 107-1 and APB 28-1 are effective for interim and annualreporting periods ending after June 15, 2009. The Company’s adoption ofFSP FAS 107-1 and FAS APB-1 did not have a material impact on its consolidatedfinancial statements.

 

In May 2009, the FASB issued SFAS No. 165, *Subsequent Events* (“SFAS 165”). SFAS 165 establishes generalstandards of accounting for and disclosures of events that occur after thebalance sheet date but before financial statements are issued or are availableto be issued. It requires the disclosure of the date through which an entityhas evaluated subsequent events and the basis for that date. SFAS 165 waseffective for interim or annual financial periods ending after June 15,2009. With the adoption of SFAS 165, the Company provided additionaldisclosures; however, the adoption did not affect our consolidated financialposition, results of operations, or cash flows.

 

In June 2009, the FASB issued SFAS No. 168, *The FASB Accounting Standards CodificationTM and the Hierarchy ofGenerally Accepted Accounting Principles—a replacement of FASB Statement No. 162*(“SFAS 168”). The Codification will become the source of authoritative GAAPrecognized by the FASB to be applied by nongovernmental entities. Rules andinterpretive releases of the SEC under authority of federal securities laws arealso sources of authoritative GAAP for SEC registrants. On the effective dateof SFAS 168, the Codification will supersede all then-existing non-SECaccounting and reporting standards. All other nongrandfathered non-SECaccounting literature not included in the Codification will becomenonauthoritative. SFAS 168 is effective for financial statements issued forinterim and annual periods ending after September 15, 2009. SFAS 168 is notexpected to have a material impact on our financial statements.

 

**18. SUBSEQUENT EVENTS**

 

We have evaluated eventsoccurring subsequent to the date of our financial statements through August 6,2009, which is the date our financial statements were issued. We haverecognized the effects of all subsequent events that provide additionalevidence about conditions that existed at our balance sheet date as of June 30,2009, including estimates inherent in the process of preparing our financialstatements. There were no non-recognized subsequent events to be disclosed inour financial statements.

 

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| **ITEM 2.** | ** ** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS** |
|------------------|------------|-------------------------------------------------------------------------------------------------|

 

Discussions of certain matters contained in thisQuarterly Report on Form 10-Q may constitute forward-looking statementsunder Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Theseforward-looking statements are based upon our current expectations, estimatesand projections about our business and our industry, and reflect our beliefsand assumptions based upon information available to us at the date of thisreport. In some cases, you can identify these statements by words such as “if,”“may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,”“estimates,” “predicts,” “potential,” “continue,” and other similar terms.These forward-looking statements relate to, among other things, the results ofour product development efforts, future sales and expense levels, our futurefinancial condition, liquidity, and business prospects generally, the impact ofour relocation of operating facilities, and outsourcing of manufacturing on ouroperating results, perceived opportunities in the marketplace for our products,and our other business plans for the future.

 

These forward-looking statements are subject tocertain risks and uncertainties that could cause the actual results,performance and outcomes to differ materially from those expressed or impliedin these forward-looking statements due to a number of risk factors including,but not limited to, the risks discussed in the 2008 Annual Report on Form 10-Kunder Item 1A “Risk Factors” and in Part II of this report on Form 10-Qunder Item 1A “Risk Factors.” We caution readers not to rely on theseforward-looking statements, which reflect management’s analysis only as of thedate of this quarterly report. We undertake no obligation to revise or updateany forward-looking statement for any reason except as required by law.

 

The following discussion is intended to provide abetter understanding of the significant changes in trends relating to ourfinancial condition and results of operations. Management’s Discussion andAnalysis of Financial Condition and Results of Operations should be read inconjunction with the accompanying Condensed Consolidated Financial Statementsand Notes thereto.

 

**Overview**

 

Previouslythe Company was organized, and reported its financial results, as a parentcompany with two segments, Private Wireless Communications and SecuredCommunications.  Having recognized that the public safety/public servicemarket is moving towards convergent telecommunications solutions, the continueddemand for interoperability and the transition from analog to digitalplatforms, we reorganized the Company in January 2008 into a singlecentralized corporate structure in order to be competitive in this market.

 

Theoperating structure of the Company also changed in the first quarter of 2008.Under the new structure, all of the Company’s operations report up to the chiefexecutive officer and president through the chief operating officer. The chieffinancial officer, chief operating officer and general counsel report to thechief executive officer and president. Based on the synergies of our products, customers, and organizationalstructure, the Company now operates in a single segment.

 

We design, develop, market and support wireless radiosand wireless communications infrastructure and systems for digital and analogplatforms. In addition, we offer encryption technologies for wireless voice,video and data communications and we also design, develop, market and supportsecure wireless networking solutions that include Wi-Fi products, meshnetworking, access points, and client infrastructure products. The Company’scustomers include first responders in public safety and public service, thefederal government, and industrial organizations.

 

Due to the timing of orders and seasonality, ourquarterly results fluctuate. We experience seasonality in our results in partdue to governmental customer spending patterns that are influenced bygovernment fiscal year-end budgets and appropriations. The unpredictable salescycle coupled with launching new products and solutions can also causevariations from quarter to quarter.

 

*Our Products and Solutions*

 

Our wireless radio offerings are primarily digitalsolutions designed to operate in both analog and digital system environments.Our products and systems are based on industry standards designed to enhanceinteroperability among systems, improve bandwidth efficiency, and integratevoice and data communications.

 

The Land Mobile Radio (“LMR”) industry utilizestwo-way wireless communications through wireless networks, which includeinfrastructure components such as base stations, repeaters, transmitters andreceivers, network switches and portable and mobile two-way communicationradios. Individual users operate portable hand-held radios andvehicular-mounted radios in their wireless communications system. Utilizinglicensed RF spectrum, the customer owns and operates the wireless communicationsystem that is networked by linking together the infrastructure components. Wedevelop 

 

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customersolutions, which leverage the customer’s wireless system and wireless radioswith customer specific or enterprise wide applications.

 

The majority of revenues are derived from the sale ofwireless radio products. Our federal, state and local governmental agencycustomers are increasingly demanding interoperable, secured communicationsproducts and systems. We believe this demand has created opportunities for us aswe believe we are positioned to provide these products and systems. As aresult, we expect to continue to allocate a majority of our on-going researchand development expenditures to wireless radio features and enhancements,infrastructure components and system development efforts.

 

We provide the domestic and international LMR industrywith secure encryption technologies for analog wireless radios. These productsare specifically designed to prevent unauthorized access to sensitive voicecommunications in parts of the world where wireless radio systems remain analogand security needs are high. These products are sold as aftermarket add-oncomponents or embedded components for existing analog radios and systems.

 

We also design, develop,market and support customized wireless network centric products and systemswhich include secure Wi-Fi products, including mesh networking, access point,bridge, and client infrastructure products, as well as security software. Weprovide sensor network solutions through our InfoMatics® middleware, whichenable sensors and databases to communicate data to pertinent personnel forcommand and control applications in near real-time. These products andsolutions utilize FIPS 140-2 validated wireless products, 802.11 wireless networking(WIFI) solutions, mesh networking and conditions based and location basedtelematics solutions.

 

*Our Salesand Distribution Approach*

 

Our products and systemsare sold through multiple channels including a direct sales force, dealers,manufacturing representatives, distributors, and strategic partneringarrangements. We utilize our dealer network to assist in installing, servicing,selling and distributing our products. We also generate revenues through thefederal government under government funded research and development SmallBusiness Innovative Research programs (“SBIR”). Additionally, we offer ourproducts to commercial, non-governmental users.

 

Much of our business is obtained through submission offormal competitive bids. Our governmental customers generally can specify theterms, conditions and form of the contract. Our government business is subjectto government funding decisions and contract types can vary widely, includingcost plus, fixed priced, indefinite delivery/indefinite quantity (“IDIQ”), andgovernment-wide acquisition contracts with the General Services Administration(“GSA”), which require pre-qualification of vendors and allows governmentcustomers to more easily procure our products and systems. Through the federalgovernment SBIR programs the business is most typically obtained through thesubmission of formal proposals under cost plus or fixed fee price agreements.

 

Depending on the size andcomplexity of customer specifications and requirements, products can be shippedto the customer in a relatively short period of time (typically 90 days) orwith complex integrations and various delivery dates, orders can span multipleyears. For example, our longer-term system contracts and government servicesrevenues are generated under customer contracts and agreements for whichrevenue is recorded under the percentage-of-completion method.

 

**Description of Operating Accounts**

 

*Revenues*. Revenues consist of product sales,services, and government-funded research and development services and solutionsnet of returns and allowances. Longer-term system and government servicesrevenues are recognized under the percentage-of-completion method.

 

*Cost of Sales.* Cost of sales includes costs ofcomponents and materials, labor, depreciation and overhead costs associatedwith the production of our products and services, as well as shipping, royalty,inventory reserves, warranty product costs, and incurred cost under salescontracts.

 

*Gross Profit.* Gross profit is net revenues less thecost of sales and is affected by a number of factors, including competitivepricing, product mix, type of contract and cost of products and services.

 

*Research and Development.* Research and development expensesconsist primarily of costs associated with research and development personnel,materials, and the depreciation of research and development equipment andfacilities. We expense research and development costs as they are incurred, netof any applicable cost reimbursements. Research and development expensesrelating to our government-funded research and development services areincluded as a component of cost of sales.

 

*Sales and Marketing.* Sales and marketing expenses consistprimarily of salaries and related costs of sales personnel, including salescommissions and travel expenses, as well as costs of advertising, product andprogram management, public relations and trade show participation.

 

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*General and Administrative*. General and administrative expensesconsist primarily of salaries and other expenses associated with ourmanagement, accounting, information systems and operational functions. Thisexpense also includes the impact of equity-based compensation expense.Accounting for government contracts delineates what is a direct chargeallowable to include in contract costs and what is considered to be an indirectcharge reflected as general and administrative expenses. We consider indirectengineering labor and operating costs such as quality, planning, operations, andcompany fringe benefits, general administrative salaries and other generaladministrative expenses as general and administrative expense.

 

*Interest Expense, Net.*Interest expense, net consists of interestexpense on the term note, revolving line of credit and capital leases net ofinterest income earned on cash and cash equivalents.

 

*Provision for Income Taxes.* Provision (benefit) for income taxesincludes the increase or decrease in the valuation reserve that is based uponmanagement’s conclusions regarding, among other considerations, our historicaloperating results and forecasted future earnings over a five year period, ourcurrent and expected customer base projections, and technological andcompetitive factors impacting our current products. Current financialaccounting standards require that organizations analyze all positive andnegative evidence relating to deferred tax asset realization, which wouldinclude our historical accuracy in forecasting future earnings, as well as ourhistory of losses incurred within the past three years. Should factorsunderlying management’s estimates change, future adjustments, either positiveor negative, to our valuation allowance may be necessary.

 

**Critical Accounting Policies**

 

The preparation of our consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States of America (GAAP) requires management to make estimates andassumptions that affect amounts reported in our condensed consolidatedfinancial statements and accompanying notes. We base our estimates onhistorical experience and all known facts and circumstances that we believe arerelevant. Actual results may differ materially from our estimates. We believethe following accounting policies to be most critical to an understanding ofour financial condition and results of operations because they require us tomake estimates, assumptions and judgments about matters that are inherentlyuncertain. Our critical accounting estimates include those regarding (1) revenues,(2) receivables, (3) inventories, (4) goodwill and otherintangible assets, (5) warranty costs, (6) income taxes, (7) long-livedassets and (8) stock-based compensation. For a discussion of the criticalaccounting estimates, see “Item 7. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations — Critical Accounting Policies”in our Annual Report on Form 10-K for the year ended December 31,2008.

 

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** **

**Results of Operations**

 

The following table presents certain CondensedConsolidated Statements of Operations information as a percentage of revenuesduring the periods indicated:

 
| ** **                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                         | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                         | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                         | ** ** | ** **             | ** ** | **(as restated)**    | ** ** | ** ** | ** ** | **(as restated)** | ** ** |
| Revenues                           |       | 100.0                  | %          | 100.0                | %          | 100.0 | % | 100.0 | % |
| Cost of sales                      |       | 58.2                   |       | 66.2                 |       | 61.4 |   | 66.3 |   |
|                               |       |                   |       |                 |       |   |   |   |   |
| Gross profit                       |       | 41.8                   |       | 33.8                 |       | 38.6 |   | 33.7 |   |
|                               |       |                   |       |                 |       |   |   |   |   |
| Operating  expenses:               |       |                   |       |                 |       |   |   |   |   |
| Research and  development          |       | 10.3                   |       | 0.4                  |       | 12.2 |   | 5.1 |   |
| Sales and  marketing               |       | 8.1                    |       | 10.0                 |       | 9.3 |   | 9.6 |   |
| General and  administrative        |       | 17.7                   |       | 17.5                 |       | 20.5 |   | 18.2 |   |
| Amortization of  intangibles       |       | 0.8                    |       | 1.2                  |       | 0.9 |   | 1.2 |   |
| Escrow fund  settlement            |       | —                 |       | —               |       | (5.3 | ) | — |   |
| Total operating  expenses          |       | 36.9                   |       | 29.1                 |       | 37.6 |   | 34.2 |   |
|                               |       |                   |       |                 |       |   |   |   |   |
| Income (loss)  from operations     |       | 4.9                    |       | 4.7                  |       | 1.0 |   | (0.5 | ) |
|                               |       |                   |       |                 |       |   |   |   |   |
| Interest  expense, net             |       | (1.2                   | )          | (0.8                 | )          | (1.2 | ) | (0.7 | ) |
|                               |       |                   |       |                 |       |   |   |   |   |
| Income (loss)  before income taxes |       | 3.7                    |       | 3.9                  |       | (0.2 | ) | (1.1 | ) |
|                               |       |                   |       |                 |       |   |   |   |   |
| Income tax  (expense)              |       | —                 |       | —               |       | — |   | — |   |
|                               |       |                   |       |                 |       |   |   |   |   |
| Net Income  (loss)                 |       | 3.7                    |       | 3.9                  |       | (0.2 | ) | (1.1 | ) |

 

**Comparison of the Three Months and Six Months Ended June 30,2009 and 2008**

 

*Revenues.*Our revenues decreased $2.4 million, or8%, to $30.1 million for the three months ended June 30, 2009 from $32.6million for the same period in 2008. The decline was attributable to lowerfederal LMR revenues partially offset by increases associated with governmentservices revenues. Our revenues decreased $13.9 million, or 21%, to $52.6million for the six months ended June 30, 2009 from $66.5 million for thesame period in 2008. The decline was attributable to lower federal LMR andre-banding revenues partially offset by increases associated with State andLocal revenues and increases in government services revenues.

 

*Gross Profit.*Our gross profit increased $1.6 million,or 14%, to $12.6 million in the three months ended June 30, 2009 from$11.0 million for the same period in 2008. Gross profit, as a percentage ofrevenues, or gross margin, was 41.8% for the three months ended June 30,2009, as compared to 33.8% for the same period in 2008. The increase in grossprofit and gross margin was attributable to re-banding orders and governmentservices product mix with lower third party content coupled with improvedproduct quality that resulted in lower cost of sales. Our gross profitdecreased $2.1 million, or 9%, to $20.3 million in the six months ended June 30,2009 from $22.4 million for the same period in 2008. The decrease in grossprofit was primarily due to the volume variance associated with the decline infederal LMR revenue. Gross profit, as a percentage of revenues, or grossmargin, was 38.6% for the six months ended June 30, 2009, as compared to33.7% for the same period in 2008. Gross margin improved in the first half of2009 primarily due to second quarter performance and improved product qualitythat resulted in lower cost of sales. We do not anticipate the second quartermargins of 41.8% achieved due to product mix will be replicated in the secondhalf of 2009. As a result we anticipate the gross margin percentage to be lowerin the second half of 2009.

 

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*Research and Development.*Research and development expensesincreased $3.0 million to $3.1 million in the three months ended June 30,2009 from $0.1 million in the same period in 2008. Research and developmentexpenses as a percentage of revenues increased to 10.3% in the second quarterof 2009 versus 0.4% for the same period in 2008. Research and developmentexpenses increased $3.1 million, or 91%, to $6.4 million in the six monthsended June 30, 2009 from $3.4 million in the same period in 2008. Researchand development expenses as a percentage of revenues increased to 12.2% in thefirst six months of 2009 versus 5.1% for the same period in 2008.

 

The increase in research and development expenses wasattributable to a non-recurring engineering cost reimbursement of $4.0 millionreceived in the second quarter of 2008 from a customer for research anddevelopment expenses relating to the development and re-engineering of ourMultinet radio product line associated with the FCC re-banding effort.  The development of ourMultinet radio has been completed and no further non-recurring engineering costreimbursement will be received.

 

*Sales and Marketing.*Sales and marketing expenses decreased$0.8 million, or 25%, to $2.4 million in the three months ended June 30,2009 from $3.2 million in the same period in 2008. The decrease is mainlyattributable to reduced labor coupled with lower sales incentives resultingfrom the decline in revenue noted above. Sales and marketing expenses as apercentage of revenues was 8.1% in the second quarter of 2009 versus 10.0% inthe second quarter of  2008. Sales andmarketing expenses decreased $1.5 million, or 23%, to $4.9 million in the sixmonths ended June 30, 2009 from $6.4 million in the same period in 2008.The decrease is mainly attributable to reduced labor coupled with lower salesincentives resulting from the decline in revenue noted above. Sales andmarketing expenses as a percentage of revenues was 9.3% for the first half of2009 versus 9.6% in the first half of 2008. We expect the trend in sales andmarketing expenses to continue for the remainder of 2009.

 

*General and Administrative.*General and administrative expensesdecreased $0.4 million, or 7%, to $5.3 million for the three months ended June 30,2009 from $5.7 million for the same period in 2008. General and administrativeexpenses decreased $1.3 million, or 11.2%, to $10.8 million for the six monthsended June 30, 2009 from $12.1 million for the same period in 2008. Thedecrease in expenses is primarily attributable to reduced labor, lowerincentive compensation accruals for 2009 and reduced stock compensation expenseresulting from increased forfeiture rates in the first half of 2009 as comparedwith the first half of 2008.

 

*Amortization of Intangibles.*Amortization of intangibles decreased$0.2 million, or 40%, to $0.2 for the three months ended June 30, 2009from $0.4 million for the same period in 2008. Amortization of intangiblesdecreased $0.3 million, or 40%, to $0.5 million in the six months ended June 30,2009 from $0.8 million in the same period in 2008. The decreases relate tolower amortization of specifically identifiable intangible assets with adefinite life as a result of the impairment of certain amortizable assetsduring the fourth quarter of 2008.

 

*Escrow fund settlement.* In connection with the acquisitionof 3eTI in 2006, the total consideration paid by the Company consisted of $36.0million in cash, which included $3.6 million to be held in escrow to indemnifythe Company for any claims under the Agreement. In August 2008, theCompany made a claim against the escrow fund for damages arising out of certainalleged breaches of representations and warranties contained in the MergerAgreement. In January 2009, we settled claims under the Agreement andreceived $2.8 million of the funds held in the escrow account. The escrow fundsreceived as part of the settlement were recorded as a reduction of operatingexpense. The Company previously incurred research and development costs inconnection with the re-design, re-testing and re-certification of certain 3eTIproducts to bring them up to specifications represented to exist at theacquisition date.

 

*Interest Expense, net.*Interest expense, net increased $0.1million to $0.4 million in expense for the three months ended June 30,2009 from $0.3 million for the same period in 2008. Interest expense, netincreased $0.2 million to $0.6 million in expense for the six months ended June 30,2009 from $0.4 million for the same period in 2008. The increases wereattributable to interest on the term loan and lower interest income earned oncash investments resulting from lower amounts of invested cash earning lowerrates of interest.

 

*Provision for Income Taxes.*We did not record a tax benefit orprovision for either the three and six months ended June 30, 2009 or 2008primarily attributable to our fully reserved deferred tax assets requiring nofurther provision for income taxes for each respective period end. Thevaluation reserve is based upon management’s conclusions regarding, among otherconsiderations, our cumulative loss position during three preceding years, ouroperating results during each period, our current and expected customer base,technological and competitive factors impacting our current products, andmanagement’s estimates of future earnings based on information currentlyavailable.

 

*Net Income / (Loss).*Net income was $1.1 million for the threemonths ended June 30, 2009, reflecting a decrease of $0.1 million, ascompared to net income of $1.2 million for the same period in 2008. Net losswas $0.1 million for the six months ended June 30, 2009, reflecting adecrease of $0.6 million, as compared to net loss of $0.7 million for the sameperiod in 2008. Excluding the $2.8 million received for the escrow fundsettlement, the net loss for the six months ended June 

 

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30,2009, would have been $2.9 million. Excluding the $4.0 million received for thenon-recurring engineering cost reimbursement, the net loss for the six monthsended June 30, 2008, would have been $4.8 million.

 

**Liquidity and Capital Resources**

 

The Company’s primary sources of liquidity are itscash and cash equivalents that were $9.5 million (net of $5.0 million pledgedrestricted cash) at June 30, 2009 and $11.3 million (net of $2.0 millionpledged restricted cash) at December 31, 2008.  In addition, effectivewith the amended Loan Agreement dated March 16, 2009, we have a revolvingline of credit for $10.0 million.

 

*Net cash from operating activities.*Our operating activities provided cash of$1.7 million in the six months ended June 30, 2009.  Our operating activities used cash of $6.4million in the six months ended June 30, 2008.

 

During the first half of 2009, operating cash wasprovided primarily from improved inventory turnover, reduced costs in excess ofbillings due to increased contract billings, collection of related partyreceivables and non-cash depreciation, amortization and stock compensationaggregating to $8.9 million. Partially offsetting were increases in billedaccounts receivable, a reduction in accounts payable and other liabilities amountingto $7.3 million. Operating cash includes $2.8 million received from the escrowfund settlement.

 

During the first half of 2008, operating cash was usedprimarily for net loss coupled with increases in billed accounts receivable,costs in excess of billed contracts, an increase in related party receivablesand other receivables, and a reduction in accounts payable aggregating to $12.7million. Partially offsetting were improved inventory turnover and non-cashdepreciation, amortization and stock compensation amounting to $6.0million.  The increase in accountsreceivable reflects delays in cash collections from certain customers duringthe quarter ended June 30, 2008. Operating cash includes $4.0 millionreceived for the non-recurring engineering cost reimbursement.

 

*Net cash from investing activities.* During the six months ended June 30,2009 and 2008, investing activities used $0.5 million and $0.9 million,respectively, primarily investing in the purchase of property, plant andequipment.

 

*Net cash from financing activities.*During the six months ended June 30,2009, there was an increase in restricted cash of $3.0 million relating to theloan amendment noted below together with other minimal financing activities.During the six months ended June 30, 2008 financing activities provided$6.5 million in a borrowing from the revolving line of credit to cover shortterm cash requirements at the beginning of the second quarter due to delays incertain customer collections. These short term borrowings were paid down by theend of the second quarter.

 

*Secured line of credit.*The Loan Agreement provides for customaryaffirmative and negative covenants, including maintenance of corporateexistence, rights, property, books and records and insurance, compliance withcontracts and laws, and certain reporting requirements, as well as limitationson debt, liens, fundamental changes, acquisitions, transfers of assets,investments, loans, guarantees, use of proceeds, sale-leaseback transactionsand capital expenditures. In addition, the Loan Agreement contains certainfinancial covenants including a maximum ratio of funded debt to EBITDA and afixed charge coverage ratio. The Loan Agreement also provides for events ofdefault that would permit the lender to accelerate the loans upon theiroccurrence, including failure to make payments, breaches of representations andwarranties, insolvencyevents, acceleration of other indebtedness, failure to dischargejudgments, material adverse effects, certain breaches of contracts, casualtylosses when no or insufficient insurance is maintained, changes of control,certain ERISA events and failure to observe covenants. As collateral for theobligations under the Loan Agreement the Lender has a security interest insubstantially all assets of the borrowers, including accounts receivable,inventories, machinery, equipment, real estate, and general intangibles.

 

As noted in our Form 10-K for the period endingDecember, 31, 2008, we were not in compliance with the financial covenants ofthe Loan Agreement for the quarter ending December 31, 2008. As a result,on March 16, 2009 we executed an Amendment to the Loan Agreement wherebyBank of America waived such financial covenant defaults on a one-time basis andamended the Loan Agreement to, among other things, lower the revolving line ofcredit from $15.0 million to $10.0 million, revise such financial covenants,add additional covenants, and to modify the advance and borrowing revisionsunder the Loan Agreement. In order to maintain compliance with the terms of theAmendment, the Company pledged as additional cash collateral for the remainingterm of the term loan, $3.0 million on the effective date of the Amendment.Furthermore, beginning with the quarter ending June 30, 2009, we arerequired to maintain a certain level of EBITDA, a certain fixed charge coverageratio on a cumulative basis beginning April 1, 2009, a minimum funded debtto EBITDA ratio on an annualized basis beginning April 1, 2009 for eachquarterly financial reporting period through June 30, 2010 and limitcapital expenditures to $2.5 million for 2009. In addition, the interest rateon the revolving note issuable pursuant to the Loan Agreement has been amendedto a floating rate equal to LIBOR plus a Libor Margin ranging from 2.50% to5.00% through the term of the note based on the Company’s funded debt toEBITDA. Effective with the Amendment, the Libor margin is 400 basis pointsthrough the second quarter of 2009. Interest rates of 4.32% and 4.47% were ineffect at June 30, 2009 and 2008, respectively. The Loan Agreement expiresJune 30, 2010.

 

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We were in compliance with all financial and negativecovenants at June 30, 2009. At June 30, 2009 and December 31,2008, no borrowings had been made on the revolving line of credit.

 

*Letters of credits and bonds.* In the normal course of our businessactivities, we are required under certain supplier agreements and contractswith various government authorities to provide letters of credit or performanceor bid bonds that may be drawn upon if we fail to perform under theseagreements and contracts. There was $0.75 million of open letters of creditunder our line of credit at June 30, 2009 and there were no open lettersof credit under our line of credit at December 31, 2008. Bonds, whichexpire on various dates, totaled $2.4 million on June 30, 2009 and December 31,2008, respectively. The majority of the bonds relate to the contract awarded inMay 2008 by the Government of Yukon, Canada that is collateralized byrestricted cash of $2.0 million. The contract is expected to be completed inthe second quarter of 2010 and the corresponding bond and restricted cash wouldbe released. No bonds had been drawn upon at either date.

 

The total available remaining credit under the line ofcredit was $9.25 million and $14.40 million as of June 30, 2009 and December 31,2008, respectively. The decline in available remaining credit reflects thereduced borrowing allowed under the revolving line of credit coupled with theopening of the letter of credit during the first quarter of 2009. The revolvingline of credit is supported by the underlying borrowing base of the Company.

 

*Backlog.* Our backlog of unfilled orders at June 30,2009 was $49.5 million, compared to a backlog of $68.2 million at December 31,2008 and $64.1 million at June 30, 2008. Depending on the size andcomplexity of customer specifications and requirements, the backlog can beconverted to revenues in a relatively short period of time (typically 90 days)or with complex integrations and various delivery dates, orders can spanmultiple years.

 

*Dividend policy.* Since our initial public offering, wehave not declared or paid any dividends on our common stock. We presentlyintend to retain earnings for use in our operations and to finance ourbusiness. Any change in our dividend policy is within the discretion of ourboard of directors and will depend, among other things, on our earnings, debtservice and capital requirements, restrictions in financing agreements, if any,business conditions and other factors that our board of directors deemsrelevant.

 

*Covenant Compliance.* The Company was in compliance with allfinancial and negative covenants at June 30, 2009.  As discussedabove, compliance with new, more restrictive financial covenants under the LoanAgreement was required beginning in the Company’s second quarter. Management noted that, if certain orders are not received and shipped in thethird quarter, the Company may not meet those more restrictive loan covenantsfor the third quarter. Management’s evaluation is based on recent experiencewith expected orders being temporarily delayed by customers.  In suchevent, the Company intends to attempt to obtain a waiver of noncompliance fromthe lender, failing which the lender could declare the Company in default underthe Loan Agreement and accelerate the payment of the $15.0 million term loan,require payment of any borrowings under the revolving line of credit and raisethe interest rate an additional 4%.  There can be no assurance that theCompany will be able to obtain such waiver.

 

If the Company is not in compliance with the bankcovenants at the end of the third quarter and is unable to obtain a waiver fromsuch noncompliance, the Company, to the extent existing resources and cash fromoperations are insufficient to pay these above obligations; we may need toraise additional funds through public or private equity or debt financing.These funds may not be available, or if available, we may not be able to obtainthem on terms favorable to us.

 

The term loan has been classified as current at theend of second quarter of 2009 due to its maturity date of June 30, 2010.Through the expiration of the term loan, we expect to build our cash balances inanticipation of refinancing the term loan at maturity. As noted above, we mayneed to raise additional funds through public or private equity or debtfinancing. These funds may not be available, or if available, we may not beable to obtain them on terms favorable to us.

 

Based on our estimated cashflows, and assuming the Company is able to meet its covenants under the LoanAgreement or obtain a waiver for noncompliance and extend the revolving line ofcredit, we believe our existing cash, cash equivalents and the revolving lineof credit are sufficient to meet our capital and operating requirements for atleast the next 12 months. However, our future operating and capitalrequirements depend on many factors, including the levels at which we generateproduct revenue and related margins, the timing and extent of development, ouroperating expenses, investments in inventory and accounts receivable andgeneral economic conditions, and also, the continued availability of our creditfacility. To the extent existing resources and cash from operations areinsufficient to support our activities, we may need to raise additional fundsthrough public or private equity or debt financing. These funds may not beavailable, or if available, we may not be able to obtain them on termsfavorable to us.

 

**Off-Balance Sheet Arrangements**

 

As part of our ongoing business, we do not participatein transactions that generate relationships with unconsolidated entities orfinancial partnerships, such as entities often referred to as structuredfinance or variable interest entities (“VIE”), 

 

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thatwould have been established for the purpose of facilitating off-balance sheetarrangements or other contractually narrow or limited purposes. As of  June 30, 2009, we are not involved inany VIE transactions.

 

**Recently Issued Accounting Standards**

 

In December 2007, the FASB issued SFAS No. 141(revised 2007), *Business Combination*(“SFAS 141R”), which replaces FASBStatement No. 141. SFAS 141R establishes principles and requirements forhow an acquirer recognizes and measures in its financial statements theidentifiable assets acquired, the liabilities assumed, any noncontrollinginterest in the acquirer and the goodwill acquired. The Statement alsoestablishes disclosure requirements which will enable users to evaluate thenature and financial effects of the business combination. SFAS 141R is to beapplied prospectively to business combinations for which the acquisition dateis on or after an entity’s fiscal year that begins after December 15,2008. The impact of our adoption of SFAS 141R will depend upon the nature andterms of business combinations, if any, that we consummate on or after January 1,2009.

 

In December 2007, the FASB issued SFAS No. 160,*Noncontrolling Interests in ConsolidatedFinancial Statements—an amendment of Accounting Research Bulletin No. 51*(“SFAS160”), which establishes accounting and reporting standards for ownershipinterests in subsidiaries held by parties other than the parent, the amount ofconsolidated net income attributable to the parent and to the noncontrollinginterest, changes in a parent’s ownership interest and the valuation ofretained noncontrolling equity investments when a subsidiary is deconsolidated.The Statement also establishes reporting requirements that provide sufficientdisclosures that clearly identify and distinguish between the interests of theparent and the interests of the noncontrolling owners. SFAS 160 is effective asof the beginning of an entity’s fiscal year that begins after December 15,2008. The adoption of SFAS 160 currently has no impact on our ConsolidatedFinancial Statements.

 

In March 2008, the FASB issued SFAS No. 161,*Disclosures about Derivative Instruments andHedging Activities, an amendment of FASB Statement No. 133*(“SFAS161”)*,* which requires additionaldisclosures about the objectives of using derivative instruments, the method bywhich the derivative instruments and related hedged items are accounted forunder FASB Statement No.133 and its related interpretations, and the effect ofderivative instruments and related hedged items on financial position,financial performance, and cash flows. SFAS 161 also requires disclosure of thefair values of derivative instruments and their gains and losses in a tabularformat. SFAS 161 is effective for financial statements issued for fiscal yearsand interim periods beginning after November 15, 2008, withearly adoption encouraged.  The Company adopted this standardeffective January 1, 2009. The implementation of this standard did nothave a material impact on our consolidated financial statements.

 

In April 2008, the FASB issued Staff Position No. 142-3,*Determination of the Useful Life ofIntangible Assets*(“FSP 142-3”). FSP 142-3 amends the factors thatshould be considered in developing renewal or extension assumptions used todetermine the useful life of a recognized intangible asset under SFAS No. 142,*Goodwill and Other Intangible Assets*.FSP 142-3 is effective for fiscal years beginning after December 15, 2008and interim periods within those fiscal years, requiring prospectiveapplication to intangible assets acquired after the effective date. The Companywill be required to adopt the principles of FSP 142-3 with respect to intangibleassets acquired on or after January 1, 2009. Due to the prospectiveapplication requirement, the Company is unable to determine what effect, ifany, the adoption of FSP 142-3 will have on its consolidated statement offinancial position, results of operations or cash flows.

 

In May 2008, the FASB issued SFAS No. 162,*The Hierarchy of Generally AcceptedAccounting Principles*(“SFAS 162”). SFAS 162 identifiesthe sources of accounting principles and the framework for selecting theprinciples used in the preparation of financial statements of nongovernmentalentities that are presented in conformity with generally accepted accountingprinciples (the GAAP hierarchy). SFAS 162 is effective for financialstatements issued for fiscal years and interim periods beginning after November 15,2008. Replaced by SFAS No. 168 as described below.

 

In November 2008, the FASB issued EITF Issue No. 08-7,*Accounting for Defensive Intangible Assets*(“EITF 08-7”).EITF 08-7 addresses the accounting for assets acquired in a businesscombination or asset acquisition that an entity does not intend to activelyuse, otherwise referred to as a ‘defensive asset.’EITF 08-7 requires defensive intangible assets tobe initially accounted for as a separate unit of accounting and not included aspart of the cost of the acquirer’s existing intangible asset(s) because itis separately identifiable. EITF 08-7 also requires that defensiveintangible assets be assigned a useful life in accordance withparagraph 11 of SFAS 142 and is effective for financial statementsissued for fiscal years beginning after December 15, 2008. Due to theprospective application requirement, the Company is unable to determine whateffect, if any, the adoption of FSP 142-3 will have on its consolidated statementof financial position, results of operations or cash flows.

 

In April 2009, the FASB issued FSP FAS 157-4, *Determining Fair Value When the Volume and Level ofActivity for the Asset or Liability Have Significantly Decreased andIdentifying Transactions That Are Not Orderly*. This FSP providesadditional guidance for estimating fair value in accordance with FASB StatementNo. 157, *Fair Value Measurements*,when the volume and level of activity for the asset or liability havesignificantly decreased. This FSP also includes guidance on identifyingcircumstances that indicate a transaction is not orderly. This FSP emphasizesthat even if there has been a 

 

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significantdecrease in the volume and level of activity for the asset or liability andregardless of the valuation technique(s) used, the objective of a fairvalue measurement remains the same. Fair value is the price that would bereceived to sell an asset or paid to transfer a liability in an orderly transaction(that is, not a forced liquidation or distressed sale) between marketparticipants at the measurement date under current market conditions. FSP FAS157-4 is effective for interim and annual reporting periods ending after June 15,2009, and is applied prospectively. The Company’s adoption of FSP FAS 157-4 didnot have a material impact on its consolidated financial statements.

 

In April 2009, the FASB issued FSP FAS 107-1 andAPB 28-1, *Interim Disclosures about FairValue of Financial Instruments.* This FSP amends FASB Statement No. 107,*Disclosures about Fair Value of FinancialInstruments*, to require disclosures about fair value of financialinstruments for interim reporting periods of publicly traded companies as wellas in annual financial statements. This FSP also amends APB Opinion No. 28,*Interim Financial Reporting*, torequire those disclosures in summarized financial information at interimreporting periods. FSP FAS 107-1 and APB 28-1 are effective for interim andannual reporting periods ending after June 15, 2009. The Company’sadoption of FSP FAS 107-1 and APB 28-1 did not have a material impact on itsconsolidated financial statements.

 

In May 2009, the FASB issued SFAS No. 165, *Subsequent Events* (“SFAS 165”). SFAS 165 establishes generalstandards of accounting for and disclosures of events that occur after thebalance sheet date but before financial statements are issued or are availableto be issued. It requires the disclosure of the date through which an entityhas evaluated subsequent events and the basis for that date. SFAS 165 waseffective for interim or annual financial periods ending after June 15,2009. With the adoption of SFAS 165, the Company provided additionaldisclosures; however, the adoption did not affect our consolidated financial position,results of operations, or cash flows.

 

In June 2009, the FASB   issued  SFAS No. 168, *The FASB AccountingStandards CodificationTM and the Hierarchy of Generally Accepted AccountingPrinciples—a replacement of FASB Statement No. 162* (“SFAS 168”).The Codification will become the source of authoritative GAAP recognized by theFASB to be applied by nongovernmental entities. Rules and interpretivereleases of the SEC under authority of federal securities laws are also sourcesof authoritative GAAP for SEC registrants. On the effective date of SFAS 168,the Codification will supersede all then-existing non-SEC accounting andreporting standards. All other nongrandfathered non-SEC accounting literaturenot included in the Codification will become nonauthoritative. SFAS 168 iseffective for financial statements issued for interim and annual periods endingafter September 15, 2009. SFAS 168 is not expected to have a materialimpact on our financial statements.

 

**ITEM 3.****                                 ****QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Our financial instruments consist of cash and cashequivalents, trade accounts receivable, accounts payable, current  and long-term obligations. The primaryobjective of our investment activities is to preserve principal while at thesame time maximizing yields without increasing risk.

 

Although a substantial majority of our sales aredenominated in U.S. dollars, fluctuations in the value of internationalcurrencies relative to the U.S. dollar may affect the price, competitivenessand profitability of our products sold in international markets.Furthermore, the uncertainty of monetary exchange values has caused, and may inthe future cause, some foreign customers to delay new orders or delay paymentfor existing orders. Additionally, troubled economic and political conditionscould result in lower revenues for us. While most international sales aresupported by letters of credit or cash in advance, the purchase of our productsby international customers presents increased risks, which include:

 

·                  unexpected changes in regulatory requirements;

 

·                  tariffs and other trade barriers;

 

·                  political and economic instability in foreign markets;

 

·                  difficulties in establishing foreign distributionchannels;

 

·                  longer payment cycles or uncertainty in the collectionof accounts receivable;

 

·                  increased costs associated with maintaininginternational marketing efforts;

 

·                  cultural differences in the conduct of business;

 

·                  natural disasters or acts of terrorism;

 

·                  difficulties in protecting intellectual property; and

 

·                  susceptibility to orders being cancelled as a resultof foreign currency fluctuations since a substantial majority of our quotationsand invoices are denominated in U.S. dollars.

 

Export of our products is subject to the U.S. ExportAdministration regulations and some of our secured communications productsrequire a license or a license exception in order to ship internationally. Wecannot assure that such approvals will be available to us or our products inthe future in a timely manner or at all or that the federal government will 

 

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notrevise its export policies or the list of products, persons or countries forwhich export approval is required. Our inability to obtain required exportapprovals would adversely affect our international sales, which may have amaterial adverse effect on us. In addition, foreign companies not subject toUnited States export restrictions may have a competitive advantage in theinternational secured communications market. We cannot predict the impact ofthese factors on the international market for our products.

 

**ITEM 4.****                                 ****CONTROLS AND PROCEDURES**

 

**Disclosure Controls and Procedures**

 

Our Chief Executive Officer (“CEO”) and ChiefFinancial Officer (“CFO”) reviewed and evaluated our disclosure controls andprocedures, as defined in Rule 240.13a-15(e) and 15d-15(e) underthe Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of theperiod covered by this report. Based on this evaluation, our CEO and CFO haveconcluded that our disclosure controls and procedures were effective as of theend of the period covered by this report to ensure that information required tobe disclosed in the reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms and isaccumulated and communicated to our management including our principalexecutive and principal financial officer, as appropriate, to allow timelydecisions regarding disclosures.

 

**Internal Controls Over Financial Reporting**

 

As required by Rule 13a-15(d) under theExchange Act, our CEO and CFO, also conducted an evaluation of our internalcontrol over financial reporting to determine whether any change occurredduring our most recent fiscal quarter that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

**Remediation of Material Weakness in Internal Control**

 

As reported in our 2008 Form 10-K, we did notmaintain effective controls to properly and timely identify the appropriateaccounting treatment at the time that the Company entered into a memorandum ofunderstanding with one of its vendors in an effort to resolve a dispute betweenthe parties regarding an outstanding non-trade receivable. The agreementgranted credits on future purchases to the Company, and therefore should havebeen accounted for by reducing the cost of future inventory purchases, andsubsequently cost of sales, over the period of the agreement, and theoutstanding receivable should have been written off. Prior to the restatement,the Company recorded credits received as a result of this agreement ascollections of a receivable rather than a reduction of inventory cost. As aresult, the Company wrote off this “Other Receivable” as of the third quarterof 2007 and the related credits on future purchases received under thisagreement are being treated as a reduction to cost of sales resulting from thelower cost basis of inventory. Management did not properly and timely identifythat the execution of this agreement required a change in accounting treatmentin accordance with accounting principals generally accepted in the UnitedStates of America, and therefore is a material weakness in Internal ControlOver Financial Reporting.

 

We believe we have taken the steps necessary toremediate this material weakness pertaining to non-standard agreements byimproving processes, procedures and approval levels to enter into suchagreements. We will continue to monitor the effectiveness of these processes,procedures and controls, and will make any further changes as managementdetermines appropriate.

 

**Changes in Internal Control Over Financial Reporting**

 

As part of our normal course of business, we willdevelop and implement new/modified control procedures associated with orders,inventory costing, purchasing, shipping, and receiving. We will continue toconduct full physical inventory counts periodically during 2009.

 

Except as discussed above, there were no changes inour internal controls over financial reporting during the quarter ending June 30,2009 that have materially affected, or are reasonably likely to materiallyaffect, our internal controls over financial reporting.

 

In preparation of our financial statements as of andfor the period ended June 30, 2009, management believes that our internalcontrols over these processes are operating and effective.

 

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**PART II. OTHER INFORMATION**

 

**ITEM 1.****                              ****LEGAL PROCEEDING**

 

See Note 14 to the Notes to Condensed ConsolidatedFinancial Statements in Part I, Item 1.

 

**ITEM 1A.****                     ****RISK FACTORS**

 

**Risk Factors Related to Our Business**

 

Our operations and financial results are subject to variousrisks and uncertainties, that are described in Item 1A of the Company’s annualreport on Form 10-K for the fiscal year 2008, that could adversely affectour business, financial condition, results of operations and trading price ofour common stock. Additionally, management has noted that, based on currentprojections, if certain orders are not received and shipped in the thirdquarter, the Company may not meet its financial covenants under the LoanAgreement with Bank of America for the third quarter. In such event, theCompany intends to attempt to obtain a waiver of noncompliance from the lender,failing which the lender could declare the Company in default under the LoanAgreement. There can be no assurance that the Company will be able to obtain suchwaiver.

 

**ITEM 2.****                              ****UNREGISTERED SALES OFSECURITIES AND USE OF PROCEEDS**

 

N/A.

 

**ITEM 3.****                              ****DEFAULTS UPON SENIORSECURITIES**

 

N/A.

 

**ITEM 4.****                               ****SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS.**

 

Weheld our Annual Meeting of Stockholders on May 27, 2009**.**

 

At the meeting,stockholders elected the two directors listed below to serve until the annualstockholders’ meeting in 2012, or until their respective successors are electedand qualified.  Out of the 26,372,672eligible votes, 22,575,668 votes were cast at the meeting either by proxiessolicited in accordance with Regulation 14A under the Securities Act of 1934,or by security holders voting in person. In the case of directors, abstentionsare treated as votes withheld and are included in the table.

 
| **Name of Director** | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|----------------------|------------|---------------|------------|--------------------|------------|
| Edward H.  Bersoff   |       | 18,254,347    |       | 4,321,528          |       |
| Bernard C.  Bailey   |       | 17,687,595    |       | 4,888,073          |       |

 

The other directors whoseterms of office continued after the meeting were Robert L. Barnett, Veronica A.Haggart, Michael E. Jalbert, Mark S. Newman and Thomas R. Thomsen.

 

Also at the meeting, thestockholders voted on a proposal to amend the Company’s 2005 Omnibus IncentiveCompensation Plan to increase the maximum number of shares which may be grantedto any one participant in any fiscal year from 100,000 to 350,000.  The following table shows the vote tabulationfor the shares represented at the meeting:

 
| **Proposal**                                                                                                                                                                        | ** ** | **Votes For** | ** ** | **Votes  Against** | ** ** | **Votes  Abstaining** | ** ** | **Broker Non-Votes** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|------------|--------------------|------------|-----------------------|------------|----------------------|------------|
|                                                                                                                                                                                |       |          |       |               |       |                  |       |                 |       |
| Approval of an amendment to the 2005 Omnibus Incentive  Compensation Plan to increase the maximum number of shares which may be  granted to any one participant in any fiscal year. |       | 9,109,792     |       | 4,419,143          |       | 76,748                |       | 8,969,985            |       |

 

**ITEM 5.****                              ****OTHER INFORMATION**

 

N/A

 

**ITEM 6.****                              ****EXHIBITS**

 

The following exhibitsare filed herewith:

 

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| **Exhibit No.** | ** ** | **Description**                                                                                                        |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                   |
| 10.1 +               |       | Amendment to the EFJ, Inc. 2005 Omnibus  Incentive Compensation Plan                                              |
|                 |       |                                                                                                                   |
| 11.1                 |       | Computation of net income (loss) per share                                                                             |
|                 |       |                                                                                                                   |
| 31.1                 |       | Chief Executive Officer’s Certification of Report on  Form 10-Q for the Quarter Ending June 30, 2009    |
|                 |       |                                                                                                                   |
| 31.2                 |       | Chief Financial Officer’s Certification of Report on  Form 10-Q for the Quarter Ending June 30, 2009    |
|                 |       |                                                                                                                   |
| 32.1                 |       | Written certification of Chief Executive Officer,  dated August 6, 2008, pursuant to 18 U.S.C. Section 1350. |
|                 |       |                                                                                                                   |
| 32.2                 |       | Written certification of Chief Financial Officer,  dated August 6, 2008, pursuant to 18 U.S.C. Section 1350. |

 

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+ Management contract or compensatory plan orarrangement.

 

**SIGNATURE**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, as amended, the registranthas duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.

 
|                                      | EF JOHNSON TECHNOLOGIES, INC. |
|-------------------------------------------|-------------------------------|
|                                      |                          |   |
|                                      |                          |   |
| **Date:   August 6, 2009** | By:                           | **/s/ Jana Ahlfinger Bell** |
|                                      |                          | Jana Ahlfinger Bell |
|                                      |                          | Executive Vice  President and Chief Financial Officer |
|                                      |                          | (Principal Financial  and Accounting Officer) |

 

27

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