** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549-1004**

 

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**Form 10-Q**

** **

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**(Mark One)**

 

**x****               Quarterly reportpursuant to Section 13 or 15(d) of the Securities Exchange Act of1934**

 

**FOR THEQUARTERLY PERIOD ENDED June 30, 2010**

** **

**or**

 

**o****                  Transitionreport pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934**

 

**For the transition period from             to             **

 

**Commission File Number 0-21681**

 

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**EF JOHNSON TECHNOLOGIES, INC.**

(Exact name of registrant as specified in itscharter)

 

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| **DELAWARE**                    | ** ** | **47-0801192**      |
|---------------------------------|------------|---------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer    |
| incorporation or organization)  |       | Identification No.) |

 

**1440 CORPORATE DRIVE**

**IRVING,TEXAS 75038**

(Address of principal executive offices andzip code)

 

**(972)819-0700**

(Registrant’s telephone number, includingarea 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 checkmark whether the registrant has submitted electronically and posted on itscorporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of thischapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files). Yes  o     No  o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of 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) |   |                             |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  YES o  NO x

 

Asof August 3, 2010, 26,555,280 shares of the Registrant’s Common Stock wereoutstanding.

 

 

 

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**PART I. FINANCIAL INFORMATION**

 

**ITEM 1.****                             ****FINANCIAL STATEMENTS**

 

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

**CONDENSED CONSOLIDATED BALANCE SHEETS**

June 30, 2010 and December 31, 2009

(Unaudited and in thousands, except share and per share data)

 
| ** **                                                                                                                                                                                | ** ** | **June 30, 2010** | ** ** | **December 31,  2009** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                |       |                   |       |                        |       |
| Current assets:                                                                                                                                                                           |       |                   |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                 |       | $                      | 12,292     |                        | $          | 16,030 |   |
| Restricted cash                                                                                                                                                                           |       | 2,783                  |       | 5,032                       |       |
| Accounts receivable, net of allowance for returns  and doubtful accounts of $1,645 and $1,490, respectively                                                                               |       | 9,148                  |       | 7,477                       |       |
| Receivables - other                                                                                                                                                                       |       | 551                    |       | 796                         |       |
| Cost in excess of billings on uncompleted  contracts                                                                                                                                      |       | 4,532                  |       | 5,096                       |       |
| Inventories, net                                                                                                                                                                          |       | 29,153                 |       | 31,295                      |       |
| Prepaid expenses                                                                                                                                                                          |       | 1,430                  |       | 912                         |       |
|                                                                                                                                                                                      |       |                   |       |                        |       |
| Total current assets                                                                                                                                                                      |       | 59,889                 |       | 66,638                      |       |
| Property, plant and equipment, net                                                                                                                                                        |       | 3,891                  |       | 4,425                       |       |
| Goodwill                                                                                                                                                                                  |       | 5,126                  |       | 5,126                       |       |
| Other intangible assets, net of accumulated  amortization                                                                                                                                 |       | 7,284                  |       | 7,778                       |       |
| Other assets                                                                                                                                                                              |       | 59                     |       | 178                         |       |
|                                                                                                                                                                                      |       |                   |       |                        |       |
| **TOTAL ASSETS**                                                                                                                                                                          |       | $                      | 76,249     |                        | $          | 84,145 |   |
|                                                                                                                                                                                      |       |                   |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                             |       |                   |       |                        |       |
| Current liabilities:                                                                                                                                                                      |       |                   |       |                        |       |
| Current portion of long-term debt obligations                                                                                                                                             |       | $                      | 5,002      |                        | $          | 15,476 |   |
| Accounts payable                                                                                                                                                                          |       | 9,187                  |       | 8,470                       |       |
| Accrued expenses                                                                                                                                                                          |       | 7,231                  |       | 7,754                       |       |
| Billings in excess of cost on uncompleted  contracts                                                                                                                                      |       | 4,160                  |       | 3,610                       |       |
| Deferred revenues                                                                                                                                                                         |       | 693                    |       | 1,118                       |       |
|                                                                                                                                                                                      |       |                   |       |                        |       |
| Total current liabilities                                                                                                                                                                 |       | 26,273                 |       | 36,428                      |       |
| Deferred income taxes                                                                                                                                                                     |       | 631                    |       | 631                         |       |
| Other liabilities                                                                                                                                                                         |       | 1,657                  |       | 715                         |       |
|                                                                                                                                                                                      |       |                   |       |                        |       |
| **TOTAL LIABILITIES**                                                                                                                                                                     |       | 28,561                 |       | 37,774                      |       |
|                                                                                                                                                                                      |       |                   |       |                        |       |
| 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, 26,516,679 and 26,477,611 issued and outstanding as of  June 30, 2010 and December 31, 2009, respectively) |       | 264                    |       | 264                         |       |
| Additional paid-in capital                                                                                                                                                                |       | 156,175                |       | 155,795                     |       |
| Accumulated other comprehensive loss                                                                                                                                                      |       | —                 |       | (470                        | )          |
| Accumulated deficit                                                                                                                                                                       |       | (108,616               | )          | (109,089                    | )          |
| Treasury stock (124,743 and 118,989 shares at cost  at June 30, 2010 and December 31, 2009)                                                                                     |       | (135                   | )          | (129                        | )          |
|                                                                                                                                                                                      |       |                   |       |                        |       |
| **TOTAL STOCKHOLDERS’ EQUITY**                                                                                                                                                       |       | 47,688                 |       | 46,371                      |       |
|                                                                                                                                                                                      |       |                   |       |                        |       |
| **TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                                                                      |       | $                      | 76,249     |                        | $          | 84,145 |   |

 

See accompanying notes to the condensed consolidated financialstatements.

 

2

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

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

For the three and six months ended June 30, 2010 and 2009

(Unaudited and in thousands, except share and per share data)

 
| ** **                                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                     | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                     | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                     | ** ** | ** **             | ** ** | **(as adjusted)**    | ** ** | ** ** | ** ** | **(as adjusted)** | ** ** |
| Revenues                                       |       | $                      | 25,696     |                 | $          | 29,876 |   | $ | 55,028 |   | $ | 51,957 |   |
| Cost  of sales                                 |       | 15,229                 |       | 17,538               |       | 34,144 |   | 32,269 |   |
|                                           |       |                   |       |                 |       |   |   |   |   |
| Gross  profit                                  |       | 10,467                 |       | 12,338               |       | 20,884 |   | 19,688 |   |
|                                           |       |                   |       |                 |       |   |   |   |   |
| Operating  expenses:                           |       |                   |       |                 |       |   |   |   |   |
| Research  and development                      |       | 2,321                  |       | 3,105                |       | 4,686 |   | 6,436 |   |
| Sales  and marketing                           |       | 1,893                  |       | 2,433                |       | 3,988 |   | 4,909 |   |
| General  and administrative                    |       | 5,303                  |       | 5,329                |       | 10,389 |   | 10,752 |   |
| Amortization  of intangibles                   |       | 247                    |       | 244                  |       | 494 |   | 490 |   |
| Escrow  fund settlement                        |       | —                 |       | —               |       | — |   | (2,804 | ) |
|                                           |       |                   |       |                 |       |   |   |   |   |
| Total  operating expenses                      |       | 9,764                  |       | 11,111               |       | 19,557 |   | 19,783 |   |
|                                           |       |                   |       |                 |       |   |   |   |   |
| Income  (loss) from operations                 |       | 703                    |       | 1,227                |       | 1,327 |   | (95 | ) |
|                                           |       |                   |       |                 |       |   |   |   |   |
| Interest  expense, net                         |       | (420                   | )          | (352                 | )          | (854 | ) | (636 | ) |
|                                           |       |                   |       |                 |       |   |   |   |   |
| Income  (loss) before income taxes             |       | 283                    |       | 875                  |       | 473 |   | (731 | ) |
|                                           |       |                   |       |                 |       |   |   |   |   |
| Income  tax (expense)                          |       | —                 |       | —               |       | — |   | — |   |
|                                           |       |                   |       |                 |       |   |   |   |   |
| Net  income (loss)                             |       | $                      | 283        |                 | $          | 875 |   | $ | 473 |   | $ | (731 | ) |
|                                           |       |                   |       |                 |       |   |   |   |   |
| Net  income (loss) per share — Basic      |       | $                      | 0.01       |                 | $          | 0.03 |   | $ | 0.02 |   | $ | (0.03 | ) |
|                                           |       |                   |       |                 |       |   |   |   |   |
| Net  income (loss) per share — Diluted    |       | $                      | 0.01       |                 | $          | 0.03 |   | $ | 0.02 |   | $ | (0.03 | ) |
|                                           |       |                   |       |                 |       |   |   |   |   |
| Weighted  average common shares — Basic   |       | 26,515,235             |       | 26,540,418           |       | 26,500,311 |   | 26,462,612 |   |
|                                           |       |                   |       |                 |       |   |   |   |   |
| Weighted  average common shares — Diluted |       | 26,794,153             |       | 27,008,852           |       | 26,786,404 |   | 26,462,612 |   |

 

See accompanying notes to the condensed consolidated financialstatements.

 

3

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

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

Six months ended June 30, 2010 and 2009

(Unaudited and in thousands)

 
| ** **                                                                                 | ** ** | **2010**   | ** ** | **2009**          | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                                                                 | ** ** | ** ** | ** ** | **(as adjusted)** | ** ** |
| Cash  flows from operating activities:                                                     |       |       |       |              |       |
| Net  income (loss)                                                                         |       | $          |       | 473               |       | $ |   | (731 | ) |
| Adjustments  to reconcile net loss to net cash provided by (used in) operating activities: |       |       |       |              |       |
|                                                                                       |       |       |       |              |       |
| Provision  for returns and doubtful accounts                                               |       | 155        |       | (71               | )          |
| Depreciation  and amortization                                                             |       | 1,673      |       | 1,922             |       |
| Recognition  of deferred gain                                                              |       | (43        | )          | (47               | )          |
| Stock-based  compensation                                                                  |       | 354        |       | 865               |       |
| Changes  in operating assets and liabilities:                                              |       |       |       |              |       |
| Accounts  receivable                                                                       |       | (1,826     | )          | (3,326            | )          |
| Accounts  receivable from related parties                                                  |       | —     |       | 905               |       |
| Receivables  - other                                                                       |       | 245        |       | 199               |       |
| Cost  in excess of billings on uncompleted contracts                                       |       | 564        |       | 2,237             |       |
| Inventories                                                                                |       | 2,142      |       | 2,835             |       |
| Prepaid  expenses and other                                                                |       | (399       | )          | 97                |       |
| Accounts  payable                                                                          |       | 717        |       | (3,058            | )          |
| Accrued  and other liabilities                                                             |       | (480       | )          | 103               |       |
| Billings  in excess of cost on uncompleted contracts                                       |       | 550        |       | 179               |       |
| Deferred  revenues                                                                         |       | 516        |       | (388              | )          |
|                                                                                       |       |       |       |              |       |
| Total  adjustments                                                                         |       | 4,168      |       | 2,452             |       |
|                                                                                       |       |       |       |              |       |
| Net  cash provided by operating activities                                                 |       | 4,641      |       | 1,721             |       |
|                                                                                       |       |       |       |              |       |
| Cash  flows from investing activities:                                                     |       |       |       |              |       |
| Purchase  of property, plant and equipment                                                 |       | (645       | )          | (472              | )          |
| Other  assets                                                                              |       | —     |       | 2                 |       |
|                                                                                       |       |       |       |              |       |
| Net  cash used in investing activities                                                     |       | (645       | )          | (470              | )          |
|                                                                                       |       |       |       |              |       |
| Cash  flows from financing activities:                                                     |       |       |       |              |       |
| (Increase)  decrease in restricted cash related to term loan                               |       | 2,249      |       | (3,007            | )          |
| Principal  payments on long-term debt                                                      |       | (10,003    | )          | (5                | )          |
| Proceeds  from issuances of common stock                                                   |       | 26         |       | 31                |       |
| Purchase  of treasury stock                                                                |       | (6         | )          | (86               | )          |
|                                                                                       |       |       |       |              |       |
| Net  cash used in financing activities                                                     |       | (7,734     | )          | (3,067            | )          |
|                                                                                       |       |       |       |              |       |
| Net  decrease in cash and cash equivalents                                                 |       | (3,738     | )          | (1,816            | )          |
| Cash  and cash equivalents, beginning of period                                            |       | 16,030     |       | 11,267            |       |
|                                                                                       |       |       |       |              |       |
| Cash  and cash equivalents, end of period                                                  |       | $          |       | 12,292            |       | $ |   | 9,451 |   |

 

**Supplemental Disclosure of Cash Flow Information:**

TheCompany paid interest of $847 and $659 during six months ended June 30,2010 and 2009, respectively.

TheCompany paid income taxes of $67 and $79 during six months ended June 30,2010 and 2009, respectively.

 

See accompanying notes to the condensed consolidated financialstatements.

 

4

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

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Three and six months ended June 30, 2010 and 2009**

**(Unaudited)**

 

**1.****       ****GENERAL**

 

Thecondensed consolidated balance sheet of EF Johnson Technologies, Inc., atDecember 31, 2009, presented within this Report on Form 10-Q, hasbeen derived from audited consolidated financial statements at that date. Thecondensed consolidated financial statements for the three and six  months ended June 30, 2010 and 2009 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, 2009. The results of operations and cash flows for the threeand six  months ended June 30, 2010are not necessarily indicative of the results for any other period or theentire fiscal year ending December 31, 2010.

 

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.

 

OnApril 1, 2009, Transcrypt International, Inc. merged into E.F.Johnson Company.

 

TheCompany entered into an Agreement and Plan of Merger (the “Original MergerAgreement”) dated as of May 15, 2010, with FP-EF Holding Corporation, aDelaware corporation (“Parent”), and FP-EF Corporation, a Delaware corporationand a wholly-owned subsidiary of Parent (“Merger Sub”), as amended by thatAmendment to Agreement and Plan of Merger dated June 19, 2010 (the “Amendment,”together with the Original Merger Agreement, the “Merger Agreement”). TheMerger Agreement provides that, upon the terms and subject to the conditionsset forth in the Merger Agreement, the Merger Sub will merge with and into theCompany (the “Merger”), with the Company continuing as the survivingcorporation (“Surviving Corporation”) and as a wholly-owned subsidiary ofParent.  Parent is an affiliate of Francisco Partners II, L.P., a globaltechnology-focused private equity fund.

 

Pursuantto the terms of the Merger Agreement, stockholders will receive $1.50 per sharein cash for their shares of stock of the Company, at which time the Companywill be privately held. Consummation of the Merger is subject to customaryconditions, including, among others, (i) approval of the Company’sstockholders, (ii) expiration or termination of the applicableHart-Scott-Rodino Act waiting period, if applicable, (iii) absence of anyorder or injunction prohibiting the consummation of the Merger,(iv) subject to certain exceptions, the accuracy of representations andwarranties with respect to the Company’s business and compliance by the Companywith its covenants contained in the Merger Agreement, and (v) stockholdersowning no more than 10% of the Company’s outstanding common stock dissentingfrom the Merger and seeking appraisal rights.

 

TheMerger Agreement contains certain termination rights for both the Company andParent, and further provides that, in connection with the termination of theMerger Agreement under specified circumstances, the Company will be required topay Parent a termination fee of $1.5 million and/or reimburse certainout-of-pocket expenses up to $1.0 million.  Additionally, the Company’sonly recourse if Parent breaches the Merger Agreement or the Company terminatesthe Merger Agreement in certain circumstances is the right to receive a reversetermination fee from Parent of $3.5 million and up to $1.0 million asreimbursement for certain of the Company’s out-of-pocket expenses.  TheCompany cannot seek equitable relief to enforce Parent to consummate theMerger.

 

Parent and Merger Sub haverepresented and warranted that they will have sufficient financing toconsummate the Merger and there is no financing condition to closing. Additionally, Francisco Partners II, L.P. and Francisco Partners Parallel FundII, L.P., affiliates of Parent, have delivered to the Company a limitedguarantee with respect to the payment of the Parent Termination Fee andout-of-pocket expenses of the Company.

 

5

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

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Three and six months ended June 30, 2010 and 2009**

**(Unaudited)**

 

**2.****       ****ORGANIZATION AND CONSOLIDATION**

 

Weare a provider of secure wireless solutions that are sold to: (1) domesticand foreign public safety / public service entities, (2) federal, stateand local governmental agencies, including the Departments of Defense andHomeland Security, 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 (basestations or repeaters);

 

·                  infrastructureequipment and systems;

 

·                  secureencryption technologies for proprietary wireless radios;

 

·                  customizedwireless network centric products and systems to the federal governmentprimarily under government funded Small Business Innovative Research (SBIR)programs; and

 

·                  niche hardwareand secure software technologies for the WLAN markets primarily in thegovernment and industrial controls sectors.

 

Our products are marketed under the “EFJohnson,” “3eTI”and “Transcrypt” brandnames.

 

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. In orderto be competitive in the public safety/public service market that has movedtowards convergent telecommunications solutions with demand forinteroperability and the continued transition from analog to digital platforms,the Company is organized in a single centralized corporate structure. In lightof the converged telecommunication markets and our corporate structure, theCompany has one segment to report.

 

**3.****       ****BUSINESS CONDITION AND LIQUIDITY**

 

TheCompany has incurred net losses of $12.2 million, $20.9 million and$41.1 million for the years ended December 31, 2009, 2008 and 2007,respectively. The Company generated net cash and cash equivalents of$4.8 million (net of restricted cash) in 2009, but used net cash and cashequivalents of $3.7 million (net of the $10.0 million term loan payment) in thefirst half of 2010. Additionally, the Company used net cash and cashequivalents of $4.4 million and $7.2 million in fiscal years 2008 and2007, respectively. The Company was not in compliance with certain of thefinancial covenants of its Revolving Line of Credit Loan Agreement, Term LoanAgreement and Security Agreement, as amended (the “Loan Agreement”) with Bankof America, N.A. for the quarter ending December 31, 2009. The Companyexecuted an amendment to the Loan Agreement effective March 1, 2010 whichwaived these covenant violations on a one-time basis, but the amendment alsoincluded additional restrictions and further limited our access to liquidity(see Note 11).

 

Asof March 31, 2010, the Company had $15.0 million due on June 30, 2010under the term loan portion of the Loan Agreement. The Company had pledged $3.0million to Bank of America, which is shown as Restricted Cash on our balancesheet as of March 31, 2010 that partially offset the term loan.

 

TheCompany did not anticipate that it would have sufficient cash on hand to payoff the term loan when due, without dedicating all or substantially all of ourcash flow from operations to the payment of our indebtedness. The bank alsoindicated that it would not renew the loan agreement with terms favorable tothe Company. As a result, the Company developed and implemented specific actionplans to improve profitability and resolve this liquidly matter in the firsthalf of 2010 including the following: i) flattening the organizationalstructure and reducing employee and operational expenses in January 2010,and ii)  retaining the services of an outside investment banking firm andto explore options available to the Company to refinance the debt, or raiseadditional funds through private equity or debt financing, sales of assets, orother strategic alternatives.

 

Asmore fully disclosed in Note 1 above, on May 15, 2010, the Company enteredinto the Original Merger Agreement  whichwas subsequently amended on June 19, 2010.

 

OnMay 15, 2010, the Company entered into a Seventh Amendment (the “SeventhAmendment”) to the Loan Agreement that extended the maturity of the LoanAgreement until August 31, 2010, in order to allow the Company toconsummate the Merger. The bank also waived compliance with certain financialcovenants contained in the Loan Agreement for the Company’s fiscal quarterending June 30, 2010, on a one-time basis. In consideration of the bank’s

 

6

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

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Three and six months ended June 30, 2010 and 2009**

**(Unaudited)**

 

agreement,the Company agreed to pay down the outstanding principal balance of the termloan portion of the Loan Agreement from $15.0 million to $5.0 million onJune 17, 2010. The parties further amended the Loan Agreement to increasethe revolving line of credit from $3.75 million to $6.0 million effectiveJune 17, 2010.  All future advances under the Loan Agreement willcontinue to be subject to the bank’s discretion.  The Seventh Amendmentfurther requires the Company to continue to provide additional financialreporting to the bank on a monthly basis through the maturity of the loans.

 

OnJune 17, 2010, the Company paid down the outstanding principal balance ofthe term loan portion of the Loan Agreement from $15.0 million to $5.0 millionas required by the Seventh Amendment. The Company authorized the bank toapply $5.75 million of funds held by the bank in a pledged account that reducedthe outstanding principal balance of the term loan as of June 30, 2010.The Company has a remaining cash balance of $0.75 million pledged to Bank ofAmerica that is shown as part of the Restricted Cash on our balance sheet ascollateral for the outstanding letter of credit. As of June 30, 2010, theCompany had $5.25 million available under its existing line of credit(subject to the bank’s discretion) net of the letter of credit outstanding for$0.75 million and had unrestricted cash of approximately $12.3 million.

 

Theaccompanying financial statements have been prepared assuming that the Companywill continue as a going concern. The financial statements do not include anyadjustments to reflect the possible future effects on the recoverability and classificationof assets or the amounts and classifications of liabilities that may resultshould the Company be unable to continue as a going concern.

 

**4.****       ****RETROSPECTIVEADOPTION OF NEW ACCOUNTING GUIDANCE**

 

In September 2009, the Financial AccountingStandards Board (“FASB”) amended the accounting standards related to revenuerecognition for arrangements with multiple deliverables (“new accountingguidance”). The new accounting guidance permits prospective or retrospectiveadoption, and the Company elected to retrospectively adopt as of January 1,2009 during the fourth quarter of 2009.

 

Prior to 2009, the Companyhad not provided a significant number of optional extended warranties; andtherefore, the Company determined that the deferral of revenue associated withoptional extended warranties was insignificant in prior years.

 

The new accounting guidancegenerally requires the Company to account for the sale of products and optionalextended warranties as separate deliverables. The first deliverable is the hardwarerecognized at the time of delivery, and the second deliverable is the optionalextended warranty recognized ratably over the period benefited. The newaccounting guidance requires the Company to estimate a stand-alone sellingprice for the optional extended warranty, defer that amount as deferred revenueand recognize the revenue ratably over the period benefited.

 

The Company had the optionof adopting the new accounting guidance at the start of the fiscal year on aprospective basis or at an interim period on a retrospective basis and electedretrospective adoption. Retrospective adoption required the Company to reviseits previously issued 2009 quarterly interim financial statements as if the newaccounting guidance had been applied from the beginning of the fiscal year.

 

7

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

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Three and six months ended June 30, 2010 and 2009**

**(Unaudited)**

 

Thefollowing table unaudited (in thousands, except per share amounts) presents theeffects of the retrospective adoption of the new accounting guidance as of January 1,2009 to the Company’s previously reported Condensed Consolidated Statements ofOperations for the three and six months ended June 30, 2009:

 
| ** **                                   | ** ** | **As previously  reported  Three Months  Ended  June 30, 2009** | ** ** | **Adjustment** | ** ** | **As adjusted  Three Months  Ended June 30,  2009** | ** ** | **As previously  reported Six  Months Ended  June 30,  2009** | ** ** | **Adjustment** | ** ** | **As adjusted Six  Months Ended  June 30,  2009** | ** ** |
|----------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------|------------|----------------------------------------------------------|------------|--------------------------------------------------------------------|------------|----------------|------------|--------------------------------------------------------|------------|
| ** **                                   | ** ** | ** **                                                           | ** ** | ** **     | ** ** | ** **                                               | ** ** | ** **                                                         | ** ** | ** **     | ** ** | ** **                                             | ** ** |
| **Revenues**                                 |       | $                                                                    | 30,129     |           | $          | (253                                                     | )          | $                                                                  | 29,876     |           | $          | 52,558                                                 |       | $ | (601 | ) | $ | 51,957 |   |
| Net income (loss) before income taxes        |       | $                                                                    | 1,128      |           | $          | (253                                                     | )          | $                                                                  | 875        |           | $          | (130                                                   | )          | $ | (601 | ) | $ | (731 | ) |
| **Net income (loss)**                        |       | $                                                                    | 1,128      |           | $          | (253                                                     | )          | $                                                                  | 875        |           | $          | (130                                                   | )          | $ | (601 | ) | $ | (731 | ) |
|                                         |       |                                                                 |       |           |       |                                                     |       |                                                               |       |           |       |                                                   |       |
| Net income (loss) per share—basic       |       | $                                                                    | 0.04       |           | $          | (0.01                                                    | )          | $                                                                  | 0.03       |           | $          | (0.00                                                  | )          | $ | (0.02 | ) | $ | (0.03 | ) |
|                                         |       |                                                                 |       |           |       |                                                     |       |                                                               |       |           |       |                                                   |       |
| Net income (loss) per share—diluted     |       | $                                                                    | 0.04       |           | $          | (0.01                                                    | )          | $                                                                  | 0.03       |           | $          | (0.00                                                  | )          | $ | (0.02 | ) | $ | (0.03 | ) |
|                                         |       |                                                                 |       |           |       |                                                     |       |                                                               |       |           |       |                                                   |       |
| Weighted average common shares— basic   |       | 26,540                                                               |       | 26,540         |       | 26,540                                                   |       | 26,463                                                             |       | 26,463         |       | 26,463                                                 |       |
|                                         |       |                                                                 |       |           |       |                                                     |       |                                                               |       |           |       |                                                   |       |
| Weighted average common shares— diluted |       | 27,009                                                               |       | 27,009         |       | 27,009                                                   |       | 26,463                                                             |       | 26,463         |       | 26,463                                                 |       |

 

**5.****       ****NET INCOME(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”), restrictedstock grants and restricted stock units (collectively “Incentive Shares”). Forthe three and six  months ended June 30,2010 and the three months ended June 30, 2009, outstanding incentiveshares with exercise prices lower than the average market price of the commonstock for the period were considered common stock equivalents and were dilutivein the calculation of the diluted weighted average common shares. Outstandingincentive shares that had exercise prices higher than the average market priceof the common stock for the period were considered anti-dilutive and excludedfrom the calculation of diluted weighted average common shares. For the sixmonths ended June 30, 2009 all outstanding incentive shares wereconsidered anti-dilutive due to the net loss for the period end.  The outstanding incentive shares that areconsidered dilutive and anti-dilutive are as follows:

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                  | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                  | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| Incentive  shares with dilutive effect      |       | 278,918                |       | 468,164              |       | 286,093 |   | — |   |
| Incentive  shares with anti-dilutive effect |       | 901,596                |       | 1,312,529            |       | 906,400 |   | 1,823,742 |   |
| Outstanding  incentive shares               |       | 1,180,514              |       | 1,780,693            |       | 1,192,493 |   | 1,823,742 |   |

 

Weuse the treasury stock method to calculate diluted weighted average commonshares, as if all such options were outstanding for the periods presented.

 

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

 

Weuse the Black-Scholes option pricing model to determine the fair value of allstock option grants and stock satisfied stock appreciation rights (“SSAR’s”)(collectively “Options”). For the three and six months ended June 30,2010, we recognized compensation expense of $0.1 million and $0.2 million,respectively, related to options and $0.1 million and virtually zero, respectively,related to restricted stock grants and restricted stock units.  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 ofcompensation expense was recognized related to equity grants made in the firstquarter of 2009 to certain named executive officers associated withperformance-based incentives earned for meeting certain operational, newproduct introductions and other personal goals.

 

8

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

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Three and six months ended June 30, 2010 and 2009**

**(Unaudited)**

 

**7.****       ****ESCROW FUND SETTLEMENT**

 

OnJanuary 13, 2009, the Company entered into a Settlement Agreement andMutual Release (the “Settlement Agreement”) settling a claim made by theCompany against the escrow fund established in connection with the acquisitionof 3eTI by the Company in 2006.  Pursuant to the Agreement and Plan ofMerger (the “3eTI Merger Agreement”), dated July 10, 2006, by and amongthe Company, 3eTI, Avanti Acquisition Corp., Chih-Hsiang Li, as Stockholders’Agent, and Steven Chen, James Whang, Chih-Hsiang Li and AEPCO, Inc., $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 3eTI Merger Agreement.  In August 2008, the Companymade a claim against the escrow fund for damages arising out of certain allegedbreaches of representations and warranties contained in the 3eTI Merger Agreement.

 

Pursuantto the terms of the Settlement Agreement, the Company received onJanuary 16, 2009, approximately $2.8 million, inclusive of interest, outof the escrow fund.  The remaining balance of the escrow fund (orapproximately $1.1 million, inclusive of interest) was paid out to the formerstockholders of 3eTI pursuant to the terms of the 3eTI Merger Agreement. The Settlement Agreement also contains a mutual release of liability for claimsrelated to the acquisition of 3eTI by the Company.

 

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.

 

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

 

OnJuly 19, 2006, we entered into an interest rate swap agreement to manageinterest costs and risks associated with changing interest rates, not forspeculative or trading purposes. The interest rate swap agreement terminated onJune 30, 2010. The interest rate swap was designated as a cash flow hedgeand was recorded in the consolidated financial statements at fair value.Changes in the fair value of the swap were recorded in AccumulatedComprehensive Loss in the balance sheet as the derivative was assessed aseffectively hedged. Changes in the fair value of the swap would have been  reclassified to other income (expense) to theextent the hedging instrument is determined to be ineffective.

 

Theinterest rate swap agreement effectively converted 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 paid 5.64% andthe counterparty paid LIBOR on a monthly basis. The cumulative net unrealized loss was brought down to zero as of June 30,2010.  Previously the cumulative netunrealized loss was included in the long term debt obligations and accumulatedother comprehensive income in the consolidated balance sheet. The following isa summary of comprehensive loss (in thousands):

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                   | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                   | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                   | ** ** | ** **                       | ** ** | **(as adjusted)**              | ** ** | ** ** | ** ** | **(as adjusted)** | ** ** |
| Net income (loss)                            |       | $                                | 283        |                           | $          | 875 |   | $ | 473 |   | $ | (731 | ) |
| Reclassification to interest expense         |       | (239                             | )          | (198                           | )          | (333 | ) | (390 | ) |
| Fair value adjustment for interest rate swap |       | 510                              |       | 353                            |       | 803 |   | 664 |   |
| Comprehensive income (loss)                  |       | $                                | 554        |                           | $          | 1,030 |   | $ | 943 |   | $ | (457 | ) |

 

9

----

 

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

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Three and six months ended June 30, 2010 and 2009**

**(Unaudited)**

 

**9.****       ****INVENTORIES**

** **

Thefollowing is a summary of inventories (in thousands):

 
| ** **                 | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|----------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Raw materials and supplies |       | $                           | 6,981      |                            | $          | 6,773 |   |
| Work in progress           |       | 1,014                       |       | 742                             |       |
| Finished goods             |       | 21,986                      |       | 23,621                          |       |
| Service inventories        |       | 1,454                       |       | 1,696                           |       |
|                       |       | 31,435                      |       | 32,832                          |       |
| Reserve for obsolescence   |       | (2,282                      | )          | (1,537                          | )          |
| Total inventories          |       | $                           | 29,153     |                            | $          | 31,295 |   |

 

**10.****      ****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 existing technology, customer relationships,license and covenants not-to-compete, are amortized over their useful life on astraight-line basis. Intangible assets consisting of trademark and trade nameand certifications are not subject to amortization.

 

Weperformed fair value-based impairment tests at December 31, 2009 andconcluded that no impairment of the related goodwill or trade name hadoccurred.

 

Noevents occurred during the six months ended June 30, 2010 and 2009,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$0.3 million and $0.2 million  for thethree months ended June 30, 2010 and June 30, 2009,respectively.  Amortization expense,related to intangible assets which are subject to amortization, was $0.5million for the six months ended June 30, 2010 and June 30, 2009,respectively.  Intangible assets consistof the following as of the dates indicated (in thousands):

 
| ** **                                     | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                                     | ** ** | **Gross**              | ** ** | ** **                 | ** ** | **Net** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Net** | ** ** |
| ** **                                     | ** ** | **Amount**             | ** ** | **Impairment**             | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Impairment** | ** ** | **Amount** | ** ** |
|                                           |       |                   |       |                       |       |   |   |   |   |   |   |   |   |
| Intangible assets not subject to amortization: |       |                   |       |                       |       |   |   |   |   |   |   |   |   |
| Goodwill                                       |       | $                      | 5,126      |                       | $          | — |   | $ | 5,126 |   | $ | 5,126 |   | $ | — |   | $ | 5,126 |   |
| Trademarks                                     |       | 2,044                  |       | —                     |       | 2,044 |   | 2,044 |   | — |   | 2,044 |   |
| Certifications                                 |       | 1,230                  |       | —                     |       | 1,230 |   | 1,230 |   | — |   | 1,230 |   |
|                                           |       | $                      | 8,400      |                       | $          | — |   | $ | 8,400 |   | $ | 8,400 |   | $ | — |   | $ | 8,400 |   |

 
| ** **                                  | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|---------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                                  | ** ** | **Gross**              | ** ** | ** **                 | ** ** | **Accumulated** | ** ** | **Net** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | **Net** | ** ** |
| ** **                                  | ** ** | **Amount**             | ** ** | **Impairment**             | ** ** | **Amortization** | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Impairment** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
|                                        |       |                   |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Intangible  assets subject to amortization: |       |                   |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Existing  technology                        |       | $                      | 6,190      |                       | $          | — |   | $ | (3,493 | ) | $ | 2,697 |   | $ | 6,190 |   | $ | — |   | $ | (3,218 | ) | $ | 2,972 |   |
| Customer  relationships                     |       | 3,756                  |       | —                     |       | (2,545 | ) | 1,211 |   | 3,756 |   | — |   | (2,333 | ) | 1,423 |   |
| Licenses                                    |       | 159                    |       | —                     |       | (159 | ) | — |   | 159 |   | — |   | (159 | ) | — |   |
| Covenant  not-to-compete                    |       | 400                    |       | —                     |       | (400 | ) | — |   | 400 |   | — |   | (400 | ) | — |   |
| Trademarks/Patents                          |       | 209                    |       | —                     |       | (107 | ) | 102 |   | 209 |   | — |   | (100 | ) | 109 |   |
|                                        |       | $                      | 10,714     |                       | $          | — |   | $ | (6,704 | ) | $ | 4,010 |   | $ | 10,714 |   | $ | — |   | $ | (6,210 | ) | $ | 4,504 |   |

 

10

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

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Three and six months ended June 30, 2010 and 2009**

**(Unaudited)**

 

**11.****      ****NOTE PAYABLE AND LINE OF CREDIT**

 

Weamended our Loan Agreement with Bank of America in July 2006 to increaseour revolving line of credit of $15.0 million and include a term loan of $15.0million. Both borrowings bear interest at a variable rate based on the LondonInterbank Offered Rate (“LIBOR”) plus a margin (“LIBOR Margin”). The LIBOR Marginwas 500 basis points at June 30, 2010 and 400 basis points at June 30,2009. The interest rate of 5.35 % and 4.32% were in effect at June 30,2010 and 2009, respectively. As discussed below, in conjunction with theexecution of the Merger Agreement an amendment to the Loan Agreement wasexecuted on May 15, 2010 that extended the expiration date from June 30,2010 to August 31, 2010.

 

The$15.0 million term loan was fully funded and used to finance the acquisition of3eTI. The Company did not borrow against the revolving line during 2009 orduring the six months ended June 30, 2010. There was $0.75 million open letters of credit under our line of creditat June 30, 2010 and 2009. The total available credit under the line ofcredit was approximately $5.25 million and $3.1 million as of June 30,2010 and December 31, 2009, respectively. As discussed in more detailbelow, the maximum that we can borrow under the revolving credit line is $6.0million through August 31, 2010.

 

TheLoan Agreement provides for customary affirmative and negative covenants,including maintenance of corporate existence and certain reportingrequirements, as well as limitations on debt, liens, fundamental changes,acquisitions, investments, loans, guarantees, use of proceeds and capitalexpenditures. In addition, the Loan Agreement contains certain financialcovenants including a maximum ratio of funded debt to EBITDA and a fixed chargecoverage ratio. The Loan Agreement also provides for events of default thatwould permit the lender to accelerate the loans upon their occurrence. Ascollateral for the obligations under the Loan Agreement the Lender has asecurity interest in substantially all assets of the borrowers, includingaccounts receivable, inventories and general intangibles.

 

Asnoted in our Form 10-K for the period ending December 31, 2009, wewere not in compliance with certain of the financial covenants of the LoanAgreement for the quarter ended December 31, 2009. As a result, effectiveMarch 1, 2010, we executed an amendment to the Loan Agreement whereby Bankof America waived such financial covenant defaults on a one-time basis, waivedcompliance with such financial covenants for the Company’s first quarter of2010, and further amended the Loan Agreement to, among other things, (i) lowerthe revolving line of credit from $10.0 million to $3.75 million, (ii) makeall future advances under the line subject to the lender’s discretion, (iii) furtherlimit our ability to obtain letters of credit, (iv) require us to pledgeadditional cash collateral totaling $3.5 million for the remaining term of theloan agreement no later than June 15, 2010, and (v) require us toprovide additional financial reporting to the bank on a monthly basis.  Failure to comply with any of these terms couldconstitute an event of default that would permit the lender to accelerate theloans upon their occurrence, which could have a material adverse effect on ouroperating results and cash flows.

 

OnMay 15, 2010, the Company entered into a Seventh Amendment to the LoanAgreement with Bank of America that extended the maturity of the Loan Agreementuntil August 31, 2010, in order to allow the Company to consummate theMerger. The bank also waived compliance with certain financial covenantscontained in the Loan Agreement for the Company’s fiscal quarter endingJune 30, 2010, on a one-time basis. In consideration of the bank’s agreement, the Company agreed to pay downthe outstanding principal balance of the term loan portion of the LoanAgreement from $15.0 million to $5.0 million on June 17, 2010.  The parties further amended the LoanAgreement to increase the revolving line of credit from $3.75 million to $6.0million effective June 17, 2010.  All future advances under the LoanAgreement will continue to be subject to the bank’s discretion.  TheSeventh Amendment further requires the Company to continue to provideadditional financial reporting to the bank on a monthly basis through thematurity of the loan.  On June 17,2010, the Company paid down the outstanding principal balance of the term loanportion of the Loan Agreement from $15.0 million to $5.0 million as requiredunder the Seventh Amendment.  Under the terms of the Seventh Amendment,the Company authorized the bank to apply $5.75 million of funds held by thebank in a pledged account that reduced the outstanding principal balance of theterm loan.

 

**12.****      ****INCOME TAXES**

 

Wedid not record a tax benefit or provision for the six months ended June 30,2010 and 2009 primarily due to our fully reserved deferred tax assets requiringno further provision for income taxes for each respective period end. TheCompany has unrecognized tax benefits of approximately $0.5 million that didnot change during the six months ended June 30, 2010

 

11

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

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Three and six months ended June 30, 2010 and 2009**

**(Unaudited)**

 

relatingto carry forward of business credits. In addition, future changes in theunrecognized tax benefit will have no net impact on the effective tax rate dueto the existence of the valuation allowance.

 

Asof June 30, 2010, we have no accrual requirement for interest or penaltiesrelated to uncertain tax positions since the tax benefits have not beenincluded in prior income tax return filings.

 

Thetax years 2005-2009 remain open to examination by the major taxingjurisdictions to which we are subject. Additionally, upon inclusion of the NOLand R&D credit carry forward tax benefits from tax years 1996 to 2004 infuture tax returns, the related tax benefit for the period in which the benefitarose may be subject to examination.

 

**13.****      ****WARRANTY COSTS**

 

Weprovide a one-to-three year warranty on substantially all of our product sales,depending upon certain terms and conditions of the sale, and estimate futurewarranty claims based on historical experience and anticipated costs to beincurred over the life of the warranty. Warranty expense is accrued at the timeof sale with an additional accrual for specific items after the sale when theirexistence is known and amounts are determinable. A reconciliation of changes inour accrued warranty reserve as of June 30, 2010 is as follows (inthousands):

 
| ** **                     | ** ** | **Balance at**                  | ** ** | **Charged to** | ** ** | **Deduction /** | ** ** | **Balance at**    | ** ** |
|--------------------------------|------------|---------------------------------|------------|---------------------|------------|----------------------|------------|-------------------|------------|
| ** **                     | ** ** | **December 31, 2009** | ** ** | **Expense**         | ** ** | **Expenditures**     | ** ** | **June 30, 2010** | ** ** |
| Allowance for Warranty Reserve |       | $                               | 2,600      |                | 234        |                 | 234        |              | $          | 2,600 |   |
|                                |            |                                 |            |                     |            |                      |            |                   |            |  |  |

 

**14.****      ****FAIR VALUEOF FINANCIAL INSTRUMENTS**

 

Thecarrying amounts of our current assets and liabilities approximate fair valuebecause of the short maturity of these instruments. The carrying amount of ourterm loan approximates fair value as it is based on prevailing market rates ofinterest. The fair value of our interest rate swap agreement represents theamount required to settle the agreement using prevailing market rates ofinterest.

 

TheFASB authoritative guidance relating to the accounting for financial assets andliabilities which defines fair value, establishes a framework for measuringfair value, provides guidance regarding the manner in determining fair value ofa financial asset when there is no active market for such asset at themeasurement date and expands disclosures about fair value measurements.

 

Theauthoritative guidance defines fair value as the price that would be receivedfor an asset or paid to transfer a liability (an exit price) in the principalor most advantageous market for the asset or liability in an orderlytransaction between market participants on the measurement date. There are threelevels of inputs that may be used to measure fair value:

 

·                  Level 1—quotedprices in active markets for identical assets and liabilities.

 

·                  Level 2—observableinputs other than quoted prices in active markets for identical assets andliabilities.

 

·                  Level 3—unobservableinputs in which there is little or no market data available, which require thereporting entity to develop its own assumptions.

 

12

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

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Three and six months ended June 30, 2010 and 2009**

**(Unaudited)**

 

As of June 30, 2010, the interest rate swapagreement expired resulting in no further requirement to carry a liability inthe consolidated balance sheet.  Thefollowing table provides the liabilities carried at fair value measured on arecurring basis as of June 30, 2009 (in thousands):

 
| ** **                                                 | ** ** | **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, 2009 |       | $                              | 814        |                                                  | $          | —                                                |       | $                                                | 814        |   | $ | — |   |
|                                                            |            |                                |            |                                                       |            |                                                       |            |                                                  |            |  |  |  |  |

 

**15.****      ****COMMITMENTS AND CONTINGENCIES**

 

Weare involved in certain legal proceedings incidental to the normal conduct ofour business. At this time, we do not believe that any liabilities relating tosuch legal proceedings are likely to be, individually or in the aggregate,material to our business, financial condition, results of operations or cashflows.

 

TheCompany has accrued legal settlement fees in the amount of $150,000 as of June 30,2010. The total we have accrued in regards to all legal proceedings as of December 31,2009 was $32,000.

 

Inthe normal course of our business activities related to sales of wireless radiosystems to local and state governmental entities, we are required under certaincontracts with various government authorities to provide letters of credit orperformance or bid bonds that may be drawn upon if we fail to perform under ourcontracts. There was a $0.75 million letter of credit under our line of creditas of June 30, 2010 and December 31, 2009. Performance and bid bonds,which expire on various dates, totaled $2.4 million at June 30, 2010 andDecember 31, 2009. No bonds had been drawn upon at either date. ** **The majority of bonds relate to the contractawarded in May 2008 by the Government of Yukon, Canada that iscollateralized by restricted cash of $2.0 million.

 

**LitigationRelating to the Merger**

 

Sincethe announcement of the Merger, two putative stockholder class action lawsuitshave been filed against the Company and the members of the Board of Directors. *Bruce L. Deichl and P. Elayne Wishart v. EF JohnsonTechnologies, Inc., et al.,*was filed in the District Court ofDallas County, Texas on May 21, 2010 and *EdwinMcKean, Raul Quino v. Michael Jalbert, et al.*was filed in theDistrict Court of Dallas County, Texas on May 26, 2010. The Plaintiffs inthe Deichl and McKean lawsuits filed a consolidated amended petition on June 30,2010. The consolidated petition names the Company, the members of the Board ofDirectors, Parent and Merger Sub as defendants. The consolidated petitionasserts generally that the members of the Board of Directors breached theirfiduciary duties by, among other things, failing to maximize stockholder valuein the Merger and by failing to provide adequate disclosures in the Company’s June 23,2010 preliminary proxy statement. The consolidated petition further assertsthat the Company, Parent and Merger Sub aided and abetted those alleged breachesof fiduciary duties. The consolidated petition seeks, among other relief, anorder enjoining the consummation of the Merger, rescissory damages orrescission of the Merger if it is consummated, other damages in an unspecifiedamount, and an award of attorneys’ fees and costs of litigation. The Company,Francisco Partners, Parent and Merger Sub believe that these lawsuits arewithout merit and intend to defend them vigorously.

 

**16.****      ****COSTSASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES**

 

OnNovember 15, 2007, the Company committed to an organizational plan (the “2007Plan”) to shift from three divisions to one integrated corporate structurefocused on secure wireless communications for government and industrialcustomers. The Plan resulted in improved efficiencies in our operations,reduced our infrastructure costs and supported a new technology roadmap drivingtoward a streamlined and more effective structure. Implementation of the Planincluded senior and middle management changes as well as staff reductions designedto eliminate redundant positions and reflect the Company’s decision toconsolidate operations and move production from three locations into acentralized operations and outsourcing program in the Dallas/Fort Wortharea.  All exit costs for the 2007 planhad been incurred by March 31, 2009.

 

OnDecember 31, 2009, the Company committed to a work force reduction plan(the “2009 Plan”) to realign certain executive and senior management positionsas well as staff reductions resulting from the fourth quarter 2009 performanceof land mobile radio product sales. The 2009 Plan was implemented in the firstquarter of 2010.

 

13

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

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Three and six months ended June 30, 2010 and 2009**

**(Unaudited)**

 

Coststhat were directly associated with the 2009 Plan were being recorded as “restructuringcosts” and were included in general and administrative expenses. Other coststhat do not qualify as restructuring costs are being classified as otheroperating expenses or costs of goods sold in the Company’s consolidatedstatements of operations.

 

Thetiming of the recognition of costs associated with this move were determined inaccordance the FASB authoritative guidance relating to the accounting for**costs associatedwith exit or disposal activities and provides that a liability for acost associated with an exit or disposal activity shall be recognized at itsfair value 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.

 

Thefollowing table summarizes the estimates and actual exit costs incurred as of June 30,2009 for the 2007 Plan (in thousands):

 
| ** **                    | ** ** | **Original  amount  expected to  be incurred** | ** ** | **Additional  costs incurred** | ** ** | **Total  amount  expected to  be incurred** | ** ** | **Amount  incurred as of  June 30, 2009** | ** ** | **Remaining  amount to  be incurred** | ** ** |
|-------------------------------|------------|------------------------------------------------|------------|--------------------------------|------------|---------------------------------------------|------------|------------------------------------------------|------------|---------------------------------------|------------|
| One-time termination benefits |       | $                                              | 951        |                           | $          | —                                      |       | $                                              | 951        |                                  | $          | 951 |   | $ | — |   |
| Other costs                   |       | 139                                            |       | 59                             |       | 198                                         |       | 198                                            |       | —                                |       |
| Total costs                   |       | $                                              | 1,090      |                           | $          | 59                                          |       | $                                              | 1,149      |                                  | $          | 1,149 |   | $ | — |   |

 

Thefollowing table summarizes the beginning and ending liability reserve for exitcosts as of December 31, 2009 for the 2007 Plan (in thousands):

 
| ** **                    | ** ** | **Balance at  December 31,  2008** | ** ** | **Cash  Payments** | ** ** | **Balance at  December 31,  2009** | ** ** |
|-------------------------------|------------|-----------------------------------------|------------|--------------------|------------|-----------------------------------------|------------|
| One-time termination benefits |       | $                                       | 12         |               | $          | 12                                      |       | $ | — |   |
| Other costs                   |       | —                                  |       | —             |       | —                                  |       |
| Total costs                   |       | $                                       | 12         |               | $          | 12                                      |       | $ | — |   |

 

The following table summarizes the estimates andactual exit costs incurred as of June 30, 2010 for the 2009 Plan (inthousands):. 

 
| ** **                    | ** ** | **Original  amount  expected to be  incurred and  accrued as of  December 31,  2009** | ** ** | **Amount  incurred  as of  June 30,  2010** | ** ** | **Remaining  amount to  be incurred  as of June  30, 2010** | ** ** |
|-------------------------------|------------|--------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------------|------------|
| One-time termination benefits |       | $                                                                                          | 311        |                                             | $          | 233                                                         |       | $ | 78 |   |
| Other costs                   |       | 25                                                                                         |       | 25                                               |       | —                                                      |       |
| Total costs                   |       | $                                                                                          | 336        |                                             | $          | 258                                                         |       | $ | 78 |   |

 

**17.****      ****RELATEDPARTY TRANSACTIONS**

 

Forthe period October 2005 through June 2009, DRS Technologies, Inc.(“DRS”) was considered a related party due to Mr. Newman, Chairman,President and Chief Executive Officer of DRS, who also served as a director ofthe Company during this period. Effective June 5, 2009, Mr. Newmanresigned as a Director of the Company due to potential conflicts of

 

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

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Three and six months ended June 30, 2010 and 2009**

**(Unaudited)**

 

interestrelating to his position with DRS. Transactions with DRS subsequent to June 5,2009 would not be considered related party transactions.

 

Duringthe three months ended March 31, 2009, DRS and its related subsidiaries (partof Finmeccanica) acquiredapproximately $0.4 million of products from EF Johnson.

 

**18.****      ****RECENTLYISSUED ACCOUNTING STANDARDS**

 

InJanuary 2010, the FASB issued FASB ASU 2010-06, *Improving Disclosures About Fair Value Measurements,*whichamends FASB ASC 820. The updated guidance requires new disclosures aboutrecurring or nonrecurring fair-value measurements including significanttransfers into and out of Level 1 and Level 2 fair-value measurements andinformation on purchases, sales, issuances, and settlements on a gross basis inthe reconciliation of Level 3 fair-value measurements. The guidance alsoclarified existing fair-value measurement disclosure guidance about the levelof disaggregation, inputs, and valuation techniques. The guidance became effectivefor interim and annual reporting periods beginning on or after December 15,2009, with an exception for the disclosures of purchases, sales, issuances andsettlements on the roll-forward of activity in Level 3 fair value measurements.Those disclosures will be effective for fiscal years beginning after December 15,2010 and for interim periods within those fiscal years.  We do not anticipate the adoption of thisguidance to have a material impact on our condensed consolidated financialstatements.

 

InApril 2010, the FASB issued ASU No. 2010-17, “Milestone Method ofRevenue Recognition.” This ASU allows entities to make a policy election to usethe milestone method of revenue recognition and provides guidance on defining amilestone and guidance on the criteria that should be met for applying themilestone method. The scope of this ASU is limited to the transactionsinvolving milestones relating to research and development deliverables or unitsof accounting under which a vendor satisfies its performance obligations over aperiod of time, and when a portion or all of the consideration is contingentupon uncertain future events or circumstances, except when the guidance in theASU conflicts with the guidance provided elsewhere in Topic 605, Revenue Recognition.The guidance includes enhanced disclosure requirements about each arrangement,individual milestones and related contingent consideration, information aboutsubstantive milestones and factors considered in the determination. Theamendments in this ASU are effective prospectively to milestones achieved infiscal years, and interim periods within those years, beginning after June 15,2010. Early application and retrospective application are permitted. We haveevaluated this new ASU and have determined that it does not have a significantimpact on the determination or reporting of our financial results as of June 30,2010. The Company is required to review certain new contracts pertinent toTopic 605, Revenue Recognition, and related ASU’s on an on-going basis.

 

**19.****      ****SUBSEQUENT EVENTS**

 

Wehave evaluated events occurring subsequent to the date of our financialstatements and through the date our financial statements were issued. We haverecognized the effects of all subsequent events that provide additional evidenceabout conditions that existed at our balance sheet date as of June 30,2010, 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 ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Discussionsof certain matters contained in this Quarterly Report on Form 10-Q mayconstitute forward-looking statements under Section 27A of the SecuritiesAct of 1933, as amended, and Section 21E of the Securities Exchange Act of1934, as amended, (the “Exchange Act”). These forward-looking statements arebased upon our current expectations, estimates and projections about ourbusiness and our industry, and reflect our beliefs and assumptions based uponinformation available to us at the date of this report. In some cases, you canidentify 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 relateto, among other things, the results of our product development efforts, futuresales and expense levels, our future financial condition, liquidity, andbusiness prospects generally, the impact of our relocation of operatingfacilities, and outsourcing of manufacturing on our operating results,perceived opportunities in the marketplace for our products, and our otherbusiness plans for the future.

 

Theseforward-looking statements are subject to certain risks and uncertainties thatcould cause the actual results, performance and outcomes to differ materiallyfrom those expressed or implied in these forward-looking statements due to anumber of risk factors including, but not limited to, the risks discussed inthe 2009 Annual Report on Form 10-K under Item 1A “Risk Factors” andin Part II of this report on Form 10-Q under Item 1A “RiskFactors.” We caution readers not to rely on these forward-looking statements,which reflect management’s analysis only as of the date of this quarterlyreport. We undertake no obligation to revise or update any forward-lookingstatement for any reason except as required by law.

 

Thefollowing discussion is intended to provide a better understanding of thesignificant changes in trends relating to our financial condition and resultsof operations. Management’s Discussion and Analysis of Financial Condition andResults of Operations should be read in conjunction with the accompanyingCondensed Consolidated Financial Statements and Notes thereto.

 

**Overview**

 

Inorder to be competitive in the public safety/public service market that hasmoved towards convergent telecommunications solutions with demand forinteroperability and the continued transition from analog to digital platforms,the Company is organized in a single centralized corporate structure. In lightof the converged telecommunication markets and our corporate structure, theCompany has one segment to report.

 

Wedesign, develop, market and support wireless radios and wireless communicationsinfrastructure and systems for digital and analog platforms. In addition, weoffer encryption technologies for wireless voice, video and data communicationsand we also design, develop, market and support secure wireless networkingsolutions that include Wi-Fi products, mesh networking, access points, andclient infrastructure products. The Company’s customers include first respondersin public safety and public service, the federal government, and industrialorganizations.

 

Dueto the timing of orders and seasonality, our quarterly results fluctuate. Weexperience seasonality in our results in part due to governmental customerspending patterns that are influenced by government fiscal year-end budgets andappropriations. The unpredictable sales cycle coupled with launching newproducts and solutions can also cause variations from quarter to quarter.

 

TheCompany entered into an Agreement and Plan of Merger (the “Original MergerAgreement”) dated as of May 15, 2010, with FP-EF Holding Corporation, aDelaware corporation (“Parent”), and FP-EF Corporation, a Delaware corporationand a wholly-owned subsidiary of Parent (“Merger Sub”), as amended by thatAmendment to Agreement and Plan of Merger dated June 19, 2010 (the “Amendment,”together with the Original Merger Agreement, the “Merger Agreement”). TheMerger Agreement provides that, upon the terms and subject to the conditionsset forth in the Merger Agreement, the Merger Sub will merge with and into theCompany (the “Merger”), with the Company continuing as the survivingcorporation (“Surviving Corporation”) and as a wholly-owned subsidiary ofParent.  Parent is an affiliate of Francisco Partners II, L.P., a globaltechnology-focused private equity fund.

 

Pursuantto the terms of the Merger Agreement, stockholders will receive $1.50 per sharein cash for their shares of stock of the Company, at which time the Companywill be privately held. Consummation of the Merger is subject to customaryconditions, including, among others, (i) approval of the Company’sstockholders, (ii) expiration or termination of the applicableHart-Scott-Rodino Act waiting period, if applicable, (iii) absence of anyorder or injunction prohibiting the consummation of the Merger,(iv) subject to certain exceptions, the accuracy of representations andwarranties with respect to the Company’s business and compliance by the Companywith its covenants contained in the Merger Agreement, and (v) stockholdersowning no more than 10% of the Company’s outstanding common stock dissentingfrom the Merger and seeking appraisal rights.

 

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TheMerger Agreement contains certain termination rights for both the Company andParent, and further provides that, in connection with the termination of theMerger Agreement under specified circumstances, the Company will be required topay Parent a termination fee of $1.5 million and/or reimburse certainout-of-pocket expenses up to $1.0 million.  Additionally, the Company’sonly recourse if Parent breaches the Merger Agreement or the Company terminatesthe Merger Agreement in certain circumstances is the right to receive a reversetermination fee from Parent of $3.5 million and up to $1.0 million asreimbursement for certain of the Company’s out-of-pocket expenses.  TheCompany cannot seek equitable relief to enforce Parent to consummate theMerger.

 

Parentand Merger Sub have represented and warranted that they will have sufficientfinancing to consummate the Merger and there is no financing condition toclosing.  Additionally, Francisco Partners II, L.P. and Francisco PartnersParallel Fund II, L.P., affiliates of Parent, have delivered to the Company alimited guarantee with respect to the payment of the Parent Termination Fee andout-of-pocket expenses of the Company.

 

*Our Products and Solutions*

 

Ourwireless radio offerings are primarily digital solutions designed to operate inboth analog and digital system environments. Our products and systems are basedon industry standards designed to enhance interoperability among systems,improve bandwidth efficiency, and integrate voice and data communications.

 

TheLand Mobile Radio (“LMR”) industry utilizes two-way wireless communicationsthrough wireless networks, which include infrastructure components such as basestations, repeaters, transmitters and receivers, network switches and portableand mobile two-way communication radios. Individual users operate portablehand-held radios and vehicular-mounted radios in their wireless communicationssystem. Utilizing licensed RF spectrum, the customer owns and operates thewireless communication system that is networked by linking together the infrastructurecomponents. We develop customer solutions, which leverage the customer’swireless system and wireless radios with customer specific or enterprise wideapplications.

 

Themajority of our revenues are derived from the sale of wireless radio products.Our federal, state and local governmental agency customers are increasinglydemanding interoperable, secured communications products and systems. Webelieve this demand has created opportunities for us as we believe we arepositioned to provide these products and systems. As a result, we expect tocontinue to allocate a majority of our on-going research and developmentexpenditures to wireless radio features and enhancements, infrastructurecomponents and system development efforts.

 

Weprovide the domestic and international LMR industry with secure encryptiontechnologies for analog wireless radios. These products are specificallydesigned to prevent unauthorized access to sensitive voice communications inparts of the world where wireless radio systems remain analog and securityneeds are high. These products are sold as aftermarket add-on components orembedded components for existing analog radios and systems.

 

Wealso design, develop, market and support customized wireless network centricproducts and systems which include secure Wi-Fi products, including meshnetworking, access point, bridge, and client infrastructure products, as wellas security software. We provide sensor network solutions through ourInfoMatics® middleware, which enable sensors and databases to communicate datato pertinent personnel for command and control applications in near real-time.These products and solutions utilize FIPS 140-2 validated wireless products,802.11 wireless networking (WIFI) solutions, mesh networking and conditionsbased and location based telematics solutions.

 

*Our Salesand Distribution Approach*

 

Ourproducts and systems are sold through multiple channels including a directsales force, dealers, distributors, and strategic partnering arrangements. Weutilize our dealer network to assist in installing, servicing, selling anddistributing our products. We also generate revenues through the federalgovernment under government funded research and development Small BusinessInnovative Research programs (“SBIR”). Additionally, we offer our products tocommercial, non-governmental users.

 

Muchof our business is obtained through submission of formal competitive bids. Ourgovernmental customers generally can specify the terms, conditions and form ofthe contract. Our government business is subject to government fundingdecisions and contract types can vary widely, including cost plus, fixedpriced, indefinite delivery/indefinite quantity (“IDIQ”), and government-wideacquisition contracts with the General Services Administration (“GSA”), whichrequire pre-qualification of vendors and allows government customers to moreeasily procure our products and systems.

 

Dependingon the size and complexity of customer specifications and requirements,products can be shipped to the customer in a relatively short period of time(typically 90 days) or with complex integrations and various delivery dates,orders can span multiple years. For example, our longer-term system contractsand government services revenues are generated under customer contracts andagreements for which revenue is recorded under the percentage-of-completionmethod.

 

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**Description of Operating Accounts**

 

*Revenues*. Revenues consist ofproduct sales, services, and government-funded research and developmentservices and solutions net of returns and allowances. Longer-term system andgovernment services revenues are recognized under the percentage-of-completionmethod.

 

*Cost of Sales.* Cost of sales includescosts of components and materials, labor, depreciation and overhead costsassociated with the production of our products and services, as well asshipping, royalty, inventory reserves, warranty product costs, and incurredcost under sales contracts.

 

*Gross Profit.* Gross profit is netrevenues less the cost of sales and is affected by a number of factors,including competitive pricing, product mix, type of contract and cost ofproducts and services including warranty and inventory reserves and conversioncosts.

 

*Research and Development.* Unreimbursedresearch and development expenses consist primarily of costs associated withresearch and development personnel, materials, and the depreciation of researchand development equipment and facilities. We expense all unreimbursed researchand development costs as they are incurred while all research and developmentexpenses that are reimbursed by our government customers are included as acomponent of cost of sales.

 

*Sales and Marketing.* Sales and marketingexpenses consist primarily of salaries and related costs of sales personnel,including sales commissions and travel expenses, as well as costs ofadvertising, product and program management, public relations and trade showparticipation.

 

*General and Administrative*. General andadministrative expenses consist primarily of salaries and other expensesassociated with our management, post sales operations support, accounting,information systems and administrative functions. This expense also includesthe impact of equity-based compensation expense and costs relating to ouroperating facility moves. Pertinent to 3eTI, accounting for governmentcontracts delineates what is a direct charge allowable to include in contractcosts and what is considered to be an indirect charge reflected as general andadministrative expenses. We consider indirect engineering labor and operatingcosts such as quality, planning, operations, and company fringe benefits,general administrative salaries and other general administrative expenses asgeneral and administrative expense.

 

*Amortization of Intangibles.*    Amortizationof intangibles consist primarily amortization expense associated with thedefinite lived intangibles assets acquired in the 3eTI acquisition. Definitelived intangible assets, consisting of existing technology, customerrelationships, license and covenants not-to-compete, are amortized over theiruseful life on a straight-line basis.

 

*Escrow Fund Settlement.*    Escrowfund settlement consists of funds received associated with the 3eTI reportingunit for settled claims against funds held in an escrow account. The escrowfund reimbursed the Company for 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.

 

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

 

*Provision for Income Taxes.* Provision(benefit) for income taxes includes the increase or decrease in the valuationreserve that is based upon management’s conclusions regarding, among otherconsiderations, our historical operating results and forecasted future earningsover a five year period, our current and expected customer base projections,and technological and competitive factors impacting our current products.Current financial accounting standards require that organizations analyze allpositive and negative evidence relating to deferred tax asset realization,which would include our historical accuracy in forecasting future earnings, aswell as our history of losses incurred within the past three years. Shouldfactors underlying management’s estimates change, future adjustments, eitherpositive or negative, to our valuation allowance may be necessary.

 

**Critical Accounting Policies**

 

Thepreparation of our consolidated financial statements in conformity withaccounting principles generally accepted in the United States of America (GAAP)requires management to make estimates and assumptions that affect amountsreported in our condensed consolidated financial statements and accompanyingnotes. We base our estimates on historical experience and all known facts andcircumstances that we believe are relevant. Actual results may differmaterially from our estimates. We believe the following accounting policies tobe most critical to an understanding of our financial condition and results ofoperations because they require us to make estimates, assumptions and judgmentsabout matters that are inherently uncertain. Our critical accounting estimatesinclude those regarding (1) revenues, (2) receivables, (3) inventories,(4) goodwill and other intangible assets, (5) warranty costs, (6) incometaxes, (7) long-lived assets and (8) stock-based compensation. For adiscussion of the critical accounting estimates, see “Item 7. Management’sDiscussion and Analysis of Financial Condition

 

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andResults of Operations — Critical Accounting Policies” in our Annual Report on Form 10-Kfor the year ended December 31, 2009.

 

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**Results of Operations**

 

Thefollowing table presents certain Condensed Consolidated Statements ofOperations information as a percentage of revenues during the periodsindicated:

 
| ** **                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                        | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                        | ** ** | ** **                       | ** ** | **(as adjusted)**              | ** ** | ** ** | ** ** | **(as adjusted)** | ** ** |
| Revenues                          |       | 100.0                            | %          | 100.0                          | %          | 100.0 | % | 100.0 | % |
| Cost of sales                     |       | 59.3                             |       | 58.7                           |       | 62.0 |   | 62.1 |   |
|                              |       |                             |       |                           |       |   |   |   |   |
| Gross profit                      |       | 40.7                             |       | 41.3                           |       | 38.0 |   | 37.9 |   |
|                              |       |                             |       |                           |       |   |   |   |   |
|                              |       |                             |       |                           |       |   |   |   |   |
| Operating expenses:               |       |                             |       |                           |       |   |   |   |   |
| Research and development          |       | 9.0                              |       | 10.4                           |       | 8.5 |   | 12.4 |   |
| Sales and marketing               |       | 7.4                              |       | 8.1                            |       | 7.2 |   | 9.4 |   |
| General and administrative        |       | 20.6                             |       | 17.8                           |       | 18.9 |   | 20.7 |   |
| Amortization of intangibles       |       | 1.0                              |       | 0.8                            |       | 0.9 |   | 0.9 |   |
| Escrow fund settlement            |       | —                           |       | —                         |       | — |   | (5.4 | ) |
|                              |       |                             |       |                           |       |   |   |   |   |
| Total operating expenses          |       | 38.0                             |       | 37.2                           |       | 35.5 |   | 38.1 |   |
|                              |       |                             |       |                           |       |   |   |   |   |
| Income (loss) from operations     |       | 2.7                              |       | 4.1                            |       | 2.4 |   | (0.2 | ) |
|                              |       |                             |       |                           |       |   |   |   |   |
| Interest expense, net             |       | (1.6                             | )          | (1.2                           | )          | (1.6 | ) | (1.2 | ) |
|                              |       |                             |       |                           |       |   |   |   |   |
| Income (loss) before income taxes |       | 1.1                              |       | 2.9                            |       | 0.9 |   | (1.4 | ) |
|                              |       |                             |       |                           |       |   |   |   |   |
| Income tax (expense)              |       | —                           |       | —                         |       | — |   | — |   |
|                              |       |                             |       |                           |       |   |   |   |   |
| Net Income (loss)                 |       | 1.1                              | %          | 2.9                            | %          | 0.9 | % | (1.4 | )% |

 

**Comparison of the Three Months and Six Months Ended June 30,2010 and 2009**

 

*Revenues.*Our revenues decreased $4.2million, or 14%, to $25.7 million for the three months ended June 30, 2010 from$29.9 million for the same period in 2009. The decline was attributable tolower LMR revenues associated with re-banding projects partially offset byincreases associated with State LMR infrastructure revenues. Our revenuesincreased $3.0 million, or 6%, to $55.0 million for the six months ended June30, 2010 from $52.0 for the same period in 2009.  The increase was attributable to increasedState LMR infrastructure revenues.

 

*Gross Profit.*Our gross profit decreased$1.9 million, or 15%, to $10.4 million in the three months ended June 30, 2010from $12.3 million for the same period in 2009. Gross profit, as a percentageof revenues, or gross margin, was 40.7% for the three months ended June 30,2010, as compared to 41.3% for the same period in 2009. The decrease in grossprofit and gross margin was attributable to lower quarterly revenues andproduct mix.  Our gross profit increased$1.2 million, or 6%, to $20.9 million for the six months ended June 30, 2010from $19.7 million for the same period in 2009. Gross profit, as a percentageof revenues, or gross margin, was 38.0% for the six months ended June 30, 2010,as compared to 37.9% for the same period in 2009. The increase in gross profitfor the first half of 2010 was attributable to overall revenue volume. Weanticipate margins to fluctuate over the remainder of fiscal year 2010 due toproduct mix.

 

*Research and Development.*Research anddevelopment expenses decreased $0.8 million, or 26% to $2.3 million in thethree months ended June 30, 2010 from $3.1 million in the same period in 2009.Research and development expenses as a percentage of revenues decreased to 9.0%in the second quarter of 2010 versus 10.4% for the same period in 2009 mainlydue to controlling costs and a more focused approach for core initiatives.Research and development expenses decreased $1.7 million, or 27% to $4.7million in the six months ended June 30, 2010 from $6.4 million in the sameperiod in 2009. Research and development expenses as a percentage of revenuesdecreased to 8.5% in the first half of 2010 versus 12.4% for the same period in2009. The lower research and development expenses for the first half of 2010are due to the completion of 

 

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certainengineering programs and a more focused R&D approach for our coreinitiatives. We anticipate research and development costs to increase in thesecond half of 2010 as the Company begins work on new core initiatives andprojects.

 

*Sales and Marketing.*Sales and marketing expensesdecreased $0.5 million, or 21%, to $1.9 million in the three months ended June30, 2010 from $2.4 million in the same period in 2009. Sales and marketingexpenses as a percentage of revenues were 7.4% in the second quarter of 2010versus 8.1% for the same period of 2009. The decrease sales and marketingexpenses is mainly attributable to lower headcount and lower sales compensationstructure through the second quarter of 2010. Sales and marketing expensesdecreased $0.9 million, or 18%, to $4.0 million in the six months ended June30, 2010 from $4.9 million in the same period in 2009. Sales and marketingexpenses as a percentage of revenues were 7.2% for the first half of 2010versus 9.4% in the first half of 2009.  Weanticipate sales and marketing expenses to increase in the second half of 2010relating to filling open positions and upcoming marketing initiatives.

 

*General and Administrative.*General andadministrative expenses were flat at $5.3 million for the three months endedJune 30, 2010 and 2009, respectively. General and administrative expensesdecreased slightly by $0.4 million, or 3%, to $10.4 million for the six monthsended June 30, 2010 from $10.8 million for the same period in 2009.

 

*Amortization of Intangibles.*Amortization ofintangibles remained stable at $0.2 for the three months ended June 30, 2010and for the same period in 2009. Amortization of intangibles remained stable at $0.5 for the six monthsended June 30, 2010 and for the same period in 2009.

 

*Escrow fund settlement.* InJanuary 2009, we settled claims under the 2006 3eTI acquisition agreementand received $2.8 million of the funds held in the escrow account establishedin connection with the acquisition. The escrow funds received as part of thesettlement that were not replicated in 2010 were recorded as a reduction ofoperating expense. The settlement was in connection with the acquisition of3eTI 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 3eTI acquisition. 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 3eTI acquisitionagreement. 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.*Interestexpense, net remained relatively flat at $0.4 million in expense for the threemonths ended June 30, 2010 and 2009, respectively.  Interest expense, net increased $0.2 millionto approximately $0.8 million in expense for the six months ended June 30, 2010from $0.6 million for the same period in 2009. The increases were attributableto increased interest rates on the term loan relating to the loan amendmentexecuted in March 2010 as more fully disclosed in “Liquidity and Capital Resources”below.

 

*Provision for Income Taxes.*We did notrecord a tax benefit or provision for either the three months ended June 30,2010 and 2009 primarily due to our fully reserved deferred tax assets requiringno further 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 $0.3 millionfor the three months ended June 30, 2010, reflecting a decrease of $0.6million, as compared to net income of $0.9 million for the same period in 2009.Excluding the $2.8 million received for the escrow fund settlement, the netloss for the three months ended June 30, 2009, would have been $1.9 million.Net income was $0.5 million for the six months ended June 30, 2010, reflectingan increase of $1.2 million, as compared to net loss of ($0.7) million for thesame period in 2009. Excluding the $2.8 million received for the escrow fundsettlement, the net loss for the six months ended June 30, 2009, would havebeen ($3.5) million. The improved operating performance relates to the 6%increase in revenues and lower operating expenses relating to reductions inresearch and development and sales and marketing expenses during 2010.

 

**Liquidity and Capital Resources**

 

TheCompany’s primary sources of liquidity are its cash and cash equivalents whichwere $12.3 million (net of $2.8 million pledged restricted cash) at June 30,2010 and $16.0 million at December 31, 2009 (net of $5.0 millionpledged restricted cash). In June 2010, the Company paid $10.0 million towardsthe $15.0 million term loan leaving a balance of $5.0 million as of June 2010.The Company recognized net income of $0.5 million for the first half of 2010.However, due to the net losses in 2009, 2008 and 2007, we considered the timingof prior year losses and several other key factors in assessing the liquidityrequirements of the Company for the next twelve months.

 

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Managementdeveloped operational cash flow projections which factor in our backlog oforders, timing of receiving and shipping orders, the continued focus on costmanagement, and our historical collection and payment patterns with customersand vendors. The majority of our customers are with the United StatesGovernment, state counties that are rebanding under the FCC and Sprint / Nextelescrowed funds arrangement, state and local agencies and our dealer networksupporting state and local agencies. In several cases, our customer purchasesof products and services are supported by encumbered funds and grants. Whilethis does not provide absolute payment assurance, it does indicatecollectibility is reasonably assured. Management continues to monitor thefinancial condition of our vendors and supply chain noting some impact from thecurrent economic conditions could disrupt our deliveries.

 

TheCompany also has a secured line of credit agreement with Bank of America, N.A.(the “Loan Agreement”), which has been extended to August 31, 2010 as discussedbelow. Borrowings bear interest at a variable rate based on the LondonInterbank Offered Rate (“LIBOR”) plus a margin (“LIBOR Margin”). The LIBORMargin was 500 basis points at June 30, 2010. The effective interest rate atJune 30, 2010 was 5.35 percent. The outstanding balance of the term loanportion of the Loan Agreement was $5.0 million as of June 30, 2010.

 

TheLoan Agreement provides for customary affirmative and negative covenants, includingmaintenance of corporate existence, property and certain reportingrequirements, as well as limitations on debt, liens, fundamental changes,acquisitions, investments, loans, guarantees, use of proceeds and capitalexpenditures. In addition, the Loan Agreement contains certain financialcovenants including a maximum ratio of funded debt to EBITDA and a fixed chargecoverage ratio. The Loan Agreement also provides for events of default thatwould permit the bank to accelerate the loans upon their occurrence. Ascollateral for the obligations under the Loan Agreement, the bank has asecurity interest in substantially all assets of the borrowers, includingaccounts receivable, inventories and general intangibles.

 

TheCompany did not borrow against the revolving line of credit during 2009 orduring the six months ended June 30, 2010. There was $0.75 million of openletters of credit under our line of credit at June 30, 2010 and December 31,2009. The total available credit under the line of credit was $5.25 million and$3.1 million as of June 30, 2010 and December 31, 2009, respectively. Asdiscussed in more detail below, effective with the May 15, 2010 amendment tothe Loan Agreement, the maximum that we can borrow under the revolving creditline has been increased from $3.75 million to $6.0 million after June 17, 2010through August 31, 2010. Any borrowings under the line of credit are at thediscretion of the bank.

 

Asnoted in our Form 10-K for the period ending December, 31, 2009, we werenot in compliance with certain of the financial covenants of the Loan Agreementfor the quarter ended December 31, 2009. As a result, effectiveMarch 1, 2010, we executed an amendment to the Loan Agreement whereby Bankof America waived such financial covenant defaults on a one-time basis, waivedcompliance with such financial covenants for the Company’s first quarter of2010, and further amended the Loan Agreement to, among other things,(i) lower the revolving line of credit from $10.0 million to$3.75 million, (ii) make all future advances under the line subjectto the bank’s discretion, (iii) further limit our ability to obtainletters of credit, (iv) require us to pledge additional cash collateraltotaling $3.5 million for the remaining term of the Loan Agreement nolater than June 15, 2010, and (v) require us to provide additionalfinancial reporting to the bank on a monthly basis.

 

OnMay 15, 2010, the Company entered into a Seventh Amendment (the “SeventhAmendment”) to the Loan Agreement that extended the maturity of the LoanAgreement until August 31, 2010, in order to allow the Company toconsummate the Merger as more fully disclosed in the overview above. The bankalso waived compliance with certain financial covenants contained in the LoanAgreement for the Company’s fiscal quarter ending June 30, 2010, on aone-time basis. In consideration of the bank’s agreement, the Company agreed topay down the outstanding principal balance of the term loan portion of the LoanAgreement from $15.0 million to $5.0 million on June 17, 2010.  The parties further amended the LoanAgreement to increase the revolving line of credit from $3.75 million to $6.0million effective June 17, 2010.  All future advances under the LoanAgreement will continue to be subject to the bank’s discretion.  TheSeventh Amendment further requires the Company to continue to provideadditional financial reporting to the bank on a monthly basis through thematurity of the loans.  On June 17, 2010,the Company paid down the outstanding principal balance of the term loanportion of the Loan Agreement from $15.0 million to $5.0 million as requiredunder the Seventh Amendment.  Under the terms of the Seventh Amendment,the Company authorized the bank to apply $5.75 million of funds held by theLender in a pledged account that reduced the outstanding principal balance ofthe term loan.

 

Asmore fully disclosed in the overview above, the Company entered into theOriginal Merger Agreement on May 15, 2010which was subsequently amended on June19, 2010.

 

Asnoted above, the maturity of the Loan Agreement was extended to August 31, 2010in order for the Company to consummate the Merger. As a result, the$5.0 million remaining balance of the term loan is due and payable in fullon that date. If the Merger is not consummated on that date, the Company doesnot anticipate that it will have sufficient cash on hand on that date to payoff the term loan without dedicating all or substantially all of our cash flowfrom operations to the 

 

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paymentof our indebtedness, thereby substantially reducing the funds available foroperations, working capital, capital expenditures, research and development,sales and marketing initiatives and general corporate or other purposes.

 

Ourcurrent cash flow and capital resources are limited, and we require additionalfunds to pursue our business. We may not be able to secure further financing inthe future. If we are not able to obtain additional financing on reasonableterms, we may not be able to execute our business strategy, conduct ouroperations at the level desired, or even to continue business.

 

Ifwe raise additional funds through further issuances of equity or convertibledebt securities, our existing stockholders could suffer significant dilution intheir percentage ownership of our company, and any new equity securities weissue could have rights, preferences and privileges senior to those of holdersof our common stock. In addition, any debt financing that we may secure in the futurecould have restrictive covenants relating to our capital raising activities andother financial and operational matters, which may make it more difficult forus to obtain additional capital and to pursue business opportunities.

 

Ifwe sell certain assets of the Company to satisfy our obligations, that maymaterially reduce our revenues in the future, which, to the extent not offsetby cost reductions or revenue from new or existing customers, could materiallyreduce our cash flows and adversely affect our financial position. This maylimit our ability to raise capital or fund our operations, working capitalneeds and capital expenditures in the future. See “Part II Other Information,Item 1A. Risk Factors” of this Form 10-Q for an additional discussion ofrisks.

 

*Letters of credits and bonds.*    Inthe normal course of our business activities related to sales of wireless radiosystems to local and state governmental entities, we are required undercontracts with various government authorities to provide letters of credit orperformance or bid bonds that may be drawn upon if we fail to perform under ourcontracts. There was a $0.75 million letter of credit under our line of creditas of June 30, 2010 and December 31, 2009, respectively. Performance andbid bonds, which expire on various dates, totaled $2.4 million at June 30,2010 and December 31, 2009, respectively. No bonds had been drawn upon ateither date. The majority of bonds relate to the contract awarded in May 2008by the Government of Yukon, Canada that is collateralized by restricted cash of$2.0 million.

 

*Net cash from operating activities.*Our operatingactivities provided cash of $4.6 million and $1.7 million in the six monthsended June 30, 2010 and 2009, respectively.

 

Duringthe first half of 2010, operating cash was provided primarily from net incomeof $0.5 million, reductions in inventory, costs in excess of billings and otherreceivables coupled with increases in accounts payable, billings in excess ofcosts, deferred revenues and non-cash depreciation, amortization and stockcompensation all aggregating to $6.8 million. Partially offsetting were uses ofcash relating to increases in accounts receivable and prepaid expenses coupledwith reductions in other accrued liabilities all aggregating to $2.7 million.

 

Duringthe first half of 2009, operating cash was provided primarily from improvedinventory turnover, reduced costs in excess of billings due to increasedcontract billings, collection of related party receivables and non-cash depreciation,amortization and stock compensation aggregating to $9.2 million. Partiallyoffsetting were a net loss of $0.7 million, increases in billed accountsreceivable, a reduction in accounts payable and other liabilities amounting to$6.8 million. Operating cash includes $2.8 million received from the escrowfund settlement.

 

*Net cash from investing activities.* During the sixmonths ended June 30, 2010 and 2009, investing activities used approximately$0.6 million and $0.5 million, respectively, for purchases of property, plantand equipment.

 

*Net cash from financing activities.*During the sixmonths ended June 30, 2010 cash used in financing activities amounted to $7.7million.  The long term debt was paiddown using $10.0 million that was partially offset by a net decrease inrestricted cash of $2.2 million. In accordance with the amended loan agreement,the Company funded $3.5 million in additional pledged cash during the secondquarter of 2010 and transferred $5.75 million from the restricted cash accountto partially pay the term loan down on June 17, 2010. During the six monthsended June 30, 2009, financing activities used cash primarily attributable toestablishing $3.0 million of restricted cash at Bank of America associated withthe loan amendment noted above.

 

*Backlog.* Our Transcrypt-brandedproducts typically have a short turnaround cycle. In contrast, our EFJohnsonproducts and systems, and 3eTI government services contracts, typically have alonger turnaround cycle due to customer system integration and contractdelivery requirements that may span multiple years. Backlog as of June 30, 2010was $52.1 million, compared to a backlog of $70.2 million at December 31,2009 and $49.5 million at June 30, 2009.

 

*Dividend policy.* Since our initial public offering,we have 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 

 

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andcapital requirements, restrictions in financing agreements, if any, businessconditions and other factors that our board of directors deems relevant.

 

**Off-Balance Sheet Arrangements**

 

Aspart of our on-going business, we do not participate in transactions thatgenerate relationships with unconsolidated entities or financial partnerships,such as entities often referred to as structured finance or variable interestentities (“VIE”), that would have been established for the purpose offacilitating off-balance sheet arrangements or other contractually narrow orlimited purposes. As of June 30, 2010, we are not involved in any VIEtransactions and do not have any off-balance sheet arrangements.

 

**Recently Issued Accounting Standards**

 

SeeNote 18 to the Condensed Consolidated Financial Statements in “Part I FinancialInformation, Item 1 Financial Statements” of this Form 10-Q for a fulldescription of recent accounting standards, including the expected dates ofadoption and estimated effects on results of operation and financial condition,which is incorporated herein by reference.

 

**ITEM 3.****         ****QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Weare exposed to certain market risks in the ordinary course of our business.These risks result primarily from changes in interest rates and foreigncurrency exchange rates. We do not currently hold any derivatives or otherfinancial instruments purely for trading or speculative purposes.

 

Ourfinancial instruments consist of cash, cash equivalents, short- and long-terminvestments, trade accounts receivable, accounts payable and long-termobligations. The primary objective of our investment activities is to preserveprincipal while at the same time maximizing yields without increasing risk. Asof June 30, 2010 and December 31, 2009, respectively, we had an investmentportfolio of short-term investments in a variety of interest-bearing moneymarket funds. Due to the short duration of our investment portfolio, ahypothetical 1% change in interest rates would not be material to our financialcondition or results of operations.

 

TheCompany has $5.0 million of variable rate debt outstanding as of June 30,2010, which debt matures on August 31, 2010. The debt is variable based onthe LIBOR rate. Assuming interest rate volatility in the future is similar towhat has been seen in recent years, the Company does not anticipate that shortterm changes in interest rates will materially affect its consolidatedfinancial position, results of operations or cash flows. See “Liquidity andCapital Resources” for further discussion of our financing facilities andcapital structure.

 

Althougha substantial majority of our sales are denominated in U.S. dollars,fluctuations in the value of international currencies relative to the U.S.dollar may affect the price, competitiveness and profitability of our productssold in international markets. Furthermore, the uncertainty of monetaryexchange values has caused, and may in the future cause, some foreign customersto delay new orders or delay payment for existing orders. The Company does notuse financial instruments to hedge foreign currency exchange rate changes.While most international sales are supported by letters of credit or cash inadvance, the purchase of our products by international customers presentsincreased risks, which include:

 

·      unexpected changes in regulatory requirements;

 

·      tariffs and other trade barriers;

 

·      political and economic instability in foreignmarkets;

 

·      difficulties in establishing foreign distributionchannels;

 

·      longer payment cycles or uncertainty in thecollection of accounts receivable;

 

·      increased costs associated with maintaining internationalmarketing 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.

 

Exportof our products is subject to the U.S. Export Administration regulations andsome of our secured communications products require a license or a licenseexception in order to ship internationally. We cannot assure that such 

 

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approvalswill be available to us or our products in the future in a timely manner or atall or that the federal government will not revise its export policies or thelist of products, persons or countries for which export approval is required.Our inability to obtain required export approvals would adversely affect ourinternational sales, which may have a material adverse effect on us. Inaddition, foreign companies not subject to United States export restrictionsmay have a competitive advantage in the international secured communicationsmarket. We cannot predict the impact of these factors on the internationalmarket for our products.

 

**ITEM 4.****         ****CONTROLSAND PROCEDURES**

 

**Disclosure Controls and Procedures**

 

OurChief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) reviewedand evaluated our disclosure controls and procedures, as defined in Rule240.13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended (the “ExchangeAct”) as of the end of the period covered by this report. Based on thisevaluation, our CEO and CFO have concluded that our disclosure controls andprocedures were effective as of the end of the period covered by this report toensure that information required to be disclosed in the reports that we file orsubmit under the Exchange Act is recorded, processed, summarized and reportedwithin the time periods specified in the Securities and Exchange Commission’srules and forms and is accumulated and communicated to our management includingour principal executive and principal financial officer, as appropriate, toallow timely decisions regarding disclosures.

 

**Internal Controls Over Financial Reporting**

 

Asrequired by Rule 13a-15(d) under the Exchange Act, our CEO and CFO, alsoconducted an evaluation of our internal control over financial reporting todetermine whether any change occurred during our most recent fiscal quarterthat has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

        Aspart of our normal operations, we update our internal controls as necessary toaccommodate any modifications to our business processes or accountingprocedures. No change occurred during the most recent fiscal quarter thatmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

Inpreparation of our financial statements as of and for the period ended June 30,2010, management believes that our internal controls over these processes areoperating and effective.

 

**PART II. OTHER INFORMATION**

 

**ITEM 1.****         ****LEGALPROCEEDING**

 

SeeNote 15 to the Condensed Consolidated Financial Statements in “Part I FinancialInformation, Item 1 Financial Statements” of this Form 10-Q for disclosureof legal proceedings and estimated effects on results of operation andfinancial condition, which is incorporated herein by reference.

 

**ITEM 1A.****      ****RISKFACTORS**

 

**Risk Factors Related to Our Business**

 

Our operations and financialresults are subject to various risks and uncertainties, that are described inItem 1A of the Company’s annual report on Form 10-K for the fiscal year 2009,that could adversely affect our business, financial condition, cash flow orresults of operations, as well as adversely affect the value of an investmentin our common stock.

 

The risk factor set forthbelow has been updated from these previously disclosed in the “Risk Factors”section of our annual report on Form 10-K for the fiscal year 2009 with morecurrent information.

 

***Our businesscould be subject to increased risk if the Merger is not consummated.***

 

The Company does notanticipate that it will have sufficient cash on hand to pay off the $5.0 millionterm loan when it comes due on August 31, 2010, without dedicating all orsubstantially all of our cash flow from operations to the payment of ourindebtedness, thereby substantially reducing the funds available foroperations, working capital, capital expenditures, research and development,sales and marketing initiatives and general corporate or other purposes. As aresult, the Company 

 

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explored options availableto it to refinance the debt, or to raise additional funds through privateequity or debt financing, sales of assets, or other strategic alternatives.These efforts resulted in the Company’s entry into the Merger Agreement.

 

In the event the Merger isnot consummated, the Company will be required to pay the remaining outstandingbalance to the Bank on or before August 31, 2010. There can be no assurancethat the Company would be able to obtain a new or extended credit facility uponthe termination of the Loan Agreement. If we raise additional funds throughfurther issuances of equity or convertible debt securities, our existingstockholders could suffer significant dilution in their percentage ownership ofour company, and any new equity securities we issue could have rights,preferences and privileges senior to those of holders of our common stock. Inaddition, any debt financing that we may secure in the future could haverestrictive covenants relating to our capital raising activities and otherfinancial and operational matters, which may make it more difficult for us toobtain additional capital and to pursue business opportunities.

 

If we sell certain assets ofthe Company to satisfy our obligations, that may materially reduce our revenuesin the future, which, to the extent not offset by cost reductions or revenuefrom new or existing customers, could materially reduce our cash flows andadversely affect our financial position. This may limit our ability to raisecapital or fund our operations, working capital needs and capital expendituresin the future. Our current cash flow and capital resources are limited, and werequire additional funds to pursue our business. We may not be able to securefurther financing in the future. If we are not able to obtain additionalfinancing on reasonable terms, we may not be able to execute our businessstrategy, conduct our operations at the level desired, or even to continuebusiness.

 

Our “report of registeredpublic accounting firm” on our Form 10-K for the fiscal year 2009, indicatesthat our recurring losses from operations, working capital deficit and maturingterm loan raise substantial doubt about our ability to continue as a goingconcern.

 

***Failure to complete the Merger for regulatory or other reasons couldadversely affect the Company’s stock price and its future business andfinancial results.***

 

Completion of the Merger isconditioned upon, among other things, the consent of the Company’s stockholdersand the satisfaction of certain conditions related to the Company’sindebtedness and levels of cash on hand at the closing of the Merger. There isno assurance that the Company will be successful in its efforts to obtain suchstockholder approval or meet all of the other conditions. The Company will alsoremain liable for significant transaction costs, including legal, accountingand financial advisory fees. In addition, the Company would have to evaluateits remaining strategic options, which would include the need to refinance itsremaining obligations under its Loan Agreement with Bank of America, N.A. thatis due to be repaid in full on August 31, 2010. Further, the market price ofthe Company’s common stock may reflect various market assumptions as to whetherthe Merger will occur. Consequently, the completion of, or failure to complete,the merger could result in a significant change in the market price of theCompany’s common stock.

 

**ITEM 2.****         ****UNREGISTEREDSALES OF SECURITIES AND USE OF PROCEEDS**

 

N/A.

 

**ITEM 3.****         ****DEFAULTSUPON SENIOR SECURITIES**

 

N/A.

 

**ITEM 4.****          ****RESERVED**

 

N/A

 

**ITEM 5.****         ****OTHERINFORMATION**

 

N/A

 

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

 

The following exhibits arefiled herewith:

 
| **Exhibit No.** | ** ** | **Description**                             |
|----------------------|------------|---------------------------------------------|
|                 |       |                                        |
| 11.1                 |       | Computation of net income  (loss) per share |

 

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| 31.1   |   | Chief Executive Officer’s  Certification of Report on Form 10-Q for the Quarter Ending June 30,  2010    |
|--------|--------|--------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                               |
| 31.2   |   | Chief Financial Officer’s  Certification of Report on Form 10-Q for the Quarter Ending June 30,  2010    |
|   |   |                                                                                                               |
| 32.1   |   | Written certification of  Chief Executive Officer, dated August 6, 2010, pursuant to 18 U.S.C.  Section 1350. |
|   |   |                                                                                                               |
| 32.2   |   | Written certification of  Chief Financial Officer, dated August 6, 2010, pursuant to 18 U.S.C.  Section 1350. |

 

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+ Management contract orcompensatory plan or arrangement.

 

**SIGNATURE**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, as amended, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                                   | EF JOHNSON TECHNOLOGIES,  INC. |
|----------------------------------------|--------------------------------|
|                                   |                           |   |
|                                   |                           |   |
| **Date:  August**6**, 2010** | By:                            | **/s/ Jana Ahlfinger Bell** |
|                                   |                           | Jana Ahlfinger Bell |
|                                   |                           | Executive Vice President  and Chief Financial Officer |
|                                   |                           | (Principal Financial and  Accounting Officer) |

 

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