** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549-1004**

 

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**Form 10-Q**

 

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**(Mark One)**

** **

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

 

**FOR THE QUARTERLY PERIOD ENDED MARCH 31,2010**

 

**or**

 

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

 

**For the transition period from             to            **

 

**CommissionFile Number 0-21681**

 

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**EF JOHNSON TECHNOLOGIES, INC.**

(Exact name ofregistrant as specified in its charter)

 

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

 

**1440CORPORATE DRIVE**

**IRVING,TEXAS 75038**

(Address of principalexecutive offices and zip 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 90days.    YES  x    NO  o

 

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

 

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

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

 

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

 

As of May 4,2010, 26,516,679 shares of the Registrant’s Common Stock were outstanding.

 

 

 

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**PART I. FINANCIAL INFORMATION**

 

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

 

**EFJOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

March 31, 2010 and December 31, 2009

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

 
| ** **                                                                                                                                                                                  | ** ** | **March 31,   2010** | ** ** | **December 31,   2009** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|------------------------------|------------|
| **ASSETS**                                                                                                                                                                                  | ** ** | ** **                | ** ** |                         | ** ** |
| Current assets:                                                                                                                                                                             |       |                      |       |                         |       |
| Cash and cash  equivalents                                                                                                                                                                  |       | $                         | 13,523     |                         | $          | 16,030 |   |
| Restricted cash                                                                                                                                                                             |       | 5,032                     |       | 5,032                        |       |
| Accounts receivable,  net of allowance for returns and doubtful accounts of $1,534 and $1,490,  respectively                                                                                |       | 25,452                    |       | 7,477                        |       |
| Receivables - other                                                                                                                                                                         |       | 613                       |       | 796                          |       |
| Cost in excess of  billings on uncompleted contracts                                                                                                                                        |       | 4,576                     |       | 5,096                        |       |
| Inventories, net                                                                                                                                                                            |       | 28,096                    |       | 31,295                       |       |
| Prepaid expenses                                                                                                                                                                            |       | 1,047                     |       | 912                          |       |
| Total current assets                                                                                                                                                                        |       | 78,339                    |       | 66,638                       |       |
| Property, plant and  equipment, net                                                                                                                                                         |       | 3,888                     |       | 4,425                        |       |
| Goodwill                                                                                                                                                                                    |       | 5,126                     |       | 5,126                        |       |
| Other intangible  assets, net of accumulated amortization                                                                                                                                   |       | 7,531                     |       | 7,778                        |       |
| Other assets                                                                                                                                                                                |       | 178                       |       | 178                          |       |
| **TOTAL  ASSETS**                                                                                                                                                                           |       | $                         | 95,062     |                         | $          | 84,145 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                               |       |                      |       |                         |       |
| Current liabilities:                                                                                                                                                                        |       |                      |       |                         |       |
| Current portion of  long-term debt obligations                                                                                                                                              |       | $                         | 15,275     |                         | $          | 15,476 |   |
| Accounts payable                                                                                                                                                                            |       | 14,596                    |       | 8,470                        |       |
| Accrued expenses                                                                                                                                                                            |       | 7,489                     |       | 7,754                        |       |
| Billings in excess of  cost on uncompleted contracts                                                                                                                                        |       | 7,412                     |       | 3,610                        |       |
| Deferred revenues                                                                                                                                                                           |       | 1,057                     |       | 1,118                        |       |
| Total current  liabilities                                                                                                                                                                  |       | 45,829                    |       | 36,428                       |       |
| Deferred income taxes                                                                                                                                                                       |       | 631                       |       | 631                          |       |
| Other liabilities                                                                                                                                                                           |       | 1,639                     |       | 715                          |       |
| **TOTAL  LIABILITIES**                                                                                                                                                                      |       | 48,099                    |       | 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, 26,486,586 and 26,477,611 issued  and outstanding as of March 31, 2010 and December 31, 2009,  respectively) |       | 264                       |       | 264                          |       |
| Additional paid-in  capital                                                                                                                                                                 |       | 155,998                   |       | 155,795                      |       |
| Accumulated other  comprehensive loss                                                                                                                                                       |       | (271                      | )          | (470                         | )          |
| Accumulated deficit                                                                                                                                                                         |       | (108,899                  | )          | (109,089                     | )          |
| Treasury stock (118,989  and 118,989 shares at cost at March 31, 2010 and December 31, 2009)                                                                                      |       | (129                      | )          | (129                         | )          |
| **TOTAL  STOCKHOLDERS’ EQUITY**                                                                                                                                                        |       | 46,963                    |       | 46,371                       |       |
| **TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                        |       | $                         | 95,062     |                         | $          | 84,145 |   |

 

See accompanying notes to the condensed consolidated financialstatements.

 

2

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**EFJOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

For the three months ended March 31, 2010 and 2009

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

 
| ** **                                     | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------|------------|------------------------|------------|
| ** **                                     | ** ** | **March 31,**     | ** ** |
| ** **                                     | ** ** | **2010**               | ** ** | **2009** | ** ** |
| ** **                                     | ** ** | ** **             | ** ** | **(as adjusted)** | ** ** |
| Revenues                                       |       | $                      | 29,332     |   | $ | 22,081 |   |
| Cost of sales                                  |       | 18,915                 |       | 14,731 |   |
| Gross profit                                   |       | 10,417                 |       | 7,350 |   |
|                                           |       |                   |       |   |   |
| Operating expenses:                            |       |                   |       |   |   |
| Research and  development                      |       | 2,365                  |       | 3,331 |   |
| Sales and marketing                            |       | 2,095                  |       | 2,476 |   |
| General and  administrative                    |       | 5,086                  |       | 5,423 |   |
| Amortization of  intangibles                   |       | 247                    |       | 246 |   |
| Escrow fund settlement                         |       | —                 |       | (2,804 | ) |
| Total operating  expenses                      |       | 9,793                  |       | 8,672 |   |
| Income (loss) from  operations                 |       | 624                    |       | (1,322 | ) |
|                                           |       |                   |       |   |   |
| Interest expense, net                          |       | (434                   | )          | (284 | ) |
| Income (loss) before  income taxes             |       | 190                    |       | (1,606 | ) |
|                                           |       |                   |       |   |   |
| Income tax (expense)                           |       | —                 |       | — |   |
| Net income (loss)                              |       | $                      | 190        |   | $ | (1,606 | ) |
|                                           |       |                   |       |   |   |
| Net income (loss) per  share — Basic      |       | $                      | 0.01       |   | $ | (0.06 | ) |
| Net income (loss) per  share — Diluted    |       | $                      | 0.01       |   | $ | (0.06 | ) |
|                                           |       |                   |       |   |   |
| Weighted average common  shares — Basic   |       | 26,485,220             |       | 26,383,931 |   |
| Weighted average common  shares — Diluted |       | 26,781,866             |       | 26,383,931 |   |

 

See accompanying notes to the condensed consolidated financialstatements.

 

3

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**EFJOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

Three months ended March 31, 2010 and 2009

(Unaudited and in thousands)

 
| ** **                                                                                 | ** ** | **2010**   | ** ** | **2009**          | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                                                                 | ** ** | ** ** | ** ** | **(as adjusted)** | ** ** |
| Cash flows from  operating activities:                                                     |       |       |       |              |       |
| Net income (loss)                                                                          |       | $          | 190        |              | $          | (1,606 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |       |       |       |              |       |
|                                                                                       |       |       |       |              |       |
| Provision for returns  and doubtful accounts                                               |       | 44         |       | 748               |       |
| Depreciation and  amortization                                                             |       | 843        |       | 972               |       |
| Recognition of deferred  gain                                                              |       | (24        | )          | (24               | )          |
| Stock-based  compensation                                                                  |       | 195        |       | 549               |       |
| Changes in operating  assets and liabilities:                                              |       |       |       |              |       |
| Accounts receivable                                                                        |       | (18,019    | )          | (124              | )          |
| Accounts receivable  from related parties                                                  |       | —     |       | 281               |       |
| Receivables - other                                                                        |       | 183        |       | (97               | )          |
| Cost in excess of  billings on uncompleted contracts                                       |       | 520        |       | 82                |       |
| Inventories                                                                                |       | 3,199      |       | 1,083             |       |
| Prepaid expenses and  other                                                                |       | (135       | )          | (199              | )          |
| Accounts payable                                                                           |       | 6,126      |       | (553              | )          |
| Accrued and other  liabilities                                                             |       | (245       | )          | (1,838            | )          |
| Billings in excess of  cost on uncompleted contracts                                       |       | 3,802      |       | 753               |       |
| Deferred revenues                                                                          |       | 863        |       | (222              | )          |
| Total adjustments                                                                          |       | (2,648     | )          | 1,411             |       |
| Net cash used in  operating activities                                                     |       | (2,458     | )          | (195              | )          |
| Cash flows from  investing activities:                                                     |       |       |       |              |       |
| Purchase of property,  plant and equipment                                                 |       | (59        | )          | (296              | )          |
| Net cash used in  investing activities                                                     |       | (59        | )          | (296              | )          |
| Cash flows from  financing activities:                                                     |       |       |       |              |       |
| Increase in restricted  cash related to term loan                                          |       | —     |       | (3,003            | )          |
| Principal payments on  long-term debt                                                      |       | (1         | )          | (2                | )          |
| Proceeds from issuances  of common stock                                                   |       | 11         |       | 19                |       |
| Purchase of treasury  stock                                                                |       | —     |       | (86               | )          |
| Net cash provided by  (used in) financing activities                                       |       | 10         |       | (3,072            | )          |
| Net decrease in cash  and cash equivalents                                                 |       | (2,507     | )          | (3,563            | )          |
| Cash and cash  equivalents, beginning of period                                            |       | 16,030     |       | 11,267            |       |
| Cash and cash  equivalents, end of period                                                  |       | $          | 13,523     |              | $          | 7,704 |   |

 

**Supplemental Disclosure of Cash Flow Information:**

The Company paid interestof $366 and $359 during three months ended March 31, 2010 and 2009,respectively.

The Company paid incometaxes of $43 and $37 during three months ended March 31, 2010 and 2009,respectively.

 

See accompanying notes to the condensed consolidated financialstatements.

 

4

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** **

**EFJOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Threemonths ended March 31, 2010 and 2009**

**(Unaudited)**

 

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

 

Thecondensed consolidated balance sheet of EF Johnson Technologies, Inc., at December 31,2009, presented within this Report on Form 10-Q, has been derived fromaudited consolidated financial statements at that date. The condensedconsolidated financial statements for the three months ended March 31,2010 and 2009 are unaudited. The condensed consolidated financial statementsreflect all normal and recurring accruals and adjustments that, in the opinionof management, are necessary for a fair presentation of the financial position,operating results, and cash flows for the interim periods presented in thisquarterly report. The condensed consolidated financial statements should beread in conjunction with the consolidated financial statements and notesthereto, together with management’s discussion and analysis of financialcondition and results of operations, contained in our Annual Report on Form 10-Kfor the year ended December 31, 2009. The results of operations and cashflows for the three months ended March 31, 2010 are not necessarilyindicative of the results for any other period or the entire fiscal year endingDecember 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.

 

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

 

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

 

We are a provider of secure wireless solutions thatare sold to: (1) domestic and foreign public safety / public serviceentities, (2) federal, state and local governmental agencies, includingthe Departments of Defense and Homeland Security, and (3) domestic andforeign commercial customers.  ThroughEFJohnson, Transcrypt and 3eTI we design, develop, market, and support:

 

·                  mobile and portable wireless radios;

 

·                  stationary transmitters / receivers (base stations orrepeaters);

 

·                  infrastructure equipment and systems;

 

·                  secure encryption technologies for proprietarywireless radios;

 

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

 

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

 

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

 

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

 

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.

 

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**EFJOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Threeended March 31, 2010 and 2009**

**(Unaudited)**

 

**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 $2.5 million in the first quarter of 2010. Additionally, theCompany used net cash and cash equivalents of $4.4 million and $7.2million in fiscal years 2008 and 2007, respectively. The Company was not incompliance with certain of the financial covenants of its loan agreement withBank of America, N.A. for the quarter ending December 31, 2009. TheCompany executed an amendment to the loan agreement effective March 1,2010 which waived these covenant violations on a one-time basis, but theamendment also included additional restrictions and further limited our accessto liquidity (see Note 11).

 

Priorto the amendment discussed below, the Company’s loan agreement with Bank ofAmerica, N.A., which governs our revolving line of credit and $15 millionterm loan, would have expired on June 30, 2010, resulting in the$15.0 million term loan becoming due and payable in full on that date. TheCompany has pledged $3.0 million to Bank of America, which is shown asRestricted Cash on our balance sheet and partially offsets this term loan. As aresult of the amendment executed March 1, 2010, the maximum that we couldborrow under the revolving credit line was $3.75 million through June 30,2010. As of March 31, 2010, the Company had $3.0 million availableunder its existing line of credit (subject to the lender’s discretion) net ofthe letter of credit outstanding for $0.75 million and had unrestricted cash ofapproximately $13.5 million.

 

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.  As a result, the Company developed andimplemented specific action plans to improve profitability and resolve thisliquidly matter in the first half of 2010 including the following:i) flattened the organizational structure and reduced employee andoperational expenses in January 2010, and ii)  retained the servicesof an outside investment banking firm to support the required programs toaccomplish management’s objectives and to explore options available to theCompany to refinance the debt, or raise additional funds through private equityor debt financing, sales of assets, or other strategic alternatives.

 

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 andclassification of assets or the amounts and classifications of liabilities thatmay result should the Company be unable to continue as a going concern.

 

**Subsequentevents**

 

On May 15,2010, the Company, entered into an Agreement and Plan of Merger (the “MergerAgreement”) with FP-EF Holding Corporation, a Delaware corporation (“Parent”),and FP-EF Corporation, a Delaware corporation and a wholly-owned subsidiary ofParent (“Merger Sub”).  The MergerAgreement provides that, upon the terms and subject to the conditions set forthin the Merger Agreement, the Merger Sub will merge with and into the Company(the “Merger”), with the Company continuing as the surviving corporation (“SurvivingCorporation”) and as a wholly-owned subsidiary of Parent.  Parent is an affiliate of Francisco PartnersII, L.P., a global technology-focused private equity fund.

 

Pursuantto the terms of the Merger Agreement, stockholders will receive $1.05 per sharein cash for their shares of stock of the Company at which time the Company willbe 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) subjectto certain exceptions, the accuracy of representations and warranties withrespect to the Company’s business and compliance by the Company with itscovenants contained in the Merger Agreement and (v) stockholders owning nomore than 10% of the Company’s outstanding common stock dissenting from theMerger and seeking appraisal rights.

 

The Merger Agreementcontains certain termination rights for both the Company and Parent, andfurther provides that, in connection with the termination of the MergerAgreement under specified circumstances, the Company will be required to payParent a termination fee of $1.0 million and/or reimburse certain out-of-pocketexpenses up to $1.0 million.  Additionally,the Company’s only recourse if Parent breaches the Merger Agreement or theCompany terminates the Merger Agreement in certain circumstances is the rightto receive a reverse termination fee from Parent of $2.0 million and up to $1.0million in certain of the Company’s out-of-pocket expenses.  The Company cannot seek equitable relief toenforce Parent to consummate the Merger.

 

Parent and Merger Sub have represented and warrantedthat they will have sufficient financing to consummate the Merger and there isno financing condition to closing. 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.

 

On May 15, 2010, EF Johnson Technologies, Inc.(the “Company”) entered into a Seventh Amendment (the “Seventh Amendment”)effective as of May 15, 2010, to our Revolving Line of Credit LoanAgreement, Term Loan Agreement and Security Agreement (the “Loan Agreement”)with Bank of America, N.A. (the “Lender”) to extend the maturity of the LoanAgreement until August 31, 2010, to allow the Company to consummate theMerger. The Lender also waived compliance with certain financial covenantscontained in the Loan Agreement for the Company’s fiscal quarter ending June 30,2010, on

 

6

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**EFJOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Threeended March 31, 2010 and 2009**

**(Unaudited)**

 

a one-time basis. In consideration of the Lender’sagreement, the Company agreed to pay down the outstanding principal balance ofthe term loan portion of the Loan Agreement from $15.0 million to $5.0 millionon June 17, 2010.  Under the termsof the Seventh Amendment, the Company may authorize the Lender to apply fundsheld by the Lender in a pledged account in reduction of the outstandingprincipal balance, provided that the balance remaining in the pledged accountcannot be reduced below $0.75 million. On June 17, 2010, the amountcontained in the pledged account is expected to be $6.5 million.

 

The parties further amended the Loan Agreement toincrease the revolving line of credit from $3.75 million to $6.0 millioneffective June 17, 2010.  All futureadvances under the Loan Agreement will continue to be subject to the Lender’sdiscretion.  The Seventh Amendmentfurther requires the Company to continue to provide additional financialreporting to the Lender on a monthly basis through the maturity of the loans.

 

**4.****       ****RETROSPECTIVE ADOPTION OF NEWACCOUNTING GUIDANCE**

 

In September 2009, the Financial AccountingStandards Board (“FASB”) amended theaccounting standards related to revenue recognition for arrangements withmultiple deliverables (“new accounting guidance”). The new accounting guidancepermits prospective or retrospective adoption, and the Company elected toretrospectively adopt as of January 1, 2009 during the fourth quarter of2009.

 

Prior to 2009, the Company had not provided asignificant number of optional extended warranties; and therefore, the Companydetermined that the deferral of revenue associated with optional extendedwarranties was insignificant in prior years.

 

The new accounting guidance generally requires theCompany to account for the sale of products and optional extended warranties asseparate deliverables. The first deliverable is the hardware recognized at thetime of delivery, and the second deliverable is the optional extended warrantyrecognized ratably over the period benefited. The new accounting guidancerequires the Company to estimate a stand-alone selling price for the optionalextended warranty, defer that amount as deferred revenue and recognize the revenueratably over the period benefited.

 

The Company had the option of adopting the newaccounting guidance at the start of the fiscal year on a prospective basis orat an interim period on a retrospective basis and elected retrospectiveadoption. Retrospective adoption required the Company to revise its previouslyissued 2009 quarterly interim financial statements as if the new accountingguidance had been applied from the beginning of the fiscal year.

 

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**EF JOHNSONTECHNOLOGIES, INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Threeended March 31, 2010 and 2009**

**(Unaudited)**

 

The following table unaudited (in thousands, exceptper share amounts) presents the effects of the retrospective adoption of thenew accounting guidance as of January 1, 2009 to the Company’s previouslyreported Condensed Consolidated Statements of Operations for the three monthsended March 31, 2009:

 
| ** **                                   | ** ** | **As previously**   | ** ** | ** **     | ** ** | **As**                   | ** ** |
|----------------------------------------------|------------|--------------------------|------------|----------------|------------|--------------------------|------------|
| ** **                                   | ** ** | **reported**             | ** ** | ** **     | ** ** | **amended**              | ** ** |
| ** **                                   | ** ** | **March 31,  2009** | ** ** | **Adjustment** | ** ** | **March 31,  2009** | ** ** |
| ** **                                   | ** ** | ** **               | ** ** | ** **     | ** ** | ** **               | ** ** |
| **Revenues**                                 |       | $                        | 22,429     |           | $          | (348                     | )          | $ | 22,081 |   |
| Net income (loss)  before income taxes       |       | $                        | (1,258     | )              | $          | (348                     | )          | $ | (1,606 | ) |
| **Net  income (loss)**                       |       | $                        | (1,258     | )              | $          | (348                     | )          | $ | (1,606 | ) |
|                                         |       |                     |       |           |       |                     |       |
| Net income (loss) per  share—basic      |       | $                        | (0.05      | )              | $          | (0.01                    | )          | $ | (0.06 | ) |
|                                         |       |                     |       |           |       |                     |       |
| Net income (loss) per  share—diluted    |       | $                        | (0.05      | )              | $          | (0.01                    | )          | $ | (0.06 | ) |
|                                         |       |                     |       |           |       |                     |       |
| Weighted average common  shares— basic  |       | 26,383                   |       | 26,383         |       | 26,383                   |       |
|                                         |       |                     |       |           |       |                     |       |
| Weighted average common shares— diluted |       | 26,383                   |       | 26,383         |       | 26,383                   |       |

 

**5.****       ****NET INCOME (LOSS) PER SHARE**

 

Basic income (loss) per share (“EPS”) is calculatedbased upon the weighted average number of common shares outstanding during theperiod. The diluted EPS calculation reflects the potential dilution from commonstock equivalents such as stock options, stock satisfied stock appreciationrights (“SSAR’s”), restricted stock grants and restricted stock units(collectively “Incentive Shares”). For the three months ended March 31,2010, outstanding incentive shares with exercise prices lower than the averagemarket price of the common stock for the period were considered common stockequivalents and were dilutive in the calculation of the diluted weightedaverage common shares. Outstanding incentive shares that had exercise priceshigher than the average market price of the common stock for the period wereconsidered anti-dilutive and excluded from the calculation of diluted weightedaverage common shares. For the three months ended March 31, 2009 alloutstanding incentive shares were considered anti-dilutive due to the net lossfor the period end.  The outstandingincentive shares that are considered dilutive and anti-dilutive are as follows:

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------|------------|------------------------|------------|
| ** **                                  | ** ** | **March 31,**     | ** ** |
| ** **                                  | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Incentive shares with  dilutive effect      |       | 296,646                |       | — |   |
| Incentive shares with  anti-dilutive effect |       | 1,180,418              |       | 1,889,919 |   |
| Outstanding incentive  shares               |       | 1,477,064              |       | 1,889,919 |   |

 

We use the treasury stockmethod to calculate diluted weighted average common shares, as if all suchoptions were outstanding for the periods presented.

 

**6.****       ****ACCOUNTING FOR STOCK-BASEDCOMPENSATION**

 

We use the Black-Scholesoption pricing model to determine the fair value of all stock option grants andstock satisfied stock appreciation rights (“SSAR’s”) (collectively “Options”).For the three months ended March 31, 2010 and 2009, we recognizedcompensation expense of $0.1 million and $0.3 million, respectively, related tooptions and $0.1 million and $0.1 million, respectively, related to restrictedstock grants and restricted stock units. Additionally, $0.1 million of compensation expense was recognizedrelated to equity grants made in the first quarter of 2009 to certain namedexecutive officers associated with performance-based incentives earned for meetingcertain operational, new product introductions and other personal goals.

 

8

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**EFJOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Threeended March 31, 2010 and 2009**

**(Unaudited)**

 

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

 

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

 

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

 

The escrow funds received as part of the settlementwere recorded as a reduction of operating expense. The Company previouslyincurred research and development costs in connection with the re-design,re-testing and re-certification of certain 3eTI products to bring them up tospecifications represented to exist at the acquisition date.

 

**8.****       ****INTEREST RATE SWAP AGREEMENT ANDCOMPREHENSIVE LOSS**

 

On July 19,2006, we entered into an interest rate swap agreement to manage interest costsand risks associated with changing interest rates, not for speculative ortrading purposes. The interest rate swap has been designated as a cash flowhedge and is recorded in the consolidated financial statements at fair value.Changes in the fair value of the swap have been recorded in AccumulatedComprehensive Loss in the balance sheet as the derivative is assessed as effectivelyhedged at March 31, 2010. Changes in the fair value of the swap would bereclassified to other income (expense) to the extent the hedging instrument isdetermined to be ineffective.

 

Theinterest rate swap agreement effectively converts the variable LIBOR componentof the interest rate on the $15.0 million term loan to a fixed rate of 5.64%.Under the terms of the interest rate swap agreement, the Company will pay 5.64%and the counterparty will pay LIBOR on a monthly basis. The interest rate swapagreement terminates on June 30, 2010, the termination date of the termloan. The cumulative net unrealized loss was $0.3 million and is included inthe current portion of long-term debt obligations due to the termination dateof the interest rate swap agreement and accumulated other comprehensive loss inthe consolidated balance sheet at March 31, 2010. The following is asummary of comprehensive loss (in thousands):

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **March 31,**               | ** ** |
| ** **                                    | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| ** **                                    | ** ** | ** **                       | ** ** | **(as adjusted)** | ** ** |
| Net income (loss)                             |       | $                                | 190        |   | $ | (1,606 | ) |
| Reclassification to  interest expense         |       | (239                             | )          | (192 | ) |
| Fair value adjustment  for interest rate swap |       | 438                              |       | 311 |   |
| Comprehensive income  (loss)                  |       | $                                | 389        |   | $ | (1,487 | ) |

 

9

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** **

**EFJOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Threeended March 31, 2010 and 2009**

**(Unaudited)**

 

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

 

The following is a summary of inventories (inthousands):

 
| ** **                 | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
|----------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Raw materials and supplies |       | $                            | 7,728      |                            | $          | 6,773 |   |
| Work in progress           |       | 122                          |       | 742                             |       |
| Finished goods             |       | 20,652                       |       | 23,621                          |       |
| Service inventories        |       | 1,506                        |       | 1,696                           |       |
|                       |       | 30,008                       |       | 32,832                          |       |
| Reserve for  obsolescence  |       | (1,912                       | )          | (1,537                          | )          |
| Total inventories          |       | $                            | 28,096     |                            | $          | 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 existingtechnology, customer relationships, license and covenants not-to-compete, areamortized over their useful life on a straight-line basis. Intangible assetsconsisting of trademark and trade name and certifications are not subject toamortization.

 

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

 

Noevents occurred during the three months ended March 31, 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$0.2 million for the three months ended March 31, 2010 and March 31,2009, respectively.  Intangible assetsconsist of the following as of the dates indicated (in thousands):

 
| ** **                                      | ** ** | **March 31,  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 |   |

 
| ** **                                  | ** ** | **March 31,  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      |                        | $          | — |   | $ | (3,355 | ) | $ | 2,835 |   | $ | 6,190 |   | $ | — |   | $ | (3,218 | ) | $ | 2,972 |   |
| Customer relationships                      |       | 3,756                    |       | —                      |       | (2,439 | ) | 1,317 |   | 3,756 |   | — |   | (2,333 | ) | 1,423 |   |
| Licenses                                    |       | 159                      |       | —                      |       | (159 | ) | — |   | 159 |   | — |   | (159 | ) | — |   |
| Covenant not-to-compete                     |       | 400                      |       | —                      |       | (400 | ) | — |   | 400 |   | — |   | (400 | ) | — |   |
| Trademarks/Patents                          |       | 209                      |       | —                      |       | (104 | ) | 105 |   | 209 |   | — |   | (100 | ) | 109 |   |
|                                        |       | $                        | 10,714     |                        | $          | — |   | $ | (6,457 | ) | $ | 4,257 |   | $ | 10,714 |   | $ | — |   | $ | (6,210 | ) | $ | 4,504 |   |

 

10

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**EFJOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Threeended March 31, 2010 and 2009**

**(Unaudited)**

 

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

 

Weamended our line of credit agreement with Bank of America in July 2006 toretain our revolving line of credit of up to $15.0 million and include a termloan of $15.0 million (the “Loan Agreement”). Both borrowings bear interest ata variable rate based on the London Interbank Offered Rate (“LIBOR”) plus amargin (“LIBOR Margin”). The LIBOR Margin was 500 basis points at March 31,2010 and 400 basis points at March 31, 2009. The interest rate of 5.41%and 4.56% were in effect at March 31, 2010 and 2009, respectively. TheLoan Agreement expires June 30, 2010. As discussed below, an amendment to theLoan Agreement was executed on March 1, 2010that resulted in higher interest rates.

 

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 three months ended March 31, 2010.  There was $0.75 million open letters ofcredit under our line of credit at March 31, 2010 and 2009. As discussedin more detail below, the maximum that we can borrow under the revolving creditline was $3.75. The total available credit under the line of credit wasapproximately $3.0 million and $3.1 million as of March 31, 2010 and December 31,2009, respectively. 

 

TheLoan Agreement provides for customary affirmative and negative covenants, includingmaintenance of corporate existence and certain reporting requirements, as wellas limitations on debt, liens, fundamental changes, acquisitions, investments,loans, guarantees, use of proceeds and capital expenditures. In addition, theLoan Agreement contains certain financial covenants including a maximum ratioof funded debt to EBITDA and a fixed charge coverage ratio. The Loan Agreementalso provides for events of default that would permit the lender to acceleratethe loans upon their occurrence. As collateral for the obligations under theLoan Agreement the Lender has a security interest in substantially all assetsof the borrowers, including accounts receivable, inventories and generalintangibles.

 

Wewere not in compliance with certain of the financial covenants of the LoanAgreement for the quarter ended December 31, 2009. As a result, effective March 1,2010, we executed an amendment to the Loan Agreement whereby Bank of Americawaived such financial covenant defaults on a one-time basis, waived compliancewith such financial covenants for the Company’s first quarter of 2010, andfurther amended the Loan Agreement to, among other things, (i) lower therevolving 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 termscould constitute an event of default that would permit the lender to acceleratethe loans upon their occurrence, which could have a material adverse effect onour operating results and cash flows.

 

As more fully disclosed in Note 3 above, on May 15,2010, the Company entered into the Seventh Amendment to our Loan Agreement withBank of America, N.A. to extend the maturity of the Loan Agreement until August 31,2010 to allow the Company to consummate the Merger. The Lender also waivedcompliance with certain financial covenants contained in the Loan Agreement forthe Company’s fiscal quarter ending June 30, 2010, on a one-timebasis.   In consideration of the Lender’sagreement, the Company agreed to pay down the outstanding principal balance ofthe term loan portion of the Loan Agreement from $15.0 million to $5.0 millionon June 17, 2010.  Under the termsof the Seventh Amendment, the Company may authorize the Lender to apply fundsheld by the Lender in a pledged account in reduction of the outstandingprincipal balance, provided that the balance remaining in the pledged accountcannot be reduced below $0.75 million. On June 17, 2010, the amountcontained in the pledged account is expected to be $6.5 million.

 

The parties further amended the Loan Agreement toincrease the revolving line of credit from $3.75 million to $6.0 millioneffective June 17, 2010.  All futureadvances under the Loan Agreement will continue to be subject to the Lender’sdiscretion.  The Seventh Amendmentfurther requires the Company to continue to provide additional financialreporting to the Lender on a monthly basis through the maturity of the loans.

 

TheCompany agreed to pay Lender a one-time fee in the amount of $0.032 million onor before June 30, 2010, which fee is in addition to any fees previouslyrequired by the Lender, including, without limitation, the fees required underthe terms of the Sixth Amendment to Revolving Line of Credit Loan Agreement,Term Loan Agreement and Security Agreement dated as of March 1, 2010.

 

11

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**EFJOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Threeended March 31, 2010 and 2009**

**(Unaudited)**

 

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

 

We didnot record a tax benefit or provision for the three months ended March 31,2010 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 threemonths ended March 31, 2010 relating to carryforward of business credits. In addition, future changes in the unrecognizedtax benefit will have no net impact on the effective tax rate due to theexistence of the valuation allowance.

 

As of March 31,2010, we have no accrual requirement for interest or penalties related to uncertaintax positions since the tax benefits have not been included in prior income taxreturn 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**

 

We provide a one-to-three year warranty on substantiallyall of our product sales, depending upon certain terms and conditions of thesale, and estimate future warranty claims based on historical experience andanticipated costs to be incurred over the life of the warranty. Warrantyexpense is accrued at the time of sale with an additional accrual for specificitems after the sale when their existence is known and amounts aredeterminable. A reconciliation of changes in our accrued warranty reserve as ofMarch 31, 2010 is as follows (in thousands):

 
| ** **                      | ** ** | **Balance at**                  | ** ** | **Charged to** | ** ** | **Deduction /** | ** ** | **Balance at**               | ** ** |
|---------------------------------|------------|---------------------------------|------------|---------------------|------------|----------------------|------------|------------------------------|------------|
| ** **                      | ** ** | **December 31, 2009** | ** ** | **Expense**         | ** ** | **Expenditures**     | ** ** | **March 31, 2010** | ** ** |
| Allowance for Warranty  Reserve |       | $                               | 2,600      |                | 114        |                 | 114        |                         | $          | 2,600 |   |
|                                 |            |                                 |            |                     |            |                      |            |                              |            |  |  |

 

**14.****      ****FAIR VALUE OF 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 arethree levels of inputs that may be used to measure fair value:

 

·                  Level 1—quoted prices in activemarkets for identical assets and liabilities.

·                  Level 2—observable inputs other thanquoted prices in active markets for identical assets and liabilities.

·                  Level 3—unobservable inputs in whichthere is little or no market data available, which require the reporting entityto develop its own assumptions.

 

12

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**EFJOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Threeended March 31, 2010 and 2009**

**(Unaudited)**

 

The following table providesthe liabilities carried at fair value measured on a recurring basis as of March 31,2010 (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 March 31, 2009 |       | $                              | 969        |                                                          | $          | —                                                         |       | $                                                 | 969        |   | $ | — |   |
| Interest rate swap -  liability at March 31, 2010 |       | $                              | 271        |                                                          | $          | —                                                         |       | $                                                 | 271        |   | $ | — |   |

 

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

 

We areinvolved in certain legal proceedings incidental to the normal conduct of ourbusiness. At this time, we do not believe that any liabilities relating to suchlegal proceedings are likely to be, individually or in the aggregate, materialto our business, financial condition, results of operations or cash flows.

 

TheCompany has no legal settlement fees accrued as of March 31, 2010. Thetotal we have accrued in regards to all legal proceedings as of December 31,2009 was $32,000.

 

In thenormal 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 March 31, 2010 and December 31, 2009. Performance and bidbonds, which expire on various dates, totaled $2.4 million at March 31,2010 and December 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.

 

**16.****      ****COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES**

 

On November 15,2007, the Company committed to an organizational plan (the “2007 Plan”) toshift from three divisions to one integrated corporate structure focused onsecure wireless communications for government and industrial customers. ThePlan resulted in improved efficiencies in our operations, reduced ourinfrastructure costs and supported a new technology roadmap driving toward astreamlined and more effective structure. Implementation of the Plan includes seniorand middle management changes as well as staff reductions designed to eliminateredundant positions and reflects the Company’s decision to consolidateoperations and move production from three locations into a centralizedoperations and outsourcing program in the Dallas/Fort Worth area.   All exit costs for the 2007 plan had beenincurred by March 31, 2009.

 

On December 31,2009, the Company committed to a work force reduction plan (the “2009 Plan”) torealign certain executive and senior management positions as well as staffreductions resulting from the fourth quarter 2009 performance of land mobileradio product sales. The 2009 Plan was implemented in the first quarter of2010.

 

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.

 

13

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**EFJOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Threeended March 31, 2010 and 2009**

**(Unaudited)**

 

Thefollowing table summarizes the estimates and actual exit costs incurred as of March 31,2009 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   March 31, 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                                                  |       | $ | — |   |

 

Thefollowing table summarizes the estimates and actual exit costs incurred and thebeginning and ending reserve for exit costs as of March 31, 2010 for the2009 Plan (in thousands):

 
| ** **                     | ** ** | **Original  amount   expected to be  incurred and   accrued as of  December  2009** | ** ** | **Amount   incurred   and paid   as of  March 31,   2010** | ** ** | **Remaining  amount to be  incurred as   of March 31,   2010** | ** ** |
|--------------------------------|------------|-------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| One-time termination  benefits |       | $                                                                                   | 311        |                                                            | $          | 140                                                                 |       | $ | 171 |   |
| Other costs                    |       | 25                                                                                  |       | 25                                                              |       | —                                                              |       |
| Total costs                    |       | $                                                                                   | 336        |                                                            | $          | 165                                                                 |       | $ | 171 |   |

 

**17.****      ****RELATED PARTY TRANSACTIONS**

 

For the 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 adirector of the Company during this period. Effective June 5, 2009, Mr. Newmanresigned as a Director of the Company due to potential conflicts of 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(part of Finmeccanica) acquired approximately $0.4 million of products fromEF Johnson.

 

14

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**EFJOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Threeended March 31, 2010 and 2009**

**(Unaudited)**

 

**18.****      ****RECENTLY ISSUED ACCOUNTING STANDARDS**

 

In January 2010,the FASB issued FASB ASU 2010-06, *ImprovingDisclosures About Fair Value Measurements,*which amends FASB ASC820. The updated guidance requires new disclosures about recurring ornonrecurring fair-value measurements including significant transfers into andout of Level 1 and Level 2 fair-value measurements and information onpurchases, sales, issuances, and settlements on a gross basis in thereconciliation of Level 3 fair-value measurements. The guidance also clarifiedexisting fair-value measurement disclosure guidance about the level ofdisaggregation, 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.

 

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

 

We have evaluated eventsoccurring subsequent to the date of our financial statements and through thedate our financial statements were issued. We have recognized the effects ofall subsequent events that provide additional evidence about conditions thatexisted at our balance sheet date as of March 31, 2010, includingestimates inherent in the process of preparing our financial statements. Therewere no non-recognized subsequent events to be disclosed in our financialstatements.

 

As more fully disclosed in Note 3 above, on May 15,2010, the Company, entered into a Merger Agreement with FP-EF HoldingCorporation, a Delaware corporation (“Parent”), and FP-EF Corporation, aDelaware corporation and a wholly-owned subsidiary of Parent (“Merger Sub”).  The Merger Agreement provides that, upon theterms and subject to the conditions set forth in the Merger Agreement, theMerger Sub will merge with and into the Company, with the Company continuing asthe surviving corporation (“Surviving Corporation”) and as a wholly-ownedsubsidiary of Parent. Pursuant to the terms of the Merger Agreement,stockholders will receive $1.05 per share in cash for their shares of stock ofthe Company at which time the Company will be privately held.

 

As more fully disclosed in Note 11 above, on May 15,2010, the Company entered into a Seventh Amendment effective as of May 15,2010, to our Loan Agreement with Bank of America, N.A. to extend the maturityof the Loan Agreement to allow the Company to consummate the Merger. Under theterms of the Seventh Amendment, the Lender extended the maturities of the loansgoverned and secured by the Loan Agreement until August 31, 2010, andwaived compliance with certain financial covenants contained in the LoanAgreement for the Company’s fiscal quarter ending June 30, 2010, on aone-time basis.

 

15

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**ITEM 2.****        ****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION 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**

 

In order to becompetitive in the public safety/public service market that has moved towardsconvergent telecommunications solutions with demand for interoperability and thecontinued transition from analog to digital platforms, the Company is organizedin a single centralized corporate structure. In light of the convergedtelecommunication markets and our corporate structure, the Company has onesegment to report.

 

We design,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 firstresponders in public safety and public service, the federal government, andindustrial organizations.

 

Due tothe 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.

 

*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 theinfrastructure components. We develop customer solutions, which leverage thecustomer’s wireless system and wireless radios with customer specific orenterprise wide applications.

 

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

 

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systems. As a result, weexpect to continue to allocate a majority of our on-going research anddevelopment expenditures to wireless radio features and enhancements,infrastructure components 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.

 

We also design, develop, market and supportcustomized wireless network centric products and systems which include secureWi-Fi products, including mesh networking, access point, bridge, and clientinfrastructure products, as well as security software. We provide sensornetwork solutions through our InfoMatics® middleware, which enable sensors anddatabases to communicate data to pertinent personnel for command and controlapplications in near real-time. These products and solutions utilize FIPS 140-2validated wireless products, 802.11 wireless networking (WIFI) solutions, meshnetworking and conditions based and location based telematics solutions.

 

*Our Sales and Distribution Approach*

 

Our products and systemsare sold through multiple channels including a direct sales force, dealers,distributors, and strategic partnering arrangements. We utilize our dealernetwork to assist in installing, servicing, selling and distributing ourproducts. We also generate revenues through the federal government under governmentfunded research and development Small Business Innovative Research programs(“SBIR”). Additionally, we offer our products to commercial, non-governmentalusers.

 

Much of our business isobtained through submission of formal competitive bids. Our governmentalcustomers generally can specify the terms, conditions and form of the contract.Our government business is subject to government funding decisions and contracttypes can vary widely, including cost plus, fixed priced, indefinitedelivery/indefinite quantity (“IDIQ”), and government-wide acquisitioncontracts with the General Services Administration (“GSA”), which requirepre-qualification of vendors and allows government customers to more easilyprocure our products and systems.

 

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

 

**Description of Operating Accounts**

 

*Revenues*. Revenues consist of product sales, services, andgovernment-funded research and development services and solutions net ofreturns and allowances. Longer-term system and government services revenues arerecognized under the percentage-of-completion method.

 

*Cost of Sales.* Cost of sales includes costs of components andmaterials, labor, depreciation and overhead costs associated with theproduction of our products and services, as well as shipping, royalty,inventory reserves, warranty product costs, and incurred cost under salescontracts.

 

*Gross Profit.* Gross profit is net revenues less the cost of salesand is affected by a number of factors, including competitive pricing, productmix, type of contract and cost of products and services including warranty andinventory reserves and conversion costs.

 

*Research and Development.* Unreimbursed research and development expensesconsist primarily of costs associated with research and development personnel,materials, and the depreciation of research and development equipment andfacilities. We expense all unreimbursed research and development costs as theyare incurred while all research and development expenses that are reimbursed byour government customers are included as a component of cost of sales.

 

*Sales and Marketing.* Sales and marketing expenses consist primarily ofsalaries and related costs of sales personnel, including sales commissions andtravel expenses, as well as costs of advertising, product and programmanagement, public relations and trade show participation.

 

*General and Administrative*. General and administrative expenses consistprimarily of salaries and other expenses associated with our management, postsales operations support, accounting, information systems and administrativefunctions. This expense also includes the impact of equity-based compensationexpense and costs relating to our operating facility moves. Pertinent to 3eTI,accounting for government contracts delineates what is a direct chargeallowable to include in contract costs and what is considered to be an indirectcharge reflected as general and administrative expenses. We consider indirectengineering labor and operating costs such as quality, planning, operations,and company fringe benefits, general administrative salaries and other generaladministrative expenses as general and administrative expense.

 

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*Amortization of Intangibles.*    Amortization of intangiblesconsist primarily amortization expense associated with the definite lived intangiblesassets acquired in the 3eTI acquisition. Definite lived intangible assets,consisting of existing technology, customer relationships, license andcovenants not-to-compete, are amortized over their useful life on astraight-line basis.

 

*Escrow Fund Settlement.*    Escrow fund settlementconsists of funds received associated with the 3eTI reporting unit for settledclaims against funds held in an escrow account. The escrow fund reimbursed theCompany for previously incurred research and development costs in connectionwith the re-design, re-testing and re-certification of certain 3eTI products tobring them up to specifications represented to exist at the acquisition date.

 

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

 

*Provision for Income Taxes.* Provision (benefit) for income taxes includes theincrease or decrease in the valuation reserve that is based upon management’sconclusions regarding, among other considerations, our historical operatingresults and forecasted future earnings over a five year period, our current andexpected customer base projections, and technological and competitive factorsimpacting our current products. Current financial accounting standards requirethat organizations analyze all positive and negative evidence relating todeferred tax asset realization, which would include our historical accuracy inforecasting future earnings, as well as our history of losses incurred withinthe past three years. Should factors underlying management’s estimates change,future adjustments, either positive or negative, to our valuation allowance maybe 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 and Results of Operations —Critical Accounting Policies” in our Annual Report on Form 10-K for theyear ended December 31, 2009.

 

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**Results of Operations**

 

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

 
| ** **                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------|------------|------------------------|------------|
| ** **                         | ** ** | **March 31,**     | ** ** |
| ** **                         | ** ** | **2010**               | ** ** | **2009** | ** ** |
| ** **                         | ** ** | ** **             | ** ** | **(as adjusted)** | ** ** |
| Revenues                           |       | 100.0                  | %          | 100.0 | % |
| Cost of sales                      |       | 64.5                   |       | 66.7 |   |
|                               |       |                   |       |   |   |
| Gross profit                       |       | 35.5                   |       | 33.3 |   |
|                               |       |                   |       |   |   |
| Operating expenses:                |       |                   |       |   |   |
| Research and  development          |       | 8.1                    |       | 15.1 |   |
| Sales and marketing                |       | 7.1                    |       | 11.2 |   |
| General and  administrative        |       | 17.3                   |       | 24.6 |   |
| Amortization of intangibles        |       | 0.9                    |       | 1.1 |   |
| Escrow fund settlement             |       | —                 |       | (12.7 | ) |
| Total operating  expenses          |       | 33.4                   |       | 39.3 |   |
|                               |       |                   |       |   |   |
| Income (loss) from  operations     |       | 2.1                    |       | (6.0 | ) |
|                               |       |                   |       |   |   |
| Interest expense, net              |       | (1.5                   | )          | (1.3 | ) |
|                               |       |                   |       |   |   |
| Income (loss) before  income taxes |       | 0.6                    |       | (7.3 | ) |
|                               |       |                   |       |   |   |
| Income tax (expense)               |       | —                 |       | — |   |
|                               |       |                   |       |   |   |
| Net income (loss)                  |       | 0.6                    | %          | (7.3 | )% |

 

**Comparison of the Three Months Ended March 31, 2010 and2009**

 

*Revenues.*Our revenues increased $7.3 million, or 33%, to $29.3million for the three months ended March 31, 2010 from $22.1 million forthe same period in 2009. The increase was attributable to increased State andLocal LMR revenues relating to certain delayed shipments from the fourthquarter of 2009 and increases associated with government services revenues,partially offset by lower federal LMR revenues.

 

*Gross Profit.*Our gross profit increased $3.0 million, or 41%, to$10.4 million in the three months ended March 31, 2010 from $7.4 millionfor the same period in 2009. Gross profit, as a percentage of revenues, orgross margin, was 35.5% for the three months ended March 31, 2010, ascompared to 33.3% for the same period in 2009. The increase in gross profit andgross margin was attributable to both higher quarterly revenues, and lowerconversion costs associated with lower warranty cost and inventory reserverequirements. We anticipate margins to fluctuate over the remainder of fiscalyear 2010 due to product mix.

 

*Research and Development.*Research and development expenses decreased $0.9million, or 27% to $2.4 million in the three months ended March 31, 2010from $3.3 million in the same period in 2009. Research and development expensesas a percentage of revenues decreased to 8.1% in the first quarter of 2010versus 15.1% for the same period in 2009 mainly due to increased revenues.Lower first quarter 2010 expenses are due to the completion of certainengineering programs and a more focused R&D approach for our coreinitiatives.

 

*Sales and Marketing.*Sales and marketing expenses decreased $0.4 million,or 16%, to $2.1 million in the three months ended March 31, 2010 from $2.5million in the same period in 2009. The decrease is mainly attributable tolower headcount

 

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and lower salescompensation structure in the first quarter of 2010. Sales and marketingexpenses as a percentage of revenues were 7.1% in the first quarter of 2010versus 11.2% in the first quarter of 2009.

 

*General and Administrative.*General and administrative expenses decreased $0.3million, or 6%, to $5.1 million for the three months ended March 31, 2010from $5.4 million for the same period in 2009. The decrease in expenses isprimarily attributable to workforce reductions in 2010, lower bad debtrequirements and reduced stock compensation expense resulting from increasedestimated forfeiture rates in the first three months of 2010 as compared withthe first three months of 2009.

 

*Amortization of Intangibles.*Amortization of intangibles remained stable at $0.2for the three months ended March 31, 2010 and for the same period in 2009.

 

*Escrow fund settlement.* In January 2009, we settled claims underthe 2006 3eTI acquisition agreement (the “Agreement”) and received $2.8 millionof the funds held in the escrow account. The escrow funds received as part ofthe settlement 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 Agreement. In August 2008, theCompany made a claim against the escrow fund for damages arising out of certainalleged breaches of representations and warranties contained in the MergerAgreement. 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 the acquisitiondate.

 

*Interest Expense, net.*Interest expense, net increased $0.1 million to $0.4million in expense for the three months ended March 31, 2010 from $0.3million for the same period in 2009. The increases were attributable toincreased interest rates on the term loan relating to the loan amendmentexecuted in March 2010 as more fully disclosed in “Liquidity and CapitalResources” below.

 

*Provision for Income Taxes.*We did not record a tax benefit or provision foreither the three months ended March 31, 2010 and 2009 primarily due to ourfully reserved deferred tax assets requiring no further provision for incometaxes for each respective period end. The valuation reserve is based uponmanagement’s conclusions regarding, among other considerations, our cumulativeloss position during three preceding years, our operating results during eachperiod, our current and expected customer base, technological and competitivefactors impacting our current products, and management’s estimates of futureearnings based on information currently available.

 

*Net Income / (Loss).*Net income was $0.2 million for the three months endedMarch 31, 2010, reflecting an increase of $1.8 million, as compared to netloss of $1.6 million for the same period in 2009. Excluding the $2.8 millionreceived for the escrow fund settlement, the net loss for the three monthsended March 31, 2009, would have been $4.4 million. The improved operatingperformance relates to higher revenues, improved margins and lower operatingexpenses resulting from reductions in work force in 2009.

 

**Liquidity and Capital Resources**

 

The Company’sprimary sources of liquidity are its cash and cash equivalents which were $13.5million (net of $5.0 million pledged restricted cash) at March 31, 2010and $16.0 million at December 31, 2009 (net of $5.0 millionpledged restricted cash). Due to the net losses in 2009, 2008 and 2007, weconsidered several key factors in assessing the liquidity requirements of theCompany for the next twelve months. Management developed operational cash flowprojections which factor in our backlog of orders, timing of receiving andshipping orders, the continued focus on cost management, and our historicalcollection and payment patterns with customers and vendors. The majority of ourcustomers are with the United States Government, state counties that arerebanding under the FCC and Sprint / Nextel escrowed funds arrangement, stateand local agencies and our dealer network supporting state and local agencies.In several cases, our customer purchases of products and services are supportedby encumbered funds and grants. While this does not provide absolute paymentassurance, it does indicate collectibility is reasonably assured. Managementcontinues to monitor the financial condition of our vendors and supply chainnoting some impact from the current economic conditions could disrupt ourdeliveries.

 

TheCompany also has a secured line of credit agreement with Bank of America, N.A.(the “Loan Agreement”), which, prior to the Seventh Amendment discussed below,would have expired on June 30, 2010. We amended the Loan Agreement in July 2006to include a revolving line of credit of up to $15.0 million and a termloan of $15.0 million. The $15.0 millionterm loan was fully funded and used to finance theacquisition of 3eTI. Both borrowings bear interest at a variable rate based onthe London Interbank Offered Rate (“LIBOR”) plus a margin (“LIBOR Margin”). TheLIBOR Margin was 500 basis points at March 31, 2010. The effectiveinterest rate at March 31, 2010 was 5.41 percent.

 

The Loan Agreement provides for customaryaffirmative and negative covenants, including maintenance of corporateexistence, property and certain reporting requirements, as well as limitationson debt, liens, fundamental changes, acquisitions, investments, loans,guarantees, use of proceeds and capital expenditures. In addition, the LoanAgreement

 

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contains certainfinancial covenants including a maximum ratio of funded debt to EBITDA and afixed charge coverage ratio. The Loan Agreement also provides for events ofdefault that would permit the lender to accelerate the loans upon theiroccurrence. As collateral for the obligations under the Loan Agreement, theLender has a security interest in substantially all assets of the borrowers,including accounts receivable, inventories and general intangibles.

 

TheCompany did not borrow against the revolving line of credit during 2009 orduring the three months ended March 31, 2010. There was $0.75 million ofan open letter of credit under our line of credit at March 31, 2010 and2009. As of March 31, 2010, the maximum that we can borrow under therevolving credit line was $3.75 million. The total available credit under theline of credit was approximately $3.0 million and $3.1 million as of March 31,2010 and December 31, 2009, respectively. Effective with the SeventhAmendment discussed below, the maximum the Company will be able to borrow underthe revolving credit line will increase to is $6.0 million with any borrowingsunder the line of credit are at the discretion of the lender.

 

Wewere not in compliance with certain of the financial covenants of the LoanAgreement for the quarter ended December 31, 2009. As a result, effective March 1,2010, we executed an amendment to the Loan Agreement whereby Bank of Americawaived such financial covenant defaults on a one-time basis, waived compliancewith such financial covenants for the Company’s first quarter of 2010, andfurther amended the Loan Agreement to, among other things, (i) lower therevolving 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 ofthe Loan Agreement no later than June 15, 2010, and (v) require us toprovide additional financial reporting to the bank on a monthly basis. Failureto comply with any of these terms could constitute an event of default thatwould permit the lender to accelerate the loans upon their occurrence, whichcould have a material adverse effect on our operating results and cash flows.We cannot assure that in the future we will be able to achieve, maintain orsatisfy these obligations under the Loan Agreement or obtain a waiver from Bankof America in the event we fail to comply.

 

Priorto the Seventh Amendment discussed below, the Loan Agreement would have expiredon June 30, 2010, resulting in the $15.0 million term loan becomingdue and payable in full on that date. The Company did not anticipate that itwould have sufficient cash on hand on that date to pay off the term loanwithout dedicating all or substantially all of our cash flow from operations tothe payment of our indebtedness, thereby substantially reducing the fundsavailable for operations, working capital, capital expenditures, research anddevelopment, sales and marketing initiatives and general corporate or otherpurposes. As a result, the Company began exploring options available to it torefinance the debt, or raise additional funds through private equity or debtfinancing, sales of assets, or other strategic alternatives.

 

On May 15,2010, the Company, entered into an Agreement and Plan of Merger (the “MergerAgreement”) with FP-EF Holding Corporation, a Delaware corporation (“Parent”),and FP-EF Corporation, a Delaware corporation and a wholly-owned subsidiary ofParent (“Merger Sub”). The Merger Agreement provides that, upon the terms andsubject to the conditions set forth in the Merger Agreement, the Merger Subwill merge with and into the Company (the “Merger”), with the Companycontinuing as the surviving corporation (“Surviving Corporation”) and as awholly-owned subsidiary of Parent. Parent is an affiliate of Francisco PartnersII, L.P., aglobal technology-focused private equity fund. 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. andFrancisco Partners Parallel Fund II, L.P., affiliates of Parent, have deliveredto the Company a limited guarantee with respect to the payment of the ParentTermination Fee and out-of-pocket expenses of the Company.

 

Pursuantto the terms of the Merger Agreement, stockholders will receive $1.05 per sharein cash for their shares of stock of the Company at which time the Company willbe 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) subjectto certain exceptions, the accuracy of representations and warranties withrespect to the Company’s business and compliance by the Company with itscovenants contained in the Merger Agreement and (v) stockholders owning nomore than 10% of the Company’s outstanding common stock dissenting from theMerger and seeking appraisal rights.

 

The Merger Agreementcontains certain termination rights for both the Company and Parent, andfurther provides that, in connection with the termination of the MergerAgreement under specified circumstances, the Company will be required to payParent a termination fee of $1.0 million and/or reimburse certain out-of-pocketexpenses up to $1.0 million.  Additionally,the Company’s only recourse if Parent breaches the Merger Agreement or theCompany terminates the Merger Agreement in certain circumstances is the rightto receive a reverse termination fee from Parent of $2.0 million and up to $1.0million in certain of the Company’s out-of-pocket expenses.  The Company cannot seek equitable relief toenforce Parent to consummate the Merger.

 

On May 15, 2010, the Company entered into aSeventh Amendment effective as of May 15, 2010, to our Loan Agreement withBank of America, N.A. to extend the maturity of the Loan Agreement until August 31,2010 to allow the Company to consummate the Merger. The Lender also waivedcompliance with certain financial covenants contained in the Loan Agreement forthe Company’s fiscal quarter ending June 30, 2010, on a one-timebasis.  In consideration of the Lender’sagreement, the Company agreed to pay down the outstanding principal balance ofthe term loan portion of the Loan Agreement from $15.0 million to $5.0 millionon June 17, 2010.  Under the termsof the Seventh Amendment, the Company may authorize the Lender to apply fundsheld by the Lender in a pledged account in reduction of the outstandingprincipal balance, provided that the balance remaining in the pledged accountcannot be reduced below $0.75 million. On June 17, 2010, the amountcontained in the pledged account is expected to be $6.5 million.

 

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The parties further amended the Loan Agreement toincrease the revolving line of credit from $3.75 million to $6.0 millioneffective June 17, 2010.  All futureadvances under the Loan Agreement will continue to be subject to the Lender’sdiscretion.  The Seventh Amendmentfurther requires the Company to continue to provide additional financialreporting to the Lender on a monthly basis through the maturity of the loans.

 

Ourcurrent cash flow and capital resources are limited, and we require additionalfunds to pursue our business. In the event that the Merger is not consummated,the Company will be required to pay all amounts outstanding to Bank of Americaon August 31, 2010 when the Loan Agreement expires. We may not be able tosecure further 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.

 

If weraise additional funds through further issuances of equity or convertible debtsecurities, 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 thefuture could have restrictive covenants relating to our capital raisingactivities and other financial and operational matters, which may make it moredifficult for us to obtain additional capital and to pursue businessopportunities.

 

If wesell 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 OtherInformation, Item 1A. Risk Factors” of this Form 10-Q for an additionaldiscussion of risks.

 

*Letters of credits and bonds.*    In the normal course of ourbusiness activities related to sales of wireless radio systems to local andstate governmental entities, we are required under contracts with variousgovernment authorities to provide letters of credit or performance or bid bondsthat may be drawn upon if we fail to perform under our contracts. There was a$0.75 million letter of credit under our line of credit as of March 31,2010 and December 31, 2009, respectively. Performance and bid bonds, whichexpire on various dates, totaled $2.4 million at March 31, 2010 and December 31,2009, respectively. No bonds had been drawn upon at either date. The majorityof bonds relate to the contract awarded in May 2008 by the Government ofYukon, Canada that is collateralized by restricted cash of $2.0 million.

 

*Net cash from operating activities.*Our operating activities used cash of$2.5 million and $0.2 million in the three months ended March 31, 2010 and2009 respectively.

 

Duringthe first three months of 2010, operating cash was used primarily for increasesin trade accounts receivable and reductions in other accrued liabilities allaggregating to $18.4 million. Partially offsetting were net income of $0.2million coupled with increases in accounts payable, improved inventoryturnover, increased billings in excess of costs on certain percentage ofcompletion contracts, and non-cash depreciation, amortization and stockcompensation all aggregating to $15.9 million. The increase in accountsreceivable reflects certain customer related delays in shipments from thefourth quarter 2009.

 

Duringthe first quarter of 2009, cash was used primarily resulting from a net loss of$1.6 million coupled with decreases in accounts payable, accrued expenses anddeferred revenues all aggregating to $4.7 million. Partially offsetting werenon-cash depreciation and amortization, stock compensation expense, reductionsin inventories, accounts receivable from related parties, and other amountingto $4.5 million. Operating cash includes $2.8 million received from the escrowfund settlement.

 

*Net cash from investing activities.* During the three months ended March 31,2010 and 2009, investing activities used approximately $0.1 million and $0.3million respectively for purchases of property, plant and equipment.

 

*Net cash from financing activities.*During the three months ended March 31,2010 there was minimal financing activities. During the three months ended March 31,2009, financing activities used cash primarily attributable to establishing$3.0 million of restricted cash at Bank of America associated with the loanamendment noted above.

 

*Backlog.* Our Transcrypt-branded products typically have ashort turnaround cycle. In contrast, our EFJohnson products and systems, and3eTI government services contracts, typically have a longer turnaround cycledue to customer system integration and contract delivery requirements that mayspan multiple years. At March 31, 2010 was $61.6 million, compared to abacklog of $70.2 million at December 31, 2009 and $67.0 million at March 31,2009.

 

*Dividend policy.* Since our initial public offering, we have notdeclared or paid any dividends on our common stock. We presently intend toretain earnings for use in our operations and to finance our business. Anychange in our dividend policy is within the discretion of our board ofdirectors and will depend, among other things, on our earnings, debt serviceand capital requirements, restrictions in financing agreements, if any, businessconditions and other factors that our board of directors deems relevant.

 

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**Off-Balance Sheet Arrangements**

 

Aspart of our ongoing 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 March 31, 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 IFinancial Information, Item 1 Financial Statements” of this Form 10-Qfor a full description of recent accounting standards, including the expecteddates of adoption and estimated effects on results of operation and financialcondition, which is incorporated herein by reference.

 

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

 

We areexposed to certain market risks in the ordinary course of our business. Theserisks result primarily from changes in interest rates and foreign currencyexchange rates. We do not currently hold any derivatives or other financialinstruments 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 preserve principalwhile at the same time maximizing yields without increasing risk. As of December 31,2009, we had an investment portfolio of short-term investments in a variety ofinterest-bearing money market funds. Due to the short duration of ourinvestment portfolio, a hypothetical 1% change in interest rates would not bematerial to our financial condition or results of operations.

 

TheCompany has $15.0 million of variable rate debt outstanding at December 31,2009, which debt matures on June 30, 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 consolidated, financialposition, results of operations or cash flows. See “Liquidity and CapitalResources” and Item 1A. “Risk Factors” for further discussion of our financingfacilities and capital structure.

 

Although a substantialmajority of our sales are denominated in U.S. dollars, fluctuations in thevalue of international currencies relative to the U.S. dollar may affect theprice, competitiveness and profitability of our products sold in internationalmarkets. Furthermore, the uncertainty of monetary exchange values has caused,and may in the future cause, some foreign customers to delay new orders ordelay payment for existing orders. The company does not use financialinstruments to hedge foreign currency exchange rate changes. While mostinternational sales are supported by letters of credit or cash in advance, thepurchase of our products by international customers presents increased risks,which include:

 

·                  unexpected changes in regulatory requirements;

 

·                  tariffs and other trade barriers;

 

·                  political and economic instability in foreign markets;

 

·                  difficulties in establishing foreign distributionchannels;

 

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

 

·                  increased costs associated with maintaininginternational marketing efforts;

 

·                  cultural differences in the conduct of business;

 

·                  natural disasters or acts of terrorism;

 

·                  difficulties in protecting intellectual property; and

 

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

 

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 suchapprovals will be available to us or our products in the future in a timelymanner or at all or that the federal government will not revise its

 

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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. In addition,foreign companies not subject to United States export restrictions may have acompetitive advantage in the international secured communications market. Wecannot predict the impact of these factors on the international market for ourproducts.

 

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

 

**Disclosure Controls and Procedures**

 

OurChief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) reviewedand evaluated our disclosure controls and procedures, as defined in Rule 240.13a-15(e) and15d-15(e) under the Exchange Act of 1934, as amended (the “Exchange Act”)as of the end of the period covered by this report. Based on this evaluation,our CEO and CFO have concluded that our disclosure controls and procedures wereeffective as of the end of the period covered by this report to ensure thatinformation required to be disclosed in the reports that we file or submitunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the Securities and Exchange Commission’s rules andforms and is accumulated and communicated to our management including ourprincipal executive and principal financial officer, as appropriate, to allowtimely decisions regarding disclosures.

 

**Internal Controls Over Financial Reporting**

 

As requiredby 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.

 

As part of our normal operations, we update ourinternal controls as necessary to accommodate any modifications to our businessprocesses or accounting procedures. No change occurred during the most recentfiscal quarter that materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

Inpreparation of our financial statements as of and for the period ended March 31,2010, management believes that our internal controls over these processes areoperating and effective.

 

**PART II. OTHER INFORMATION**

 

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

 

SeeNote 15 to the Condensed Consolidated Financial Statements in “Part IFinancial Information, Item 1 Financial Statements” of this Form 10-Qfor disclosure of legal proceedings and estimated effects on results ofoperation and financial condition, which is incorporated herein by reference.

 

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

 

**Risk Factors Related to Our Business**

 

Our operations and financial results are subject tovarious risks and uncertainties, that are described in Item 1A of the Company’sannual report on Form 10-K for the fiscal year 2009, that could adverselyaffect our business, financial condition, cash flow or results of operations,as well as adversely affect the value of an investment in our common stock.

 

The risk factor set forth below has been updated fromthese previously disclosed in the “Risk Factors” section of our annual reporton Form 10-K for the fiscal year 2009 with more current information.

 

*Our business could be subject to increased risk if theMerger is not consummated.*

 

The Company does not anticipate that it will havesufficient cash on hand on that date to pay off the $15.0 million term loanwithout dedicating all or substantially all of our cash flow from operations tothe payment of our indebtedness, thereby substantially reducing the fundsavailable for operations, working capital, capital expenditures, research anddevelopment, sales and marketing initiatives and general corporate or otherpurposes.  As a result, the Companyexplored options available to it to refinance the debt, or to raise additionalfunds through private equity or debt financing, sales of assets, or other strategicalternatives. 

 

On May 15,2010, the Company entered into the Merger Agreement which provides for theCompany to be acquired by an affiliate of Francisco Partners II, L.P.  Pursuant to the terms of the MergerAgreement, stockholders will receive $1.05 per share in cash for their

 

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shares of stock of theCompany at which time the Company will be privately held.  Consummation of the Merger is subject tocustomary conditions, 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) subjectto certain exceptions, the accuracy of representations and warranties withrespect to the Company’s business and compliance by the Company with itscovenants contained in the Merger Agreement and (v) stockholders owning nomore than 10% of the Company’s outstanding common stock dissenting from theMerger and seeking appraisal rights.

 

On May 15, 2010, the Company entered into aSeventh Amendment to our Loan Agreement with Bank of America, N.A. (the “Lender”)to extend the maturities of the Loan Agreement until August 31, 2010 toallow the Company to consummate the Merger. The Lender also waived compliance with certain financial covenantscontained in the Loan Agreement for the Company’s fiscal quarter ending June 30,2010, on a one-time basis.  Inconsideration of the Lender’s agreement, the Company agreed to pay down theoutstanding principal balance of the term loan portion of the Loan Agreementfrom $15.0 million to $5.0 million on June 17, 2010.  Under the terms of the Seventh Amendment, theCompany may authorize the Lender to apply funds held by the Lender in a pledgedaccount in reduction of the outstanding principal balance, provided that thebalance remaining in the pledged account cannot be reduced below $0.75 million.On June 17, 2010, the amount contained in the pledged account is expectedto be $6.5 million.

 

The parties further amended the Loan Agreement toincrease the revolving line of credit from $3.75 million to $6.0 millioneffective June 17, 2010.  All futureadvances under the Loan Agreement will continue to be subject to the Lender’sdiscretion.  The Seventh Amendmentfurther requires the Company to continue to provide additional financialreporting to the Lender on a monthly basis through the maturity of the loans.

 

In the event the Merger is not consummated, theCompany will be required to pay the remaining outstanding balance to the Lenderon or before August 31, 2010 and will pursue alternative financing of theobligations due.

 

If we raise additional funds through further issuancesof equity or convertible debt securities, our existing stockholders couldsuffer significant dilution in their percentage ownership of our company, andany new equity securities we issue could have rights, preferences andprivileges senior to those of holders of our common stock.  In addition, any debt financing that we maysecure in the future could have restrictive covenants relating to our capitalraising activities and other financial and operational matters, which may makeit more difficult for us to obtain additional capital and to pursue businessopportunities.

 

If we sell certain assets of the Company to satisfyour obligations, that may materially reduce our revenues in the future, which,to the extent not offset by cost reductions or revenue from new or existingcustomers, could materially reduce our cash flows and adversely affect ourfinancial position.  This may limit ourability to raise capital or fund our operations, working capital needs andcapital expenditures in the future.

 

Our current cash flow and capital resources arelimited, and we require additional funds to pursue our business.  We may not be able to secure furtherfinancing in the future.  If we are notable to obtain additional financing on reasonable terms, we may not be able toexecute our business strategy, conduct our operations at the level desired, oreven to continue business.

 

Our “report of registered public accounting firm” onour Form 10-K for the fiscal year 2009, indicates that our recurringlosses from operations, working capital deficit and maturing term loan raisesubstantial doubt about our ability to continue as a going concern.

 

***Failureto complete the Merger for regulatory or other reasons could adversely affectthe Company’s stock price and its future business and financial results.***

 

Completion of the Mergeris conditioned upon, among other things, the consent of the Company’sstockholders and 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 bank facility with Bank of America, N.A. thatis due to be repaid in full on August 31, 2010. Further, the market priceof the Company’s common stock may reflect various market assumptions as towhether the Merger will occur. Consequently, the completion of, or failure tocomplete, the merger could result in a significant change in the market priceof the Company’s common stock.

 

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

 

N/A.

 

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

 

N/A.

 

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

 

N/A

 

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

 

N/A

 

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

 

The following exhibits are filed herewith:

 
| **Exhibit No.** | ** ** | **Description**                                                                                                      |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                 |
| 11.1                 |       | Computation of net income (loss) per share                                                                           |
|                 |       |                                                                                                                 |
| 31.1                 |       | Chief Executive Officer’s Certification of Report on  Form 10-Q for the Quarter Ending March 31, 2010 |
|                 |       |                                                                                                                 |
| 31.2                 |       | Chief Financial Officer’s Certification of Report on  Form 10-Q for the Quarter Ending March 31, 2010 |
|                 |       |                                                                                                                 |
| 32.1                 |       | Written certification of Chief Executive Officer,  dated May 17, 2010, pursuant to 18 U.S.C. Section 1350. |
|                 |       |                                                                                                                 |
| 32.2                 |       | Written certification of Chief Financial Officer,  dated May 17, 2010, pursuant to 18 U.S.C. Section 1350. |

 

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+ Management contract or compensatory plan orarrangement.

 

**SIGNATURE**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, as amended, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|                          | EF JOHNSON TECHNOLOGIES, INC. |
|-------------------------------|-------------------------------|
|                          |                          |
|                          |                          |
| **Date:  May  17, 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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