**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549-1004**

 

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**Form 10-Q**

 

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**(MarkOne)**
| **x**      | **Quarterly  report pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934**                                                                                   |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                      |
| ** ** | **FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2009**                                                                                                                                    |
|       |
| **or**     |
|       |
| **o**      | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 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 ofincorporation or organization) |       | (I.R.S.  EmployerIdentification No.) |

 

**1440CORPORATE DRIVE**

**IRVING, TEXAS 75038**

(Address of principal executive offices and zip code)

 

**(972)819-0700**

(Registrant’stelephone number, including area code)

 

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

 

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

 

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

 

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

 

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

 

As of May 4,2009, 26,393,142 shares of the Registrant’s Common Stock were outstanding.

 

 

 

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**PART I.FINANCIAL INFORMATION**

 

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

 

**EF JOHNSON TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

March 31, 2009 and December 31, 2008

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

 
| ** **                                                                                                                                                                                  | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                  |       |                     |       |                        |       |
| Current assets:                                                                                                                                                                             |       |                     |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                  |       | $                        | 7,704      |                        | $          | 11,267 |   |
| Accounts  receivable, net of allowance for returns and doubtful accounts of $1,781 and  $1,969, respectively                                                                                |       | 17,610                   |       | 18,234                      |       |
| Accounts  receivable due from related parties                                                                                                                                               |       | 1,000                    |       | 1,281                       |       |
| Receivables -  other                                                                                                                                                                        |       | 946                      |       | 849                         |       |
| Cost in excess  of billings on uncompleted contracts                                                                                                                                        |       | 5,034                    |       | 5,116                       |       |
| Inventories, net                                                                                                                                                                            |       | 36,239                   |       | 37,322                      |       |
| Prepaid expenses                                                                                                                                                                            |       | 1,831                    |       | 1,632                       |       |
| Total current  assets                                                                                                                                                                       |       | 70,364                   |       | 75,701                      |       |
| Property, plant  and equipment, net                                                                                                                                                         |       | 5,566                    |       | 5,996                       |       |
| Restricted cash                                                                                                                                                                             |       | 5,024                    |       | 2,021                       |       |
| Goodwill                                                                                                                                                                                    |       | 5,126                    |       | 5,126                       |       |
| Other intangible  assets, net of accumulated amortization                                                                                                                                   |       | 8,524                    |       | 8,770                       |       |
| Other assets                                                                                                                                                                                |       | 73                       |       | 73                          |       |
| **TOTAL  ASSETS**                                                                                                                                                                           |       | $                        | 94,677     |                        | $          | 97,687 |   |
|                                                                                                                                                                                        |       |                     |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                               |       |                     |       |                        |       |
| Current  liabilities:                                                                                                                                                                       |       |                     |       |                        |       |
| Current portion  of long-term debt obligations                                                                                                                                              |       | $                        | 9          |                        | $          | 9 |   |
| Accounts payable                                                                                                                                                                            |       | 11,175                   |       | 11,728                      |       |
| Accrued expenses                                                                                                                                                                            |       | 8,924                    |       | 10,786                      |       |
| Billings in  excess of cost on uncompleted contracts                                                                                                                                        |       | 970                      |       | 217                         |       |
| Deferred  revenues                                                                                                                                                                          |       | 665                      |       | 1,235                       |       |
| Total current  liabilities                                                                                                                                                                  |       | 21,743                   |       | 23,975                      |       |
| Long-term debt  obligations, net of current portion                                                                                                                                         |       | 15,004                   |       | 15,006                      |       |
| Deferred income  taxes                                                                                                                                                                      |       | 631                      |       | 631                         |       |
| Other  liabilities                                                                                                                                                                          |       | 987                      |       | 1,106                       |       |
| **TOTAL  LIABILITIES**                                                                                                                                                                      |       | 38,365                   |       | 40,718                      |       |
|                                                                                                                                                                                        |       |                     |       |                        |       |
| Commitments and  contingencies                                                                                                                                                              |       |                     |       |                        |       |
|                                                                                                                                                                                        |       |                     |       |                        |       |
| Stockholders’  equity:                                                                                                                                                                 |       |                     |       |                        |       |
| Preferred stock  ($0.01 par value; 3,000,000 shares authorized; none issued)                                                                                                                |       | —                   |       | —                      |       |
| Common stock  ($0.01 par value; 50,000,000 voting shares authorized, 26,528,028 and  26,336,735 issued and outstanding as of March 31, 2009 and  December 31, 2008, respectively) |       | 262                      |       | 262                         |       |
| Additional  paid-in capital                                                                                                                                                                 |       | 155,256                  |       | 154,688                     |       |
| Accumulated  other comprehensive loss                                                                                                                                                       |       | (969                     | )          | (1,088                      | )          |
| Accumulated  deficit                                                                                                                                                                        |       | (98,119                  | )          | (96,861                     | )          |
| Treasury stock  (103,255 and 18,083 shares at cost at March 31, 2009 and  December 31, 2008)                                                                                      |       | (118                     | )          | (32                         | )          |
| **TOTAL  STOCKHOLDERS’ EQUITY**                                                                                                                                                        |       | 56,312                   |       | 56,969                      |       |
| **TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                        |       | $                        | 94,677     |                        | $          | 97,687 |   |

 

See accompanying notes to the condensed consolidatedfinancial statements.

 

2

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**EF JOHNSON TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

For the three months ended March 31, 2009 and 2008

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

 
| ** **                                              | ** ** | **2009**   | ** ** | **2008**          | ** ** |
|---------------------------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                              | ** ** | ** ** | ** ** | **(as restated)** | ** ** |
| Revenues                                                |       | $          | 22,429     |              | $          | 33,899 |   |
| Cost of sales                                           |       | 14,731     |       | 22,505            |       |
| Gross profit                                            |       | 7,698      |       | 11,394            |       |
| Operating  expenses:                                    |       |       |       |              |       |
| Research and  development                               |       | 3,331      |       | 3,255             |       |
| Sales and  marketing                                    |       | 2,476      |       | 3,166             |       |
| General and  administrative                             |       | 5,423      |       | 6,401             |       |
| Amortization of  intangibles                            |       | 246        |       | 407               |       |
| Escrow fund  settlement                                 |       | (2,804     | )          | —            |       |
| Total operating  expenses                               |       | 8,672      |       | 13,229            |       |
| Loss from  operations                                   |       | (974       | )          | (1,835            | )          |
| Interest  expense, net                                  |       | (284       | )          | (181              | )          |
| Loss before  income taxes                               |       | (1,258     | )          | (2,016            | )          |
| Income tax  benefit (expense)                           |       | —     |       | —            |       |
| Net loss                                                |       | $          | (1,258     | )                 | $          | (2,016 | ) |
| Net loss per  share—Basic and dilutive             |       | $          | (0.05      | )                 | $          | (0.08 | ) |
| Weighted average  common shares—Basic and dilutive |       | 26,383,931 |       | 26,062,748        |       |

 

See accompanying notes to the condensed consolidatedfinancial statements

 

3

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**EF JOHNSON TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

Three months ended March 31, 2009 and 2008

(Unaudited and in thousands)

 
| ** **                                                                   | ** ** | **2009**   | ** ** | **2008**               | ** ** |
|------------------------------------------------------------------------------|------------|------------|------------|------------------------|------------|
| ** **                                                                   | ** ** | ** ** | ** ** | **(as restated)** | ** ** |
| Cash flows from  operating activities:                                       |       |       |       |                   |       |
| Net loss                                                                     |       | $          | (1,258     | )                      | $          | (2,016 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |       |       |                   |       |
| Provision for  returns and doubtful accounts                                 |       | 748        |       | 272                    |       |
| Depreciation and  amortization                                               |       | 972        |       | 1,115                  |       |
| Recognition of  deferred gain                                                |       | (24        | )          | (24                    | )          |
| Stock-based  compensation                                                    |       | 549        |       | 642                    |       |
| Changes in  operating assets and liabilities:                                |       |       |       |                   |       |
| Accounts  receivable                                                         |       | (124       | )          | 236                    |       |
| Accounts  receivable from related parties                                    |       | 281        |       | (7,624                 | )          |
| Receivables -  other                                                         |       | (97        | )          | (315                   | )          |
| Cost in excess of  billings on uncompleted contracts                         |       | 82         |       | (1,487                 | )          |
| Inventories                                                                  |       | 1,083      |       | (47                    | )          |
| Prepaid expenses  and other                                                  |       | (199       | )          | (370                   | )          |
| Accounts payable                                                             |       | (553       | )          | (2,738                 | )          |
| Accrued and  other liabilities                                               |       | (1,838     | )          | (887                   | )          |
| Billings in  excess of cost on uncompleted contracts                         |       | 753        |       | 455                    |       |
| Deferred  revenues                                                           |       | (570       | )          | (422                   | )          |
| Total  adjustments                                                           |       | 1,063      |       | (11,194                | )          |
| Net cash used in  operating activities                                       |       | (195       | )          | (13,210                | )          |
| Cash flows from  investing activities:                                       |       |       |       |                   |       |
| Increase in  restricted cash                                                 |       | (3,003     | )          | —                 |       |
| Purchase of  property, plant and equipment                                   |       | (296       | )          | (407                   | )          |
| Other assets                                                                 |       | —     |       | (78                    | )          |
| Net cash used in  investing activities                                       |       | (3,299     | )          | (485                   | )          |
| Cash flows from  financing activities:                                       |       |       |       |                   |       |
| Proceeds on  revolving lines of credits                                      |       | —     |       | 6,500                  |       |
| Principal  payments on long-term debt                                        |       | (2         | )          | (2                     | )          |
| Purchase of  treasury stock                                                  |       | (86        | )          | —                 |       |
| Proceeds from  issuances of common stock                                     |       | 19         |       | 8                      |       |
| Net cash (used  in) provided by financing activities                         |       | (69        | )          | 6,506                  |       |
| Net decrease in  cash and cash equivalents                                   |       | (3,563     | )          | (7,189                 | )          |
| Cash and cash  equivalents, beginning of period                              |       | 11,267     |       | 15,636                 |       |
| Cash and cash  equivalents, end of period                                    |       | $          | 7,704      |                   | $          | 8,447 |   |

 

**SupplementalDisclosure of Cash Flow Information:**

The Company paid interestof $359 and $332 during the three months ended March 31, 2009 and 2008,respectively.

The Company paid incometaxes of $37 and $21 during the three months ended March 31, 2009 and2008, respectively.

 

See accompanying notes to the condensed consolidatedfinancial statements

 

4

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** **

**EFJOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Threemonths ended March 31, 2009 and 2008**

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

 

**1. GENERAL**

 

The condensedconsolidated balance sheet of EF Johnson Technologies, Inc. at December 31,2008, presented within this Report on Form 10-Q, has been derived fromaudited consolidated financial statements at that date. The condensedconsolidated financial statements as of March 31, 2009 and for the threemonths ended March 31, 2009 and 2008 are unaudited. The condensedconsolidated financial statements reflect all normal and recurring accruals andadjustments that, in the opinion of management, are necessary for a fairpresentation of the financial position, operating results, and cash flows forthe interim periods presented in this quarterly report. The condensedconsolidated financial statements should be read in conjunction with theconsolidated financial statements and notes thereto, together with management’sdiscussion and analysis of financial condition and results of operations,contained in our Annual Report on Form 10-K for the year ended December 31,2008. The results of operations and cash flows for the three months ended March 31,2009 are not necessarily indicative of the results for any other period or theentire fiscal year ending December 31, 2009.

 

At the Company’s May 28,2008 Annual Meeting of Stockholders, the Stockholders approved an amendment ofthe Company’s Certificate of Incorporation to change the corporate name fromEFJ, Inc. to EF Johnson Technologies, Inc. The Company’s stock isquoted on the NASDAQ Global Market under the symbol “EFJI”, and its tickersymbol did not change.

 

Unless the contextotherwise provides, all references to “the Company”, “we,” “us,” and “our”include EF Johnson Technologies, Inc., its predecessor entity and itssubsidiaries, including E.F. Johnson Company, Transcrypt International, Inc.,and 3e Technologies International, Inc. on a consolidated basis. Allreferences to “EFJohnson” refer to E.F. Johnson Company, all references to “Transcrypt”refer to Transcrypt International, Inc., and all references to 3eTI referto 3e Technologies International, Inc.

 

**2. ORGANIZATION AND CONSOLIDATION**

 

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

 

·                  mobile and portable wireless radios;

 

·                  stationary transmitters / receivers (base stations orrepeaters);

 

·                  infrastructure equipment and systems;

 

·                  secure encryption technologies for proprietarywireless radios;

 

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

 

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

 

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

 

Previously theCompany was organized, and reported its financial results, as a parent companywith two segments, Private Wireless Communications and Secured Communications. Having recognized that the public safety/public service market is movingtowards convergent telecommunications solutions, the continued demand forinteroperability and the transition from analog to digital platforms, wereorganized the Company in January 2008 into a single centralizedcorporate structure in order to be competitive in this market. In light ofthese changes, the Company reassessed its segment reporting, and beginning withthe first quarter of 2008, we have no segments to report.

 

5

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**EFJOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Threemonths ended March 31, 2009 and 2008**

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

 

**3. RESTATEMENT**

 

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

 

The previously filedannual report on Form 10-K for 2007 and quarterly reports on Form 10-Qaffected by the restatements have not been amended and should not be reliedupon.

 

On March 30, 2009,the Audit Committee (the “Audit Committee”) of the Company’s Board of Directorsconcluded that, upon the recommendation of management, in consultation withGrant Thornton LLP (“Grant Thornton”), the Company’s independent registeredpublic accounting firm, the Company’s previously issued financial statementsfor each of the quarters ended September 30, 2007 and March 31, June 30and September 30, 2008, respectively, and for the fourth quarter and yearended December 31, 2007, required restatement.

 

During the third quarterof 2007, the Company entered into a memorandum of understanding with one of itsvendors in an effort to resolve a dispute between the parties regarding anoutstanding non-trade receivable. The agreement granted credits on futurepurchases to the Company, and therefore should have been accounted for byreducing the cost of future inventory purchases, and subsequently cost ofsales, over the period of the agreement, and the outstanding receivable shouldhave been written off. Prior to the restatement, the Company recorded creditsreceived as a result of this agreement as collections of a receivable insteadof a reduction of inventory cost. As a result, the Company wrote off this “OtherReceivable” balance as of the third quarter of 2007, and the related credits onfuture purchases received under this agreement are being treated as a reductionto cost of sales resulting from the lower cost basis of inventory. Thewrite-off of this receivable was charged to cost of sales, as the transactionsthat generated the disputed receivables related to the transfer of inventory atcost to a contract manufacturer. Based on estimated purchases, we anticipatethat approximately $2.7 million of credits remaining at December 31, 2008will be earned over the next two to three years pursuant to this agreement.

 

This adjustment is a non-cash adjustment in 2007 and2008. Future purchases covered by the memorandum of understanding will have apositive impact on our gross margin and operating income on a going forwardbasis. For the three months ended March 31, 2009, we recognized $117 incredits.

 

6

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**EFJOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Threemonths ended March 31, 2009 and 2008**

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

 

**3. RESTATEMENT (continued)**

 

The following tables (in thousands) summarize the netincreases (decreases) for the three months ended March 31, 2008. Theseadjustments did not change the amounts reported as cash flows from operating,investing, or financing activities.

 
| ** **                                               | ** ** | **As previously  reported  March 31,** | ** ** | ** **     | ** ** | **Restated  March 31,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------------|------------|----------------|------------|------------------------------|------------|
| ** **                                               | ** ** | **2008**                                         | ** ** | **Adjustment** | ** ** | **2008**                     | ** ** |
| ** **                                               | ** ** | ** **                                       | ** ** | ** **     | ** ** | ** **                   | ** ** |
| **Revenues**                                             |       | $                                                | 33,899     |           | $          | —                       |       | $ | 33,899 |   |
| Cost of sales                                            |       | 22,601                                           |       | (96            | )          | 22,505                       |       |
| Gross profit                                             |       | 11,298                                           |       | 96             |       | 11,394                       |       |
|                                                     |       |                                             |       |           |       |                         |       |
| Total operating  expenses                                |       | 13,229                                           |       | —         |       | 13,229                       |       |
| Loss from  operations                                    |       | (1,931                                           | )          | 96             |       | (1,835                       | )          |
| Interest  (expense) income and other income (expense)    |       | (181                                             | )          | —         |       | (181                         | )          |
| Net loss before  income taxes                            |       | $                                                | (2,112     | )              | $          | 96                           |       | $ | (2,016 | ) |
| Income tax  benefit (expense)                            |       | —                                           |       | —         |       | —                       |       |
| **Net  loss**                                            |       | $                                                | (2,112     | )              | $          | 96                           |       | $ | (2,016 | ) |
| Net loss per  share–basic and dilutive              |       | $                                                | (0.08      | )              | $          | —                       |       | $ | (0.08 | ) |
| Weighted average  common shares– basic and dilutive |       | 26,062,748                                       |       | —         |       | 26,062,748                   |       |
|                                                          |            |                                                  |            |                |            |                              |            |  |  |  |  |

 

7

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**EFJOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Threemonths ended March 31, 2009 and 2008**

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

 

**3. RESTATEMENT (continued)**

 
| ** **                                                | ** ** | **As previously  reported  March 31,** | ** ** | ** **     | ** ** | **Restated  March 31,** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------------|------------|----------------|------------|------------------------------|------------|
| ** **                                                | ** ** | **2008**                                         | ** ** | **Adjustment** | ** ** | **2008**                     | ** ** |
| **Assets**                                                |       |                                             |       |           |       |                         |       |
| Cash and cash  equivalents                                |       | $                                                | 8,447      |           | $          | —                       |       | $ | 8,447 |   |
| Accounts  receivable                                      |       | 28,461                                           |       | —         |       | 28,461                       |       |
| Receivables–other                                    |       | 7,163                                            |       | (3,350         | )          | 3,813                        |       |
| Cost in excess  of billings on uncompleted contracts      |       | 4,762                                            |       | —         |       | 4,762                        |       |
| Inventories, net                                          |       | 33,918                                           |       | —         |       | 33,918                       |       |
| Prepaid Expenses                                          |       | 1,479                                            |       | —         |       | 1,479                        |       |
| Total current  assets                                     |       | 84,230                                           |       | (3,350         | )          | 80,880                       |       |
|                                                      |       |                                             |       |           |       |                         |       |
| Property, plant  and equipment, net                       |       | 6,795                                            |       | —         |       | 6,795                        |       |
| Goodwill                                                  |       | 20,040                                           |       | —         |       | 20,040                       |       |
| Other intangible  assets, net of accumulated amortization |       | 13,414                                           |       | —         |       | 13,414                       |       |
| Other assets                                              |       | 430                                              |       | —         |       | 430                          |       |
| TOTAL ASSETS                                              |       | $                                                | 124,909    |           | $          |  (3,350                 | )          | $ | 121,559 |   |
|                                                      |       |                                             |       |           |       |                         |       |
| **Liabilities**                                           |       |                                             |       |           |       |                         |       |
| Line of Credit                                            |       | $                                                | 6,500      |           | $          | —                       |       | $ | 6,500 |   |
| Current portion  of long-term debt obligations            |       | 8                                                |       | —         |       | 8                            |       |
| Accounts payable                                          |       | 10,673                                           |       | —         |       | 10,673                       |       |
| Accrued expenses                                          |       | 10,321                                           |       | —         |       | 10,321                       |       |
| Billings in  excess of cost on uncompleted contracts      |       | 676                                              |       | —         |       | 676                          |       |
| Deferred Revenue                                          |       | 588                                              |       | —         |       | 588                          |       |
| Total current  liabilities                                |       | 28,766                                           |       | —         |       | 28,766                       |       |
|                                                      |       |                                             |       |           |       |                         |       |
| Long-term debt  obligations, net of current portion       |       | 15,013                                           |       | —         |       | 15,013                       |       |
| Deferred Tax  Liability                                   |       | 1,489                                            |       | —         |       | 1,489                        |       |
| Other  liabilities                                        |       | 1,134                                            |       | —         |       | 1,134                        |       |
| TOTAL  LIABILITIES                                        |       | 46,402                                           |       | —         |       | 46,402                       |       |
|                                                      |       |                                             |       |           |       |                         |       |
| **Equity**                                                |       |                                             |       |           |       |                         |       |
| Shareholders’  Equity                                |       | 262                                              |       | —         |       | 262                          |       |
| Additional  paid-in capital                               |       | 154,006                                          |       | —         |       | 154,006                      |       |
| Accumulated  other comprehensive loss                     |       | (1,107                                           | )          | —         |       | (1,107                       | )          |
| Accumulated  deficit                                      |       | (74,654                                          | )          | (3,350         | )          | (78,004                      | )          |
| TOTAL  STOCKHOLDERS’ EQUITY                          |       | 78,507                                           |       | (3,350         | )          | 75,157                       |       |
|                                                      |       |                                             |       |           |       |                         |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY          |       | $                                                | 124,909    |           | $          |  (3,350                 | )          | $ | 121,559 |   |

 

**4. NET LOSS PER SHARE**

 

Basic loss per share (“EPS”) is calculated based uponthe weighted average number of common shares outstanding during the period. Thediluted EPS calculation reflects the potential dilution from common stockequivalents such as stock options, stock satisfied stock appreciation rights (“SSAR’s”),restricted stock grants and restricted stock units (collectively “IncentiveShares”). For the three months ended March 31, 2009 and 2008, alloutstanding incentive shares of 1,889,919 and 1,643,572, respectively, wereconsidered anti-dilutive due to the net loss in each quarter. For the threemonths ended March 31, 2009 and 2008, outstanding incentive shares of584,630 and 509,558, respectively, had exercise prices lower than the average marketprice of the common stock for the respective periods. Outstanding incentiveshares that had exercise prices higher than the average market price of thecommon stock for the periods were considered anti-dilutive and excluded fromthe calculation of diluted weighted average common shares.

 

We use thetreasury stock method to calculate diluted weighted average common shares, asif all such options were outstanding for the periods presented.

 

**5. 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, 2009, we recognized compensationexpense of $0.3 million related to options and $0.1 million related to restricted stock grants andrestricted stock units. Additionally, $0.1 million of compensation expense wasrecognized related to equity grants made to certain named executive officersassociated with performance based incentives earned for meeting certainoperational, new product introductions and other personal goals.  For the three months ended March 31,2008, we recognized compensation expense of $0.4 million related to options and$0.2 million related to restricted stock grants and restricted stock units.

 

8

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**EFJOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Threemonths ended March 31, 2009 and 2008**

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

 

At the Company’s May 28,2008 Annual Meeting of Stockholders, the Stockholders approved an amendment tothe EFJ, Inc. 2005 Omnibus Incentive Compensation Plan to increase thenumber of shares available for issuance pursuant to the plan by 1,500,000shares.

 

**6. ESCROW FUND SETTLEMENT**

 

On January 13, 2009, the Company entered into a Settlement Agreementand Mutual Release (the “Settlement Agreement”) settling a claim made by theCompany against the escrow fund established in connection with the acquisitionof 3eTI by the Company in 2006.  Pursuantto the Agreement and Plan of Merger (the “Merger Agreement”), dated July 10,2006, by and among the Company, 3eTI, Avanti Acquisition Corp., Chih-Hsiang Li,as Stockholders’ Agent, and Steven Chen, James Whang, Chih-Hsiang Li and AEPCO, Inc.(as the “Principal Stockholders”), $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, theCompany made a claim against the escrow fund for damages arising out of certainalleged breaches of representations and warranties contained in the MergerAgreement.

 

Pursuant to the terms of the Settlement Agreement, the Company receivedon January 16, 2009, approximately $2.8 million, inclusive of interest,out of the escrow fund.  The remainingbalance of the escrow fund (or approximately $1.1 million, inclusive ofinterest) was paid out to the former stockholders of 3eTI pursuant to the termsof the Merger Agreement.  The SettlementAgreement also contains a mutual release of liability for claims related to theacquisition of 3eTI by the Company.

 

The escrow funds received as part of the settlement were recorded as areduction of operating expense. The Company previously incurred research anddevelopment costs in connection with the re-design, re-testing andre-certification of certain 3eTI products to bring them up to specificationsrepresented to exist at the acquisition date.

 

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

 

On July 19,2006, we entered into an interest rate swap agreement to manage interest costsand risks associated with changing interest rates, not for speculative ortrading purposes. The interest rate swap has been designated as a cash flowhedge and is recorded in the consolidated financial statements at fair value.Changes in the fair value of the swap have been recorded in AccumulatedComprehensive Loss in the balance sheet as the derivative is assessed aseffectively hedged at March 31, 2009. Changes in the fair value of theswap would be reclassified to other income (expense) to the extent the hedginginstrument is determined to be ineffective.

 

The interest rateswap agreement effectively converts the variable LIBOR component of theinterest rate on the $15.0 million term loan to a fixed rate of 5.64%. Underthe terms of the interest rate swap agreement, the Company will pay 5.64% andthe 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 $1.0 million and is included withother long-term liabilities and accumulated other comprehensive loss in theconsolidated balance sheet at March 31, 2009. The following is a summaryof comprehensive loss:

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **March 31,**               |
| ** **                                    | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| ** **                                    | ** ** | ** **                       | ** ** | **(restated)** | ** ** |
| Net loss                                      |       | $                                | (1,258     | ) | $ | (2,016 | ) |
| Reclassification  to interest expense         |       |                             | (192       | ) |   | (74 | ) |
| Fair value  adjustment for interest rate swap |       | 311                              |       | (323 | ) |
| Comprehensive  loss                           |       | $                                | (1,139     | ) | $ | (2,413 | ) |

 

9

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**EF JOHNSONTECHNOLOGIES, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Three months ended March 31, 2009 and 2008**

**(Unaudited and in thousands, except share and pershare data)**

 

**8. INVENTORIES**

 

Thefollowing is a summary of inventories:

 
| ** **                  | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|-----------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Raw materials  and supplies |       | $                            | 11,967     |                            | $          | 11,598 |   |
| Work in progress            |       | 245                          |       | 1,049                           |       |
| Finished goods              |       | 24,912                       |       | 24,673                          |       |
| Service  inventories        |       | 3,162                        |       | 3,163                           |       |
|                        |       | 40,286                       |       | 40,483                          |       |
| Reserve for  obsolescence   |       | (4,047                       | )          | (3,161                          | )          |
| Total  inventories          |       | $                            | 36,239     |                            | $          | 37,322 |   |

 

**9. GOODWILL AND INTANGIBLE ASSETS**

 

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

 

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

 

Noevents occurred during the three months ended March 31, 2009 and 2008,respectively, that would indicate that an impairment of such assets had takenplace as of such dates.

 

Amortizationexpense, related to intangible assets which are subject to amortization, was$0.2 and $0.4 million for the three months ended March 31, 2009 and March 31,2008, respectively. Intangible assets consist of the following as of the datesindicated:

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

 
| ** **                                  | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                                  | ** ** | **Gross**                    | ** ** | ** **                      | ** ** | **Accumulated** | ** ** | **Net** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | **Net** | ** ** |
| ** **                                  | ** ** | **Amount**                   | ** ** | **Impairment**                  | ** ** | **Amortization** | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Impairment** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
|                                        |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Intangible  assets subject to amortization: |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Existing  technology                        |       | $                            | 6,190      |                            | $          | — |   | $ | (2,805 | ) | $ | 3,385 |   | $ | 6,190 |   | $ | — |   | $ | (2,667 | ) | $ | 3,523 |   |
| Customer  relationships                     |       | 3,756                        |       | —                          |       | (2,014 | ) | 1,742 |   | 4,800 |   | (1,044 | ) | (1,908 | ) | 1,848 |   |
| License                                     |       | 159                          |       | —                          |       | (159 | ) | — |   | 320 |   | (161 | ) | (159 | ) | — |   |
| Covenant  not-to-compete                    |       | 400                          |       | —                          |       | (400 | ) | — |   | 400 |   | — |   | (400 | ) | — |   |
| Trademarks/Patents                          |       | 209                          |       | —                          |       | (86 | ) | 123 |   | 209 |   | — |   | (84 | ) | 125 |   |
|                                        |       | $                            | 10,714     |                            | $          | — |   | $ | (5,464 | ) | $ | 5,250 |   | $ | 11,919 |   | $ | (1,205 | ) | $ | (5,218 | ) | $ | 5,496 |   |

 

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

 

Weamended our secured line of credit agreement with Bank of America in July 2006to retain a revolving line of credit of up to $15.0 million and include a termloan of $15.0 million (the “Loan Agreement”). Both borrowings bear interest ata variable rate based on the London Interbank Offered Rate (“LIBOR”) plus amargin (“LIBOR Margin”) determined by our ratio of debt to earnings beforeinterest, taxes, depreciation, and amortization (“EBITDA”). The LIBOR Marginwas 400 basis points as of March 31, 2009 and was 200 basis points at March 31,2008. As discussed below, an amendment to the 

 

10

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**EF JOHNSONTECHNOLOGIES, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Three months ended March 31, 2009 and 2008**

**(Unaudited and in thousands, except share and pershare data)**

 

Loan Agreement was executedin March 2009 that resulted in increased basis points and lowered therevolving line of credit to $10.0 million. Interest rates of 4.56% and 4.62%were in effect at March 31, 2009 and 2008, respectively. The LoanAgreement expires June 30, 2010.

 

The$15.0 million term loan was fully funded and used to finance the acquisition of3eTI dated July 10, 2006. At March 31, 2009 and December 31,2008, no borrowings had been made on the revolving line of credit. There was $0.75million open letters of credit under our line of credit at March 31, 2009and there were no open letters of credit under our line of credit at December 31,2008. The total available remaining credit under the line of credit was $9.3million and $14.4 million as of March 31, 2009 and December 31,2008, respectively.

 

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

 

Asnoted in our Form 10-K for the period ending December 31, 2008, wewere not in compliance with the financial covenants of the Loan Agreement forthe quarter ended December 31, 2008. As a result, effective March 16,2009 we executed an Amendment to the Loan Agreement whereby Bank of Americawaived such financial covenant defaults on a one-time basis, and amended theLoan Agreement to, among other things, lower the revolving line of credit from$15.0 million to $10.0 million, revise such financial covenants, add additionalcovenants, and to modify the advance and borrowing provisions under the LoanAgreement. In order to maintain compliance with the terms of the Amendment, theCompany pledged as additional cash collateral for the remaining term of theterm loan $3.0 million on the effective date of the Amendment. Furthermore,beginning with the quarter ending June 30, 2009, we are required tomaintain a certain level of EBITDA, maintain certain fixed charge coverage ratioon a cumulative basis beginning April 1, 2009, a minimum funded debt toEBITDA ratio on an annualized basis beginning April 1, 2009 for eachquarterly financial reporting period through June 30, 2010 and limitcapital expenditures to $2.5 million for 2009. In addition, the interest rateon the revolving note issuable pursuant to the Loan Agreement has been amendedto a floating rate equal to LIBOR plus a Libor Margin ranging from 2.50% to5.00% through the term of the note based on the Company’s funded debt toEBITDA.

 

TheCompany was in compliance with all financial and negative covenants at March 31,2009.  As discussed above, compliancewith new, more restrictive financial covenants under the Loan Agreement will berequired beginning in the Company’s second quarter.  Management has noted that, based on currentprojections, if certain orders are not received and shipped in the secondquarter, the Company may not meet those more restrictive loan covenants for thesecond quarter.  Management’s evaluationis based on recent experience with expected orders being temporarily delayed bycustomers.   In such event, theCompany intends to attempt to obtain a waiver of non compliance from thelender, failing which the lender could declare the Company in default under theLoan Agreement and accelerate the payment of the $15.0 million term loan,require payment of any borrowings under the revolving line of credit and raisethe interest rate an additional 4%. There can be no assurance that the Company will be able to obtain suchwaiver.

 

Ifthe Company is not in compliance with the bank covenants at the end of thesecond quarter and is unable to obtain a waiver from such noncompliance, theCompany will be required to classify the $15 million term loan as a current liabilityas of the end of the second quarter.Additionally, to the extent existing resources and cash from operationsare insufficient to pay these obligations; we may need to raise additionalfunds through public or private equity or debt financing. These funds may notbe available, or if available, we may not be able to obtain them on termsfavorable to us.

 

Inany event, however, the term loan will be classified as current in the secondquarter of 2009 due to its maturity date of June 10, 2010.

 

**11. INCOME TAXES**

 

Wedid not record a tax benefit or provision for either the three months ended March 31,2009 or 2008 primarily due to our fully reserved deferred tax assets requiringno further provision for income taxes for each respective period end. The Companyhas unrecognized tax benefits of approximately $0.5 million that did not changesignificantly during the three 

 

11

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**EF JOHNSONTECHNOLOGIES, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Three months ended March 31, 2009 and 2008**

**(Unaudited and in thousands, except share and pershare data)**

 

months ended March 31,2009 relating to carry forward of business credits. The adoption of FIN 48 didnot result in the recognition of additional tax liability for unrecognizedincome tax benefits since the tax benefits have not be included in prior incometax return filings. In addition, future changes in the unrecognized tax benefitwill have no net impact on the effective tax rate due to the existence of thevaluation allowance.

 

Asof March 31, 2009, we have no accrual requirement for interest orpenalties related to uncertain tax positions since the tax benefits have notbeen included in prior income tax return filings.

 

Thetax years 2004-2008 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 2003 infuture tax returns, the related tax benefit for the period in which the benefitarose may be subject to examination.

 

**12. WARRANTY COSTS**

 

Weprovide a one-to-three year warranty on substantially all of our product sales,depending upon certain terms and conditions of the sale, and estimate futurewarranty claims based on historical experience and anticipated costs to beincurred over the life of the warranty. Warranty expense is accrued at the timeof sale with an additional accrual for specific items after the sale when theirexistence is known and amounts are both extraordinary and determinable. Areconciliation of changes in our accrued warranty reserve as of March 31,2009 is as follows:

 
| ** **                      | ** ** | **Balance at**             | ** ** | **Charged to** | ** ** | **Deduction /** | ** ** | **Balance at**          | ** ** |
|---------------------------------|------------|---------------------------------|------------|---------------------|------------|----------------------|------------|------------------------------|------------|
| ** **                      | ** ** | **December 31, 2008** | ** ** | **Expense**         | ** ** | **Expenditures**     | ** ** | **March 31, 2009** | ** ** |
| Allowance for  Warranty Reserve |       | $                               | 3,116      |                | 898        |                 | 763        |                         | $          | 3,251 |   |
|                                 |            |                                 |            |                     |            |                      |            |                              |            |  |  |

 

**13. FAIR VALUE MEASUREMENT**

 

In September 2006, the FASB issued SFAS No. 157,*“Fair Value Measurements,”* (“SFAS 157”),which was effective for fiscal years beginning after November 15, 2007 andfor interim periods within those years. This statement defines fair value,establishes a framework for measuring fair value and expands the relateddisclosure requirements. This statement applies under other accountingpronouncements that require or permit fair value measurements. The statementindicates, among other things, that a fair value measurement assumes that thetransaction to sell an asset or transfer a liability occurs in the principalmarket for the asset or liability or, in the absence of a principal market, themost advantageous market for the asset or liability. SFAS 157 defines fairvalue based upon an exit price model.

 

The Company adopted the provisions of SFAS 157 as ofJanuary 1, 2008 relating to financial assets and liabilities.Non-recurring nonfinancial assets and nonfinancial liabilities include thosemeasured at fair value in goodwill impairment testing and indefinite livedintangible assets measured at fair value for impairment testing.

 

The provisions of SFAS 157 relating to non-recurringnonfinancial assets and nonfinancial liabilities will be applied ascircumstances require. Interest rate swaps are measured at fair valueindirectly through market corroboration, for substantially the full term of thefinancial instrument within Level 2 of the fair value hierarchy.

 

The following table provides the liabilities carriedat fair value measured on a recurring basis as of March 31, 2009 and 2008:

 
| ** **                                                  | ** ** | **Fair Value Measurements Using** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                  | ** ** | **Total Carrying  Value**                   | ** ** | **Quoted prices  in active  markets  (Level 1)** | ** ** | **Significant  other  observable  inputs  (Level 2)** | ** ** | **Significant  unobservable  inputs  (Level 3)** | ** ** |
| Interest rate  swap - liability at March 31, 2008 |       | $                                                | 1,107      |   | $ | — |   | $ | 1,107 |   | $ | — |   |
| Interest rate  swap - liability at March 31, 2009 |       | $                                                | 969        |   | $ | — |   | $ | 969 |   | $ | — |   |

 

In February 2007, the FASB issued SFAS No. 159,*“The Fair Value Option for Financial Assets andFinancial Liabilities — Including an amendment of FASB Statement No. 115,”*(“SFAS 159”) which is effective for fiscal years

 

12

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**EF JOHNSONTECHNOLOGIES, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Three months ended March 31, 2009 and 2008**

**(Unaudited and in thousands, except share and pershare data)**

 

beginningafter November 15, 2007. This statement permits entities to choose tomeasure many financial instruments and certain other items at fair value. Thisstatement also establishes presentation and disclosure requirements designed tofacilitate comparisons between entities that choose different measurementattributes for similar types of assets and liabilities. Unrealized gains andlosses on items for which the fair value option is elected would be reported inearnings. We have adopted SFAS 159 and have elected not to measure any additionalfinancial instruments and other items at fair value.

 

**14. COMMITMENTS AND CONTINGENCIES**

 

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

 

Thetotal we have accrued in regards to all legal proceedings as of March 31,2009 and December 31, 2008 was $0.1 million.

 

Inthe normal course of our business activities, we are required under certainsupplier agreements and contracts with various government authorities toprovide letters of credit and bonds that may be drawn upon if we fail to performunder these agreements or contracts. There was $0.75 million open letters ofcredit under our line of credit at March 31, 2009 and there were no openletters of credit under our line of credit at December 31, 2008. Bonds,which expire on various dates, totaled $2.4 million on March 31, 2009 and December 31,2008. No bonds had been drawn upon at either date.

 

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

 

OnNovember 15, 2007, the Company committed to an organizational plan (the “Plan”)to shift from three divisions to one integrated corporate structure focused onsecure wireless communications for government and industrial customers. ThePlan was expected to improve efficiencies in our operations, reduce ourinfrastructure costs and to support a new technology roadmap driving towards astreamlined and more effective structure. Implementation of the Plan includedsenior and middle management changes as well as staff reductions designed toeliminate redundant positions and reflects the Company’s decision toconsolidate operations and move production from three locations into acentralized operations and outsourcing program in the Dallas/Fort Worth area.

 

Coststhat were directly associated with the Plan were being recorded as “restructuringcosts” and were included in general and administrative expenses. Other coststhat did not qualify as restructuring costs were 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 with SFAS No. 146, *Accounting for Costs Associated with Exit or DisposalActivities**,*** and otherrelevant guidance, that provides that a liability for a cost associated with anexit or disposal activity shall be recognized at its fair value in the periodin which the liability is incurred. In particular, employee-related terminationcosts associated with the relocation are generally recognized ratably over theperiod that the employees are required to provide services in order to earn therespective termination benefit.

 

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

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

 

13

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**EF JOHNSONTECHNOLOGIES, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Three months ended March 31, 2009 and 2008**

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

 

The following tablesummarizes the beginning and ending liability reserve for exit costs as of March 31,2009:

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

 

**16.****RELATEDPARTY TRANSACTIONS**

 

Duringthe three months ended March 31, 2009 and 2008, DRS Technologies, Inc.(“DRS”) and its related subsidiaries (part of Finmeccanica)acquired approximately $0.4 million and $8.1 million, respectively, of ourproducts.  As of March 31, 2009 and December 31,2008 there were amounts due from DRS for $1.0 million and $1.3 million,respectively. Since August 1995, Mark Newman has been the Chairman,President and Chief Executive Officer of DRS. Mr. Newman was appointed adirector of the Company in 2005. It is anticipated that the Company may engagein similar business with DRS in the future.

 

14

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**17. RECENTLY ISSUED ACCOUNTINGSTANDARDS**

 

In December 2007, the FASB issued SFAS No.141 (revised 2007), *Business Combination*“SFAS141R”), which replaces FASB Statement No. 141. SFAS 141R establishes principlesand requirements for how an acquirer recognizes and measures in its financialstatements the identifiable assets acquired, the liabilities assumed, anynoncontrolling interest in the acquirer and the goodwill acquired. TheStatement also establishes disclosure requirements which will enable users toevaluate the nature and financial effects of the business combination. SFAS141R is to be applied prospectively to business combinations for which theacquisition date is on or after an entity’s fiscal year that begins afterDecember 15, 2008. The impact of our adoption of SFAS 141R will depend upon thenature and terms of business combinations, if any, that we consummate on orafter January 1, 2009.

 

In December 2007, the FASB issued SFAS No.160, *Noncontrolling Interests inConsolidated Financial Statements—an amendment of Accounting Research BulletinNo. 51*(“SFAS 160”), which establishes accounting and reportingstandards for ownership interests in subsidiaries held by parties other thanthe parent, the amount of consolidated net income attributable to the parentand to the noncontrolling interest, changes in a parent’s ownership interestand the valuation of retained noncontrolling equity investments when asubsidiary is deconsolidated. The Statement also establishes reportingrequirements that provide sufficient disclosures that clearly identify anddistinguish between the interests of the parent and the interests of thenoncontrolling owners. SFAS 160 is effective as of the beginning of an entity’sfiscal year that begins after December 15, 2008. The adoption of SFAS 160currently has no impact on our Consolidated Financial Statements.

 

In March 2008, the FASB issued SFAS No. 161, *Disclosures about Derivative Instruments and HedgingActivities, an amendment of FASB Statement No. 133*(“SFAS 161”)*,* which requires additional disclosuresabout the objectives of using derivative instruments, the method by which thederivative instruments and related hedged items are accounted for under FASBStatement No.133 and its related interpretations, and the effect of derivativeinstruments and related hedged items on financial position, financialperformance, and cash flows. SFAS 161 also requires disclosure of the fairvalues of derivative instruments and their gains and losses in a tabularformat. SFAS 161 is effective for financial statements issued for fiscal yearsand interim periods beginning after November 15, 2008, withearly adoption encouraged.  The Company adopted this standardeffective January 1, 2009. The implementation of this standard did not have amaterial impact on our consolidated financial statements.

 

In April 2008, the FASB issued StaffPosition No. 142-3, *Determination of theUseful Life of Intangible Assets*(“FSP 142-3”). FSP 142-3 amends thefactors that should be considered in developing renewal or extensionassumptions used to determine the useful life of a recognized intangible assetunder SFAS No. 142, *Goodwill and OtherIntangible Assets*. FSP 142-3 is effective for fiscal yearsbeginning after December 15, 2008 and interim periods within those fiscalyears, requiring prospective application to intangible assets acquired afterthe effective date. The Company will be required to adopt the principles of FSP142-3 with respect to intangible assets acquired on or after January 1, 2009.Due to the prospective application requirement, the Company is unable todetermine what effect, if any, the adoption of FSP 142-3 will have on itsconsolidated statement of financial position, results of operations or cashflows.

 

In May 2008, the FASB issued SFAS No. 162, *The Hierarchy of Generally Accepted AccountingPrinciples*(“SFAS 162”). SFAS 162 identifies the sourcesof accounting principles and the framework for selecting the principles used inthe preparation of financial statements of nongovernmental entities that arepresented in conformity with generally accepted accounting principles (the GAAPhierarchy). SFAS 162 is effective for financial statements issued forfiscal years and interim periods beginning after November 15, 2008. TheCompany’s adoption of SFAS 162 did not have a material impact on ourconsolidated financial statements.

 

In November 2008, the FASB issued EITF IssueNo. 08-7, *Accounting for DefensiveIntangible Assets*(“EITF 08-7”). EITF 08-7 addresses theaccounting for assets acquired in a business combination or asset acquisitionthat an entity does not intend to actively use, otherwise referred to as a‘defensive asset.’

 

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EITF 08-7 requires defensive intangible assets to be initiallyaccounted for as a separate unit of accounting and not included as part of thecost of the acquirer’s existing intangible asset(s) because it is separatelyidentifiable. EITF 08-7 also requires that defensive intangible assets beassigned a useful life in accordance with paragraph 11 of SFAS 142and is effective for financial statements issued for fiscal years beginningafter December 15, 2008. Dueto the prospective application requirement, the Company is unable to determinewhat effect, if any, the adoption of FSP 142-3 will have on its consolidatedstatement of financial position, results of operations or cash flows.

 

In April 2009, the FASB issued FSP FAS 115-2 and FAS124-2, *Recognition and Presentation ofOther-Than-Temporary Impairments*. This FSP amends theother-than-temporary impairment guidance for debt securities to make theguidance more operational and to improve the presentation and disclosure ofother-than-temporary impairments in the financial statements. The mostsignificant change the FSP brings is a revision to the amount ofother-than-temporary loss of a debt security recorded in earnings. FSP FAS115-2 and FAS 124-2 are effective for interim and annual reporting periodsending after June 15, 2009. The Company does not believe that theimplementation of this standard will have a material impact on its consolidatedfinancial statements.

 

In April 2009, the FASB issued FSP FAS 157-4, *Determining Fair Value When the Volume and Level ofActivity for the Asset or Liability Have Significantly Decreased andIdentifying Transactions That Are Not Orderly*. This FSP providesadditional guidance for estimating fair value in accordance with FASB StatementNo. 157, *Fair Value Measurements*,when the volume and level of activity for the asset or liability havesignificantly decreased. This FSP also includes guidance on identifyingcircumstances that indicate a transaction is not orderly. This FSP emphasizesthat even if there has been a significant decrease in the volume and level ofactivity for the asset or liability and regardless of the valuationtechnique(s) used, the objective of a fair value measurement remains the same.Fair value is the price that would be received to sell an asset or paid totransfer a liability in an orderly transaction (that is, not a forcedliquidation or distressed sale) between market participants at the measurementdate under current market conditions. FSP FAS 157-4 is effective for interimand annual reporting periods ending after June 15, 2009, and is appliedprospectively. The Company does not believe that the implementation of thisstandard will have a material impact on its consolidated financial statements.

 

In April 2009, the FASB issued FSP FAS FAS 107-1 andAPB 28-1, *Interim Disclosures about FairValue of Financial Instruments.* This FSP amends FASB Statement No.107, *Disclosures about Fair Value ofFinancial Instruments*, to require disclosures about fair value offinancial instruments for interim reporting periods of publicly tradedcompanies as well as in annual financial statements. This FSP also amends APBOpinion No. 28, *Interim Financial Reporting*,to require those disclosures in summarized financial information at interimreporting periods. FSP FAS 107-1 and APB 28-1 are effective for interim andannual reporting periods ending after June 15, 2009. The Company does notbelieve that the implementation of this standard will have a material impact onits consolidated financial statements.

 

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

 

Discussions of certain matters contained in this Quarterly Report on Form 10-Qmay constitute forward-looking statements under Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended, (the “Exchange Act”). These forward-lookingstatements are based upon our current expectations, estimates and projectionsabout our business and our industry, and reflect our beliefs and assumptionsbased upon information available to us at the date of this report. In somecases, you can identify these statements by words such as “if,” “may,” “might,”“will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,”“potential,” “continue,” and other similar terms. These forward-lookingstatements relate to, among other things, the results of our productdevelopment efforts, future sales and expense levels, our future financialcondition, liquidity, and business prospects generally, the impact of ourrelocation of operating facilities, and outsourcing of manufacturing on ouroperating results, perceived opportunities in the marketplace for our products,and our other business plans for the future.

 

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

 

The following discussion is intended to provide a better understandingof the significant changes in trends relating to our financial condition andresults of operations. Management’s Discussion and Analysis of FinancialCondition and Results of Operations should be read in conjunction with theaccompanying Condensed Consolidated Financial Statements and Notes thereto.

 

**Overview**

 

Previously the Companywas organized, and reported its financial results, as a parent company with twosegments, Private Wireless Communications and Secured Communications. Having recognized that the public safety/public service market is movingtowards convergent telecommunications solutions, the continued demand forinteroperability and the transition from analog to digital platforms, wereorganized the Company in January 2008 into a single centralizedcorporate structure in order to be competitive in this market.

 

The operating structureof the Company also changed in the first quarter of 2008. Under the newstructure, all of the Company’s operations report up to the chief executiveofficer and president through the chief operating officer. The chief financialofficer, chief operating officer and general counsel report to the chiefexecutive officer and president.  Basedon the synergies of our products, customers, and organizational structure, theCompany now operates in a single segment.

 

We design, develop, market and support wireless radios and wirelesscommunications infrastructure and systems for digital and analog platforms. Inaddition, we offer encryption technologies for wireless voice, video and datacommunications and we also design, develop, market and support secure wirelessnetworking solutions that include Wi-Fi products, mesh networking, accesspoints, and client infrastructure products. The Company’s customers includefirst responders in public safety and public service, the federal government,and industrial organizations.

 

Due to the timing of orders and seasonality, our quarterly resultsfluctuate. We experience seasonality in our results in part due to governmentalcustomer spending patterns that are influenced by government fiscal year-endbudgets and appropriations. The unpredictable sales cycle coupled withlaunching new products and solutions can also cause variations from quarter toquarter.

 

*OurProducts and Solutions*

 

Our wireless radio offerings are primarily digital solutions designedto operate in both analog and digital system environments. Our products andsystems are based on industry standards designed to enhance interoperabilityamong systems, improve bandwidth efficiency, and integrate voice and datacommunications.

 

The Land Mobile Radio (“LMR”) industry utilizes two-way wirelesscommunications through wireless networks, which include infrastructurecomponents such as base stations, repeaters, transmitters and receivers,network switches and portable and mobile two-way communication radios.Individual users operate portable hand-held radios and vehicular-mounted radiosin their wireless communications system. Utilizing licensed RF spectrum, thecustomer owns and operates the wireless communication system that is networkedby linking together the infrastructure components. We develop customersolutions, which leverage the customer’s wireless system and wireless radioswith customer specific or enterprise wide applications.

 

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The majority of revenues are derived from the sale of wireless radioproducts. Our federal, state and local governmental agency customers areincreasingly demanding interoperable, secured communications products andsystems. We believe this demand has created opportunities for us as we believewe are positioned to provide these products and systems. As a result, we expectto continue to allocate a majority of our on-going research and developmentexpenditures to wireless radio features and enhancements, infrastructurecomponents and system development efforts.

 

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

 

We also design, develop, market and support customized wireless networkcentric products and systems which include secure Wi-Fi products, includingmesh networking, access point, bridge, and client infrastructure products, aswell as security software. We provide sensor network solutions, through ourInfoMatics® middleware, which enables 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,manufacturing representatives, distributors, and strategic partneringarrangements. We utilize our dealer network to assist in installing, servicing,selling and distributing our products. We also generate revenues through thefederal government under government funded research and development SmallBusiness Innovative Research programs (“SBIR”). Additionally, we offer ourproducts to commercial, non-governmental users.

 

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

 

Depending on the size and complexity of customerspecifications and requirements, products can be shipped to the customer in arelatively short period of time (typically 90 days), or with complexintegrations and various delivery dates, orders can span multiple years. Forexample, our longer-term system contracts and government services revenues aregenerated under customer contracts and agreements for which revenue is recordedunder the percentage-of-completion method.

 

**Descriptionof Operating Accounts**

 

*Revenues*. Revenues consist of product sales, services, and government-fundedresearch and development services and solutions net of returns and allowances.Longer-term system and government services revenues are recognized under thepercentage of completion method.

 

*Cost of Sales.* Cost of sales includes costs of componentsand materials, 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 costof sales and is affected by a number of factors, including competitive pricing,product mix, business segment mix, and cost of products and services.

 

*Research and Development.* Research and development expenses consistprimarily of costs associated with research and development personnel,materials, and the depreciation of research and development equipment andfacilities. We expense research and development costs as they are incurred.Research and development expenses relating to our government funded researchand development services are included as a component of cost of sales.

 

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

 

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*General and Administrative*. General and administrative expenses consistprimarily of salaries and other expenses associated with our management,accounting, information systems and operational functions. This expense alsoincludes the impact of equity-based compensation expense. Accounting forgovernment contracts delineates what is a direct charge allowable to include incontract costs and what is considered to be an indirect charge reflected asgeneral and administrative expenses. We consider indirect engineering labor andoperating costs such as quality, planning, operations, and company fringebenefits, general administrative salaries and other general administrativeexpenses as general and administrative expense.

 

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

 

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

 

**CriticalAccounting Policies**

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America (GAAP) requiresmanagement to make estimates and assumptions that affect amounts reported inour condensed consolidated financial statements and accompanying notes. We baseour estimates on historical experience and all known facts and circumstancesthat we believe are relevant. Actual results may differ materially from ourestimates. We believe the following accounting policies to be most critical toan understanding of our financial condition and results of operations becausethey require us to make estimates, assumptions and judgments about matters thatare inherently uncertain. Our critical accounting estimates include thoseregarding (1) revenues,(2) receivables, (3) inventories,(4) goodwill and other intangibleassets, (5) warranty costs, (6) incometaxes, (7) long-lived assets and (8) stock-based compensation. For a discussion of the critical accounting estimates, see “Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations — Critical Accounting Policies” in our Annual Report on Form 10-Kfor the year ended December 31, 2008.

 

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**Results of Operations**

 

The following table presents certain Condensed Consolidated Statementsof Operations information as a percentage of revenues during the periodsindicated:

 
| ** **                   | ** ** | **March 31,** | ** ** |
|------------------------------|------------|--------------------|------------|
| ** **                   | ** ** | **2009**           | ** ** | **2008** | ** ** |
| ** **                   | ** ** | ** **         | ** ** | **(restated)** | ** ** |
| Revenues                     |       | 100.0              | %          | 100.0 | % |
| Cost of sales                |       | 65.7               |       | 66.4 |   |
| Gross profit                 |       | 34.3               |       | 33.6 |   |
|                         |       |               |       |   |   |
| Operating  expenses:         |       |               |       |   |   |
| Research and  development    |       | 14.9               |       | 9.6 |   |
| Sales and  marketing         |       | 11.0               |       | 9.3 |   |
| General and  administrative  |       | 24.2               |       | 18.9 |   |
| Amortization of  intangibles |       | 1.1                |       | 1.2 |   |
| Escrow fund  settlement      |       | (12.5              | )          | — |   |
|                         |       |               |       |   |   |
| Total operating  expenses    |       | 38.7               |       | 39.0 |   |
| Loss from  operations        |       | (4.4               | )          | (5.4 | ) |
| Interest  expense, net       |       | (1.3               | )          | (0.5 | ) |
| Loss before  income taxes    |       | (5.7               | )          | (5.9 | ) |
| Income tax  provision        |       | —             |       | — |   |
| Net loss                     |       | (5.7               | )%         | (5.9 | )% |

 

**Comparisonof the Three Months Ended March 31, 2009 and 2008**

 

*Revenues.*Our revenues decreased $11.5 million, or 34%, to $22.4 million for thethree months ended March 31, 2009 from $33.9 million for the same periodin 2008. The decline was mainly attributable to lower federal orders anddeliveries coupled with a decline in revenues associated with the FCCre-banding effort.

 

*Gross Profit.*Our gross profit decreased $3.7 million, or32%, to $7.7 million in the three months ended March 31, 2009 from $11.4million for the same period in 2008. The decrease in gross profit wasattributable to the volume variance associated with the decline in revenue.Gross profit, as a percentage of revenues, or gross margin, was 34.3% for thethree months ended March 31, 2009, as compared to 33.6% for the sameperiod in 2008. Gross margin improved in the first quarter of 2009 primarilydue to improved product quality that resulted in lower cost of sales. Weanticipate margins to be stable over the remainder of fiscal year 2009.

 

*Research and Development.*Research and development expenses wererelatively flat at $3.3 million in the three months ended March 31, 2009and 2008, respectively. Research and development expenses as a percentage ofrevenues increased to 14.9% in the first three months of 2009 versus 9.6% forthe same period in 2008 mainly attributable to the decline in revenue.

 

*Sales and Marketing.*Sales and marketing expenses decreased $0.7million, or 21.8%, to $2.5 million in the three months ended March 31,2009 from $3.2 million in the same period in 2008. The decrease is mainlyattributable to lower marketing expenses associated with reduced labor andtrade show expenses. Sales and marketing expenses as a percentage of revenuesincreased to 11.0% in the first three months of 2009 versus 9.3% for the sameperiod in 2008 mainly attributable to the decline in revenue.

 

*General and Administrative.*General and administrative expenses decreased$1.0 million, or 15.6%, to $5.4 million for the three months ended March 31,2009 from $6.4 million for the same period in 2008. The decrease in expenses isprimarily attributable to lower incentive compensation accruals for 2009 andreduced stock compensation expense resulting from increased forfeiture rates inthe first quarter of 2009 as compared with the first quarter of 2008.

 

*Amortization of Intangibles.*Amortization of intangibles decreased $0.2million, or 40%, to $0.2 million for the three months ended March 31, 2009from $0.4 for the same period in 2008. The decrease relates to loweramortization of specifically identifiable intangible assets with a definitelife as a result of the impairment of certain amortizable assets during thefourth quarter of 2008.

 

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*Escrow fund settlement.* In connection with theacquisition of 3eTI in 2006, the total consideration paid by the Companyconsisted of $36.0 million in cash, which included $3.6 million to be held inescrow to indemnify the Company for any claims under the Agreement. In August 2008,the Company made a claim against the escrow fund for damages arising out ofcertain alleged breaches of representations and warranties contained in theMerger Agreement. In January 2009, we settled claims under the Agreementand received $2.8 million of the funds held in the escrow account. The escrow funds received as part of thesettlement were recorded as a reduction of operating expense. The Companypreviously incurred research and development costs in connection with there-design, re-testing and re-certification of certain 3eTI products to bringthem up to specifications represented to exist at the acquisition date.

 

*Interest Expense, net.*Interest expense, net increased $0.1 million,or 57%, to $0.3 million for the three months ended March 31, 2009 from$0.2  million for the same period in2008. This is attributable to interest on the term loan and lower interestincome earned on cash investments.

 

*Provision for Income Taxes.*We did not record a tax benefit or provisionfor either the three months ended March 31, 2009 or 2008 primarilyattributable to our fully reserved deferred tax assets requiring no furtherprovision for income taxes for each respective period end. The valuationreserve is based upon management’s conclusions regarding, among otherconsiderations, our cumulative loss position during three preceding years, ouroperating results during each period, our current and expected customer base,technological and competitive factors impacting our current products, andmanagement’s estimates of future earnings based on information currentlyavailable.

 

*Net Loss.*Net loss was $1.3 million for the three months ended March 31,2009, reflecting a decrease of $0.7 million, as compared to net loss of $2.0million for the same period in 2008. Excluding the $2.8 million received forthe escrow fund settlement, the net loss for the three months ended March 31,2009, would have been $4.1 million.

 

**Liquidityand Capital Resources**

 

The Company’s primary sources of liquidityare its cash and cash equivalents that were $7.7 million (net of $5.0 millionpledged restricted cash) at March 31, 2009 and $11.3 million at December 31,2008.  In addition, effective with theamended Loan Agreement dated March 16, 2009, we have a revolving line ofcredit for $10.0 million.

 

*Net cash from operating activities.*Our operating activities used cash of $0.2million and $13.2 million in the three months ended March 31, 2009 and2008, respectively.

 

During the first quarter of 2009, cash was used primarily resultingfrom a net loss of $1.3 million coupled with decreases in accounts payable,accrued expenses and deferred revenues totaling $3.0 million. Operating cashincludes $2.8 million received from the escrow fund settlement. Partially offsettingwere non-cash depreciation and amortization, stock compensation expense,reductions in accounts receivable, inventories and other amounting to $3.6million.

 

During the first quarter of 2008, cash was used primarily resultingfrom a net loss of $2.0 million coupled with increases in accounts receivableand decreases in accounts payable and accrued expenses amounting to $11.0million. The increase in accounts receivable reflects delays in cashcollections from certain customers during the quarter ended March 31,2008.

 

*Net cash from investing activities.* During the three months ended March 31,2009 and 2008, investing activities used $3.3 million and $0.5 million,respectively.  During the first threemonths of 2009, there was an increase in restricted cash of $3.0 millionrelating to the loan amendment noted above and the remainder was attributableto the purchase of property, plant and equipment. During the first three monthsof 2008, we invested primarily in the purchase of property, plant and equipment.

 

*Net cash from financing activities.*During the three months ended March 31,2009, financing activities were minimal. During the three months ended March 31,2008 financing activities provided $6.5 million in a borrowing from therevolving line of credit to cover short term cash requirements at the beginningof the second quarter due to delays in certain customer collections.

 

*Secured line of credit.*The Loan Agreement provides for customaryaffirmative and negative covenants, including maintenance of corporateexistence, rights, property, books and records and insurance, compliance withcontracts and laws, and certain reporting requirements, as well as limitationson debt, liens, fundamental changes, acquisitions, transfers of assets,investments, loans, guarantees, use of proceeds, sale-leaseback transactionsand capital expenditures. In addition, the Loan Agreement contains certainfinancial covenants including a maximum ratio of funded debt to EBITDA and afixed charge coverage ratio. The Loan Agreement also provides for events ofdefault that would permit the lender to accelerate the loans upon theiroccurrence, including failure to make payments, breaches of representations andwarranties, insolvency 

 

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events,acceleration of other indebtedness, failure to discharge judgments, materialadverse effects, certain breaches of contracts, casualty losses when no orinsufficient insurance is maintained, changes of control, certain ERISA eventsand failure to observe covenants. As collateral for the obligations under theLoan Agreement the Lender has a security interest in substantially all assetsof the borrowers, including accounts receivable, inventories, machinery,equipment, real estate, and general intangibles.

 

As noted in our Form 10-K for the period ending December, 31,2008, we were not in compliance with the financial covenants of the LoanAgreement for the quarter ending December 31, 2008. As a result, on March 16,2009 we executed an Amendment to the Loan Agreement whereby Bank of Americawaived such financial covenant defaults on a one-time basis and amended theLoan Agreement to, among other things, lower the revolving line of credit from$15.0 million to $10.0 million, revise such financial covenants, add additionalcovenants, and to modify the advance and borrowing revisions under the LoanAgreement. In order to maintain compliance with the terms of the Amendment, theCompany pledged as additional cash collateral for the remaining term of the termloan, $3.0 million on the effective date of the Amendment. Furthermore,beginning with the quarter ending June 30, 2009, we are required tomaintain a certain level of EBITDA, a certain fixed charge coverage ratio on acumulative basis beginning April 1, 2009, a minimum funded debt to EBITDAratio on an annualized basis beginning April 1, 2009 for each quarterlyfinancial reporting period through June 30, 2010 and limit capitalexpenditures to $2.5 million for 2009. In addition, the interest rate on the revolvingnote issuable pursuant to the Loan Agreement has been amended to a floatingrate equal to LIBOR plus a Libor Margin ranging from 2.50% to 5.00% through theterm of the note based on the Company’s funded debt to EBITDA. Effective withthe Amendment, the Libor margin will be 400 basis points through the secondquarter of 2009. The interest rate of 4.56% and 4.62% were in effect at March 31,2009 and 2008, respectively. The Loan Agreement expires June 30, 2010.

 

We were in compliance with all financial and negative covenants at March 31,2009. At March 31, 2009 and December 31, 2008, no borrowings had beenmade on the revolving line of credit.

 

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

 

The total available remaining credit under the line of credit was$9.3 million and $14.4 million as of March 31, 2009 and December 31,2008, respectively. The revolving line of credit is supported by theunderlying borrowing base of the Company.

 

*Backlog.* Our backlog of unfilled orders at March 31, 2009 was $67.0million, compared to a backlog of $68.2 million at December 31, 2008 and$74.3 million at March 31, 2008. Depending on the size and complexity ofcustomer specifications and requirements, the backlog can be converted torevenues in a relatively short period of time (typically 90 days) or withcomplex integrations and various delivery dates, orders can span multipleyears.

 

*Dividendpolicy.* 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,business conditions and other factors that our board of directors deemsrelevant.

 

*Covenant Compliance.* The Company was in compliance with all financial and negativecovenants at March 31, 2009.  Asdiscussed above, compliance with new, more restrictive financial covenantsunder the Loan Agreement will be required beginning in the Company’s secondquarter.  Management noted that, ifcertain orders are not received and shipped in the second quarter, the Companymay not meet those more restrictive loan covenants for the second quarter. Management’sevaluation is based on recent experience with expected orders being temporarilydelayed by customers.  In suchevent, the Company intends to attempt to obtain a waiver of non compliance fromthe lender, failing which the lender could declare the Company in default underthe Loan Agreement and accelerate the payment of the $15.0 million term loan,require payment of any borrowings under the revolving line of credit and raisethe interest rate an additional 4%. There can be no assurance that the Company will be able to obtain suchwaiver.

 

If the Company is not in compliance with the bank covenants atthe end of the second quarter and is unable to obtain a waiver from suchnoncompliance, the Company will be required to classify the $15 million termloan as a current liability as of the end of the second quarter. Additionally, to the extent existingresources and cash from operations are insufficient to 

 

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pay these obligations, we may need to raise additional funds throughpublic or private equity or debt financing. These funds may not be available,or if available, we may not be able to obtain them on terms favorable to us.

 

In any event, however, the term loan will be classified as current inthe second quarter of 2009 due to its maturity date of June 10, 2010.

 

Based on our estimated cash flows, andassuming the Company is able to meet its covenants under the Loan Agreement orobtain a waiver for non-compliance, we believe our existing cash, cashequivalents and the revolving line of credit are sufficient to meet our capitaland operating requirements for at least the next 12 months. However,our future operating and capital requirements depend on many factors, includingthe levels at which we generate product revenue and related margins, the timingand extent of development, our operating expenses, investments in inventory andaccounts receivable and general economic conditions, and also, the continuedavailability of our credit facility. To the extent existing resources and cashfrom operations are insufficient to support our activities, we may need toraise additional funds through public or private equity or debt financing.These funds may not be available, or if available, we may not be able to obtainthem on terms favorable to us.

 

**Off-BalanceSheet Arrangements**

 

As part of our ongoing business, we do not participate in transactionsthat generate relationships with unconsolidated entities or financialpartnerships, such as entities often referred to as structured finance orvariable interest entities, or VIEs, that would have been established for thepurpose of facilitating off-balance sheet arrangements or other contractuallynarrow or limited purposes. As of March 31, 2009, we are not involved inVIE transactions nor any off-balance sheet arrangements.

 

**RecentlyIssued Accounting Standards**

 

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

 

In December 2007,the FASB issued SFAS No. 160, *NoncontrollingInterests in Consolidated Financial Statements—an amendment of AccountingResearch Bulletin No. 51*(“SFAS 160”), which establishesaccounting and reporting standards for ownership interests in subsidiaries heldby parties other than the parent, the amount of consolidated net incomeattributable to the parent and to the noncontrolling interest, changes in aparent’s ownership interest and the valuation of retained noncontrolling equityinvestments when a subsidiary is deconsolidated. The Statement also establishesreporting requirements that provide sufficient disclosures that clearlyidentify and distinguish between the interests of the parent and the interestsof the noncontrolling owners. SFAS 160 is effective as of the beginning of anentity’s fiscal year that begins after December 15, 2008. The adoption ofSFAS 160 currently has no impact on our Consolidated Financial Statements.

 

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

 

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

 

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In May 2008, the FASB issued SFAS No. 162,*The Hierarchy of Generally AcceptedAccounting Principles*(“SFAS 162”). SFAS 162 identifiesthe sources of accounting principles and the framework for selecting theprinciples used in the preparation of financial statements of nongovernmentalentities that are presented in conformity with generally accepted accountingprinciples (the GAAP hierarchy). SFAS 162 is effective for financialstatements issued for fiscal years and interim periods beginning after November 15,2008. The Company’s adoption of SFAS 162 did not have a material impact on ourconsolidated financial statements.

 

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

 

In April 2009, the FASB issued FSP FAS 115-2 andFAS 124-2, *Recognition and Presentation ofOther-Than-Temporary Impairments*. This FSP amends the other-than-temporaryimpairment guidance for debt securities to make the guidance more operationaland to improve the presentation and disclosure of other-than-temporaryimpairments in the financial statements. The most significant change the FSPbrings is a revision to the amount of other-than-temporary loss of a debtsecurity recorded in earnings. FSP FAS 115-2 and FAS 124-2 are effective forinterim and annual reporting periods ending after June 15, 2009. TheCompany does not believe that the implementation of this standard will have amaterial impact on its consolidated financial statements.

 

In April 2009, the FASB issued FSP FAS 157-4, *Determining Fair Value When the Volume and Level ofActivity for the Asset or Liability Have Significantly Decreased and IdentifyingTransactions That Are Not Orderly*. This FSP provides additionalguidance for estimating fair value in accordance with FASB Statement No. 157,*Fair Value Measurements*, when thevolume and level of activity for the asset or liability have significantly decreased.This FSP also includes guidance on identifying circumstances that indicate atransaction is not orderly. This FSP emphasizes that even if there has been asignificant decrease in the volume and level of activity for the asset orliability and regardless of the valuation technique(s) used, the objectiveof a fair value measurement remains the same. Fair value is the price thatwould be received to sell an asset or paid to transfer a liability in anorderly transaction (that is, not a forced liquidation or distressed sale)between market participants at the measurement date under current marketconditions. FSP FAS 157-4 is effective for interim and annual reporting periodsending after June 15, 2009, and is applied prospectively. The Company doesnot believe that the implementation of this standard will have a materialimpact on its consolidated financial statements.

 

In April 2009, theFASB issued FSP FAS FAS 107-1 and APB 28-1, *InterimDisclosures about Fair Value of Financial Instruments.* This FSP amendsFASB Statement No. 107, *Disclosuresabout Fair Value of Financial Instruments*, to require disclosuresabout fair value of financial instruments for interim reporting periods ofpublicly traded companies as well as in annual financial statements. This FSPalso amends APB Opinion No. 28, *InterimFinancial Reporting*, to require those disclosures in summarizedfinancial information at interim reporting periods. FSP FAS 107-1 and APB 28-1are effective for interim and annual reporting periods ending after June 15,2009. The Company does not believe that the implementation of this standardwill have a material impact on its consolidated financial statements.

 

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

 

Our financial instrumentsconsist of cash and cash equivalents, trade accounts receivable, accountspayable and long-term obligations. The primary objective of our investmentactivities is to preserve principal while at the same time maximizing yieldswithout increasing risk.

 

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 ininternational markets. Furthermore, the uncertainty of monetary exchange valueshas caused, and may in the future cause, some foreign customers to delay neworders or delay payment for existing orders. Additionally, troubled economicand political conditions could result in lower revenues for us. 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 distribution channels;

 

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·                  longer payment cycles or uncertainty in the collection of accountsreceivable;

 

·                  increased costs associated with maintaining international marketingefforts;

 

·                  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 result of foreigncurrency fluctuations since a substantial majority our quotations and invoicesare denominated in U.S. dollars.

 

Export of our products issubject to the U.S. Export Administration regulations and some of our securedcommunications products require a license or a license exception in order toship internationally. We cannot assure that such approvals will be available tous or our products in the future in a timely manner or at all or that thefederal government will not revise its export policies or the list of products,persons or countries for which export approval is required. Our inability toobtain required export approvals would adversely affect our internationalsales, which would have a material adverse effect on us. In addition, foreigncompanies 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**

 

**DisclosureControls and Procedures**

 

Our Chief ExecutiveOfficer (“CEO”) and Chief Financial Officer (“CFO”) reviewed and evaluated ourdisclosure 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.

 

**InternalControls Over Financial Reporting**

 

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

 

**Remediationof Material Weakness in Internal Control**

 

As reported in our 2008 Form 10-K,we did not maintain effective controls to properly and timely identify theappropriate accounting treatment at the time that the Company entered into amemorandum of understanding with one of its vendors in an effort to resolve adispute between the parties regarding an outstanding non-trade receivable. Theagreement granted credits on future purchases to the Company, and thereforeshould have been accounted for by reducing the cost of future inventorypurchases, and subsequently cost of sales, over the period of the agreement,and the outstanding receivable should have been written off. Prior to therestatement, the Company recorded credits received as a result of thisagreement as collections of a receivable rather than a reduction of inventorycost. As a result, the Company wrote off this “Other Receivable” as of thethird quarter of 2007 and the related credits on future purchases receivedunder this agreement are being treated as a reduction to cost of salesresulting from the lower cost basis of inventory. Management did not properlyand timely identify that the execution of this agreement required a change inaccounting treatment in accordance with accounting principals generallyaccepted in the United States of America, and therefore is a material weaknessin Internal Control Over Financial Reporting.

 

We believe we have takenthe steps necessary to remediate this material weakness pertaining tonon-standard agreements by improving processes, procedures and approval levelsto enter into such agreements. We will continue to monitor the effectiveness ofthese processes, procedures and controls, and will make any further changes asmanagement determines appropriate.

 

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**Changesin Internal Control Over Financial Reporting**

 

As part of our normalcourse of business, we will develop and implement new/modified controlprocedures associated with orders, inventory costing, purchasing, shipping, andreceiving. We will continue to conduct full physical inventory countsperiodically during 2009.

 

Except as discussedabove, there were no changes in our internal controls over financial reportingduring the quarter ending March 31, 2009 that have materially affected, orare reasonably likely to materially affect, our internal controls overfinancial reporting.

 

In preparation of ourfinancial statements as of and for the period ended March 31, 2009,management believes that our internal controls over these processes areoperating and effective.

 

**PART II.OTHER INFORMATION**

 

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

 

See Note 13 to the Notesto Condensed Consolidated Financial Statements in Part I, Item 1.

 

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

 

**RiskFactors Related to Our Business**

 

Our operations andfinancial results are subject to various risks and uncertainties, that aredescribed in Item 1A of the Company’s annual report on Form 10-K for the fiscalyear 2008, that could adversely affect our business, financial condition,results of operations and trading price of our common stock. Additionally,management has noted that, based on current projections, if certain orders arenot received and shipped in the second quarter, the Company may not meet itsfinancial covenants under the Loan Agreement with Bank ofAmerica for the second quarter. In such event, the Company intends to attemptto obtain a waiver of non-compliance from the lender, failing which the lendercould declare the Company in default under the Loan Agreement. There can be noassurance that the Company will be able to obtain such waiver.

 

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

 

N/A.

 

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

 

N/A.

 

**ITEM 4.****                              ****SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS**

 

N/A.

 

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

 

N/A

 

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

 

The following exhibitsare filed herewith:

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.0                 |       | Settlement Agreement and Mutual Release dated as of  January 13, 2009, by and among the Company and the Company  Securityholders, by and through Chih-Hsiang Li, as Stockholders’ Agent  (incorporated herein by reference to Exhibit 10.1 to the Company’s  Current Report on Form 8-K filed with the SEC on January 20, 2009.                                                                                              |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.2                 |       | Fifth Amendment to Revolving Line of Credit Loan  Agreement, Term Loan Agreement and Security Agreement by and among the  Company, E. F. Johnson Company, Transcrypt International, Inc., 3e  Technologies International, Inc, and Bank of America, N.A., dated as of  March 16, 2009 (incorporated herein by reference to Exhibit 10.1 to  the Company’s Current Report on Form 8-K filed with the SEC on  March 19, 2009). |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.3                 |       | Fourth Amendment to Revolving Note by and among the  Company, E. F. Johnson Company, Transcrypt International, Inc., 3e  Technologies International, Inc, and Bank of America, N.A., dated as of  March 16, 2009 (incorporated herein by reference to Exhibit 10.2 to  the Company’s Current Report on Form 8-K filed with the SEC on  March 19, 2009).                                                                      |

 

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| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                  |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                                                             |
| 10.4                 |       | Second Amendment to Term Note by and among the  Company, E. F. Johnson Company, Transcrypt International, Inc., 3e  Technologies International, Inc, and Bank of America, N.A., dated as of  March 16, 2009 (incorporated herein by reference to Exhibit 10.3 to  the Company’s Current Report on Form 8-K filed with the SEC on  March 19, 2009). |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                             |
| 11.1                 |       | Computation of income per share                                                                                                                                                                                                                                                                                                                                                  |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                             |
| 31.1                 |       | Chief Executive Officer’s Certification of Report on  Form 10-Q for the Quarter Ending March 31, 2009                                                                                                                                                                                                                                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                             |
| 31.2                 |       | Chief Financial Officer’s Certification of Report on  Form 10-Q for the Quarter Ending March 31, 2009                                                                                                                                                                                                                                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                             |
| 32.1                 |       | Written certification of Chief Executive Officer,  dated May 6, 2008 pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                                                                                               |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                             |
| 32.2                 |       | Written certification of Chief Financial Officer,  dated May 6, 2009 pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                                                                                               |

 

**SIGNATURE**

 

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

 

 
|                    | EF Johnson Technologies, Inc. |
|-------------------------|------------------------------------|
|                    |                               |   |
| Date:  May 6, 2009 | By:                                | /s/ Jana Ahlfinger Bell |
|                    |                               | Jana Ahlfinger Bell |
|                    |                               | Executive Vice President and Chief Financial Officer |
|                    |                               | (Principal Financial and Accounting Officer) |

 

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