**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 ENDEDSEPTEMBER 30, 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               **

 

**Commission File Number 0-21681**

 

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**EF JOHNSON TECHNOLOGIES, INC.**

(Exactname of registrant as specified in its charter)

 

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

 

**1440 CORPORATE DRIVE**

**IRVING, TEXAS 75038**

(Address of principalexecutive offices and zip code)

 

**(972)819-0700**

(Registrant’s telephonenumber, including area code)

 

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

 

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

 

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

 

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

 

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

 

As of November 9,2009, 26,477,611 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**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

September 30, 2009 and December 31, 2008

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

 
| ** **                                                                                                                                                                                      | ** ** | **September 30,  2009** | ** ** | **December 31,   2008** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **ASSETS**                                                                                                                                                                                      |       |                         |       |                         |       |
| Current assets:                                                                                                                                                                                 |       |                         |       |                         |       |
| Cash and cash  equivalents                                                                                                                                                                      |       | $                            | 11,524     |                         | $          | 11,267 |   |
| Restricted cash                                                                                                                                                                                 |       | 5,030                        |       | —                       |       |
| Accounts receivable,  net of allowance for returns and doubtful accounts of $1,888 and $1,969,  respectively                                                                                    |       | 16,929                       |       | 18,234                       |       |
| Accounts receivable due  from related parties                                                                                                                                                   |       | —                       |       | 1,281                        |       |
| Receivables - other                                                                                                                                                                             |       | 320                          |       | 849                          |       |
| Cost in excess of  billings on uncompleted contracts                                                                                                                                            |       | 4,717                        |       | 5,116                        |       |
| Inventories, net                                                                                                                                                                                |       | 32,743                       |       | 37,322                       |       |
| Prepaid expenses                                                                                                                                                                                |       | 789                          |       | 1,632                        |       |
| Total current assets                                                                                                                                                                            |       | 72,052                       |       | 75,701                       |       |
| Property, plant and  equipment, net                                                                                                                                                             |       | 4,801                        |       | 5,996                        |       |
| Restricted cash                                                                                                                                                                                 |       | —                       |       | 2,021                        |       |
| Goodwill                                                                                                                                                                                        |       | 5,126                        |       | 5,126                        |       |
| Other intangible  assets, net of accumulated amortization                                                                                                                                       |       | 8,025                        |       | 8,770                        |       |
| Other assets                                                                                                                                                                                    |       | 71                           |       | 73                           |       |
| **TOTAL  ASSETS**                                                                                                                                                                               |       | $                            | 90,075     |                         | $          | 97,687 |   |
|                                                                                                                                                                                            |       |                         |       |                         |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                  |       |                         |       |                         |       |
| Current liabilities:                                                                                                                                                                            |       |                         |       |                         |       |
| Current portion of  long-term debt obligations                                                                                                                                                  |       | $                            | 15,667     |                         | $          | 9 |   |
| Accounts payable                                                                                                                                                                                |       | 7,860                        |       | 11,728                       |       |
| Accrued expenses                                                                                                                                                                                |       | 8,325                        |       | 10,786                       |       |
| Billings in excess of  cost on uncompleted contracts                                                                                                                                            |       | 204                          |       | 217                          |       |
| Deferred revenues                                                                                                                                                                               |       | 602                          |       | 1,235                        |       |
| Total current  liabilities                                                                                                                                                                      |       | 32,658                       |       | 23,975                       |       |
| Long-term debt  obligations, net of current portion                                                                                                                                             |       | —                       |       | 15,006                       |       |
| Deferred income taxes                                                                                                                                                                           |       | 631                          |       | 631                          |       |
| Other liabilities                                                                                                                                                                               |       | 9                            |       | 1,106                        |       |
| **TOTAL  LIABILITIES**                                                                                                                                                                          |       | 33,298                       |       | 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, 26,470,277 and 26,336,735 issued  and outstanding as of September 30, 2009 and December 31, 2008,  respectively) |       | 262                          |       | 262                          |       |
| Additional paid-in  capital                                                                                                                                                                     |       | 155,899                      |       | 154,688                      |       |
| Accumulated other  comprehensive loss                                                                                                                                                           |       | (659                         | )          | (1,088                       | )          |
| Accumulated deficit                                                                                                                                                                             |       | (98,596                      | )          | (96,861                      | )          |
| Treasury stock (118,989  and 18,083 shares at cost at September 30, 2009 and December 31,  2008)                                                                                      |       | (129                         | )          | (32                          | )          |
| **TOTAL  STOCKHOLDERS’ EQUITY**                                                                                                                                                            |       | 56,777                       |       | 56,969                       |       |
| ** **                                                                                                                                                                                      |       |                         |       |                         |       |
| **TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                            |       | $                            | 90,075     |                         | $          | 97,687 |   |

 

See accompanying notes to the condensed consolidatedfinancial statements.

 

2

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**EF JOHNSON TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

For the three and nine months ended September 30,2009 and 2008

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

 
| ** **                                       | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**   | ** ** |
|--------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                                       | ** ** | **September 30,** | ** ** | **September  30,** | ** ** |
| ** **                                       | ** ** | **2009**               | ** ** | **2008**                | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                       | ** ** | ** **             | ** ** | **(as restated)**       | ** ** | ** ** | ** ** | **(as restated)** | ** ** |
| Revenues                                         |       | $                      | 24,412     |                    | $          | 34,500 |   | $ | 76,970 |   | $ | 100,969 |   |
| Cost of sales                                    |       | 16,170                 |       | 21,649                  |       | 48,439 |   | 65,719 |   |
| Gross profit                                     |       | 8,242                  |       | 12,851                  |       | 28,531 |   | 35,250 |   |
|                                             |       |                   |       |                    |       |   |   |   |   |
| Operating expenses:                              |       |                   |       |                    |       |   |   |   |   |
| Research and  development, net of reimbursements |       | 2,424                  |       | 3,559                   |       | 8,860 |   | 6,935 |   |
| Sales and marketing                              |       | 2,229                  |       | 3,275                   |       | 7,138 |   | 9,689 |   |
| General and  administrative                      |       | 4,577                  |       | 4,756                   |       | 15,329 |   | 16,862 |   |
| Amortization of  intangibles                     |       | 250                    |       | 357                     |       | 740 |   | 1,170 |   |
| Escrow fund settlement                           |       | —                 |       | —                  |       | (2,804 | ) | — |   |
| Total operating  expenses                        |       | 9,480                  |       | 11,947                  |       | 29,263 |   | 34,656 |   |
| Income (loss) from  operations                   |       | (1,238                 | )          | 904                     |       | (732 | ) | 594 |   |
|                                             |       |                   |       |                    |       |   |   |   |   |
| Interest expense, net                            |       | (367                   | )          | (259                    | )          | (1,003 | ) | (707 | ) |
| Income (loss) before  income taxes               |       | (1,605                 | )          | 645                     |       | (1,735 | ) | (113 | ) |
|                                             |       |                   |       |                    |       |   |   |   |   |
| Income tax (expense)                             |       | —                 |       | —                  |       | — |   | — |   |
| Net income (loss)                                |       | $                      | (1,605     | )                       | $          | 645 |   | $ | (1,735 | ) | $ | (113 | ) |
|                                             |       |                   |       |                    |       |   |   |   |   |
| Net income (loss) per  share – Basic        |       | $                      | (0.06      | )                       | $          | 0.02 |   | $ | (0.07 | ) | $ | — |   |
| Net income (loss) per  share – Diluted      |       | $                      | (0.06      | )                       | $          | 0.02 |   | $ | (0.07 | ) | $ | — |   |
|                                             |       |                   |       |                    |       |   |   |   |   |
| Weighted average common  shares – Basic     |       | 26,440,835             |       | 26,121,544              |       | 26,355,828 |   | 26,088,648 |   |
| Weighted average common  shares – Diluted   |       | 26,440,835             |       | 26,687,013              |       | 26,355,828 |   | 26,088,648 |   |

 

See accompanying notes to the condensed consolidatedfinancial statements.

 

3

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**EF JOHNSON TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

Nine months ended September 30, 2009 and 2008

(Unaudited and in thousands)

 
| ** **                                                                                 | ** ** | **2009**   | ** ** | **2008**          | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                                                                 | ** ** | ** ** | ** ** | **(as restated)** | ** ** |
| Cash flows from  operating activities:                                                     |       |       |       |              |       |
| Net loss                                                                                   |       | $          | (1,735     | )                 | $          | (113 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |       |       |       |              |       |
|                                                                                       |       |       |       |              |       |
| Provision (used)  provided for returns and doubtful accounts                               |       | (81        | )          | 248               |       |
| Depreciation and  amortization                                                             |       | 2,844      |       | 3,433             |       |
| Recognition of deferred  gain                                                              |       | (71        | )          | (71               | )          |
| Stock-based  compensation                                                                  |       | 1,171      |       | 1,742             |       |
| Changes in operating  assets and liabilities:                                              |       |       |       |              |       |
| Accounts receivable                                                                        |       | 2,667      |       | (11,497           | )          |
| Accounts receivable  from related parties                                                  |       | —     |       | 497               |       |
| Receivables - other                                                                        |       | 529        |       | 1,161             |       |
| Cost in excess of  billings on uncompleted contracts                                       |       | 399        |       | 34                |       |
| Inventories                                                                                |       | 4,579      |       | 208               |       |
| Prepaid expenses and  other                                                                |       | 843        |       | (62               | )          |
| Accounts payable                                                                           |       | (3,868     | )          | (1,935            | )          |
| Accrued and other  liabilities                                                             |       | (2,390     | )          | (1,525            | )          |
| Billings in excess of  cost on uncompleted contracts                                       |       | (13        | )          | 68                |       |
| Deferred revenues                                                                          |       | (642       | )          | (202              | )          |
| Total adjustments                                                                          |       | 5,967      |       | (7,901            | )          |
| Net cash provided by  (used in) operating activities                                       |       | 4,232      |       | (8,014            | )          |
|                                                                                       |       |       |       |              |       |
| Cash flows from  investing activities:                                                     |       |       |       |              |       |
| Increase in restricted  cash related to collateralized bond                                |       | —     |       | (2,012            | )          |
| Purchase of property,  plant and equipment                                                 |       | (904       | )          | (1,564            | )          |
| Other assets                                                                               |       | 2          |       | 137               |       |
| Net cash used in  investing activities                                                     |       | (902       | )          | (3,439            | )          |
|                                                                                       |       |       |       |              |       |
| Cash flows from  financing activities:                                                     |       |       |       |              |       |
| Proceeds on revolving  lines of credits                                                    |       | —     |       | 11,600            |       |
| Principal payments on  revolving lines of credits                                          |       | —     |       | (9,600            | )          |
| Increase in restricted  cash related to term loan                                          |       | (3,009     | )          | —            |       |
| Principal payments on  long-term debt                                                      |       | (7         | )          | (6                | )          |
| Proceeds from issuances  of common stock                                                   |       | 40         |       | 18                |       |
| Purchase of treasury  stock                                                                |       | (97        | )          | —            |       |
| Proceeds from exercise  of stock options                                                   |       | —     |       | 46                |       |
| Net cash (used in)  provided by financing activities                                       |       | (3,073     | )          | 2,058             |       |
| Net increase (decrease)  in cash and cash equivalents                                      |       | 257        |       | (9,395            | )          |
| Cash and cash  equivalents, beginning of period                                            |       | 11,267     |       | 15,636            |       |
| Cash and cash  equivalents, end of period                                                  |       | $          | 11,524     |              | $          | 6,241 |   |

 

**SupplementalDisclosure of Cash Flow Information:**

The Company paid interestof $1,024 and $920 during nine months ended September 30, 2009 and 2008,respectively.

The Company paid incometaxes of $79 and $235 during nine months ended September 30, 2009 and2008, respectively.

 

See accompanying notes to the condensed consolidatedfinancial statements.

 

4

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**EF JOHNSON TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**Three and nine months ended September 30,2009 and 2008**

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

 

**1.GENERAL**

 

Thecondensed consolidated balance sheet of EF Johnson Technologies, Inc.,formerly EFJ, Inc., at December 31, 2008, presented within thisReport on Form 10-Q, has been derived from audited consolidated financialstatements at that date. The condensed consolidated financial statements as of September 30,2009 and for the three and nine months ended September 30, 2009 and 2008are unaudited. The condensed consolidated financial statements reflect allnormal and recurring accruals and adjustments that, in the opinion ofmanagement, are necessary for a fair presentation of the financial position,operating results, and cash flows for the interim periods presented in thisquarterly report. The condensed consolidated financial statements should beread in conjunction with the consolidated financial statements and notesthereto, together with management’s discussion and analysis of financialcondition and results of operations, contained in our Annual Report on Form 10-Kfor the year ended December 31, 2008. The results of operations and cashflows for the three and nine months ended September 30, 2009 are notnecessarily indicative of the results for any other period or the entire fiscalyear ending December 31, 2009.

 

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

 

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

 

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

 

**2.ORGANIZATION AND CONSOLIDATION**

 

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

 

·                  mobile and portable wireless radios;

 

·                  stationary transmitters / receivers (base stations orrepeaters);

 

·                  infrastructure equipment and systems;

 

·                  secure encryption technologies for proprietarywireless radios;

 

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

 

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

 

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

 

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

 

5

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**EFJOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Three andnine months ended September 30, 2009 and 2008**

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

 

**3.RESTATEMENT**

 

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

 

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

 

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

 

During the third quarter of 2007, the Company enteredinto a memorandum of understanding with one of its vendors in an effort toresolve a dispute between the parties regarding an outstanding non-tradereceivable. The agreement granted credits on future purchases to the Company,and therefore should have been accounted for by reducing the cost of futureinventory purchases, and subsequently cost of sales, over the period of theagreement, and the outstanding receivable should have been written off. Priorto the restatement, the Company recorded credits received as a result of thisagreement as collections of a receivable instead of a reduction of inventorycost. As a result, the Company wrote off this “Other Receivable” balance as ofthe third quarter of 2007, and the related credits on future purchases receivedunder this agreement are being treated as a reduction to cost of salesresulting from the lower cost basis of inventory. The write-off of thisreceivable was charged to cost of sales, as the transactions that generated thedisputed receivables related to the transfer of inventory at cost to a contractmanufacturer. Based on estimated purchases, we anticipate that approximately$2.7 million of credits remaining at December 31, 2008 will be earned overthe next two to three years pursuant to this agreement. The balance of creditsremaining at September 30, 2009 was approximately $2.4 million.

 

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 and nine months ended September 30, 2009 werecognized $37 and $255 in credits, respectively. For the three and nine monthsended September 30, 2008 we recognized $223 and $565 in credits,respectively.

 

The following tables (in thousands) summarize the netincreases (decreases) for the three and nine months ended September 30,2008. These adjustments did not change the amounts reported as cash flows fromoperating, investing, or financing activities.

 
| ** **                                    | ** ** | **As previously  reported three  months ended** | ** ** | ** **     | ** ** | **Adjusted three   months ended** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------|------------|----------------|------------|-----------------------------------|------------|
| ** **                                    | ** ** | **September 30,**                               | ** ** | ** **     | ** ** | **September 30,**                 | ** ** |
| ** **                                    | ** ** | **2008**                                        | ** ** | **Adjustment** | ** ** | **2008**                          | ** ** |
|                                          |       |                                            |       |           |       |                              |       |
| Revenues                                      |       | $                                               | 34,500     |           | $          | —                            |       | $ | 34,500 |   |
| Cost of sales                                 |       | 21,872                                          |       | (223           | )          | 21,649                            |       |
| Gross profit                                  |       | 12,628                                          |       | 223            |       | 12,851                            |       |
|                                          |       |                                            |       |           |       |                              |       |
| Total operating  expenses                     |       | 11,947                                          |       | —         |       | 11,947                            |       |
| Income from  operations                       |       | 681                                             |       | 223            |       | 904                               |       |
| Interest  expense, net                        |       | (259                                            | )          | —         |       | (259                              | )          |
| Net income  before income taxes               |       | $                                               | 422        |           | $          | 223                               |       | $ | 645 |   |
| Income tax  benefit (expense)                 |       | —                                          |       | —         |       | —                            |       |
| Net income                                    |       | $                                               | 422        |           | $          | 223                               |       | $ | 645 |   |
| Net income per  share—basic              |       | $                                               | 0.02       |           | $          | —                            |       | $ | 0.02 |   |
| Net income per  share—diluted            |       | $                                               | 0.02       |           | $          | —                            |       | $ | 0.02 |   |
| Weighted average  common shares— basic   |       | 26,121,544                                      |       | 26,121,544     |       | 26,121,544                        |       |
| Weighted average  common shares— diluted |       | 26,687,013                                      |       | 26,687,013     |       | 26,687,013                        |       |

 

6

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**EF JOHNSON TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**Three and nine months endedSeptember 30, 2009 and 2008**

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

 

**3.RESTATEMENT (continued)**

 

 
| ** **                                              | ** ** | **As previously  reported nine  months ended** | ** ** | ** **     | ** ** | **Adjusted nine  months ended** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------|------------|----------------|------------|---------------------------------|------------|
| ** **                                              | ** ** | **September 30,**                              | ** ** | ** **     | ** ** | **September 30,**               | ** ** |
| ** **                                              | ** ** | **2008**                                       | ** ** | **Adjustment** | ** ** | **2008**                        | ** ** |
|                                                    |       |                                           |       |           |       |                            |       |
| Revenues                                                |       | $                                              | 100,969    |           | $          | —                          |       | $ | 100,969 |   |
| Cost of sales                                           |       | 66,284                                         |       | (565           | )          | 65,719                          |       |
| Gross profit                                            |       | 34,685                                         |       | 565            |       | 35,250                          |       |
|                                                    |       |                                           |       |           |       |                            |       |
| Total operating  expenses                               |       | 34,656                                         |       | —         |       | 34,656                          |       |
| Loss from  operations                                   |       | 29                                             |       | 565            |       | 594                             |       |
| Interest  expense, net                                  |       | (707                                           | )          | —         |       | (707                            | )          |
| Net loss before  income taxes                           |       | $                                              | (678       | )              | $          | 565                             |       | $ | (113 | ) |
| Income tax  benefit (expense)                           |       | —                                         |       | —         |       | —                          |       |
| Net loss                                                |       | $                                              | (678       | )              | $          | 565                             |       | $ | (113 | ) |
| Net loss per  share—basic and diluted              |       | $                                              | (0.03      | )              | $          | 0.03                            |       | — |   |
| Weighted average  common shares— basic and diluted |       | 26,088,648                                     |       | 26,088,648     |       | 26,088,648                      |       |

 
| ** **                                           | ** ** | **As previously  reported  September 30,** | ** ** | ** **     | ** ** | **Adjusted  September 30,** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------------|------------|----------------|------------|-----------------------------|------------|
| ** **                                           | ** ** | **2008**                                        | ** ** | **Adjustment** | ** ** | **2008**                    | ** ** |
| **Assets**                                           |       |                                            |       |           |       |                        |       |
| Current assets:                                      |       |                                            |       |           |       |                        |       |
| Cash and cash  equivalents                           |       | $                                               | 6,241      |           | $          | —                      |       | $ | 6,241 |   |
| Accounts  receivable                                 |       | 32,097                                          |       | —         |       | 32,097                      |       |
| Receivables—other                               |       | 5,218                                           |       | (2,881         | )          | 2,337                       |       |
| Cost in excess  of billings on uncompleted contracts |       | 3,241                                           |       | —         |       | 3,241                       |       |
| Inventories, net                                     |       | 33,663                                          |       | —         |       | 33,663                      |       |
| Prepaid Expenses                                     |       | 1,171                                           |       | —         |       | 1,171                       |       |
| Total current  assets                                |       | 81,631                                          |       | (2,881         | )          | 78,750                      |       |
| **TOTAL  ASSETS**                                    |       | $                                               | 122,946    |           | $          | (2,881                      | )          | $ | 120,065 |   |
|                                                 |       |                                            |       |           |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**       |       |                                            |       |           |       |                        |       |
| **TOTAL  LIABILITIES**                               |       | 41,399                                          |       | —         |       | 41,399                      |       |
| Commitments and  contingencies                       |       |                                            |       |           |       |                        |       |
| Stockholders’  equity:                          |       |                                            |       |           |       |                        |       |
| Common stock                                         |       | 262                                             |       | —         |       | 262                         |       |
| Additional  paid-in capital                          |       | 155,162                                         |       | —         |       | 155,162                     |       |
| Accumulated  other comprehensive loss                |       | (657                                            | )          | —         |       | (657                        | )          |
| Accumulated  deficit                                 |       | (73,220                                         | )          | (2,881         | )          | (76,101                     | )          |
| **TOTAL  STOCKHOLDERS’ EQUITY**                 |       | 81,547                                          |       | (2,881         | )          | 78,666                      |       |
|                                                 |       |                                            |       |           |       |                        |       |
| **TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY** |       | $                                               | 122,946    |           | $          | (2,881                      | )          | $ | 120,065 |   |

 

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

 

Basic income (loss) pershare (“EPS”) is calculated based upon the weighted average number of commonshares outstanding during the period. The diluted EPS calculation reflects thepotential dilution from common stock equivalents such as stock options, stocksatisfied stock appreciation rights (“SSAR’s”), restricted stock grants andrestricted stock units (collectively “Incentive Shares”). For the three monthsended September 30, 2008, outstanding incentive shares with exercise 

 

7

----

 

**EF JOHNSON TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**Three and nine months endedSeptember 30, 2009 and 2008**

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

 

prices lower than theaverage market price of the common stock for the period were considered commonstock equivalents and were dilutive in the calculation of the diluted weightedaverage common shares. Outstanding incentive shares that had exercise priceshigher than the average market price of the common stock for the periods wereconsidered anti-dilutive and excluded from the calculation of diluted weightedaverage common shares. For the three months ended September 30, 2009 andthe nine months ended September 30, 2009 and 2008, respectively, alloutstanding incentive shares were considered anti-dilutive due to the net lossfor the period end.  The outstandingincentive shares that are considered dilutive and anti-dilutive are as follows:

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|---------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                  | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                  | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Incentive shares with  dilutive effect      |       | —                 |       | 565,469                |       | — |   | — |   |
| Incentive shares with  anti-dilutive effect |       | 1,660,701              |       | 1,088,810              |       | 1,747,704 |   | 1,457,856 |   |
| Outstanding incentive  shares               |       | 1,660,701              |       | 1,654,279              |       | 1,747,704 |   | 1,457,856 |   |

 

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

 

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

 

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 and nine months ended September 30, 2009, we recognizedcompensation expense of $0.3 million and $0.8 million, respectively, related tooptions and $0.1 million and $0.2 million, respectively, related to restrictedstock grants and restricted stock units. Additionally, $0.1 million of compensation expense was recognizedrelated to equity grants made in the first quarter of 2009 to certain namedexecutive officers associated with performance-based incentives earned formeeting certain operational, new product introductions and other personalgoals. For the three and nine months ended September 30, 2008, werecognized compensation expense of $0.4 million and $1.2 million, respectively,related to options and $0.2 million and $0.6 million, respectively, related torestricted stock grants and restricted stock units.

 

At the Company’s May 27, 2009 Annual Meeting ofStockholders, the Stockholders approved an amendment to the EFJ, Inc. 2005Omnibus Incentive Compensation Plan to increase the maximum number of shares ofcommon stock that may be granted to any one participant in any fiscal year from100,000 to 350,000 shares.

 

**6.ESCROW FUND SETTLEMENT**

 

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

 

Pursuant to the terms ofthe Settlement Agreement, the Company received on January 16, 2009,approximately $2.8 million, inclusive of interest, out of the escrowfund.  The remaining balance of the escrow fund (or approximately $1.1 million,inclusive of interest) was paid out to the former stockholders of 3eTI pursuantto the terms of the Merger Agreement.  The Settlement Agreement alsocontains a mutual release of liability for claims related to the acquisition of3eTI by the Company.

 

8

----

 

**EF JOHNSON TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**Three and nine months endedSeptember 30, 2009 and 2008**

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

 

The escrow funds receivedas part of the settlement were recorded as a reduction of operating expense.The Company previously incurred research and development costs in connectionwith the re-design, re-testing and re-certification of certain 3eTI products tobring them up to specifications represented to exist at the acquisition date.

 

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

 

On July 19, 2006, weentered into an interest rate swap agreement to manage interest costs and risksassociated with changing interest rates, not for speculative or tradingpurposes. The interest rate swap has been designated as a cash flow hedge andis recorded in the consolidated financial statements at fair value. Changes inthe fair value of the swap have been recorded in Accumulated Comprehensive Lossin the balance sheet as the derivative is assessed as effectively hedged at September 30,2009. Changes in the fair value of the swap would be reclassified to otherincome (expense) to the extent the hedging instrument is determined to beineffective.

 

The interest rate swapagreement effectively converts the variable LIBOR component of the interestrate on the $15.0 million term loan to a fixed rate of 5.64%. Under the termsof the interest rate swap agreement, the Company will pay 5.64% and thecounterparty will pay LIBOR on a monthly basis. The interest rate swapagreement terminates on June 30, 2010, the termination date of the termloan. The cumulative net unrealized loss was $0.7 million and is included inthe current portion of long-term debt obligations due to the termination dateof the interest rate swap agreement and accumulated other comprehensive loss inthe consolidated balance sheet at September 30, 2009. The following is asummary of comprehensive loss:

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|----------------------------|------------|
| ** **                                    | ** ** | **September 30,**           | ** ** | **September 30,**     | ** ** |
| ** **                                    | ** ** | **2009**                         | ** ** | **2008**                   | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                    | ** ** | ** **                       | ** ** | **(as restated)**          | ** ** | ** ** | ** ** | **(as restated)** | ** ** |
| Net income (loss)                             |       | $                                | (1,605     | )                          | $          | 645 |   | $ | (1,735 | ) | $ | (113 | ) |
| Reclassification to  interest expense         |       | (205                             | )          | (121                       | )          | (596 | ) | (308 | ) |
| Fair value adjustment  for interest rate swap |       | 360                              |       | 169                        |       | 1,025 |   | 361 |   |
| Comprehensive income  (loss)                  |       | $                                | (1,450     | )                          | $          | 693 |   | $ | (1,306 | ) | $ | (60 | ) |

 

**8.INVENTORIES**

 

Thefollowing is a summary of inventories:

 
| ** **                  | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|-----------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Raw materials and  supplies |       | $                                | 10,371     |                            | $          | 11,598 |   |
| Work in progress            |       | 354                              |       | 1,049                           |       |
| Finished goods              |       | 23,318                           |       | 24,673                          |       |
| Service inventories         |       | 2,847                            |       | 3,163                           |       |
|                        |       | 36,890                           |       | 40,483                          |       |
| Reserve for  obsolescence   |       | (4,147                           | )          | (3,161                          | )          |
| Total inventories           |       | $                                | 32,743     |                            | $          | 37,322 |   |

 

**9.GOODWILL AND INTANGIBLE ASSETS**

 

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

 

We performed fairvalue-based impairment tests at December 31, 2008. Upon completion of theimpairment test, we concluded that the fair value of the 3eTI reporting unitwas lower than the carrying value of the associated goodwill, certainintangibles and its trade name. Therefore, in the fourth quarter ended December 31, 2008, wereported an impairment charge of $14.9 million related to goodwill and $3.5million related to the other intangibles, including trade name, that wasrecorded in general and administrative expenses.

 

9

----

 

**EF JOHNSON TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**Three and nine months endedSeptember 30, 2009 and 2008**

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

 

No events occurred duringthe nine months ended September 30, 2009 and 2008, respectively, whichwould indicate that an impairment of such assets had taken place as of suchdates.

 

Amortization expense,related to intangible assets which are subject to amortization, was $0.3 and$0.4 million for the three months ended September 30, 2009 and September 30,2008, respectively. Amortization expense, related to intangible assets whichare subject to amortization, was $0.8 and $1.2 million for the nine monthsended September 30, 2009 and September 30, 2008, respectively.Intangible assets consist of the following as of the dates indicated:

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

 
| ** **                                  | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|---------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                                  | ** ** | **Gross**                   | ** ** | ** **                 | ** ** | **Accumulated** | ** ** | **Net** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | **Net** | ** ** |
| ** **                                  | ** ** | **Amount**                  | ** ** | **Impairment**             | ** ** | **Amortization** | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Impairment** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
|                                        |       |                        |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Intangible assets  subject to amortization: |       |                        |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Existing technology                         |       | $                           | 6,190      |                       | $          | — |   | $ | (3,080 | ) | $ | 3,110 |   | $ | 6,190 |   | $ | — |   | $ | (2,667 | ) | $ | 3,523 |   |
| Customer relationships                      |       | 3,756                       |       | —                     |       | (2,227 | ) | 1,529 |   | 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                         |       | —                     |       | (97 | ) | 112 |   | 209 |   | — |   | (84 | ) | 125 |   |
|                                        |       | $                           | 10,714     |                       | $          | — |   | $ | (5,963 | ) | $ | 4,751 |   | $ | 11,919 |   | $ | (1,205 | ) | $ | (5,218 | ) | $ | 5,496 |   |

 

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

 

We amended our securedline of credit agreement with Bank of America in July 2006 to retain arevolving line of credit of up to $15.0 million and include a term loan of$15.0 million (the “Loan Agreement”). The $15.0 million term loan was fullyfunded and used to finance the acquisition of 3eTI dated July 10, 2006.Both borrowings bear interest at a variable rate based on the London InterbankOffered Rate (“LIBOR”) plus a margin (“LIBOR Margin”) determined by our ratioof debt to earnings before interest, taxes, depreciation, and amortization (“EBITDA”).The LIBOR Margin was 400 basis points as of September 30, 2009 and was 200basis points at September 30, 2008. As discussed below, an amendment totheLoanAgreement was executed in March 2009 that resulted in increased basispoints and lowered the revolving line of credit to $10.0 million. Interestrates of 4.26% and 4.5% were in effect at September 30, 2009 and 2008,respectively. The Loan Agreement expires June 30, 2010.

 

At September 30,2009 and December 31, 2008, no borrowings had been made on the revolvingline of credit. There was $0.75 million open letters of credit under our lineof credit at September 30, 2009 and there were no open letters of creditunder our line of credit at December 31, 2008. The total availableremaining credit under the line of credit was $9.25 million and $14.4million as of September 30, 2009 and December 31, 2008, respectively.

 

The Loan Agreementprovides for customary affirmative and negative covenants, includingmaintenance of corporate existence, rights, property, books and records andinsurance, compliance with contracts and laws, and certain reportingrequirements, as well as limitations on debt, liens, fundamental changes,acquisitions, transfers of assets, investments, loans, guarantees, use ofproceeds, sale-leaseback transactions and capital expenditures. In addition,the Loan Agreement contains certain financial covenants including a maximumratio of funded debt to EBITDA and a fixed charge coverage ratio. The LoanAgreement also provides for events of default that would permit the lender toaccelerate the loans upon their occurrence, including failure to make payments,breaches of representations and warranties, insolvency events, acceleration ofother indebtedness, failure to discharge judgments, material adverse effects,certain breaches of contracts, casualty losses 

 

10

----

 

**EF JOHNSON TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**Three and nine months endedSeptember 30, 2009 and 2008**

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

 

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.

 

As noted in our Form 10-Kfor the period ending December 31, 2008, we were not in compliance withthe financial covenants of the Loan Agreement for the quarter ended December 31,2008. As a result, effective March 16, 2009 we executed an Amendment tothe Loan Agreement whereby Bank of America waived such financial covenantdefaults on a one-time basis, and amended the Loan Agreement to, among otherthings, lower the revolving line of credit from $15.0 million to $10.0 million,revise such financial covenants, add additional covenants, and to modify theadvance and borrowing provisions under the Loan Agreement. In order to maintaincompliance with the terms of the Amendment, the Company pledged as additionalcash collateral for the remaining term of the term loan $3.0 million on theeffective date of the Amendment. Furthermore, beginning with the quarter endingJune 30, 2009, we are required to maintain a certain level of EBITDA,maintain certain fixed charge coverage ratio on a cumulative basis beginning April 1,2009, a minimum funded debt to EBITDA ratio on an annualized basis beginning April 1,2009 for each quarterly financial reporting period through June 30, 2010and limit capital expenditures to $2.5 million for 2009. In addition, theinterest rate on the revolving note issuable pursuant to the Loan Agreement hasbeen amended to a floating rate equal to LIBOR plus a Libor Margin ranging from2.50% to 5.00% through the term of the note based on the Company’s funded debtto EBITDA.

 

The Company was incompliance with all financial and negative covenants at September 30, 2009under the Loan Agreement except for the minimum EBITDA financial covenant.Effective November 9, 2009, Bank of America waived such financial covenantdefault on a one time basis.  As discussed above, compliance with new,more restrictive financial covenants under the Loan Agreement was requiredbeginning in the Company’s second quarter of 2009.  If certain orders arenot received and shipped in the fourth quarter, the Company may not meet thosemore restrictive loan covenants for the fourth quarter. Management’s evaluationis based on recent experience with expected orders being temporarily delayed bycustomers.  In such event, the Company intends to attempt to obtain awaiver of noncompliance from the lender, failing which the lender could declarethe Company in default under the Loan Agreement and accelerate the payment ofthe $15.0 million term loan, require payment of any borrowings under therevolving line of credit and raise the interest rate an additional 4%. There can be no assurance that the Company will be able to obtain such waiver.

 

If the Company is not incompliance with the bank covenants at the end of the fourth quarter and isunable to obtain a waiver from such noncompliance, the Company may need toraise additional funds through public or private equity or debt financing topay amounts due and owing under the Loan Agreement, to the extent existingresources and cash from operations are insufficient to pay such obligations.These funds may not be available, or if available, we may not be able to obtainthem on terms favorable to us.

 

TheLoan Agreement expires June 30, 2010. As a result, the $15.0 million term loan under the Loan Agreement has beenclassified as current due to its maturity date of June 30, 2010. Throughthe expiration of the term loan, we expect to build our cash balances inanticipation of payment and / or refinancing all or a portion of the term loanat maturity. As noted above, we may need to raise additional funds throughpublic or private equity or debt financing to satisfy the term loan atmaturity. These funds may not be available, or if available, we may not be ableto obtain them on terms favorable to us.

 

**11.INCOME TAXES**

 

We did not record a taxbenefit or provision for the three and nine months ended September 30,2009 and 2008 primarily due to our fully reserved deferred tax assets requiringno further provision for income taxes for each respective period end. TheCompany has unrecognized tax benefits of approximately $0.5 million that didnot change significantly during the ninemonths ended September 30, 2009 relating to carryforward of business credits. The adoption of FASB authoritative guidance foraccounting for uncertainty in income taxes did not result in the recognition ofadditional tax liability for unrecognized income tax benefits since the taxbenefits have not been included in prior income tax return filings. Inaddition, future changes in the unrecognized tax benefit will have no netimpact on the effective tax rate due to the existence of the valuationallowance.

 

As of September 30,2009, we have no accrual requirement for interest or penalties related touncertain tax positions since the tax benefits have not been included in priorincome tax return filings.

 

The tax years 2004-2008remain open to examination by the major taxing jurisdictions to which we aresubject. Additionally, upon inclusion of the NOL and R&D credit carryforward tax benefits from tax years 1996 to 2003 in future tax returns, therelated tax benefit for the period in which the benefit arose may be subject toexamination.

 

11

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**EFJOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Three andnine months ended September 30, 2009 and 2008**

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

 

**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 determinable. A reconciliation of changes inour accrued warranty reserve as of September 30, 2009 is as follows:

 
| ** **                      | ** ** | **Balance at**                  | ** ** | **Charged to** | ** ** | **Deduction /** | ** ** | **Balance at**                   | ** ** |
|---------------------------------|------------|---------------------------------|------------|---------------------|------------|----------------------|------------|----------------------------------|------------|
| ** **                      | ** ** | **December 31, 2008** | ** ** | **Expense**         | ** ** | **Expenditures**     | ** ** | **September 30, 2009** | ** ** |
| Allowance for Warranty  Reserve |       | $                               | 3,116      |                | 1,910      |                 | 1,813      |                             | $          | 3,213 |   |
|                                 |            |                                 |            |                     |            |                      |            |                                  |            |  |  |

 

**13.FAIR VALUE OF FINANCIAL INSTRUMENTS**

 

In September 2006, the FASB issuedauthoritative guidance for measuring fair value, which is effective for fiscalyears beginning after November 15, 2007 and for interim periods withinthose years. This guidance defines fair value, establishes a framework formeasuring fair value, expands the related disclosure requirements and appliesunder other accounting pronouncements that require or permit fair valuemeasurements. The guidance indicates, among other things, that a fair valuemeasurement assumes that the transaction to sell an asset or transfer aliability occurs in the principal market for the asset or liability or, in theabsence of a principal market, the most advantageous market for the asset orliability. The guidance defines fair value based upon an exit price model.

 

TheCompany adopted the guidance as of January 1, 2008 relating to financialassets and liabilities. The carrying amount of our current assets andliabilities approximates fair value because of the short maturity of theseinstruments. The carrying amount of our term loan approximates fair value as itis based on prevailing market rates of interest.

 

Theguidance relating to non-recurring nonfinancial assets and nonfinancialliabilities will be applied as circumstances require. Non-recurring nonfinancialassets and nonfinancial liabilities include those measured at fair value ingoodwill impairment testing and indefinite lived intangible assets measured atfair value for impairment testing.

 

Thefair value of our interest rate swap agreement represents the amount requiredto settle the agreement using prevailing market rates of interest. Interestrate swaps are measured at fair value indirectly through market corroboration,for substantially the full term of the financial instrument within Level 2 of thefair value hierarchy.

 

The following table provides the liabilities carriedat fair value measured on a recurring basis as of September 30, 2009:

 
| ** **                                                            | ** ** | **Fair Value Measurements Using** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                            | ** ** | **Total Carrying  Value**                   | ** ** | **Quoted prices  in active   markets  (Level 1)** | ** ** | **Significant    other   observable   inputs  (Level 2)** | ** ** | **Significant   unobservable   inputs  (Level 3)** | ** ** |
| Interest rate swap -  liability at September 30, 2008       |       | $                                                | 657        |   | $ | — |   | $ | 657 |   | $ | — |   |
|                                                                  |       |                                             |       |   |   |   |   |   |   |
| Interest rate swap -  liability at September  30, 2009 |       | $                                                | 659        |   | $ | — |   | $ | 659 |   | $ | — |   |

 

**14.COMMITMENTS AND CONTINGENCIES**

 

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

 

Thetotal we have accrued in regards to all legal proceedings as of September 30,2009 and December 31, 2008 was $0.1 million.

 

12

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**EFJOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Three andnine months ended September 30, 2009 and 2008**

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

 

In thenormal 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 toperform under these agreements or contracts. There was $0.75 million openletters of credit under our line of credit at September 30, 2009 and therewere no open letters of credit under our line of credit at December 31,2008. Bonds, which expire on various dates, totaled $2.4 million on September 30,2009 and December 31, 2008. No bonds had been drawn upon at either date.

 

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

 

On November 15,2007, the Company committed to an organizational plan (the “Plan”) to shiftfrom three divisions to one integrated corporate structure focused on securewireless communications for government and industrial customers. The Plan wasexpected to improve efficiencies in our operations, to 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 reflected the Company’s decision to consolidateoperations and move production from three locations into a centralizedoperations and outsourcing program in the Dallas/Fort Worth area.

 

Coststhat were directly associated with the Plan were recorded as “restructuringcosts” and were included in general and administrative expenses. Other coststhat did not qualify as restructuring costs were classified as other operatingexpenses or costs of goods sold in the Company’s consolidated statements ofoperations.

 

Thetiming of the recognition of costs associated with this move were determined inaccordance with FASB authoritative guidance for accounting for costsassociated with exit or disposal activities***,*** and other relevant guidance, whichprovides that a liability for a cost associated with an exit or disposalactivity shall be recognized at its fair value in the period in which theliability is incurred. In particular, employee-related termination costsassociated with the relocation are generally recognized ratably over the periodthat 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 September 30,2009:

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

 

Thefollowing table summarizes the beginning and ending liability reserve for exitcosts as of September 30, 2009:

 
| ** **                     | ** ** | **Balance at  December 31,  2008** | ** ** | **Cash Payments** | ** ** | **Balance at  September 30,  2009** | ** ** |
|--------------------------------|------------|------------------------------------|------------|-------------------|------------|-------------------------------------|------------|
| One-time  termination benefits |       | $                                  | 12         |              | $          | 12                                  |       | $ | — |   |
| Other costs                    |       | —                             |       | —            |       | —                              |       |
| Total costs                    |       | $                                  | 12         |              | $          | 12                                  |       | $ | — |   |

 

**16.****RELATED PARTY TRANSACTIONS**

 

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

 

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**EFJOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Three andnine months ended September 30, 2009 and 2008**

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

 

interest relating to hisposition with DRS. Transactions with DRS subsequent to June 5, 2009 wouldnot be considered related party transactions.

 

For theapproximate five month period ended June 5, 2009, DRS and its relatedsubsidiaries acquired approximately $1.6 million of our products. During thethree and nine months ended September 30, 2008, DRS and its relatedsubsidiaries acquired approximately $1.7 million and $15.9 million,respectively, of our products. Included in our account receivable balances asof December 31, 2008 were amounts due from DRS for $1.3 million.

 

**17.RECENTLY ISSUED ACCOUNTING STANDARDS**

 

In December 2007,the FASB revised authoritative guidance for business combinations, whichestablishes principles and requirements for how an acquirer recognizes andmeasures in its financial statements the identifiable assets acquired, theliabilities assumed, any noncontrolling interest in the acquiree and thegoodwill acquired. The guidance also establishes disclosure requirements whichwill enable users to evaluate the nature and financial effects of the businesscombination. The guidance is to be applied prospectively to business combinationsfor which the acquisition date is on or after an entity’s fiscal year thatbegins after December 15, 2008. The impact of our adoption of thisguidance will depend upon the nature and terms of business combinations, ifany, that we consummate on or after January 1, 2009.

 

In December 2007,the FASB revised authoritative guidance for consolidations, 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 guidance also establishesreporting requirements that provide sufficient disclosures that clearlyidentify and distinguish between the interests of the parent and the interestsof the noncontrolling owners. The adoption of this guidance currently has noimpact on our Consolidated Financial Statements.

 

In March 2008,the FASB revised authoritative guidance for disclosures of derivativeinstruments and hedging activities, which requires additional disclosures aboutthe objectives of using derivative instruments, the method by which thederivative instruments and related hedged items are accounted for and theeffect of derivative instruments and related hedged items on financialposition, financial performance, and cash flows. The guidance also requiresdisclosure of the fair values of derivative instruments and their gains andlosses in a tabular format. The Company adopted this guidance effective January 1,2009. The adoption of this guidance had no material impact on our consolidatedfinancial statements.

 

In April 2008,the FASB revised authoritative guidance for determining the useful life of intangible assets,**which revises the factors thatshould be considered in developing renewal or extension assumptions used todetermine the useful life of a recognized intangible asset. The Company will berequired to adopt this guidance with respect to intangible assets acquired onor after January 1, 2009. Due to the prospective application requirement,the adoption of this guidance had no impact on our consolidated financialstatements.

 

In November 2008,the FASB revised authoritative guidance for accounting for defensive intangible assets,**which addresses the accounting for assets acquiredin a business combination or asset acquisition that an entity does not intendto actively use, otherwise referred to as a ‘defensive asset’. The guidancerequires defensive intangible assets to be initially accounted for as aseparate unit of accounting and not included as part of the cost of theacquirer’s existing intangible asset(s) because it is separately identifiable.The guidance also requires that defensive intangible assets be assigned aseparate useful life. Due to the prospective application requirement, theadoption of this guidance had no impact on our consolidated financialstatements.

 

In April 2009,the FASB revised authoritative guidance for determining fair value when the volume and level of activity for theasset or liability have significantly decreased and identifying transactionsthat are not orderly. The guidance emphasizes that even if there has beena significant 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. The guidance is effective for interim and annual reporting periodsending after June 15, 2009, and is applied prospectively. The Company’sadoption of this guidance did not have a material impact on its consolidatedfinancial statements.

 

In April 2009,the FASB revised authoritative guidance for disclosures of financialinstruments. The**guidance requires disclosures aboutfair value of financial instruments for interim reporting periods of publiclytraded companies as well as in annual financial statements. The guidance iseffective for interim and annual reporting periods ending after June 15,2009. The Company’s adoption of this guidance did not have a material impact onits consolidated financial statements.

 

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**EFJOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Three andnine months ended September 30, 2009 and 2008**

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

 

In May 2009,the FASB revised authoritative guidance for subsequent events, whichestablishes general standards of accounting for and disclosures of events thatoccur after the balance sheet date but before financial statements are issuedor are available to be issued. It requires the disclosure of the date throughwhich an entity has evaluated subsequent events and the basis for that date.The guidance was effective for interim or annual financial periods ending afterJune 15, 2009. The Company adopted this guidance for the period ended June 30,2009 and provided the required disclosures for the period ending September 30,2009

 

In June 2009,the FASB issued new authoritative guidance for the hierarchy of accountingstandards, which establishes the *FASB Accounting StandardsCodification**TM** *(“Codification”)**as the sourceof authoritative U.S. GAAP recognized by the FASB to be applied bynongovernmental entities. Rules and interpretive releases of the SEC underauthority of federal securities laws are also sources of authoritative GAAP forSEC registrants. On the effective date of the guidance, the Codificationsuperseded all then-existing non-SEC accounting and reporting standards. Allother nongrandfathered non-SEC accounting literature not included in theCodification became nonauthoritative. This guidance is effective for financial statementsissued for interim and annual periods ending after September 15, 2009. Theadoption of this guidance did not have a material impact on our consolidatedfinancial statements.

 

In October 2009,the FASB issued Accounting Standards Update (“Update”) No. 2009-13, whichamends the Revenue Recognition topic of the Codification. This update providesamendments to the criteria in Subtopic 605-25 of the Codification forseparating consideration in multiple-deliverable arrangements. As a result ofthose amendments, multiple-deliverable arrangements will be separated in morecircumstances than under existing U.S. GAAP. The amendments establish a sellingprice hierarchy for determining the selling price of a deliverable and willreplace the term fair value in the revenue allocation guidance with sellingprice to clarify that the allocation of revenue is based on entity-specificassumptions rather than assumptions of a marketplace participant. Theamendments will also eliminate the residual method of allocation and requirethat arrangement consideration be allocated at the inception of the arrangementto all deliverables using the relative selling price method and will requirethat a vendor determine its best estimate of selling price in a manner that isconsistent with that used to determine the price to sell the deliverable on astandalone basis. These amendments will be effective prospectively for revenuearrangements entered into or materially modified in fiscal years beginning onor after June 15, 2010, with early adoption permitted. We are currentlyevaluating the impact the adoption of this update might have on ourconsolidated financial statements.

 

In October 2009,the FASB issued Update No. 2009-14, which amends the Software topic of theCodification. The amendments in this update change the accounting model forrevenue arrangements that include both tangible products and software elements.Tangible products containing software components and nonsoftware componentsthat function together to deliver the tangible product’s essentialfunctionality are no longer within the scope of the software revenue guidancein Subtopic 605-985 of the Codification. In addition, the amendments in thisupdate require that hardware components of a tangible product containing softwarecomponents always be excluded from the software revenue guidance. In thatregard, the amendments provide additional guidance on how to determine whichsoftware, if any, relating to the tangible product also would be excluded fromthe scope of the software revenue guidance. The amendments also provideguidance on how a vendor should allocate arrangement consideration todeliverables in an arrangement that includes both tangible products andsoftware. The amendments also provide further guidance on how to allocatearrangement consideration when an arrangement includes deliverables bothincluded and excluded from the scope of the software revenue guidance. Theseamendments will be effective prospectively for revenue arrangements enteredinto or materially modified in fiscal years beginning on or after June 15,2010, with early adoption permitted. We are currently evaluating the impact theadoption of this update might have on our consolidated financial statements.

 

**18.SUBSEQUENT EVENTS**

 

We have evaluated events occurring subsequent to thedate of our financial statements through November 12, 2009, which is thedate our financial statements were issued. We have recognized the effects ofall subsequent events that provide additional evidence about conditions thatexisted at our balance sheet date as of September 30, 2009, includingestimates inherent in the process of preparing our financial statements. Therewere no non-recognized subsequent events to be disclosed in our financialstatements.

 

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

 

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

 

Theseforward-looking statements are subject to certain risks and uncertainties thatcould cause the actual results, performance and outcomes to differ materiallyfrom those expressed or implied in these forward-looking statements due to anumber of risk factors including, but not limited to, the risks discussed inthe 2008 Annual Report on Form 10-K under Item 1A “Risk Factors” andin Part II of this report on Form 10-Q under Item 1A “RiskFactors.” We caution readers not to rely on these forward-looking statements,which reflect management’s analysis only as of the date of this quarterlyreport. We undertake no obligation to revise or update any forward-lookingstatement for any reason except as required by law.

 

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

 

**Overview**

 

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.

 

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

 

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

 

*OurProducts and Solutions*

 

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

 

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

 

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customer solutions, whichleverage the customer’s wireless system and wireless radios with customerspecific or enterprise wide applications.

 

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

 

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

 

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

 

*Our Salesand Distribution Approach*

 

Our products and systems are sold through multiplechannels including a direct sales force, dealers, manufacturingrepresentatives, distributors, and strategic partnering arrangements. Weutilize our dealer network to assist in installing, servicing, selling anddistributing our products. We alsogenerate revenues through the federal government under government fundedresearch and development Small Business Innovative Research programs (“SBIR”).Additionally, we offer our products to commercial, non-governmental users.

 

Muchof our business is obtained through submission of formal competitive bids. Ourgovernmental customers generally can specify the terms, conditions and form ofthe contract. Our government business is subject to government fundingdecisions and contract types can vary widely, including cost plus, fixedpriced, indefinite delivery/indefinite quantity (“IDIQ”), and government-wideacquisition contracts with the General Services Administration (“GSA”), whichrequire pre-qualification of vendors and allows government customers to moreeasily procure our products and systems. Through the federal government SBIRprograms the business is most typically obtained through the submission offormal proposals under cost plus or fixed fee 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, andgovernment-funded research and development services and solutions net ofreturns and allowances. Longer-term system and government services revenues arerecognized under the percentage-of-completion method.

 

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

 

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

 

*Research and Development.* Research and development expenses consist primarilyof costs associated with research and development personnel, materials, and thedepreciation of research and development equipment and facilities. We expenseresearch and development costs as they are incurred, net of any applicable costreimbursements. Research and development expenses relating to ourgovernment-funded research and development services are included as a componentof cost of sales.

 

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

 

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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 taxes includes theincrease or decrease in the valuation reserve that is based upon management’sconclusions regarding, among other considerations, our historical operatingresults and forecasted future earnings over a five year period, our current andexpected customer base projections, and technological and competitive factorsimpacting our current products. Current financial accounting standards requirethat organizations analyze all positive and negative evidence relating todeferred tax asset realization, which would include our historical accuracy inforecasting future earnings, as well as our history of losses incurred withinthe past three years. Should factors underlying management’s estimates change,future adjustments, either positive or negative, to our valuation allowance maybe necessary.

 

**CriticalAccounting Policies**

 

Thepreparation of our consolidated financial statements in conformity withaccounting principles generally accepted in the United States of America (GAAP)requires management to make estimates and assumptions that affect amountsreported in our condensed consolidated financial statements and accompanyingnotes. We base our estimates on historical experience and all known facts andcircumstances that we believe are relevant. Actual results may differmaterially from our estimates. We believe the following accounting policies tobe most critical to an understanding of our financial condition and results ofoperations because they require us to make estimates, assumptions and judgmentsabout matters that are inherently uncertain. Our critical accounting estimatesinclude those regarding (1) revenues, (2) receivables, (3) inventories,(4) goodwill and other intangible assets, (5) warranty costs, (6) incometaxes, (7) long-lived assets and (8) stock-based compensation. For adiscussion of the critical accounting estimates, see “Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations —Critical Accounting Policies” in our Annual Report on Form 10-K for theyear ended December 31, 2008.

 

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**Results of Operations**

 

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

 
| ** **                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                         | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                         | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
|                               |       |                   |       | **(as restated)**      |       |   |   | **(as restated)** |   |
| Revenues                           |       | 100.0                  | %          | 100.0                  | %          | 100.0 | % | 100.0 | % |
| Cost of sales                      |       | 66.2                   |       | 62.8                   |       | 62.9 |   | 65.1 |   |
|                               |       |                   |       |                   |       |   |   |   |   |
| Gross profit                       |       | 33.8                   |       | 37.2                   |       | 37.1 |   | 34.9 |   |
|                               |       |                   |       |                   |       |   |   |   |   |
| Operating expenses:                |       |                   |       |                   |       |   |   |   |   |
| Research and development           |       | 9.9                    |       | 10.3                   |       | 11.5 |   | 6.9 |   |
| Sales and marketing                |       | 9.1                    |       | 9.5                    |       | 9.3 |   | 9.6 |   |
| General and  administrative        |       | 18.7                   |       | 13.8                   |       | 19.9 |   | 16.7 |   |
| Amortization of  intangibles       |       | 1.0                    |       | 1.0                    |       | 1.0 |   | 1.2 |   |
| Escrow fund settlement             |       | —                 |       | —                 |       | (3.6 | ) | — |   |
| Total operating  expenses          |       | 38.8                   |       | 34.6                   |       | 38.0 |   | 34.3 |   |
| Income (loss) from  operations     |       | (5.1                   | )          | 2.6                    |       | (1.0 | ) | 0.6 |   |
|                               |       |                   |       |                   |       |   |   |   |   |
| Interest expense, net              |       | (1.5                   | )          | (0.8                   | )          | (1.3 | ) | (0.7 | ) |
| Income (loss) before  income taxes |       | (6.6                   | )          | 1.9                    |       | (2.3 | ) | (0.1 | ) |
|                               |       |                   |       |                   |       |   |   |   |   |
| Income tax (expense)               |       | —                 |       | —                 |       | — |   | — |   |
|                               |       |                   |       |                   |       |   |   |   |   |
| Net income (loss)                  |       | (6.6                   | )          | 1.9                    |       | (2.3 | ) | (0.1 | ) |

 

**Comparison of the Three Months and Nine Months Ended September 30,2009 and 2008**

 

*Revenues.*Our revenues decreased $10.1 million, or 29%, to $24.4million for the three months ended September 30, 2009 from $34.5 millionfor the same period in 2008. The decline was attributable to lower federal LMRrevenues and State and Local revenues partially offset by increases associatedwith government services revenues. Our revenues decreased $24.0 million, or24%, to $77.0 million for the nine months ended September 30, 2009 from$101.0 million for the same period in 2008. The decline was attributable tolower LMR revenues partially offset by increases in government servicesrevenues.

 

*Gross Profit.*Our gross profit decreased $4.6 million, or 36%, to$8.2 million in the three months ended September 30, 2009 from $12.9million for the same period in 2008. Gross profit, as a percentage of revenues,or gross margin, was 33.8% for the three months ended September 30, 2009,as compared to 37.2% for the same period in 2008. The decrease in gross profitand gross margin was attributable to both product mix and lower quarterlyrevenues. Our gross profit decreased $6.7 million, or 19%, to $28.5 million inthe nine months ended September 30, 2009 from $35.2 million for the sameperiod in 2008. The decrease in gross profit was primarily due to the volumevariance associated with the decline in LMR revenue. Gross profit, as apercentage of revenues, or gross margin, was 37.1% for the nine months ended September 30,2009, as compared to 34.9% for the same period in 2008. Gross margin improvedfor the nine months ended September 30, 2009 primarily due to secondquarter performance and improved product mix that resulted in lower cost ofsales. We anticipate the fourth quarter gross margin percentage to be similarto the third quarter of 2009.

 

*Research and Development.*Research and development expenses decreased $1.2million, or 32% to $2.4 million in the three months ended September 30,2009 from $3.6 million in the same period in 2008. Research and developmentexpenses as a percentage of revenues decreased to 9.9% in the third quarter of2009 versus 10.3% for the same period in 2008. Research and developmentexpenses increased $2.0 million, or 29%, to $8.9 million in the nine monthsended September 30, 2009 from $6.9 million in the same period in 2008.Research and development expenses as a percentage of revenues increased to11.5% in the first nine months of 2009 versus 6.9% for the same period in 2008.

 

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Thequarterly decline in R&D expenditures is due to certain programrealignments and completions in the second and third quarters of 2009.  We expect R&D expenses to increase infuture quarters as product development programs continue along the developmentpath requiring incremental investments.

 

Thenine-month increase in research and development expenses was attributable to anon-recurring engineering cost reimbursement of $4.0 million received in thesecond quarter of 2008 from a customer for research and development expensesrelating to the development and re-engineering of our Multinet radio productline associated with the FCC re-banding effort. The development of our Multinet radio was completed and no furthernon-recurring engineering cost reimbursements were received.

 

*Sales and Marketing.*Sales and marketing expenses decreased $1.1 million,or 33%, to $2.2 million in the three months ended September 30, 2009 from$3.3 million in the same period in 2008. The decrease is mainly attributable toreduced labor coupled with lower sales incentives resulting from the decline inrevenue noted above. Sales and marketing expenses as a percentage of revenueswere 9.1% in the third quarter of 2009 versus 9.5% in the third quarter of2008. Sales and marketing expenses decreased $2.6 million, or 26%, to $7.1million in the nine months ended September 30, 2009 from $9.7 million inthe same period in 2008. The decrease is mainly attributable to reduced laborcoupled with lower sales incentives resulting from the decline in revenue notedabove. Sales and marketing expenses as a percentage of revenues were 9.3% forthe first nine months of 2009 versus 9.6% in the first nine months of 2008. Weexpect the trend in sales and marketing expenses to continue for the remainderof 2009.

 

*General and Administrative.*General and administrative expenses decreased $0.2million, or 4%, to $4.6 million for the three months ended September 30,2009 from $4.8 million for the same period in 2008. General and administrativeexpenses decreased $1.6 million, or 9%, to $15.3 million for the nine monthsended September 30, 2009 from $16.9 million for the same period in 2008.The decrease in expenses is primarily attributable to reduced labor, lowerincentive compensation accruals for 2009 and reduced stock compensation expenseresulting from increased forfeiture rates in the first nine months of 2009 ascompared with the first nine months of 2008.

 

*Amortization of Intangibles.*Amortization of intangibles decreased $0.1 million, or25%, to $0.3 for the three months ended September 30, 2009 from $0.4million for the same period in 2008. Amortization of intangibles decreased $0.5million, or 42%, to $0.7 million in the nine months ended September 30,2009 from $1.2 million in the same period in 2008. The decreases relate tolower amortization of specifically identifiable intangible assets with adefinite life as a result of the impairment of certain amortizable assetsduring the fourth quarter of 2008.

 

*Escrow fund settlement.* In connection with the acquisition of 3eTI in2006, the total consideration paid by the Company consisted of $36.0 million incash, which included $3.6 million to be held in escrow to indemnify the Companyfor any claims under the Agreement. In August 2008, the Company made aclaim against the escrow fund for damages arising out of certain allegedbreaches of representations and warranties contained in the Merger Agreement.In January 2009, we settled claims under the Agreement and received $2.8million of the funds held in the escrow account. The escrow funds received aspart of the settlement were recorded as a reduction of operating expense. TheCompany previously incurred research and development costs in connection withthe re-design, re-testing and re-certification of certain 3eTI products tobring them up to specifications represented to exist at the acquisition date.

 

*Interest Expense, net.*Interest expense, net increased $0.1 million to $0.4million in expense for the three months ended September 30, 2009 from $0.3million for the same period in 2008. Interest expense, net increased $0.3million to $1.0 million in expense for the nine months ended September 30,2009 from $0.7 million for the same period in 2008. The increases wereattributable to interest on the term loan and lower interest income earned oncash investments resulting from lower amounts of invested cash earning lowerrates of interest.

 

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

 

*Net Income / (Loss).*Net loss was $1.6 million for the three months ended September 30,2009, reflecting an earnings decrease of $2.2 million, as compared to netincome of $0.6 million for the same period in 2008. Net loss was $1.7 millionfor the nine months ended September 30, 2009, reflecting an earningsdecrease of $1.6 million, as compared to net loss of $0.1 million for the sameperiod in 2008. Excluding the $2.8 million received for the escrow fundsettlement, the net loss for the nine months ended September 30, 2009,would have been $4.5 million. Excluding the $4.0 million received for thenon-recurring engineering cost reimbursement, the net loss for the nine monthsended September 30, 2008, would have been $4.1 million.

 

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**Liquidity and Capital Resources**

 

TheCompany’s primary sources of liquidity are its cash and cash equivalents thatwere $11.5 million (net of $5.0 million pledged restricted cash) at September 30,2009 and $11.3 million (net of $2.0 million pledged restricted cash) at December 31,2008.  In addition, effective with the amended Loan Agreement dated March 16,2009, we have a revolving line of credit for $10.0 million.

 

*Net cash from operating activities.*Our operating activities provided cash of$4.2 million in the nine months ended September 30, 2009.  Our operating activities used cash of $8.0million in the nine months ended September 30, 2008.

 

Duringthe first nine months of 2009, operating cash was provided primarily fromimproved inventory turnover, collection of trade accounts receivable, lowerprepaid expenses and non-cash depreciation, amortization and stock compensationall aggregating to $12.1 million. Partially offsetting were the net loss of$1.7 million coupled with reductions in accounts payable and other accruedliabilities all aggregating to $8.0 million. Operating cash includes $2.8million received from the escrow fund settlement in January 2009.

 

Duringthe first nine months of 2008, operating cash was used primarily for increasesin trade accounts receivable, and reductions in accounts payable and otheraccrued liabilities coupled with a net loss all aggregating to $15.1 million.Partially offsetting were collections of related party and other receivablesand non-cash depreciation, amortization and stock compensation all aggregatingto $6.8 million.  The increase inaccounts receivable reflects delays in cash collections from certain customersduring the quarter ended September 30, 2008. Operating cash includes $4.0million received for the non-recurring engineering cost reimbursement in June 2008.

 

*Net cash from investing activities.* During the nine months ended September 30,2009, investing activities used $0.9 million primarily investing in thepurchase of property, plant and equipment. During the nine months ended September 30,2008 investing activities used $3.4 million primarily attributable to establishing$2.0 million of restricted cash as collateral for the Government of Yukon,Canada bond and purchases of property plant and equipment of $1.6 million.

 

*Net cash from financing activities.*During the nine months ended September 30,2009, there was an increase in restricted cash of $3.0 million relating to theloan amendment noted below together with other minimal financing activities.During the nine months ended September 30, 2008 financing activitiesprovided $2.0 million in a borrowing from the revolving line of credit to covershort term cash requirements.

 

*Secured line of credit.*The Loan Agreement provides for customary affirmativeand negative covenants, including maintenance of corporate existence, rights,property, books and records and insurance, compliance with contracts and laws,and certain reporting requirements, as well as limitations on debt, liens,fundamental changes, acquisitions, transfers of assets, investments, loans,guarantees, use of proceeds, sale-leaseback transactions and capitalexpenditures. In addition, the Loan Agreement contains certain financialcovenants including a maximum ratio of funded debt to EBITDA and a fixed chargecoverage ratio. The Loan Agreement also provides for events of default thatwould permit the lender to accelerate the loans upon their occurrence,including failure to make payments, breaches of representations and warranties,insolvencyevents,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.

 

Asnoted in our Form 10-K for the period ending December, 31, 2008, we werenot in compliance with the financial covenants of the Loan Agreement for thequarter ending December 31, 2008. As a result, on March 16, 2009 weexecuted an Amendment to the Loan Agreement whereby Bank of America waived suchfinancial covenant defaults on a one-time basis and amended the Loan Agreementto, among other things, lower the revolving line of credit from $15.0 millionto $10.0 million, revise such financial covenants, add additional covenants,and to modify the advance and borrowing revisions under the Loan Agreement. Inorder to maintain compliance with the terms of the Amendment, the Companypledged as additional cash collateral for the remaining term of the term loan,$3.0 million on the effective date of the Amendment. Furthermore, beginningwith the quarter ending June 30, 2009, we are required to maintain acertain level of EBITDA, a certain fixed charge coverage ratio on a cumulativebasis beginning April 1, 2009, a minimum funded debt to EBITDA ratio on anannualized basis beginning April 1, 2009 for each quarterly financialreporting period through June 30, 2010 and limit capital expenditures to$2.5 million for 2009. In addition, the interest rate on the revolving noteissuable pursuant to the Loan Agreement has been amended to a floating rateequal to LIBOR plus a Libor Margin ranging from 2.50% to 5.00% through the termof the note based on the Company’s funded debt to EBITDA. Effective with theAmendment, the Libor margin is 400 basis points through the third quarter of2009. Interest rates of 4.26% and 4.5% were in effect at September 30,2009 and 2008, respectively. The Loan Agreement expires June 30, 2010.

 

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TheCompany was in compliance with all financial and negative covenants at September 30,2009 under the Loan Agreement except for the minimum EBITDA financial covenant.Effective November 9, 2009, Bank of America waived such financial covenantdefault on a one time basis. At September 30, 2009 and December 31,2008, no borrowings had been made on the revolving line of credit.

 

Asdiscussed above, compliance with new, more restrictive financial covenantsunder the Loan Agreement was required beginning in the Company’s second quarterof 2009.  If certain orders are not received and shipped in the fourthquarter, the Company may not meet those more restrictive loan covenants for thefourth quarter. Management’s evaluation is based on recent experience withexpected orders being temporarily delayed by customers.  In such event,the Company intends to attempt to obtain a waiver of noncompliance 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 theCompany will be able to obtain such waiver.

 

If theCompany is not in compliance with the bank covenants at the end of the fourthquarter and is unable to obtain a waiver from such noncompliance, the Companymay need to raise additional funds through public or private equity or debtfinancing to pay amounts due and owing under the Loan Agreement, to the extentexisting resources and cash from operations are insufficient to pay suchobligations. These funds may not be available, or if available, we may not beable to obtain them on terms favorable to us.

 

The Loan Agreement expires June 30, 2010.  As a result, the $15.0 million term loan under the Loan Agreement hasbeen classified as current due to its maturity date of June 30, 2010.Through the expiration of the term loan, we expect to build our cash balancesin anticipation of payment and / or refinancing all or a portion of the termloan at maturity. As noted above, we may need to raise additional funds throughpublic or private equity or debt financing to satisfy the term loan atmaturity. These funds may not be available, or if available, we may not be ableto obtain them on terms favorable to us.

 

The Company also intends to attempt to extend and /or refinance the $10.0 million revolving credit facility under the LoanAgreement at maturity. Assuming the Company is successful in extending and / orrefinancing the Loan Agreement, and based on our estimated cash flows, we believeour existing cash, cash equivalents and the revolving line of credit aresufficient to meet our capital and operating requirements for at least the next12 months. However, our future operating and capital requirements depend onmany factors, including the levels at which we generate product revenue andrelated margins, the timing and extent of development, our operating expenses,investments in inventory and accounts receivable and general economicconditions, and also, the continued availability of our credit facility. To theextent existing resources and cash from operations are insufficient to supportour activities, and / or the Company fails to meet its covenants under the LoanAgreement or any extension or refinancing thereof, we may need to raiseadditional funds through public or private equity or debt financing. Thesefunds may not be available, or if available, we may not be able to obtain themon terms favorable to us.

 

*Letters of credits and bonds.* In the normal course of our business activities, weare required under certain supplier agreements and contracts with variousgovernment authorities to provide letters of credit or performance or bid bondsthat may be drawn upon if we fail to perform under these agreements andcontracts. There was $0.75 million of open letters of credit under our line ofcredit at September 30, 2009 and there were no open letters of creditunder our line of credit at December 31, 2008. Bonds, which expire onvarious dates, totaled $2.4 million on September 30, 2009 and December 31,2008, respectively. The majority of the bonds relate to the contract awarded inMay 2008 by the Government of Yukon, Canada that is collateralized byrestricted cash of $2.0 million. The contract is expected to be completed inthe second quarter of 2010 and the corresponding bond and restricted cash wouldbe released. No bonds had been drawn upon at either date.

 

Thetotal available remaining credit under the line of credit was$9.25 million and $14.4 million as of September 30, 2009 and December 31,2008, respectively. The decline in available remaining credit reflects thereduced borrowing allowed under the revolving line of credit coupled with theopening of the letter of credit during the first quarter of 2009. The revolvingline of credit is supported by the underlying borrowing base of the Company.

 

*Backlog.* Our backlog of unfilled orders at September 30,2009 was $64.3 million, compared to a backlog of $68.2 million at December 31,2008 and $70.5 million at September 30, 2008. Depending on the size andcomplexity of customer specifications and requirements, the backlog can beconverted to revenues in a relatively short period of time (typically 90 days)or with complex integrations and various delivery dates, orders can spanmultiple years.

 

*Dividend policy.* Since our initial public offering, 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 deems relevant.

 

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**Off-Balance Sheet Arrangements**

 

Aspart of our ongoing business, we do not participate in transactions thatgenerate relationships with unconsolidated entities or financial partnerships,such as entities often referred to as structured finance or variable interestentities (“VIE”), that would have been established for the purpose offacilitating off-balance sheet arrangements or other contractually narrow orlimited purposes. As of September 30, 2009, we are not involved in any VIEtransactions.

 

**Recently Issued Accounting Standards**

 

SeeNote 17 to the Condensed Consolidated Financial Statements in Item 1 of this Form 10-Qfor a full description of recent accounting standards, including the expecteddates of adoption and estimated effects on results of operation and financialcondition, which is incorporated herein by reference.

 

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

 

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

 

Although a substantial majority of our sales aredenominated in U.S. dollars, fluctuations in the value of internationalcurrencies relative to the U.S. dollar may affect the price, competitivenessand profitability of our products sold in international markets. Furthermore,the uncertainty of monetary exchange values has caused, and may in the futurecause, some foreign customers to delay new orders or delay payment for existingorders. Additionally, troubled economic and political conditions could resultin lower revenues for us. While most international sales are supported byletters of credit or cash in advance, the purchase of our products byinternational customers presents increased risks, which include:

 

·                  unexpected changes in regulatory requirements;

·                  tariffs and other trade barriers;

·                  political and economic instability in foreign markets;

·                  difficulties in establishing foreign distributionchannels;

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

·                  increased costs associated with maintaininginternational marketing efforts;

·                  cultural differences in the conduct of business;

·                  natural disasters or acts of terrorism;

·                  difficulties in protecting intellectual property; and

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

 

Exportof our products is subject to the U.S. Export Administration regulations andsome of our secured communications products require a license or a licenseexception in order to ship internationally. We cannot assure that suchapprovals will be available to us or our products in the future in a timelymanner or at all or that the federal government will not revise its exportpolicies or the list of products, persons or countries for which exportapproval is required. Our inability to obtain required export approvals wouldadversely affect our international sales, which may have a material adverseeffect on us. In addition, foreign companies not subject to United Statesexport restrictions may have a competitive advantage in the internationalsecured communications market. We cannot predict the impact of these factors onthe international market for our products.

 

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

 

**Disclosure Controls and Procedures**

 

OurChief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) reviewedand evaluated our disclosure controls and procedures, as defined in Rule 240.13a-15(e) and15d-15(e) under the Exchange Act of 1934, as amended (the “Exchange Act”)as of the end of the period covered by this report. Based on this evaluation,our CEO and CFO have concluded that our disclosure controls and procedures wereeffective as of the end of the period covered by this report to ensure thatinformation required to be disclosed in the reports that we file or submitunder the Exchange Act is recorded, 

 

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processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s rules and forms and is accumulated and communicated to ourmanagement including our principal executive and principal financial officer,as appropriate, to allow timely decisions regarding disclosures.

 

**Internal Controls Over Financial Reporting**

 

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

 

**Remediationof Material Weakness in Internal Control**

 

Asreported in our 2008 Form 10-K, we did not maintain effective controls toproperly and timely identify the appropriate accounting treatment at the timethat 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 of sales,over the period of the agreement, and the outstanding receivable should havebeen written off. Prior to the restatement, the Company recorded creditsreceived as a result of this agreement as collections of a receivable ratherthan a reduction of inventory cost. As a result, the Company wrote off this “OtherReceivable” as of the third quarter of 2007 and the related credits on futurepurchases received under this agreement are being treated as a reduction tocost of sales resulting from the lower cost basis of inventory. Management didnot properly and timely identify that the execution of this agreement requireda change in accounting treatment in accordance with accounting principalsgenerally accepted in the United States of America, and therefore is a materialweakness in Internal Control Over Financial Reporting.

 

Webelieve we have taken the steps necessary to remediate this material weaknesspertaining to non-standard agreements by improving processes, procedures andapproval levels to enter into such agreements. We will continue to monitor theeffectiveness of these processes, procedures and controls, and will make anyfurther changes as management determines appropriate.

 

**Changesin Internal Control Over Financial Reporting**

 

As part of our normalcourse of business, we continually refine control procedures associated withorders, inventory costing, purchasing, shipping, and receiving and we continueto conduct full physical inventory counts periodically during 2009. However,there were no changes in our internal controls over financial reporting duringthe quarter ending September 30, 2009 that have materially affected, or arereasonably likely to materially affect, our internal controls over financialreporting.

 

**PART II. OTHER INFORMATION**

 

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

 

SeeNote 14 to the Notes to Condensed Consolidated Financial Statements in Part I,Item 1.

 

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

 

**Risk Factors Related to Our Business**

 

Ouroperations and financial results are subject to various risks and uncertaintiesthat are described in Part I, Item 1A “Risk Factors” of the Company’sannual report on Form 10-K for the year ended December 31, 2008, thatcould adversely affect our business, financial condition, results of operationsand trading price of our common stock. The risk factors as described in theCompany’s Form 10-K for the year ended December 31, 2008 are updated asfollows:

 

*We have risks associated with our liquidity and**bank covenants.*

 

Basedon current projections, if certain orders are not received and shipped in thefourth quarter, the Company may not meet its financial covenants under the LoanAgreement with Bank of America for the fourth quarter. In such event, theCompany intends to attempt to obtain a waiver of noncompliance from the lender,failing which the lender could declare the Company in default under the LoanAgreement and accelerate the payment of $15.0 million term loan, requirepayment of any borrowings under the revolving line of credit and raise theinterest rate an additional 4%. There can be no assurance that the Company willbe able to obtain such waiver. In such event, the Company may need to raise 

 

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additional funds throughpublic or private equity or debt financing to pay amounts due and owing underthe Loan Agreement, to the extent existing resources and cash from operationsare insufficient to pay such obligations. These funds may not be available, orif available, we may not be able to obtain them on terms favorable to us.

 

Furthermore,the Loan Agreement expires June 30, 2010. Through the expiration of the LoanAgreement, we may not be able to build our cash balances in anticipation ofpayment and / or refinancing all or a portion of the $15.0 million term loan atmaturity. We also may not be able to extend and / or refinancethe $10.0 million revolving credit facility under the Loan Agreement atmaturity. In such event,there is no assurance that we will be able to raise funds through public orprivate equity or debt financing to satisfy these obligations at maturity, oron terms favorable to us.

 

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

 

N/A.

 

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

 

N/A.

 

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

 

N/A

 

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

 

N/A

 

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

 

The following exhibits are filed herewith:

 
| **Exhibit No.** | ** ** | **Description**                                                                                                           |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                      |
| 11.1                 |       | Computation of net income (loss) per share                                                                                |
|                 |       |                                                                                                                      |
| 31.1                 |       | Chief Executive Officer’s Certification of Report on  Form 10-Q for the Quarter Ending September 30, 2009  |
|                 |       |                                                                                                                      |
| 31.2                 |       | Chief Financial Officer’s Certification of Report on  Form 10-Q for the Quarter Ending September 30, 2009  |
|                 |       |                                                                                                                      |
| 32.1                 |       | Written certification of Chief Executive Officer,  dated November 12, 2009, pursuant to 18 U.S.C. Section 1350. |
|                 |       |                                                                                                                      |
| 32.2                 |       | Written certification of Chief Financial Officer,  dated November 12, 2009, pursuant to 18 U.S.C. Section 1350. |

 

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**SIGNATURE**

 

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

 
|                                        | EF JOHNSON TECHNOLOGIES, INC. |
|---------------------------------------------|-------------------------------|
|                                        |                          |
|                                        |                          |
| **Date:  November 12, 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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