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EFJ 10-Q 2009

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549-1004

 


 

Form 10-Q

 


 

(Mark One)

 

x

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

FOR THE QUARTERLY PERIOD ENDED June 30, 2009

 

or

 

 

o

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from              to

 

Commission File Number 0-21681

 


 

EF JOHNSON TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 


 

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 principal executive offices and zip code)

 

(972) 819-0700

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  o

 

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

 

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

 

Large Accelerated Filer  o

 

Accelerated Filer  o

 

 

 

Non-accelerated Filer  o

 

Smaller Reporting Company  x

(Do not check if a smaller reporting company)

 

 

 

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

 

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

 

 

 



 

PART I. FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

EF JOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

June 30, 2009 and December 31, 2008

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

 

 

 

June 30, 2009

 

December 31,
2008

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

9,451

 

$

11,267

 

Restricted cash

 

5,028

 

 

Accounts receivable, net of allowance for returns and doubtful accounts of $1,898 and $1,969, respectively

 

21,631

 

18,234

 

Accounts receivable due from related parties

 

376

 

1,281

 

Receivables - other

 

650

 

849

 

Cost in excess of billings on uncompleted contracts

 

2,879

 

5,116

 

Inventories, net

 

34,487

 

37,322

 

Prepaid expenses

 

1,535

 

1,632

 

 

 

 

 

 

 

Total current assets

 

76,037

 

75,701

 

 

 

 

 

 

 

Property, plant and equipment, net

 

5,038

 

5,996

 

Restricted cash

 

 

2,021

 

Goodwill

 

5,126

 

5,126

 

Other intangible assets, net of accumulated amortization

 

8,278

 

8,770

 

Other assets

 

71

 

73

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

94,550

 

$

97,687

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Current portion of long-term debt obligations

 

$

15,823

 

$

9

 

Accounts payable

 

8,670

 

11,728

 

Accrued expenses

 

10,241

 

10,786

 

Billings in excess of cost on uncompleted contracts

 

396

 

217

 

Deferred revenues

 

847

 

1,235

 

Total current liabilities

 

35,977

 

23,975

 

Long-term debt obligations, net of current portion

 

1

 

15,006

 

Deferred income taxes

 

631

 

631

 

Other liabilities

 

18

 

1,106

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

36,627

 

40,718

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock ($0.01 par value; 3,000,000 shares authorized; none issued)

 

 

 

 

 

 

 

 

 

Common stock ($0.01 par value; 50,000,000 voting shares authorized, 26,543,142 and 26,336,735 issued and outstanding as of June 30, 2009 and December 31, 2008, respectively)

 

262

 

262

 

 

 

 

 

 

 

Additional paid-in capital

 

155,584

 

154,688

 

Accumulated other comprehensive loss

 

(814

)

(1,088

)

Accumulated deficit

 

(96,991

)

(96,861

)

 

 

 

 

 

 

Treasury stock (103,255 and 18,083 shares at cost at June 30, 2009 and December 31, 2008)

 

(118

)

(32

)

 

 

 

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

 

57,923

 

56,969

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

94,550

 

$

97,687

 

 

See accompanying notes to the condensed consolidated financial statements.

 

2



 

EF JOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the three and six months ended June 30, 2009 and 2008

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

(as restated)

 

 

 

(as restated)

 

Revenues

 

$

30,129

 

$

32,570

 

$

52,558

 

$

66,469

 

Cost of sales

 

17,538

 

21,564

 

32,269

 

44,069

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

12,591

 

11,006

 

20,289

 

22,400

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development, net of reimbursements

 

3,105

 

121

 

6,436

 

3,376

 

Sales and marketing

 

2,433

 

3,248

 

4,909

 

6,414

 

General and administrative

 

5,329

 

5,706

 

10,752

 

12,107

 

Amortization of intangibles

 

244

 

406

 

490

 

813

 

Escrow fund settlement

 

 

 

(2,804

)

 

Total operating expenses

 

11,111

 

9,481

 

19,783

 

22,710

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

1,480

 

1,525

 

506

 

(310

)

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(352

)

(268

)

(636

)

(449

)

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

1,128

 

1,257

 

(130

)

(759

)

 

 

 

 

 

 

 

 

 

 

Income tax (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

1,128

 

$

1,257

 

$

(130

)

$

(759

)

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share – Basic

 

$

0.04

 

$

0.05

 

$

 

$

(0.03

)

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share – Diluted

 

$

0.04

 

$

0.05

 

$

 

$

(0.03

)

 

 

 

 

 

 

 

 

 

 

Weighted average common shares – Basic

 

26,540,418

 

26,082,124

 

26,462,612

 

26,072,017

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares – Diluted

 

27,008,582

 

26,406,889

 

26,462,612

 

26,072,017

 

 

See accompanying notes to the condensed consolidated financial statements.

 

3



 

EF JOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Six months ended June 30, 2009 and 2008

(Unaudited and in thousands)

 

 

 

2009

 

2008

 

 

 

 

 

(as restated)

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(130

)

$

(759

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

 

 

Provision (used) for returns and doubtful accounts

 

(71

)

187

 

Depreciation and amortization

 

1,922

 

2,333

 

Recognition of deferred gain

 

(47

)

(47

)

Stock-based compensation

 

865

 

1,177

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(3,326

)

(7,521

)

Accounts receivable from related parties

 

905

 

(895

)

Receivables - other

 

199

 

(555

)

Cost in excess of billings on uncompleted contracts

 

2,237

 

(594

)

Inventories

 

2,835

 

2,523

 

Prepaid expenses and other

 

97

 

(344

)

Accounts payable

 

(3,058

)

(2,356

)

Accrued and other liabilities

 

(498

)

107

 

Billings in excess of cost on uncompleted contracts

 

179

 

281

 

Deferred revenues

 

(388

)

86

 

 

 

 

 

 

 

Total adjustments

 

1,851

 

(5,618

)

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

1,721

 

(6,377

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchase of property, plant and equipment

 

(472

)

(1,217

)

Other assets

 

2

 

277

 

 

 

 

 

 

 

Net cash used in investing activities

 

(470

)

(940

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds on revolving lines of credits

 

 

6,500

 

Principal payments on revolving lines of credits

 

 

(6,500

)

Increase in restricted cash related to term loan

 

(3,007

)

 

Principal payments on long-term debt

 

(5

)

(5

)

Proceeds from issuances of common stock

 

31

 

27

 

Purchase of treasury stock

 

(86

)

 

Proceeds from exercise of stock options

 

 

17

 

 

 

 

 

 

 

Net cash (used in) provided by financing activities

 

(3,067

)

39

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(1,816

)

(7,278

)

Cash and cash equivalents, beginning of period

 

11,267

 

15,636

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

9,451

 

$

8,358

 

 

Supplemental Disclosure of Cash Flow Information:

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

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

 

See accompanying notes to the condensed consolidated financial statements.

 

4



 

EF JOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and six months ended June 30, 2009 and 2008

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

 

1. GENERAL

 

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

 

At the Company’s May 28, 2008 Annual Meeting of Stockholders, the Stockholders approved an amendment of the Company’s Certificate of Incorporation to change the 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.

 

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

 

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

 

2. ORGANIZATION AND CONSOLIDATION

 

We are a provider of secure wireless solutions that are sold to: (1) domestic and foreign public safety / public service entities, (2) federal, state and local governmental agencies, including the Departments of Homeland Security and Defense, 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 or repeaters);

 

·                  infrastructure equipment and systems;

 

·                  secure encryption technologies for proprietary wireless radios;

 

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

 

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

 

The condensed consolidated financial statements include the accounts of EF Johnson Technologies, Inc. and our wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated in the consolidation.

 

Previously the Company was organized, and reported its financial results, as a parent company with two segments, Private Wireless Communications and Secured Communications.  Having recognized that the public safety/public service market is moving towards convergent telecommunications solutions, the continued demand for interoperability and the transition from analog to digital platforms, we reorganized the Company in January 2008 into a single centralized corporate structure in order to be competitive in this market.  In light of these changes, the Company reassessed its segment reporting, and beginning with the first quarter of 2008, we have no segments to report.

 

5



 

EF JOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and six months ended June 30, 2009 and 2008

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

 

3. RESTATEMENT

 

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

 

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

 

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

 

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

 

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

 

The following tables (in thousands) summarize the net increases (decreases) for the three and six months ended June 30, 2008. These adjustments did not change the amounts reported as cash flows from operating, investing, or financing activities.

 

 

 

As previously
reported three
months ended

 

 

 

Adjusted three
month ended

 

 

 

June 30,

 

 

 

June 30,

 

 

 

2008

 

Adjustment

 

2008

 

Revenues

 

$

32,570

 

$

 

$

32,570

 

Cost of sales

 

21,810

 

(246

)

21,564

 

Gross profit

 

10,760

 

246

 

11,006

 

 

 

 

 

 

 

 

 

Total operating expenses

 

9,481

 

 

9,481

 

Income from operations

 

1,279

 

246

 

1,525

 

Interest expense, net

 

(268

)

 

(268

)

Net income before income taxes

 

$

1,011

 

$

246

 

$

1,257

 

Income tax benefit (expense)

 

 

 

 

Net income

 

$

1,011

 

$

246

 

$

1,257

 

Net income per share—basic

 

$

0.04

 

$

0.01

 

$

0.05

 

Net income per share—diluted

 

$

0.04

 

$

0.01

 

$

0.05

 

Weighted average common shares— basic

 

26,082,124

 

26,082,124

 

26,082,124

 

Weighted average common shares— diluted

 

26,406,889

 

26,406,889

 

26,406,889

 

 

6



 

EF JOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and six months ended June 30, 2009 and 2008

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

 

3. RESTATEMENT (continued)

 

 

 

As previously
reported six
month ended

 

 

 

Adjusted six
month ended

 

 

 

June 30,

 

 

 

June 30,

 

 

 

2008

 

Adjustment

 

2008

 

Revenues

 

$

66,469

 

$

 

$

66,469

 

Cost of sales

 

44,411

 

(342

)

44,069

 

Gross profit

 

22,058

 

342

 

22,400

 

 

 

 

 

 

 

 

 

Total operating expenses

 

22,710

 

 

22,710

 

Loss from operations

 

(652

)

342

 

(310

)

Interest expense, net

 

(449

)

 

(449

)

Net loss before income taxes

 

$

(1,101

)

$

342

 

$

(759

)

Income tax benefit (expense)

 

 

 

 

Net loss

 

$

(1,101

)

$

342

 

$

(759

)

Net loss per share—basic

 

$

(0.04

)

$

0.01

 

$

(0.03

)

Weighted average common shares—basic

 

26,072,017

 

26,072,017

 

26,072,017

 

 

 

 

As previously
reported June 30,

 

 

 

Adjusted June 30,

 

 

 

2008

 

Adjustment

 

2008

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

8,358

 

$

 

$

8,358

 

Accounts receivable

 

29,574

 

 

29,574

 

Receivables—other

 

7,157

 

(3,104

)

4,053

 

Cost in excess of billings on uncompleted contracts

 

3,869

 

 

3,869

 

Inventories, net

 

31,348

 

 

31,348

 

Prepaid Expenses

 

1,453

 

 

1,453

 

Total current assets

 

81,759

 

(3,104

)

78,655

 

TOTAL ASSETS

 

$

121,675

 

$

(3,104

)

$

118,571

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

41,184

 

 

41,184

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock

 

262

 

 

262

 

Additional paid-in capital

 

154,577

 

 

154,577

 

Accumulated other comprehensive loss

 

(705

)

 

(705

)

Accumulated deficit

 

(73,643

)

(3,104

)

(76,747

)

TOTAL STOCKHOLDERS’ EQUITY

 

80,491

 

(3,104

)

77,387

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

121,675

 

$

(3,104

)

$

118,571

 

 

4. NET INCOME (LOSS) PER SHARE

 

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

 

7



 

EF JOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and six months ended June 30, 2009 and 2008

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

 

shares that had exercise prices higher than the average market price of the common stock for the periods were considered anti-dilutive and excluded from the calculation of diluted weighted average common shares. For the six months ended June 30, 2009 and 2008, all outstanding incentive shares were considered anti-dilutive due to the net loss for the period end.  The outstanding incentive shares that are considered dilutive and anti-dilutive are as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Incentive shares with dilutive effect

 

468,164

 

324,765

 

 

 

Incentive shares with anti-dilutive effect

 

1,312,529

 

985,785

 

1,823,742

 

1,256,979

 

Outstanding incentive shares

 

1,780,693

 

1,310,550

 

1,823,742

 

1,256,979

 

 

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

 

5. ACCOUNTING FOR STOCK-BASED COMPENSATION

 

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

 

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

 

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

 

6. ESCROW FUND SETTLEMENT

 

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

 

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

 

8



 

EF JOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and six months ended June 30, 2009 and 2008

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

 

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

 

7. INTEREST RATE SWAP AGREEMENT AND COMPREHENSIVE LOSS

 

On July 19, 2006, we entered into an interest rate swap agreement to manage interest costs and risks associated with changing interest rates, not for speculative or trading purposes. The interest rate swap has been designated as a cash flow hedge and is recorded in the consolidated financial statements at fair value. Changes in the fair value of the swap have been recorded in Accumulated Comprehensive Loss in the balance sheet as the derivative is assessed as effectively hedged at June 30, 2009. Changes in the fair value of the swap would be reclassified to other income (expense) to the extent the hedging instrument is determined to be ineffective.

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

(as restated)

 

 

 

(as restated)

 

Net income (loss)

 

$

1,128

 

$

1,257

 

$

(130

)

$

(759

)

Reclassification to interest expense

 

(198

)

(113

)

(390

)

(186

)

Fair value adjustment for interest rate swap

 

353

 

515

 

664

 

191

 

Comprehensive income (loss)

 

$

1,283

 

$

1,659

 

$

144

 

$

(754

)

 

8. INVENTORIES

 

The following is a summary of inventories:

 

 

 

June 30, 2009

 

December 31, 2008

 

Raw materials and supplies

 

$

11,544

 

$

11,598

 

Work in progress

 

474

 

1,049

 

Finished goods

 

23,752

 

24,673

 

Service inventories

 

2,853

 

3,163

 

 

 

38,623

 

40,483

 

Reserve for obsolescence

 

(4,136

)

(3,161

)

Total inventories

 

$

34,487

 

$

37,322

 

 

9. GOODWILL AND INTANGIBLE ASSETS

 

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

 

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

 

9



 

EF JOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and six months ended June 30, 2009 and 2008

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

 

No events occurred during the six months ended June 30, 2009 and 2008, respectively, which would indicate that an impairment of such assets had taken place as of such dates.

 

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

 

 

 

June 30, 2009

 

December 31, 2008

 

 

 

Gross

 

 

 

Net

 

Gross

 

 

 

Net

 

 

 

Amount

 

Impairment

 

Amount

 

Amount

 

Impairment

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangible assets not subject to amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

5,126

 

$

 

$

5,126

 

$

20,040

 

$

(14,914

)

$

5,126

 

Trademarks

 

2,044

 

 

2,044

 

4,364

 

(2,320

)

2,044

 

Certifications

 

1,230

 

 

1,230

 

1,230

 

 

1,230

 

 

 

$

 8,400

 

$

 

$

8,400

 

$

25,634

 

$

(17,234

)

$

8,400

 

 

 

 

June 30, 2009

 

December 31, 2008

 

 

 

Gross

 

 

 

Accumulated

 

Net

 

Gross

 

 

 

Accumulated

 

Net

 

 

 

Amount

 

Impairment

 

Amortization

 

Amount

 

Amount

 

Impairment

 

Amortization

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangible assets subject to amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Existing technology

 

$

6,190

 

$

 

$

(2,943

)

$

3,247

 

$

6,190

 

$

 

$

(2,667

)

$

3,523

 

Customer relationships

 

3,756

 

 

(2,120

)

1,636

 

4,800

 

(1,044

)

(1,908

)

1,848

 

License

 

159

 

 

(159

)

 

320

 

(161

)

(159

)

 

Covenant not-to-compete

 

400

 

 

(400

)

 

400

 

 

(400

)

 

Trademarks/Patents

 

209

 

 

(88

)

121

 

209

 

 

(84

)

125

 

 

 

$

10,714

 

$

 

$

(5,710

)

$

5,004

 

$

11,919

 

$

(1,205

)

$

(5,218

)

$

5,496

 

 

10. NOTE PAYABLE AND LINE OF CREDIT

 

We amended our secured line of credit agreement with Bank of America in July 2006 to retain a revolving 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 fully funded and used to finance the acquisition of 3eTI dated July 10, 2006. Both borrowings bear interest at a variable rate based on the London Interbank Offered Rate (“LIBOR”) plus a margin (“LIBOR Margin”) determined by our ratio of debt to earnings before interest, taxes, depreciation, and amortization (“EBITDA”). The LIBOR Margin was 400 basis points as of June 30, 2009 and was 200 basis points at June 30, 2008. As discussed below, an amendment to the Loan Agreement was executed in March 2009 that resulted in increased basis points and lowered the revolving line of credit to $10.0 million. Interest rates of 4.32% and 4.47% were in effect at June 30, 2009 and 2008, respectively. The Loan Agreement expires June 30, 2010.

 

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

 

The Loan Agreement provides for customary affirmative and 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 capital expenditures. In addition, the Loan Agreement contains certain financial covenants including a maximum ratio of funded debt to EBITDA and a fixed charge coverage ratio. The Loan Agreement also provides for events of default that would permit the lender to accelerate the loans upon their occurrence, including failure to make payments, breaches of representations and warranties, insolvency events, acceleration of other indebtedness, failure to discharge judgments, material adverse effects, certain breaches of contracts, casualty losses when no or insufficient insurance is maintained, changes of control, certain ERISA events and failure to observe covenants. As collateral for the obligations under the Loan Agreement, the Lender has a security interest in substantially all assets of the borrowers, including accounts receivable, inventories, machinery, equipment, real estate, and general intangibles.

 

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

 

10



 

EF JOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and six months ended June 30, 2009 and 2008

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

 

one-time basis, and amended the Loan Agreement to, among other things, lower the revolving line of credit from $15.0 million to $10.0 million, revise such financial covenants, add additional covenants, and to modify the advance and borrowing provisions under the Loan Agreement. In order to maintain compliance with the terms of the Amendment, the Company pledged as additional cash collateral for the remaining term of the term loan $3.0 million on the effective date of the Amendment. Furthermore, beginning with the quarter ending June 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, 2010 and limit capital expenditures to $2.5 million for 2009. In addition, the interest rate on the revolving note issuable pursuant to the Loan Agreement has been amended to a floating rate equal to LIBOR plus a Libor Margin ranging from 2.50% to 5.00% through the term of the note based on the Company’s funded debt to EBITDA.

 

The Company was in compliance with all financial and negative covenants at June 30, 2009.  As discussed above, compliance with new, more restrictive financial covenants under the Loan Agreement was required beginning in the Company’s second quarter.  Management has noted that, based on current projections, if certain orders are not received and shipped in the third quarter, the Company may not meet those more restrictive loan covenants for the third quarter.  Management’s evaluation is based on recent experience with expected orders being temporarily delayed by customers.   In such event, the Company intends to attempt to obtain a waiver of noncompliance from the lender, failing which the lender could declare the Company in default under the Loan Agreement and accelerate the payment of the $15.0 million term loan, require payment of any borrowings under the revolving line of credit and 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 in compliance with the bank covenants at the end of the third quarter and is unable to obtain a waiver from such noncompliance, the Company, to the extent existing resources and cash from operations are insufficient to pay these above obligations, may need to raise additional funds through public or private equity or debt financing. These funds may not be available, or if available, we may not be able to obtain them on terms favorable to us.

 

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

 

11. INCOME TAXES

 

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

 

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

 

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

 

11



 

EF JOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and six months ended June 30, 2009 and 2008

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

 

12. WARRANTY COSTS

 

We provide a one-to-three year warranty on substantially all of our product sales, depending upon certain terms and conditions of the sale, and estimate future warranty claims based on historical experience and anticipated costs to be incurred over the life of the warranty. Warranty expense is accrued at the time of sale with an additional accrual for specific items after the sale when their existence is known and amounts are determinable. A reconciliation of changes in our accrued warranty reserve as of June 30, 2009 is as follows:

 

 

 

Balance at

 

Charged to

 

Deduction /

 

Balance at

 

 

 

December 31, 2008

 

Expense

 

Expenditures

 

June 30, 2009

 

Allowance for Warranty Reserve

 

$

3,116

 

1,345

 

1,206

 

$

3,255

 

 

13. FAIR VALUE OF FINANCIAL INSTRUMENTS

 

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

 

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

 

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

 

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

 

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

 

 

 

Fair Value Measurements Using

 

 

 

Total Carrying
Value

 

Quoted prices
in active
markets
(Level 1)

 

Significant
other
observable
inputs
(Level 2)

 

Significant
unobservable
inputs
(Level 3)

 

Interest rate swap - liability at June 30, 2008

 

$

705

 

$

 

$

705

 

$

 

Interest rate swap - liability at June 30, 2009

 

$

814

 

$

 

$

814

 

$

 

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115,” (SFAS 159) which is effective for fiscal years beginning after November 15, 2007. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. This statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. Unrealized gains and losses on items for which the fair value option is elected would be reported in earnings. We have adopted SFAS 159 and have elected not to measure any additional financial instruments and other items at fair value.

 

14. COMMITMENTS AND CONTINGENCIES

 

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

 

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

 

12



 

EF JOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and six months ended June 30, 2009 and 2008

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

 

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

 

15. COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES

 

On November 15, 2007, the Company committed to an organizational plan (the “Plan”) to shift from three divisions to one integrated corporate structure focused on secure wireless communications for government and industrial customers. The Plan was expected to improve efficiencies in our operations, to reduce our infrastructure costs and to support a new technology roadmap driving towards a streamlined and more effective structure. Implementation of the Plan included senior and middle management changes as well as staff reductions designed to eliminate redundant positions and reflected the Company’s decision to consolidate operations and move production from three locations into a centralized operations and outsourcing program in the Dallas/Fort Worth area.

 

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

 

The timing of the recognition of costs associated with this move were determined in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, and other relevant guidance, that provides that a liability for a cost associated with an exit or disposal activity shall be recognized at its fair value in the period in which the liability is incurred. In particular, employee-related termination costs associated with the relocation are generally recognized ratably over the period that the employees are required to provide services in order to earn the respective termination benefit.

 

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

 

 

 

Original
amount
expected to
be incurred

 

Additional
costs incurred

 

Total
amount
expected to
be incurred

 

Amount
incurred as of
December 31,
2008

 

Amount
incurred for
the three
months ended
June 30, 2009

 

Amount
incurred for
the six months
ended
June 30, 2009

 

Remaining
amount to
be incurred

 

One-time termination benefits

 

$

951

 

$

 

$

951

 

$

939

 

$

 

$

12

 

$

 

Other costs

 

139

 

59

 

198

 

198

 

 

 

 

Total costs

 

$

1,090

 

$

59

 

$

1,149

 

$

1,137

 

$

 

$

12

 

$

 

 

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

 

 

 

Balance at
December 31,
2007

 

Cash
Payments

 

Balance at
December 31,
2008

 

Cash Payments

 

Balance at
June 30,
2009

 

One-time termination benefits

 

$

575

 

$

563

 

$

12

 

$

12

 

$

 

Other costs

 

3

 

3

 

 

 

 

Total costs

 

$

578

 

$

566

 

$

12

 

$

12

 

$

 

 

16. RELATED PARTY TRANSACTIONS

 

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

 

13



 

EF JOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and six months ended June 30, 2009 and 2008

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

 

17. RECENTLY ISSUED ACCOUNTING STANDARDS

 

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

 

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

 

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (“SFAS 161”), which requires additional disclosures about the objectives of using derivative instruments, the method by which the derivative instruments and related hedged items are accounted for under FASB Statement No.133 and its related interpretations, and the effect of derivative instruments and related hedged items on financial position, financial performance, and cash flows. SFAS 161 also requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged.  The Company adopted this standard effective January 1, 2009. The implementation of this standard did not have a material impact on our consolidated financial statements.

 

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

 

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

 

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

 

In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. This FSP provides additional guidance for estimating fair value in accordance with FASB Statement No. 157, Fair Value Measurements, when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. This FSP emphasizes that even if there has been a

 

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EF JOHNSON TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and six months ended June 30, 2009 and 2008

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

 

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

 

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

 

In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS 165”). SFAS 165 establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. SFAS 165 was effective for interim or annual financial periods ending after June 15, 2009. With the adoption of SFAS 165, the Company provided additional disclosures; however, the adoption did not affect our consolidated financial position, results of operations, or cash flows.

 

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

 

18. SUBSEQUENT EVENTS

 

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

 

15



 

ITEM 2.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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

 

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

 

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

 

Overview

 

Previously the Company was organized, and reported its financial results, as a parent company with two segments, Private Wireless Communications and Secured Communications.  Having recognized that the public safety/public service market is moving towards convergent telecommunications solutions, the continued demand for interoperability and the transition from analog to digital platforms, we reorganized the Company in January 2008 into a single centralized corporate structure in order to be competitive in this market.

 

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

 

We design, develop, market and support wireless radios and wireless communications infrastructure and systems for digital and analog platforms. In addition, we offer encryption technologies for wireless voice, video and data communications and we also design, develop, market and support secure wireless networking solutions that include Wi-Fi products, mesh networking, access points, and client infrastructure products. The Company’s customers include first responders in public safety and public service, the federal government, and industrial organizations.

 

Due to the timing of orders and seasonality, our quarterly results fluctuate. We experience seasonality in our results in part due to governmental customer spending patterns that are influenced by government fiscal year-end budgets and appropriations. The unpredictable sales cycle coupled with launching new products and solutions can also cause variations from quarter to quarter.

 

Our Products and Solutions

 

Our wireless radio offerings are primarily digital solutions designed to operate in both analog and digital system environments. Our products and systems are based on industry standards designed to enhance interoperability among systems, improve bandwidth efficiency, and integrate voice and data communications.

 

The Land Mobile Radio (“LMR”) industry utilizes two-way wireless communications through wireless networks, which include infrastructure components such as base stations, repeaters, transmitters and receivers, network switches and portable and mobile two-way communication radios. Individual users operate portable hand-held radios and vehicular-mounted radios in their wireless communications system. Utilizing licensed RF spectrum, the customer owns and operates the wireless communication system that is networked by linking together the infrastructure components. We develop

 

16



 

customer solutions, which leverage the customer’s wireless system and wireless radios with customer specific or enterprise wide applications.

 

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

 

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

 

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

 

Our Sales and Distribution Approach

 

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

 

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

 

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

 

Description of Operating Accounts

 

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

 

Cost of Sales. Cost of sales includes costs of components and materials, labor, depreciation and overhead costs associated with the production of our products and services, as well as shipping, royalty, inventory reserves, warranty product costs, and incurred cost under sales contracts.

 

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

 

Research and Development. Research and development expenses consist primarily of costs associated with research and development personnel, materials, and the depreciation of research and development equipment and facilities. We expense research and development costs as they are incurred, net of any applicable cost reimbursements. Research and development expenses relating to our government-funded research and development services are included as a component of cost of sales.

 

Sales and Marketing. Sales and marketing expenses consist primarily of salaries and related costs of sales personnel, including sales commissions and travel expenses, as well as costs of advertising, product and program management, public relations and trade show participation.

 

17



 

General and Administrative. General and administrative expenses consist primarily of salaries and other expenses associated with our management, accounting, information systems and operational functions. This expense also includes the impact of equity-based compensation expense. Accounting for government contracts delineates what is a direct charge allowable to include in contract costs and what is considered to be an indirect charge reflected as general and administrative expenses. We consider indirect engineering labor and operating costs such as quality, planning, operations, and company fringe benefits, general administrative salaries and other general administrative expenses as general and administrative expense.

 

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

 

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

 

Critical Accounting Policies

 

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

 

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Results of Operations

 

The following table presents certain Condensed Consolidated Statements of Operations information as a percentage of revenues during the periods indicated:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

(as restated)

 

 

 

(as restated)

 

Revenues

 

100.0

%

100.0

%

100.0

%

100.0

%

Cost of sales

 

58.2

 

66.2

 

61.4

 

66.3

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

41.8

 

33.8

 

38.6

 

33.7

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

10.3

 

0.4

 

12.2

 

5.1

 

Sales and marketing

 

8.1

 

10.0

 

9.3

 

9.6

 

General and administrative

 

17.7

 

17.5

 

20.5

 

18.2

 

Amortization of intangibles

 

0.8

 

1.2

 

0.9

 

1.2

 

Escrow fund settlement

 

 

 

(5.3

)

 

Total operating expenses

 

36.9

 

29.1

 

37.6

 

34.2

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

4.9

 

4.7

 

1.0

 

(0.5

)

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(1.2

)

(0.8

)

(1.2

)

(0.7

)

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

3.7

 

3.9

 

(0.2

)

(1.1

)

 

 

 

 

 

 

 

 

 

 

Income tax (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (loss)

 

3.7

 

3.9

 

(0.2

)

(1.1

)

 

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

 

Revenues. Our revenues decreased $2.4 million, or 8%, to $30.1 million for the three months ended June 30, 2009 from $32.6 million for the same period in 2008. The decline was attributable to lower federal LMR revenues partially offset by increases associated with government services revenues. Our revenues decreased $13.9 million, or 21%, to $52.6 million for the six months ended June 30, 2009 from $66.5 million for the same period in 2008. The decline was attributable to lower federal LMR and re-banding revenues partially offset by increases associated with State and Local revenues and increases in government services revenues.

 

Gross Profit. Our gross profit increased $1.6 million, or 14%, to $12.6 million in the three months ended June 30, 2009 from $11.0 million for the same period in 2008. Gross profit, as a percentage of revenues, or gross margin, was 41.8% for the three months ended June 30, 2009, as compared to 33.8% for the same period in 2008. The increase in gross profit and gross margin was attributable to re-banding orders and government services product mix with lower third party content coupled with improved product quality that resulted in lower cost of sales. Our gross profit decreased $2.1 million, or 9%, to $20.3 million in the six months ended June 30, 2009 from $22.4 million for the same period in 2008. The decrease in gross profit was primarily due to the volume variance associated with the decline in federal LMR revenue. Gross profit, as a percentage of revenues, or gross margin, was 38.6% for the six months ended June 30, 2009, as compared to 33.7% for the same period in 2008. Gross margin improved in the first half of 2009 primarily due to second quarter performance and improved product quality that resulted in lower cost of sales. We do not anticipate the second quarter margins of 41.8% achieved due to product mix will be replicated in the second half of 2009. As a result we anticipate the gross margin percentage to be lower in the second half of 2009.

 

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

 

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

 

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

 

General and Administrative. General and administrative expenses decreased $0.4 million, or 7%, to $5.3 million for the three months ended June 30, 2009 from $5.7 million for the same period in 2008. General and administrative expenses decreased $1.3 million, or 11.2%, to $10.8 million for the six months ended June 30, 2009 from $12.1 million for the same period in 2008. The decrease in expenses is primarily attributable to reduced labor, lower incentive compensation accruals for 2009 and reduced stock compensation expense resulting from increased forfeiture rates in the first half of 2009 as compared with the first half of 2008.

 

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

 

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

 

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

 

Provision for Income Taxes. We did not record a tax benefit or provision for either the three and six months ended June 30, 2009 or 2008 primarily attributable to our fully reserved deferred tax assets requiring no further provision for income taxes for each respective period end. The valuation reserve is based upon management’s conclusions regarding, among other considerations, our cumulative loss position during three preceding years, our operating results during each period, our current and expected customer base, technological and competitive factors impacting our current products, and management’s estimates of future earnings based on information currently available.

 

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

 

20



 

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

 

Liquidity and Capital Resources

 

The Company’s primary sources of liquidity are its cash and cash equivalents that were $9.5 million (net of $5.0 million pledged restricted cash) at June 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 $1.7 million in the six months ended June 30, 2009.  Our operating activities used cash of $6.4 million in the six months ended June 30, 2008.

 

During the first half of 2009, operating cash was provided primarily from improved inventory turnover, reduced costs in excess of billings due to increased contract billings, collection of related party receivables and non-cash depreciation, amortization and stock compensation aggregating to $8.9 million. Partially offsetting were increases in billed accounts receivable, a reduction in accounts payable and other liabilities amounting to $7.3 million. Operating cash includes $2.8 million received from the escrow fund settlement.

 

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

 

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

 

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

 

Secured line of credit. The Loan Agreement provides for customary affirmative and 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 capital expenditures. In addition, the Loan Agreement contains certain financial covenants including a maximum ratio of funded debt to EBITDA and a fixed charge coverage ratio. The Loan Agreement also provides for events of default that would permit the lender to accelerate the loans upon their occurrence, including failure to make payments, breaches of representations and warranties, insolvency events, acceleration of other indebtedness, failure to discharge judgments, material adverse effects, certain breaches of contracts, casualty losses when no or insufficient insurance is maintained, changes of control, certain ERISA events and failure to observe covenants. As collateral for the obligations under the Loan Agreement the Lender has a security interest in substantially all assets of the borrowers, including accounts receivable, inventories, machinery, equipment, real estate, and general intangibles.

 

As noted in our Form 10-K for the period ending December, 31, 2008, we were not in compliance with the financial covenants of the Loan Agreement for the quarter ending December 31, 2008. As a result, on March 16, 2009 we executed an Amendment to the Loan Agreement whereby Bank of America waived such financial covenant defaults on a one-time basis and amended the Loan Agreement to, among other things, lower the revolving line of credit from $15.0 million to $10.0 million, revise such financial covenants, add additional covenants, and to modify the advance and borrowing revisions under the Loan Agreement. In order to maintain compliance with the terms of the Amendment, the Company pledged as additional cash collateral for the remaining term of the term loan, $3.0 million on the effective date of the Amendment. Furthermore, beginning with the quarter ending June 30, 2009, we are required to maintain a certain level of EBITDA, a 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, 2010 and limit capital expenditures to $2.5 million for 2009. In addition, the interest rate on the revolving note issuable pursuant to the Loan Agreement has been amended to a floating rate equal to LIBOR plus a Libor Margin ranging from 2.50% to 5.00% through the term of the note based on the Company’s funded debt to EBITDA. Effective with the Amendment, the Libor margin is 400 basis points through the second quarter of 2009. Interest rates of 4.32% and 4.47% were in effect at June 30, 2009 and 2008, respectively. The Loan Agreement expires June 30, 2010.

 

21



 

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

 

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

 

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

 

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

 

Dividend policy. Since our initial public offering, we have not declared or paid any dividends on our common stock. We presently intend to retain earnings for use in our operations and to finance our business. Any change in our dividend policy is within the discretion of our board of directors and will depend, among other things, on our earnings, debt service and capital requirements, restrictions in financing agreements, if any, business conditions and other factors that our board of directors deems relevant.

 

Covenant Compliance. The Company was in compliance with all financial and negative covenants at June 30, 2009.  As discussed above, compliance with new, more restrictive financial covenants under the Loan Agreement was required beginning in the Company’s second quarter.  Management noted that, if certain orders are not received and shipped in the third quarter, the Company may not meet those more restrictive loan covenants for the third quarter. Management’s evaluation is based on recent experience with expected orders being temporarily delayed by customers.  In such event, the Company intends to attempt to obtain a waiver of noncompliance from the lender, failing which the lender could declare the Company in default under the Loan Agreement and accelerate the payment of the $15.0 million term loan, require payment of any borrowings under the revolving line of credit and 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 in compliance with the bank covenants at the end of the third quarter and is unable to obtain a waiver from such noncompliance, the Company, to the extent existing resources and cash from operations are insufficient to pay these above obligations; we may need to raise additional funds through public or private equity or debt financing. These funds may not be available, or if available, we may not be able to obtain them on terms favorable to us.

 

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

 

Based on our estimated cash flows, and assuming the Company is able to meet its covenants under the Loan Agreement or obtain a waiver for noncompliance and extend the revolving line of credit, we believe our existing cash, cash equivalents and the revolving line of credit are sufficient to meet our capital and operating requirements for at least the next 12 months. However, our future operating and capital requirements depend on many factors, including the levels at which we generate product revenue and related margins, the timing and extent of development, our operating expenses, investments in inventory and accounts receivable and general economic conditions, and also, the continued availability of our credit facility. To the extent existing resources and cash from operations are insufficient to support our activities, we may need to raise additional funds through public or private equity or debt financing. These funds may not be available, or if available, we may not be able to obtain them on terms favorable to us.

 

Off-Balance Sheet Arrangements

 

As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or variable interest entities (“VIE”),

 

22



 

that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of  June 30, 2009, we are not involved in any VIE transactions.

 

Recently Issued Accounting Standards

 

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

 

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

 

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (“SFAS 161”), which requires additional disclosures about the objectives of using derivative instruments, the method by which the derivative instruments and related hedged items are accounted for under FASB Statement No.133 and its related interpretations, and the effect of derivative instruments and related hedged items on financial position, financial performance, and cash flows. SFAS 161 also requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged.  The Company adopted this standard effective January 1, 2009. The implementation of this standard did not have a material impact on our consolidated financial statements.

 

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

 

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

 

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

 

In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. This FSP provides additional guidance for estimating fair value in accordance with FASB Statement No. 157, Fair Value Measurements, when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. This FSP emphasizes that even if there has been a

 

23



 

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

 

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

 

In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS 165”). SFAS 165 establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. SFAS 165 was effective for interim or annual financial periods ending after June 15, 2009. With the adoption of SFAS 165, the Company provided additional disclosures; however, the adoption did not affect our consolidated financial position, results of operations, or cash flows.

 

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

 

ITEM 3.                                  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

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

 

·                  unexpected changes in regulatory requirements;

 

·                  tariffs and other trade barriers;

 

·                  political and economic instability in foreign markets;

 

·                  difficulties in establishing foreign distribution channels;

 

·                  longer payment cycles or uncertainty in the collection of accounts receivable;

 

·                  increased costs associated with maintaining international 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 result of foreign currency fluctuations since a substantial majority of our quotations and invoices are denominated in U.S. dollars.

 

Export of our products is subject to the U.S. Export Administration regulations and some of our secured communications products require a license or a license exception in order to ship internationally. We cannot assure that such approvals will be available to us or our products in the future in a timely manner or at all or that the federal government will

 

24



 

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

 

ITEM 4.                                  CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

Our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) reviewed and evaluated our disclosure controls and procedures, as defined in Rule 240.13a-15(e) and 15d-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 were effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to our management including our principal executive and principal financial officer, as appropriate, to allow timely decisions regarding disclosures.

 

Internal Controls Over Financial Reporting

 

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

 

Remediation of Material Weakness in Internal Control

 

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

 

We believe we have taken the steps necessary to remediate this material weakness pertaining to non-standard agreements by improving processes, procedures and approval levels to enter into such agreements. We will continue to monitor the effectiveness of these processes, procedures and controls, and will make any further changes as management determines appropriate.

 

Changes in Internal Control Over Financial Reporting

 

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

 

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

 

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

 

25



 

PART II. OTHER INFORMATION

 

ITEM 1.                               LEGAL PROCEEDING

 

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

 

ITEM 1A.                      RISK FACTORS

 

Risk Factors Related to Our Business

 

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

 

ITEM 2.                               UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS

 

N/A.

 

ITEM 3.                               DEFAULTS UPON SENIOR SECURITIES

 

N/A.

 

ITEM 4.                                SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

 

We held our Annual Meeting of Stockholders on May 27, 2009.

 

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

 

Name of Director

 

Votes For

 

Votes Withheld

 

Edward H. Bersoff

 

18,254,347

 

4,321,528

 

Bernard C. Bailey

 

17,687,595

 

4,888,073

 

 

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

 

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

 

Proposal

 

Votes For

 

Votes
Against

 

Votes
Abstaining

 

Broker Non-Votes

 

 

 

 

 

 

 

 

 

 

 

Approval of an amendment to the 2005 Omnibus Incentive Compensation Plan to increase the maximum number of shares which may be granted to any one participant in any fiscal year.

 

9,109,792

 

4,419,143

 

76,748

 

8,969,985

 

 

ITEM 5.                               OTHER INFORMATION

 

N/A

 

ITEM 6.                               EXHIBITS

 

The following exhibits are filed herewith:

 

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Exhibit No.

 

Description

 

 

 

10.1 +

 

Amendment to the EFJ, Inc. 2005 Omnibus Incentive Compensation Plan

 

 

 

11.1

 

Computation of net income (loss) per share

 

 

 

31.1

 

Chief Executive Officer’s Certification of Report on Form 10-Q for the Quarter Ending June 30, 2009

 

 

 

31.2

 

Chief Financial Officer’s Certification of Report on Form 10-Q for the Quarter Ending June 30, 2009

 

 

 

32.1

 

Written certification of Chief Executive Officer, dated August 6, 2008, pursuant to 18 U.S.C. Section 1350.

 

 

 

32.2

 

Written certification of Chief Financial Officer, dated August 6, 2008, pursuant to 18 U.S.C. Section 1350.

 


+ Management contract or compensatory plan or arrangement.

 

SIGNATURE

 

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

 

 

EF JOHNSON TECHNOLOGIES, INC.

 

 

 

 

 

 

Date:  August 6, 2009

By:

/s/ Jana Ahlfinger Bell

 

 

Jana Ahlfinger Bell

 

 

Executive Vice President and Chief Financial Officer

 

 

(Principal Financial and Accounting Officer)

 

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