BK Technologies Corp - Quarter Report: 2009 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

———————

FORM 10-Q

———————

þ 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

¨ 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 000-07336

———————

RELM WIRELESS CORPORATION

(Exact name of registrant as specified in its charter)

———————

7100 Technology Drive

West Melbourne, Florida 32904

(Address of principal executive offices and Zip Code)

Registrant’s telephone number, including area code: (321) 984-1414

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 þ   No ¨

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 such shorter period that the registrant was required to submit and post such files).   Yes þ   No ¨

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨   No þ

There were 13,410,871 shares of common stock, $0.60 par value, of the registrant outstanding at August 1, 2009.

PART I. - FINANCIAL INFORMATION

Item 1.

Financial Statements

RELM WIRELESS CORPORATION

Condensed Consolidated Balance Sheets

(In thousands, except share data)(Unaudited)

See notes to condensed consolidated financial statements.

1

RELM WIRELESS CORPORATION

Condensed Consolidated Statements of Operations

(In thousands, except per share data) (Unaudited)

See notes to condensed consolidated financial statements.

2

RELM WIRELESS CORPORATION

Condensed Consolidated Statements of Cash Flows

(In thousands) (Unaudited)

See notes to condensed consolidated financial statements.

3

Notes to Condensed Consolidated Financial Statements

Unaudited

(in Thousands, Except Share Data and Percentages)

1.

Condensed Consolidated Financial Statements

The condensed consolidated balance sheets as of June 30, 2009 and December 31, 2008, the condensed consolidated statements of operations for the three and six months ended June 30, 2009 and 2008 and the condensed consolidated statements of cash flows for the six months ended June 30, 2009 and 2008 have been prepared by RELM Wireless Corporation (the Company), and are unaudited. In the opinion of management, all adjustments, which include normal recurring adjustments, necessary for a fair presentation have been made. The condensed consolidated balance sheet at December 31, 2008 has been derived from the Company’s audited consolidated financial statements at that date.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, as filed with the Securities and Exchange Commission. The results of operations for the three and six months ended June 30, 2009 are not necessarily indicative of the operating results for a full year.

Recent Accounting Pronouncements

In February 2007, the Financial Accounting Standard Board (FASB) issued Statement of Financial Accounting Standard No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159), providing companies with an option to report selected financial assets and liabilities at fair value. SFAS 159’s objective is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. United States generally accepted accounting principles has required different measurement attributes for different assets and liabilities that can create artificial volatility in earnings. SFAS 159 helps to mitigate this type of accounting-induced volatility by enabling companies to report related assets and liabilities at fair value, which would likely reduce the need for companies to comply with detailed rules for hedge accounting. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of asset and liabilities. SFAS 159 requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of a company’s choice to use fair value on its earnings. It also requires companies to display the fair value of those assets and liabilities for which it has chosen to use fair value on the face of the balance sheet. The Company adopted SFAS 159 in the first quarter 2008. The adoption of SFAS 159 did not have a material impact on the Company’s consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations.” This standard establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. This standard also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. This standard is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company adopted this standard in the first quarter 2009. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statement” was issued. This standard improves the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements. Under the new standard, noncontrolling interests are to be treated as a separate component of stockholders’ equity, not as a liability or other item outside of stockholders’ equity. This standard also requires that increases and decreases in the noncontrolling ownership be accounted for as equity transactions. This standard is effective for fiscal years beginning after December 15, 2008. The Company adopted this standard in the first quarter 2009. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued FASB Staff Position No. 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” (FSP FAS 157-4), FASB Staff Position No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (FSP FAS 115-2 and FAS 124-2), and FASB Staff Position

4

Notes to Condensed Consolidated Financial Statements

Unaudited

(in Thousands, Except Share Data and Percentages)

No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (FSP FAS 107-1 and APB 28-1). FSP FAS 157-4 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 an asset or liability have significantly decreased, and also includes guidance on identifying circumstances that indicate a transaction is not orderly. FSP FAS 115-2 and FAS 124-2 amend the other-than-temporary impairment guidance in U.S. Generally Accepted Accounting Principles for debt securities to make the guidance more operational and to improve the presentation and disclosure of other- than-temporary impairments on debt and equity securities in the financial statements. Under FSP FAS 115-2 and FAS 124-2, an impairment is considered to be other-than-temporary if an entity (i) intends to sell the security, (ii) more likely than not will be required to sell the security before recovering its cost, or (iii) does not expect to recover the security’s entire amortized cost basis, even if there is no intent to sell the security. In assessing the expectation of recovery, FSP FAS 115-2 and FAS 124-2 requires an assessment of the present value of cash flows expected to be collected. If this assessment yields an amount less than the amortized cost basis of the security, even if the entity has the intent, and more likely than not, the ability to hold the securities, a credit loss is deemed to exist, which is considered an other-than-temporary impairment. The amount of an other-than-temporary impairment attributable to credit losses is recognized in earnings, while the amount of an other-than-temporary impairment related to other factors is recognized in other comprehensive income. FSP FAS 115-2 and FAS 124-2 shall be effective for interim and annual reporting periods ending after June 15, 2009. The adoption of FSP FAS 115-2 and FAS 124-2 did not have a material impact on the Company’s consolidated financial statements.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events”. This standard is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, this standard sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS No. 165 is effective for fiscal years and interim periods ended after June 15, 2009 and will be applied prospectively. The adoption of SFAS No. 165 for the period ended June 30, 2009 did not have a material impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (SFAS 167). SFAS 167 amends FASB Interpretation No. 46(R), “Variable Interest Entities” for determining whether an entity is a variable interest entity (VIE) and requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE. Under SFAS 167, an enterprise has a controlling financial interest when it has a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. SFAS 167 also requires an enterprise to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed when determining whether it has power to direct the activities of the VIE that most significantly impact the entity’s economic performance. SFAS 167 also requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE, requires enhanced disclosures and eliminates the scope exclusion for qualifying special-purpose entities. SFAS 167 is effective for fiscal years beginning after November 15, 2009. The Company does not anticipate that the adoption of SFAS 167 will have a material impact on its consolidated financial statements.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles”. This standard replaces SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”, and establishes only two levels of U.S. generally accepted accounting principles (GAAP), authoritative and nonauthoritative. The FASB Accounting Standards Codification (the Codification) will become the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the Securities and Exchange Commission (SEC), which are sources of authoritative GAAP for SEC registrants. All other nongrandfathered, non-SEC accounting literature not included in the Codification will become nonauthoritative. This standard is effective for financial statements for interim or annual reporting periods ending after September 15, 2009. The Company will begin to use the new guidelines and numbering system prescribed by the Codification when referring to GAAP in the third quarter of 2009. As the Codification was not intended to change or alter existing GAAP, it will not have any impact on the Company’s consolidated financial statements.

5

Notes to Condensed Consolidated Financial Statements

Unaudited

(in Thousands, Except Share Data and Percentages)

2.

Significant Events and Transactions

In April 2009, the Company received orders totaling $5,200 from the U.S. Department of Defense for its new P25 digital KNG products and related equipment. These orders were largely fulfilled during the second quarter 2009.

In May 2009, the Company received orders totaling $1,100 from agencies of the U. S. Department of Agriculture and the U.S. Department of the Interior. These orders included both the Company’s new digital P25 KNG products, and its long-time flagship D-Series digital P-25 products. These orders were fulfilled during the second quarter 2009.

3.

Allowance for Doubtful Accounts

The allowance for collection losses on trade receivables was approximately $44 and $81 on gross trade receivables of $5,650 and $1,850 at June 30, 2009 and December 31, 2008, respectively. This allowance is used to state trade receivables at a net realizable value or the amount that the Company estimates will be collected of the Company’s gross receivables as of June 30, 2009.

4.

Inventories, net

The components of inventory, net of reserves for slow-moving, excess or obsolete inventory, consist of the following:

Reserves for slow-moving, excess, or obsolete inventory were approximately $2,223 at June 30, 2009, compared with approximately $2,406 at December 31, 2008. The reserve for slow-moving, excess, or obsolete inventory is used to state the Company’s inventories at the lower of cost or market.

5.

Income Taxes

Net income tax expense totaling approximately $303 has been recorded for the three and six months ended June 30, 2009. This is comprised of $329 in non-cash deferred income tax expense and a cash refund of $26 resulting from a federal R&D tax credit.

As of June 30, 2009, the Company’s deferred tax assets totaled approximately $8,871, compared with $9,200 as of December 31, 2008, and are primarily composed of net operating loss carry forwards (NOL's). These NOL’s are available to offset any Federal or state taxable income and expire starting in 2018 through 2028.

In order to fully realize the net deferred tax assets, the Company will need to generate sufficient taxable income in future years to utilize its NOL’s prior to their expiration. SFAS. 109, “Accounting for Income Taxes” requires the Company to analyze all positive and negative evidence to determine if, based on the weight of available evidence, the Company is more likely than not to realize the benefit of the net deferred tax assets. The recognition of the net deferred tax assets and related tax benefit is based upon the Company’s conclusions regarding, among other considerations, estimates of future earnings based on information currently available, current and anticipated customers, contracts and product introductions, as well as recent operating results during 2008, 2007 and 2006, and certain tax planning strategies.

The Company has evaluated the available evidence and the likelihood of realizing the benefit of its net deferred tax assets. From its evaluation the Company has concluded that based on the weight of available evidence the Company is more likely than not to realize the benefit of its net deferred tax assets recorded at June 30, 2009. Accordingly, no valuation allowance has been established. The Company cannot presently estimate what, if any, changes to the valuation of its deferred tax assets may be deemed appropriate in the future. If the Company incurs future losses, it may be necessary to record a valuation allowance related to the deferred tax assets recorded as of June 30, 2009.

6

Notes to Condensed Consolidated Financial Statements

Unaudited

(in Thousands, Except Share Data and Percentages)

6.

Capitalized Software

The Company accounts for the costs of software within our products in accordance with SFAS No. 86 “Accounting for Costs of Computer Software to be Sold, Leased or Otherwise Marketed”, under which certain software costs incurred subsequent to the establishment of technological feasibility are capitalized and amortized over the estimated lives of the related products. The Company determines technological feasibility to be established upon the internal release of a detailed program design as specified by SFAS 86. Upon the general release of the product to customers, development costs for that product are amortized over periods not exceeding five years, based on current and future revenue of the product. For the three and six months ended June 30, 2009, the Company’s amortization cost was $58 and $116, respectively, and the net capitalized software costs totaled $2,554, and for December 31, 2008 the capitalized software costs were $1,731 and there was no amortization cost.

7.

Stockholders’ Equity

The consolidated changes in stockholders’ equity for the six months ended June 30, 2009 are as follows:

8.

Income (loss) per Share

The following table sets forth the computation of basic and diluted income (loss) per share:

A total of 600,500 shares and a total of 680,500 shares related to options are not included in the computation of loss per share for the three and six months ended June 30, 2008, respectively, because to do so would have been anti-dilutive for those periods.

9.

Non-Cash Share-Based Employee Compensation

The Company has employee and non-employee director stock option programs. Related to these programs, and in accordance with SFAS No. 123R, “Share-Based Payment”, the Company recorded $16 and $31of non-cash share-based employee compensation expense for the three and six months ended June 30, 2009, respectively, compared with $11 and $37 for the same periods last year. The Company considers its non-cash share-based

7

Notes to Condensed Consolidated Financial Statements

Unaudited

(in Thousands, Except Share Data and Percentages)

employee compensation expenses as a component of cost of products ($0 for the three and six months ended June 30, 2009, respectively, compared to $0 and $1 for the same periods last year) and selling, general and administrative expenses ($16 and $31 for the three and six months ended June 30, 2009, respectively, compared to $11 and $36 for the same periods last year). No non-cash share–based employee compensation expense was capitalized as part of capital expenditures or inventory for the periods presented.

The Company uses the Black-Scholes-Merton option valuation model to calculate the fair value of a stock option grant. The non-cash share-based employee compensation expense recorded in the three and six months ended June 30, 2009 was calculated using the assumptions noted in the following table. Expected volatilities are based on the historical volatility of the Company’s common stock over the period of time commensurate with the expected life of the stock options. The dividend yield of zero is based on the fact that the Company presently has no intention to pay cash dividends in the future as the Company is prohibited from doing so under its current secured revolving credit facility.  The Company has estimated future stock option exercises by the optionees. The expected term of option grants is based upon the observed and expected time to the date of post vesting exercise and forfeitures of options by the optionees. The risk-free interest rate is derived from the average U.S. Treasury rate for the periods, which approximates the rate at the time of the stock option grant.

A summary of stock option activity under our stock option plans as of June 30, 2009, and changes during the three months ended June 30, 2009 are presented below:

10.

Commitments and Contingencies

Legal Proceedings

From time to time the Company may be involved in various claims and legal actions arising in the ordinary course of its business. There were no pending claims or legal matters as of June 30, 2009.

Other

As of June 30, 2009, the Company had commitments for purchase orders to suppliers of approximately $2,472.

Significant Customers

Sales to the United States government represented approximately $7,300 (72.6%) and $8,300 (58.8%) of the Company’s total sales for the three and six months ended June 30, 2009, respectively, compared with approximately $2,500 (39.5%) and $3,600 (36.5%) for the same periods last year.

8

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

SPECIAL NOTE CONCERNING
FORWARD-LOOKING STATEMENTS

We believe that it is important to communicate our future expectations to our security holders and to the public. This report, therefore, contains statements about future events and expectations which are “forward-looking statements” within the meaning of Sections 27A of the Securities Act of 1933 and 21E of the Securities Exchange Act of 1934, including the statements about our plans, objectives, expectations and prospects under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” You can expect to identify these statements by forward-looking words such as “may,” “might,” “could,” “would,” ”will,” “anticipate,” “believe,” “plan,” “estimate,” “project,” “expect,” “intend,” “seek” and other similar expressions. Any statement contained in this report that is not a statement of historical fact may be deemed to be a forward-looking statement. Although we believe that the plans, objectives, expectations and prospects reflected in or suggested by our forward-looking statements are reasonable, those statements involve risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements, and we can give no assurance that our plans, objectives, expectations and prospects will be achieved.

Important factors that might cause our actual results to differ materially from the results contemplated by the forward-looking statements are contained in the “Risk Factors” section of and elsewhere in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 and in our subsequent filings with the Securities and Exchange Commission, and include, among others, the following:

·

changes in customer preferences;

·

our inventory and debt levels;

·

heavy reliance on sales to agencies of the United States government;

·

federal, state and local government budget deficits and spending limitations;

·

quality of management, business abilities and judgment of our personnel;

·

the availability, terms and deployment of capital;

·

competition in the land mobile radio industry;

·

reliance on contract manufacturers;

·

limitations in available radio spectrum for use of land mobile radios;

·

changes or advances in technology; and

·

general economic and business conditions amid the financial crisis.

We assume no obligation to publicly update or revise any forward-looking statements made in this report, whether as a result of new information, future events, changes in assumptions or otherwise, after the date of this report. Readers are cautioned not to place undue reliance on these forward-looking statements.

Reported dollar amounts in management’s discussion and analysis are disclosed in millions or as whole dollar amounts.

Executive Summary

The financial and operating results for the second quarter 2009 improved significantly from the same quarter in 2008 and from the preceding quarter. This included increased total sales and sales of P25 digital products, higher gross margins and reduced operating expenses; all of which combined to yield an operating profit for the quarter and year-to-date. We also realized reductions in inventory and long-term debt, while enhancing our cash and working capital positions.

9

Previously announced orders from the U.S. Departments of Defense, Agriculture and Interior were major contributors to our results. These orders were supplemented by continued modest improvement in overall procurements in our addressable markets. While the results for the second quarter are encouraging, the business climate for land mobile radios and prospects for economic recovery and growth remain uncertain.

For the second quarter ended June 30, 2009, total sales were approximately $9.9 million, an increase of approximately $3.6 million (56.8%), compared with the same quarter last year, and an increase of $5.9 million (148.6%) compared to the first quarter 2009. Sales of P25 digital products for the second quarter comprised approximately $6.3 million (63.4% of total sales) compared with approximately $2.6 million (41.8% of total sales) for the same quarter last year, and compared with $1.8 million (45.2% of total sales) for the immediately preceding quarter.

For the six months ended June 30, 2009, total sales were approximately $13.8 million, an increase of approximately $4.0 million (41.2%), compared with the same quarter last year. Sales of P25 digital products for the six-month period comprised approximately $8.1 million (58.2% of total sales) compared with approximately $3.9 million (39.3% of total sales) for the same period last year.

Gross margins as a percentage of sales for the three months ended June 30, 2009 were 49.6% compared with 50.8% for the same quarter last year, and compared with 40.6% for the immediately preceding quarter. For the six months ended June 30, 2009, gross margins as a percentage of sales were 47.0% compared with 46.7% for the same period last year. Our gross margins for the quarter and year-to-date reflect competitive pricing pressures, which are partially offset by increased sales volumes and an improved sales-mix of higher margin P25 digital products.

Selling, general and administrative expenses decreased approximately $1.0 million (27.6%) and $2.0 million (28.6%), respectively, for the three and six months ended June 30, 2009 compared with the same quarter last year. During the quarter we completed certain engineering initiatives and continued implementing actions to reduce selling, general and administrative expenses.

Pretax income for the three months ended June 30, 2009 increased $2.6 million to approximately $2.3 million compared with a pretax loss of approximately $0.3 million for the same quarter last year. For the six months ended June 30, 2009, pretax income increased $3.8 million to approximately $1.4 million compared with a pretax loss of $2.4 million for the same period last year.

For the three and six months ended June 30, 2009, we recognized income tax expense of approximately $0.3 million, compared with an income tax benefit of approximately $0.1 million and $0.8 million, respectively, for the same periods last year. Our income tax expense and benefit for all periods reported are primarily non-cash deferred items.

Net income for the three and six months ended June 30, 2009 was approximately $2.0 million ($0.15 per basic and diluted share) and $1.1 million ($0.08 per basic and diluted share), respectively, compared with net loss of approximately $0.3 million ($0.02 per basic share) and $1.6 million ($0.12 per basic share) for the same periods last year.

To-date during 2009, we reduced long-term debt by $1.0 million (66.7%) and reduced net inventories by approximately $2.8 million (28.2%). As of June 30, 2009, we had approximately $5.2 million of cash and $15.8 million in working capital.

10

Results of Operations

As an aid to understanding our operating results for the periods covered by this report, the following table shows selected items from our condensed consolidated statements of operations expressed as a percentage of sales:

Net Sales

Net sales for the second quarter ended June 30, 2009 totaled approximately $9.9 million, an increase of approximately $3.6 million (56.8%), compared with the same quarter last year, and an increase of $5.9 million (148.6%) compared to the immediately preceding quarter. Sales of P25 digital products for the second quarter 2009 totaled approximately $6.3 million (63.4% of total sales), compared with approximately $2.6 million (41.8% of total sales) for the same quarter last year, and compared with $1.8 million (45.2% of total sales) for the immediately preceding quarter.

For the six months ended June 30, 2009, total sales were approximately $13.8 million, an increase of approximately $4.0 million (41.2%), compared with the same quarter last year. Sales of P25 digital products for the six-month period comprised approximately $8.1 million (58.2% of total sales) compared with approximately $3.9 million (39.3% of total sales) for the same period last year.

Previously announced orders from the U.S. Departments of Defense, Agriculture and Interior during the second quarter were the major drivers of our sales growth for the quarter and the six-month periods. Additionally, these orders were primarily for P25 digital products, including our new KNG Series products that were introduced last year. The purchases by the U.S. Department of Defense are particularly important, as they represent sales to new customers, and for products in frequencies that we did not offer prior to 2008. Supplementing these large transactions, we also realized some improvement in the flow of lower-value run-rate purchases, particularly from legacy customers. This was fueled, in part, by our inclusion in a blanket purchase agreement (BPA) from the U.S. General Services Administration that was implemented in the fourth quarter 2008. The total estimated value of this BPA is $500 million to various suppliers over a maximum term of five years, and it will be utilized by various federal government agencies for the purchase of a wide range of analog and P25 digital radio equipment. While sales for the second quarter are encouraging, the business climate for land mobile radios and prospects for economic recovery and growth remain uncertain.

Within the past year we have significantly expanded our P25 digital product offerings with the introduction of four new radio models, some of which address customers and markets that were previously outside the scope of our products. We anticipate introducing additional new products in this line later in 2009. We believe these products will increase our addressable opportunities and, accordingly, improve our prospects for gaining market share and sales growth.

Cost of Products and Gross Margin

Gross margins as a percentage of sales for the three months ended June 30, 2009 were 49.6% compared with 50.8% for the same quarter last year, and compared with 40.6% for the immediately preceding quarter. For the six months ended June 30, 2009, gross margins as a percentage of sales were 47.0% compared with 46.7% for the same period last year.

11

Our cost of products and gross margins are primarily related to product mix, manufacturing volumes and pricing. Our gross margins for the quarter and year-to-date reflect competitive pricing pressures, which were partially offset by increased manufacturing volumes and an improved sales-mix of high-margin P25 digital products.

Manufacturing volumes during the second quarter 2009 increased significantly as a result of increased sales orders. Consequently, we more fully utilized and absorbed our base of manufacturing and support expenses, favorably impacting product unit costs and gross margins.

We continue to utilize contract manufacturing relationships to maximize production efficiencies and minimize material and labor costs. We also regularly consider manufacturing alternatives to improve quality, speed and to reduce our product costs. We anticipate that the current contract manufacturing relationships or comparable alternatives will be available to us in the future. Leveraging increased sales volumes and P-25 product sales combined with the introduction of planned new products, we believe, should result in further cost improvements, efficiencies and gross margin performance.

Selling, General and Administrative Expenses

Selling, general and administrative (SG&A) expenses consist of marketing, sales, commissions, engineering, product development, management information systems, accounting and headquarters expenses. During the second quarter 2009, we completed certain engineering initiatives and continued implementing actions to reduce SG&A expenses, responding to the uncertain business climate. These cost reductions are not anticipated to adversely impact the execution of our strategic business plan.

SG&A expenses decreased overall by approximately $1.0 million (27.6%) to $2.6 million, or 26.5% of sales, for the three months ended June 30, 2009 compared with the same quarter last year. For the six months ended June 30, 2009, SG&A expenses decreased approximately $2.0 million (28.6%) to $5.1 million, or 36.7% of sales, compared with the same period last year.

Engineering and product development expenses for the three months ended June 30, 2009 decreased by approximately $539,000 (35.9%) compared with the same quarter last year. For the six months ended June 30, 2009, engineering and product development expenses declined by $997,000 (34.9%) compared with the same period last year. The completion of several digital development initiatives and the related new product introductions enabled us to reduce the associated engineering costs. Additional new products in our KNG line are in the development process for introduction later this year and next, however we don’t anticipate increases in current engineering expense levels related to these development projects.

Marketing and selling expenses for the second quarter ended June 30, 2009 decreased by approximately $448,000 (31.5%) compared with the same quarter last year.  For the six months ended June 30, 2009 marketing and selling expenses declined by approximately $691,000 (26.3%) compared with the same period last year. During the second half of 2008 and the first quarter 2009, we reduced selling expenses and payroll in response to sluggish sales. We maintained this lower expense structure during the second quarter 2009. We are, however, investing in selling and marketing initiatives focused on raising the profile of our new KNG product line while penetrating new customers and markets.

General and administrative expenses for the three months ended June 30, 2009 decreased by approximately $13,000 (1.9%), compared with the same quarter last year. For the six months ended June 30, 2009 general and administrative expenses decreased by approximately $349,000 (21.3%) compared with the same period last year primarily due to reductions in professional fees and headquarters’ expenses.

Operating Income

Operating income for the three and six months ended June 30, 2009 increased to approximately $2.3 million (23.0% of sales) and $1.4 million (10.3% of sales), respectively, compared with operating losses of approximately $0.4 million (6.6% of sales) and $2.5 million (25.9% of sales), respectively, for the same periods last year. The operating income for the three and six months ended June 30, 2009 was derived primarily from increased total sales and sales of P25 digital products combined with SG&A expense reductions.

12

Net Interest (Expense) Income

For the three and six months ended June 30, 2009, we incurred approximately $20,000 and $36,000, respectively, in net interest expense compared to net interest income of approximately $39,000 and $105,000, respectively, for the same periods last year. We incur interest expense on borrowings from our revolving credit facility and earn interest income on our cash balances. The increase in interest expense and decline in interest income is the result of a lower cash balance and lower interest rates earned on our cash investments combined with the interest expense on borrowings from our revolving credit facility.  As of June 30, 2009, we had borrowings of $0.5 million outstanding under the revolving credit facility. The interest rate on such revolving credit facility as of June 30, 2009 was 5%. This rate is variable based on the prime rate plus 100 basis points (subject to a reduction of 50 basis points anytime our quarterly net income is greater than $1.0 million). For the third quarter 2009, because our net income for the quarter ended June 30, 2009 exceeded $1.0 million, the interest rate has been reduced by 50 basis points and such reduction will remain in effect so long as our net income for each subsequent quarter is greater than $1.0 million.

Income Taxes

We recorded net income tax expense of approximately $303,000 for the three and six months ended June 30, 2009, respectively, compared with a tax benefit of $124,000 and $824,000, respectively, for the same periods last year. Our income tax expenses and benefits are largely non-cash deferred items. The income tax expense for the second quarter and year-to-date 2009, however, is net of a cash refund totaling $26,000 that was derived from a federal research and development tax credit.

As of June 30, 2009, we had deferred tax assets of approximately $8.9 million compared with $9.2 million at the start of the year. These assets are primarily composed of net operating loss carry forwards (NOL’s), which are available to offset any federal and state taxable income. The NOL’s expire starting in 2018 through 2028.

In order to fully realize the net deferred tax assets, we will need to generate sufficient taxable income in future years to utilize our NOL’s prior to their expiration. SFAS No. 109, “Accounting for Income Taxes” requires us to analyze all positive and negative evidence to determine if, based on the weight of available evidence, we are more likely than not to realize the benefit of the net deferred tax assets. The recognition of the net deferred tax assets and related tax benefits is based upon our conclusions regarding, among other considerations, estimates of future earnings based on information currently available, current and anticipated customers, contracts and product introductions, as well as recent operating results during 2008, 2007 and 2006, and certain tax planning strategies.

We have evaluated the available evidence and the likelihood of realizing the benefit of our net deferred tax assets. From our evaluation we have concluded that based on the weight of available evidence we are more likely than not to realize the benefit of our net deferred tax assets recorded at June 30, 2009. Accordingly, no valuation allowance has been established. We cannot presently estimate what, if any, changes to the valuation of our deferred tax assets may be deemed appropriate in the future. If we incur future losses, it may be necessary to record a valuation allowance related to the deferred tax assets recorded as of June 30, 2009.

Inflation and Changing Prices

Inflation and changing prices for the three and six months ended June 30, 2009 did not have a material impact on our operations.

Liquidity and Capital Resources

For the six months ended June 30, 2009, net cash provided by operating activities totaled approximately $1.0 million, compared with net cash used in operating activities of approximately $3.0 million during the same period last year. Cash generated from operating activities for the six months ended June 30, 2009 was primarily the result of net income totaling approximately $1.1 million compared with a net loss of approximately $1.6 million for the same period last year, as well as a decrease in net inventories totaling $2.8 million compared with an increase of $0.8 million for the same period last year. Net inventories declined during the period as a result of higher sales of products in stock. As a result of sales growth, accounts receivable increased by approximately $3.8 million during the period, compared with $1.1 million for the same period last year. During the first six months of 2009, we recorded $822,000 in capitalized software compared with $405,000 for the same period last year. Deferred tax assets for the first six months of 2009 decreased by $329,000 due to non-cash tax expense on our pretax income. For the same period last year deferred tax assets increased by approximately $824,000 as a result of the tax benefit associated with our pretax loss. Depreciation and amortization totaled approximately $216,000 for the six months ended June 30, 2009, compared with $190,000 for the same period last year.

13

Cash used in investing activities was primarily to fund the acquisition of assets pertaining to the development of our new digital products. Capital expenditures for the six months ended June 30, 2009 were approximately $320,000 compared with approximately $295,000 for the same period last year. We anticipate that future capital expenditures will be funded through our existing cash balance and operating cash flow.

Cash used in financing activities totaled $1.0 million for the six months ended June 30, 2009, representing a reduction in the principal balance on our revolving line of credit. There was no cash used by or generated from financing activities for the same period last year.

We have a secured revolving credit facility with Silicon Valley Bank (SVB). The SVB facility provides borrowing availability of up to $3.5 million and is governed by a loan and security agreement entered into between us and SVB. The facility is available on a revolving basis during the period that commenced on October 23, 2008 and ending on October 22, 2010. Under the terms and conditions of the loan and security agreement for the facility, advances are generally subject to customary borrowing conditions, including the accuracy of representations and warranties, compliance with financial maintenance and restrictive covenants and the absence of events of default. For additional information about the terms and conditions of the loan and security agreement, reference is made to Note 5 (Debt) of the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

Advances under the facility bear interest at a variable rate equal to the prime rate, in effect from time to time, plus 100 basis points, subject to a reduction of 50 basis points anytime our quarterly net income is greater than $1.0 million. Under the terms and conditions of the loan and security agreement for the facility, advances may be prepaid in whole or in part without premium or penalty. Under the terms and conditions of the loan and security agreement for the facility, our obligations are secured by substantially all of our assets, principally accounts receivable and inventory. We were in compliance with all covenants under the loan and security agreement as of the date of this report. As of June 30, 2009, we had $0.5 million of borrowings outstanding under the facility and approximately $3.0 million of additional borrowing availability.

Our cash balance at June 30, 2009 was approximately $5.2 million. We believe these funds combined with anticipated cash generated from operations and borrowing availability under our secured revolving credit facility with SVB are sufficient to meet our working capital requirements for the next twelve months. However, although we do not anticipate needing additional capital in the near term, the current financial crisis and adverse economic conditions may limit our access to credit and impair our ability to raise capital, if needed, on acceptable terms or at all. In addition, we face a number of other risks related to the financial crisis that may impact our business, liquidity and financial condition. For a description of these risks, see “Item 1A. Risk Factors—“We face a number of risks related to the financial crisis” set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

Critical Accounting Policies

In response to the SEC’s financial reporting release, FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, we have selected for disclosure our revenue recognition process and our accounting processes involving significant judgments, estimates and assumptions. These processes affect our reported revenues and current assets and are therefore critical in assessing our financial and operating status. We regularly evaluate these processes in preparing our financial statements. The processes for determining the allowance for collection of trade receivables, the reserves for slow-moving, excess or obsolete inventory, and the accounting for software costs involve certain assumptions and estimates that we believe to be reasonable under present facts and circumstances. These estimates and assumptions, if incorrect, could adversely impact the Company’s operations and financial position. Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 includes a detailed discussion of these critical accounting policies.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

We may be subject to the risk of fluctuating interest rates in the ordinary course of business for borrowings under our revolving credit facility, which bears interest at a variable rate based on the prime rate, in effect from time to time, plus 100 basis points (subject to a reduction of 50 basis points anytime our quarterly net income is greater than $1.0 million). For the third quarter 2009, because our net income for the quarter ended June 30, 2009 exceeded $1.0 million, the interest rate has been reduced by 50 basis points and such reduction will remain in effect so long as our net income for each subsequent quarter is greater than $1.0 million. As of June 30, 2009, we had $0.5 million outstanding under the facility.

14

Item 4T.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer (who serves as our principal financial and accounting officer) have evaluated the effectiveness of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of June 30, 2009. Based on this evaluation, they have concluded that our disclosure controls and procedures were effective as of June 30, 2009.

Changes in Internal Control over Financial Reporting

During the second quarter ended June 30, 2009, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Securities Exchange Act Rules 13a-15 or 15d-15 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

15

PART II- OTHER INFORMATION

Item 1.

Legal Proceedings

Reference is made to Note 10 of the Company’s Condensed Consolidated Financial Statements included elsewhere in this report for the information required by this Item.

Item 4.

Submission of Matters to a Vote of Security Holders

The Company's 2009 annual meeting of stockholders was held on May 13, 2009 at its corporate offices at 7100 Technology Drive, West Melbourne, Florida to elect seven (7) directors until the next annual meeting of stockholders and until their respective successors are duly elected and qualified.

Proxies for the annual meeting were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, and there was no solicitation in opposition to the Company's solicitation. The holders of record of an aggregate of 11,265,406 shares of the Company's common stock, out of 13,410,871 shares outstanding on the record date (March 25, 2009) for the annual meeting, were present either in person or by proxy, and constituted a quorum for the transaction of business at the annual meeting.

All nominees for director were elected, with voting as detailed below:

Item 6.

Exhibits

16

SIGNATURES

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

17

Exhibit Index