Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549-1004

Form 10-Q

Commission File Number 0-21681

EFJ, INC.
(Exact name of registrant as specified in its charter)

        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 ý    No o

        As of October 21, 2002, 17,577,315 shares of the Registrant's Common Stock were outstanding.

PART I.    FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

EFJ, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2002 and December 31, 2001
(in thousands, except share data)

See accompanying notes to the condensed consolidated financial statements.

2

EFJ, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended September 30, 2002 and 2001
(Unaudited and in thousands, except share and per share data)

See accompanying notes to the condensed consolidated financial statements.

3

EFJ, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2002 and 2001
(Unaudited and in thousands, except share data)

Summary of non-cash transactions:

        In the nine months ending September 30, 2001, the Company issued 3,122,001 and 75,000 shares of common stock as payments of a litigation settlement liabilities recorded on the books for $4,197 and $75, respectively.

        In the nine months ending September 30, 2002, the Company acquired $53 of fixed assets in exchange for long-term debt.

See accompanying notes to the condensed consolidated financial statements

4

EFJ, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2002 and 2001
(Unaudited and in thousands)

1.    GENERAL

        The condensed consolidated balance sheet of EFJ, Inc. ("EFJ" or the "Company") at December 31, 2001 has been derived from the audited consolidated financial statements at that date. The condensed consolidated financial statements as of September 30, 2002 and for the three and nine months ended September 30, 2002 and 2001 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 the Company's Annual Report on Form 10-K for the year ended December 31, 2001. The results of operations and cash flows for the three and nine months ended September 30, 2002 are not necessarily indicative of the results for any other period or the entire fiscal year ending December 31, 2002. Where appropriate, items within the condensed consolidated financial statements have been reclassified from the previous period's presentation to conform to the current presentation.

2.    ORGANIZATION AND CONSOLIDATION

        The Company is a manufacturer of wireless communications products and systems and information security products. Through its EFJohnson subsidiary, the Company designs, develops, manufactures and markets: (1) stationary land mobile radio ("LMR") transmitters/receivers (base stations or repeaters); and (2) mobile and portable radios. The Company sells its LMR products and systems mainly to two broad markets: (1) public safety and other governmental users and (2) business and industrial users. Through its Transcrypt International (f.k.a. "Transcrypt Secure Technologies") division, the Company designs and manufactures information security products, which prevent unauthorized access to sensitive voice communications. These products are based on a wide range of analog scrambling and digital encryption technologies and are sold mainly to the LMR markets as an add-on security device for analog radios.

        The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the consolidation.

        In June 2002, the Company (f.k.a. "Transcrypt International, Inc.") changed its name to EFJ, Inc. The Company's stock symbol was changed from TRII to EFJI.

3.    REVENUE RECOGNITION

        The Company's revenue recognition policy is in accordance with the criteria put forth in Staff Accounting Bulletin 101. Revenues are recognized when the earnings process is complete, generally when the product is shipped, less an estimate for an allowance for returns, if applicable, if collection is reasonably assured. For shipments where collection is not reasonably assured, the Company recognizes revenue as cash is received. If collection is contingent on a future event, the Company recognizes revenue when the contingency lapses, generally upon cash collection.

5

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. For the three and nine months ended September 30, 2001, the impact of outstanding stock options on diluted EPS was anti-dilutive as the exercise prices of outstanding stock options were greater than the average market price of the common shares for the three month and nine month periods ended September 30, 2001; additionally, a net loss was incurred for the nine months ended September 30, 2001. For the three and nine months ended September 30, 2002, all outstanding stock options granted as of such date to purchase common stock are considered common stock equivalents in the calculation of diluted EPS if their exercise price is below the average market price of the common stock for the respective three month and nine month periods ended September 30, 2002. Common stock equivalents of 260,290 and 399,676 are included in the computation of diluted EPS for the three and nine month periods ending September 30, 2002, respectively. The Company uses the treasury stock method to calculate diluted weighted average shares, as if all such options were outstanding for the three and nine month periods presented.

5.    INVENTORIES

        The following is a summary of inventory at September 30, 2002 and December 31, 2001:

6.    INTANGIBLE ASSETS

        In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets. SFAS 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The Company adopted the provisions SFAS 142, and, accordingly, goodwill and certain other intangible assets are no longer amortized to earnings effective January 1, 2002. Instead, as required by SFAS 142, the Company reviews its intangible assets for impairment. The Company performed such fair value impairment test at December 31, 2001, and updated such test at September 30, 2002, concluding that no impairment of goodwill and certain other intangible assets was deemed necessary at such dates. As a result of SFAS 142, the Company's amortization of goodwill was decreased by $237 and $711 in the three and nine months ended September 30, 2002, respectively, as compared to the same periods in 2001.

7.    REVOLVING LINE OF CREDIT

        At December 31, 2001, the Company had a $10.0 million secured line of credit with a regional bank with an outstanding balance of $5,120. The availability under this line was limited to the Company's cash balances. In February 2002, the Company voluntarily chose to pay off and terminate such line of credit, as management no longer assessed any operational need for the line of credit as structured.

6

8.    REPRICED STOCK OPTIONS:

        In 2000 and 2001, the Company effectively cancelled and reissued stock options in order to lower the exercise price of those options to $0.656 per share, an amount approximating 150% of the then prevailing market value of the Company's common stock (the "repricing"). The repricing of the stock options resulted in a new measurement date for accounting purposes and the reclassification of these options as variable plan awards beginning on the date of the repricing. The Company had previously accounted for these option grants as fixed plan awards. As of September 30, 2002, approximately 902,000 of these repriced options, in various stages of vesting, are outstanding. Because the quoted value of the Company's common stock in 2001 was not above the exercise price of the options subsequent to the repricing, by any substantial amount or for any substantial length of time, no compensation expense was recognized in 2001 for the effect of the repricing. However, at September 30, 2002 and June 30, 2002, respectively, the market value of the Company's common stock was $0.85 and $1.13; therefore, non-cash compensation charges resulted to the extent that the market value exceeded the repriced exercise price. In the three and nine months ended September 30, 2002, the amount of compensation expense (benefit) relating to these repriced options was ($199) and $162, respectively, which amounts are included in general and administrative expenses.

9.    COMMITMENTS AND CONTINGENCIES

        On or about February 5, 2001, ASRC Communication ("ASRC") filed a complaint in United States District Circuit Court of Alaska, against EFJohnson. ASRC alleges that EFJohnson engaged in wrongful activities in association with radio products sold to ASRC. ASRC purchased approximately $0.5 million of products from EFJohnson since 1999. ASRC's claims against EFJohnson include breach of contract, breach of express warranty, breach of implied warranty of merchantability, breach of implied warranty of fitness for a particular purpose, breach of duty of good faith and fair dealing, equitable estoppel, misrepresentation, and violations of the racketeer influenced and corrupt organizations act. Plaintiff seeks compensatory damages in excess of $0.5 million, attorneys' fees and costs, and punitive damages in an unspecified amount. The Company vigorously contests ASRC's allegations. However, the Company is unable to predict the likelihood of the outcome or potential liability that may arise from this legal action.

        The Company is involved in certain other legal proceedings incidental to the normal conduct of its business. The Company does not believe that any liabilities relating to such other legal proceedings are likely to be, individually or in the aggregate, material to the Company's business, financial condition, results of operations, or cash flows.

        In the normal course of its business activities, the Company is required under a contract with various governmental authorities to provide letters of credit and bonds that may be drawn upon if the Company fails to perform under its contracts. The letters of credit, which expire on various dates in 2002, have a total undrawn balance of $2.0 million at September 30, 2002. Bonds, which expire on various dates, totaled $9.7 million on September 30, 2002. As of that date, no bonds have been drawn upon.

10.    RELATED PARTY TRANSACTION

        In April 2002, the Company extended a loan to the Company's Chief Executive Officer, Michael E. Jalbert, in the principal amount of $75. This note is due on demand and bears interest at the rate of 6%. Any tax obligations associated with the loan are the sole responsibility of Mr. Jalbert.

7

11.    SEGMENT AND RELATED INFORMATION

        The Company operates in two industry segments: the wireless communication industry (EFJohnson), which is comprised of the design, development, manufacture and sale of stationary land mobile radio transmitters/receivers, mobile and portable radios and complete radio communication systems; and the information security industry (Transcrypt International), which is comprised of the design, manufacture and sale of devices that prevent the unauthorized interception of sensitive voice and data communication. The Company evaluates segment results based on gross margin and income from operations. Corporate expenses are allocated to the operating segments based upon estimated usage of corporate resources.

        The following table is a summary of unaudited quarterly results for the three and nine months ended September 30, 2002 and 2001.

8

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

        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 (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"). These forward-looking statements relate to, among other things, the results of the Company's product development efforts, future sales and expense levels, the Company's future financial condition, liquidity and business prospects generally, perceived opportunities in the marketplace for the Company's products, and the Company's 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 detailed in "ITEM 1. BUSINESS—Summary of Business Considerations and Certain Factors That May Affect Future Results of Operations and/or Stock Price" contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2001.

        The following discussion is intended to provide a better understanding of the significant changes in trends relating to the Company's 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 Consolidated Financial Statements and Notes thereto.

Revenues

        The Company's revenue recogn