EFJ, Inc.

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EFJ, Inc.

1440 Corporate Drive
Irving, Texas 75038
U.S.A.
Telephone: (972) 819-0700
Fax: (972) 819-0639
Web site: http://www.efji.com

Public Company
Incorporated: 1923 as E.F. Johnson Company
Employees: 272
Sales: $94.62 million (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: EFJI
NAIC: 334220 Radio and Television Broadcasting and Wireless Communications Equipment Manufacturing

EFJ, Inc., provides secure communications technology to the law enforcement, public safety, and defense communities as well as commercial users. The company's two main operating subsidiaries are built around different technologies. E.F. Johnson Company, a pioneer of two-way radios, focuses on digital systems or private wireless communications and accounted for more than two-thirds of 2005 revenues. Transcrypt International, Inc. supplies secure analog solutions for customers in areas that have not switched to digital radio.

ORIGINS

EFJ, Inc., was called Transcrypt International, Inc., before 2002. Its name was changed to reflect the importance of its subsidiary, E.F. Johnson Company, which had been acquired a few years earlier.

E.F. Johnson Company was founded in 1923 by Edgar F. Johnson and his new bride, Ethel. Johnson had studied electrical engineering at the University of Minnesota before setting up the company in his hometown, Waseca, about 75 miles south of Minneapolis.

The business originally involved selling electrical parts to radio stations via mail order. Demand for military radios kept Johnson busy through World War II. The company was a leading producer of amateur and CB radios after the war, introducing its first "ham" radio, the Viking, in 1949.

Johnson had more than 2,500 employees during its mid-1970s heyday. However, a flood of cheap imports from Japan soon wiped out the company's CB radio business, resulting in a $19 million loss in 1977 alone. Company founder Edgar Johnson, who had been named to the Minnesota Business Hall of Fame, retired as president and chairman the next year. He died in 1991.

Johnson had already developed a new technology that would win it long-term users in commercial and government agencies. Its Logic Trunked Radio (LTR) combined multiple communications channels on an assigned spectrum of bandwidth. LTR became a leading industry standard. Johnson eventually also licensed technology allowing it to produce equipment compatible with the systems of its larger rival, Motorola, Inc Johnson had another new line of business as well, supplying the nascent cellular phone business.

CHANGING OWNERSHIP: 1982–1996

Revenues were about $60 million in 1981, and E.F. Johnson was able to post a profit of almost $5 million. Western Union Corp. acquired Johnson in 1982 in a $132 million stock swap. However, it was sold off three years later to Diversified Energies Inc. (DEI) for $26 million plus $35 million in assumed debts.

By the mid-1980s, Johnson had revenues approaching $100 million a year and more than 1,100 employees. In 1986, it relocated its headquarters from Waseca to Minneapolis, home of its new corporate parent, DEI.

In December 1990, Johnson's parent DEI merged with Arkansas utility company Arkla Inc. By this time, Johnson had bought a controlling interest in AmeriCom Corp., an Atlanta manufacturer of network switching systems.

Cheap foreign imports had the same affect on the company's cell phone business as they had on the CB radio business earlier. There were layoffs as Johnson began sourcing components and then complete radios in Asia.

Arkla was selling off its non-core businesses and in August 1992 E.F. Johnson was acquired for $40 million by the newly formed EFJ Acquisition Corp. It was led by two New York investors, Bill Weksel and Bob Davies. Weksel was well versed in industrial management in the computer industry, noted Industrial Communications, while Davies had experience financing mergers and acquisitions for Bell Atlantic Corp. By this time, Johnson was hiring again, buoyed by a new line of digital radios for public safety and private security users. Other clients included taxi companies and large petrochemical refineries.

The company celebrated its newfound independence by revamping its company museum in Waseca in time for its 70th anniversary. It also held an initial public offering in 1993. EFJ saw growth opportunities overseas, particularly in markets that lacked telecommunications infrastructure. The company established a considerable presence in South America. Unfortunately, EFJ was soon in financial trouble again. It posted a loss of $26.5 million on revenues of $79.3 million in 1996.

TRANSCRYPT PURCHASE OF E.F. JOHNSON IN 1997

Transcrypt International bought E.F. Johnson in July 1997 for $12.4 million, mostly in stock, while agreeing to assume debts worth $13 million. Transcrypt produced scrambling and encryption devices for both analog and digital signals. Its customers included law enforcement agencies and the military.

Transcrypt had been formed in the late 1970s to sell products for securing voice communications. It was based in Lincoln, Nebraska, and was founded by John and Yvonne Kuijvenhoven.

In 1991, Transcrypt was acquired by an investment group led by John Connor. He told the Des Moines Business Record that he had screened 200 companies before settling on Transcrypt to invest in following his early retirement from Deloitte & Touche.

Transcrypt's revenues were $8 million by 1995 and growing rapidly. The company went public on the NASDAQ (ticker symbol: TRII) in January 1997. However, it soon became the subject of class-action lawsuits from stockholders alleging misleading statements on the part of officials. A round of layoffs followed at E.F. Johnson, which had about 550 employees before 138 positions were cut.

COMPANY PERSPECTIVES

At EFJ, Inc, we design, develop, market and support private wireless communications, including wireless radios, wireless communications infrastructure and systems, and secured communications encryption technologies for analog wireless radios. We provide our products and services to homeland security, defense, public safety and public service and international markets.

We leverage our software and engineering expertise in radio frequency, or RF, applications to provide first responders such as police, fire and other emergency personnel secure, highly reliable wireless radios and systems. The adoption of new digital products and systems is being accelerated by the FCC mandate for narrowband efficiency as well as the need for interoperable communications and information systems related to homeland security. Customers for our products and systems include federal, state and local governmental entities, domestic commercial users, and international entities.

Transcrypt restated results for 1994 through 1997, finding that it had prematurely recognized some sales. As restated, the company posted a net loss of $4.1 million in 1996 on revenues of $10.6 million. The next year, the loss rose to $10.9 million while revenues reached $40.4 million.

NETWORKING AFTER 1998

Voice over Internet protocol (VOIP) was revolutionizing the mobile radio business. In 1998, E.F. Johnson introduced its LTR-Net system. This allowed trunked radios in disparate locations to be connected over the web. It was suited for companies communicating with field employees from a home office.

Michael E. Jalbert was named Transcrypt's CEO in 1999. He had been head of Microdyne Corporation before it was acquired by L-3 Communications. Jalbert scaled back the company's Lincoln, Nebraska, manufacturing area by selling the 76,000-square-foot plant for $5.2 million and leasing back part of it. The E.F. Johnson subsidiary was restructured to boost its sales and support activities. A Washington, D.C., office was opened to help land more government contracts.

In 1999 Transcrypt landed a contract to produce equipment for U.K. land mobile radio producer Radiocoms, a unit of Intek. Intek was aiming to dominate the new market for 220 MHz frequency radios in the United States.

POST-9/11 UPGRADE MARKET

New York fire and police departments responding to the September 11, 2001, terrorist attacks on the United States found their efforts hindered by the inability of different radio systems to work with each other. Interoperability of communications equipment became a major public safety priority after September 11.

Emergency communications equipment had been developed by three manufacturers (including E.F. Johnson) with proprietary technologies. The Association of Public Safety Communications Officials International, Inc. (APCO) had in 1995 set forth Project 25, which provided standards for interoperability and narrower, more efficient divisions of bandwidth. Local governments were slow to purchase new equipment due to the cost involved, however. A federal mandate for more narrow divisions of the radio frequency spectrum by 2008 was a compelling prompt to upgrade. The size of the upgrade market was estimated to be worth several billion dollars.

Transcrypt International was renamed EFJ, Inc. (EFJI) in June 2002 to reflect the importance of its radio business (the initials became the new ticker symbol). Corporate headquarters had been relocated from Lincoln, Nebraska, to Washington, D.C., which was home of its CEO. The company also established an engineering office in Irving, Texas, and in 2004, the two-way radio manufacturing operation was moved there from Waseca, Minnesota. Irving became the home of EFJI's headquarters as well in 2005.

Revenues were up to $56.2 million in 2003 and EFJI was profitable, with net income of $4 million. Profits rose to $10 million on revenues of $80.9 million in 2004. The company was much leaner, with about 260 employees. Most of its revenues, and growth prospects, were with the E.F. Johnson subsidiary.

KEY DATES

1923:: E.F. Johnson Company is formed to sell electrical parts.
1949:: Johnson introduces its Viking amateur radio.
1977:: Johnson loses $19 million in one year as cheap CB radios from Japan flood U.S. market.
1978:: Transcrypt International is founded in Lincoln, Nebraska.
1982:: Western Union Corp. acquires publicly traded E.F. Johnson.
1985:: Minnesota's Diversified Energies buys E.F. Johnson from Western Union.
1990:: Arkansas utility Arkla acquires E.F. Johnson through merger with Diversified Energies.
1992:: New York investors buy E.F. Johnson from Arkla.
1993:: E.F. Johnson completes initial public offering.
1997:: Transcrypt International goes public, acquires E.F. Johnson.
1998:: Johnson's LTR-Net is introduced.
2002:: Transcrypt International is renamed EFJ, Inc.; headquarters are moved to Washington, D.C
2004:: Two-way radio manufacturing moves from Waseca, Minnesota, to Irving, Texas.
2005:: EFJ relocates headquarters from Washington to Irving, Texas.

A secondary public offering in September 2005 raised $48 million, mostly from institutional investors. Jalbert told Investment Dealers' Digest that EFJI was interested in bringing new technologies involving video and data into the secure communications market. Many emergency services agencies were still using analog technology, he added, providing substantial opportunity for upgrades. BusinessWeek ranked EFJI in the top quarter of its "100 Best Small Companies."