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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
-----------------
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission file number 1-11916
WIRELESS TELECOM GROUP, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-2582295
------------------------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25 Eastmans Road,
Parsippany, New Jersey 07054
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(Address of principal executive offices) (Zip Code)
(201) 261-8797
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common Stock, par value $.01 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
none
----
(Title of Class)
Indicate by check whether the registrant: (1) 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
- -
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [ X ]
The aggregate market value of Wireless Telecom Group, Inc.
Common Stock, $.01 par value, held by non-affiliates computed by reference to
the closing price as reported by AMEX on March 24, 2005: $44,281,874
Number of shares of Wireless Telecom Group, Inc. Common Stock,
$.01 par value, outstanding as of March 24, 2005: 17,461,301
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DOCUMENTS INCORPORATED BY REFERENCE
Part III - Items 10, 11, 12, 13 and 14 In the Company's Definitive Proxy
Statement in connection with its
2005 annual meeting of
shareholders to be filed with
the Securities and Exchange
Commission no later than
May 2, 2005.
Part IV - Certain exhibits listed in Prior filings made by the
response to Item 15(a)(3) Company under the Securities
Act of 1933 and the
Securities Exchange Act
of 1934.
TABLE OF CONTENTS
PART I
PAGE
----
Item 1. Business 3
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 15
Item 8. Financial Statements and Supplementary Data 15
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 15
Item 9A. Controls and Procedures 15
Item 9B. Other Information 15
PART III
Item 10. Directors and Executive Officers of the Registrant 16
Item 11. Executive Compensation 16
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 16
Item 13. Certain Relationships and Related Transactions 16
Item 14. Principal Accountant Fees and Services 16
PART IV
Item 15. Exhibits and Financial Statement Schedules 17
Signatures 20
2
PART I
ITEM 1. BUSINESS
--------
Wireless Telecom Group, Inc., a New Jersey corporation (the "Company"),
develops, manufactures and markets a wide variety of electronic noise sources,
passive microwave components and electronic testing and measuring instruments
including power meters, voltmeters and modulation meters. The Company's products
have historically been primarily used to test the performance and capability of
cellular/PCS and satellite communications systems, and to measure the power of
RF and microwave systems. Other applications include radio, radar, wireless
local area network (WLAN), digital television and high-speed digital design. The
Company's current operations are conducted through the Company d/b/a Noise Com,
Inc. ("Noise Com") and its wholly owned subsidiaries Boonton Electronics
Corporation ("Boonton") and Microlab/FXR ("Microlab"). The corporate website
address is www.wtt.bz.
On December 21, 2001, the Company acquired Microlab/FXR, a private
entity, for the net purchase price of $3,800,000 in cash. The acquisition of
Microlab/FXR was recorded under the purchase method of accounting for financial
statement purposes. Microlab/FXR's Balance Sheets are included in the
Consolidated Balance Sheets at December 31, 2004 and 2003. Microlab/FXR's
results of operations and cash flows for 2004, 2003 and 2002 are included in the
Consolidated Statements of Operations and Cash Flows, and Management's
Discussion and Analysis of Operations.
Microlab/FXR designs and manufactures high-power, passive microwave
components for the wireless infrastructure market and for other commercial,
aerospace and military markets. The Company's products are used in microwave
systems, Universal Mobile Telecommunications Systems (UMTS), Personal
Communications Service (PCS) and cellular communications base stations,
television transmitters, avionic systems and medical electronics. Microlab/FXR
is one of the leaders in serving the needs of the in-building distributed
antenna system market, which facilitates seamless wireless coverage throughout
the insides of buildings and building complexes.
On July 7, 2000, a newly formed, wholly-owned subsidiary of the
Company, WTT Acquisition Corp., merged with and into Boonton, a public entity.
Each share of Boonton common stock was converted into .79 shares of the
Company's common stock with aggregated consideration totaling 1,885,713 shares
of Wireless common stock. The merger was accounted for as a pooling of interests
and accordingly, all periods prior to the merger were restated to include the
results of operations, financial position and cash flows of Boonton.
MARKET
Since the Company's incorporation in the State of New Jersey in 1985,
it has been primarily engaged in supplying noise source products and electronic
testing and measurement instruments to various customers. Approximately 75% of
the Company's sales in fiscal 2004 were derived from commercial applications.
The remaining sales (approximately 25%) were comprised of sales made to the
United States Government (particularly the armed forces) and prime defense
contractors.
PRODUCTS
Noise source products are primarily used as a method of testing to
determine if sophisticated communications systems are capable of receiving the
information being transmitted. The widest application for the Company's noise
source products are as a reference standard in test instruments which measure
unwanted noise and interference in devices and components utilized in a variety
of communications equipment.
This is accomplished by comparing a noise source with known
characteristics to the unwanted noise found in the communications system being
tested. By generating a random noise signal, in combination with a live
transmission signal, a noise generator simulates real world signals and allows
the manufacturer to determine if its product is performing to specifications.
Noise source testing is often more cost-efficient, faster and more accurate than
alternative conventional methods using signal generators.
3
Coupled with other electronic devices, noise generators are also an
effective means of jamming, blocking and disturbing enemy radar and other
communications, as well as insulating and protecting friendly communications. In
the jamming mode, the Company's noise source products block out or disrupt
unwanted radar and radio transmissions generally without being detected.
The Company's noise source products are used in radar systems as part
of built-in test equipment to continuously monitor the radar receiver and in
satellite communications where the use of back-up receivers are becoming more
common as the demand for communication availability and reliability is
increasing. Testing by the Company's noise source products assures that the
back-up receiver is always functional and ready should the communication using
the first receiver fail. The Company's noise source products can test satellite
communication receivers for video, telephone and data communications.
The Company also offers a line of broadband test equipment serving the
Cable Television and Cable Modem industries. Test instruments from the broadband
product line are measurement solutions for CATV equipment, Data-Over-Cable
("DOCSIS") and Digital TV.
The Company's noise source products range from relatively simple items
with no control mechanisms or auxiliary components to complex, automated
components containing computerized or microprocessor based controls.
The Company, through its Boonton Electronics subsidiary, designs and
produces electronic testing and measuring instruments including power meters,
voltmeters, capacitance meters, audio and modulation meters and VXI products.
These products measure the power of RF and microwave systems used by the
military and commercial sectors. Further, the Company's products are also used
to test terrestrial and satellite communications, radar, telemetry and personal
communication products. Recent models are microprocessor controlled and are
often used in computerized automatic testing systems. Certain power meter
products are designed for measuring signals based on wideband modulation
formats, allowing a variety of measurements to be made, including maximum power,
peak power, average power and minimum power.
The Company, through its Microlab/FXR subsidiary, designs and
manufactures high-power, passive microwave components for the wireless
infrastructure market and for other commercial, aerospace and military markets.
The Company's products are used in microwave systems, UMTS, PCS and cellular
communications base stations, television transmitters, avionic systems and
medical electronics. These types of products serve the needs of the in-building
distributed antenna systems market, which facilitates seamless wireless coverage
throughout the insides of buildings and building complexes.
The Company's products come in various sizes, styles and models with
varying degrees of capabilities and can be customized to meet particular
customer requirements. They may be incorporated directly into the electronic
equipment concerned or may be stand alone components or devices that are
connected to, or used in conjunction with, such equipment operating from an
external site, in the factory or in the field. Prices of products range from
approximately $100 to $75,000 per unit, with most sales occurring between $2,000
and $10,000 per unit.
The Company's products have extended useful lives and the Company
provides for its noise and power products, recalibration services to ensure
their accuracy, for a fee, to its domestic and international customers, and also
calibrates test equipment manufactured by others. Such services accounted for
approximately 4% of fiscal 2004 sales.
MARKETING AND SALES
As of March 25, 2005, the Company's in-house marketing and sales force
consisted of fourteen individuals. The Company promotes the sale of its products
to customers and manufacturers' representatives through its product literature,
publication of articles, presentations at technical conferences, direct
mailings, trade advertisements and trade show exhibitions. The Company believes
that extensive advertising is a major factor in generating in-house sales.
4
The Company's products are sold globally through its in-house sales
people and by over eighty non-exclusive manufacturers' representatives.
Generally, manufacturers' representatives do not stock inventories of the
Company's products. Manufacturers' representatives accounted for an aggregate of
72% and 62% of the Company's sales for the years ended December 31, 2004 and
2003, respectively. For the year ended December 31, 2004, one representative
accounted for more that 10% of total sales. In 2003, no representative accounted
for more than 10% of total sales. The Company does not believe that, although
there can be no assurance, the loss of any or all of its representatives would
have a material adverse affect on its business.
The Company's relationship with its representatives is usually governed
by written contracts that either run for one-year renewable periods terminable
by either party on 60 days prior notice or have indefinite lives terminable by
either party on 60 days prior notice. The contracts generally provide for
exclusive territorial and product representation and prohibit the handling of
competing products. The Company continually reviews and assesses the performance
of its representatives and makes changes from time to time based on such
assessments.
The Company believes that educating its existing and potential
customers as to the advantages and applications of its products is a vital
factor in its continued success as is its commitment to rapid product
introductions and timely revisions to existing products. Management believes
that its products offer state-of-the-art performance combined with outstanding
customer and technical support. The Company has always placed great emphasis on
designing its products to be user-friendly.
CUSTOMERS
Since its inception in 1985, the Company has sold its products to more
than 3,000 customers. The Company currently sells the majority of its products
to various commercial users in the communications industry. Other sales are made
to large defense contractors, which incorporate the Company's products into
their products for sale to the U.S. and foreign governments, multi-national
concerns and Fortune 500 companies. In fiscal 2004, approximately 75% of sales
were derived from commercial applications. The remaining sales were comprised of
government and military applications.
For fiscal 2004, the Company's largest customer accounted for
approximately 7% of total sales. The Company's largest customers vary from year
to year. Accordingly, while the complete loss of any large customer or
substantial reduction of sales to such customers could have a material adverse
effect on the Company, the Company has experienced shifts in sales patterns with
such large companies in the past without any material adverse effect. There can
be no assurance, however, that the Company will not experience future shifts in
sales patterns not having a material adverse effect on its business.
Export sales for fiscal 2004 were $7,151,000, or approximately 32% of
total sales. These sales were made predominantly to customers in Europe
($3,714,000 or 17% of total sales) and Asia ($2,742,000 or 12% of total sales).
In February 1996, the Company established a Foreign Sales Corporation (FSC). The
Company receives a federal tax deduction for a portion of its export profits. As
a result of foreign trade agreements entered into by the U.S. government, the
use of a FSC has been curtailed as of December 31, 2002, and as such, the tax
benefits generated by such an entity have been eliminated. The Company,
nevertheless, will continue to service its overseas customers.
RESEARCH AND DEVELOPMENT
The Company currently maintains an engineering staff (nineteen
individuals as of March 25, 2005) whose duties include the improvement of
existing products, modification of products to meet customer needs and the
engineering, research and development of new products and applications. Expenses
for research and development involve engineering for improvements and
development of new products for commercial markets. Such expenditures include
the cost of engineering services and engineering support personnel and were
approximately $1,946,000 and $2,046,000 for the years ended December 31, 2004
and 2003, respectively.
5
COMPETITION
The Company competes against many companies, which utilize similar
technology to that of the Company, some of which are larger and have
substantially greater resources and expertise in financial, technical and
marketing areas than the Company. Some of these companies are Agilent
Technologies (formerly Hewlett-Packard), IFR, Rhode and Schwarz, Micronetics,
Anritsu, Aerial Facilities, M/A Com and Kathrein. The Company competes by having
a niche in several product areas where it capitalizes on its expertise in
manufacturing products with unique specifications.
The Company designs its products with special attention to making them
user-friendly, and constantly re-evaluates its products for the purpose of
enhancing and improving them. The Company believes that these efforts, along
with its willingness to adapt its products to the particular needs of its
customers and its intensive efforts in customer and technical support, are
factors that add to the competitiveness of its products.
BACKLOG
The Company's backlog of firm orders was approximately $5,000,000 at
December 31, 2004, compared to approximately $3,900,000 at December 31, 2003. It
is anticipated that the majority of the backlog orders will be filled during the
current year. The stated backlog is not necessarily indicative of Company sales
for any future period nor is a backlog any assurance that the Company will
realize a profit from the orders.
INVENTORY, SUPPLIES AND MANUFACTURING
The Company purchases components, devices and subassemblies from a wide
variety of sources. For example, its noise source diodes, a key component in all
of its noise source products, are made by third parties in accordance with the
Company's designs and specifications. The Company's inventory policy stresses
maintaining substantial raw materials in order to lessen its dependency on third
party suppliers and to improve its capacity to facilitate production. However,
shortages or delays of supplies may, in the future, have a material adverse
impact on the Company's operations. No third party supplier accounted for more
than 10% of the Company's total inventory purchases for fiscal 2004.
The Company is not party to any formal written contract regarding the
deliveries of its supplies and components. It generally purchases such items
pursuant to written purchase orders of both the individual and blanket variety.
Blanket purchase orders usually cover the purchase of a larger amount of items
at fixed prices for delivery and payment on specific dates.
The Company primarily produces its products by final and some
intermediate assembly, calibration and testing. Testing of products is generally
accomplished at the end of the manufacturing process and is performed in-house
as are all quality control processes. The Company utilizes modern equipment for
the design, engineering, manufacture, assembly and testing of its products.
WARRANTY AND SERVICE
The Company provides one-year warranties on all of its products
covering both parts and labor. The Company, at its option, repairs or replaces
products that are defective during the warranty period if the proper preventive
maintenance procedures have been followed by its customers. Repairs that are
necessitated by misuse of such products or are required outside the warranty
period are not covered by the Company's warranty.
In cases of defective products, the customer typically returns them to
the Company's facility. The Company's service personnel replace or repair the
defective items and ship them back to the customer. Generally, all servicing is
done at the Company's plants, and the Company charges its customers a fee for
those service items that are not covered by warranty. Noise Com and Microlab/FXR
usually do not offer their customers any formal written service contracts.
Boonton Electronics offers its customers formal written service contracts for a
fee.
6
PRODUCT LIABILITY COVERAGE
The testing of electronic communications equipment and the accurate
transmission of information entail a risk of product liability by customers and
others. Claims may be asserted against the Company by end-users of any of the
Company's products. The Company has maintained product liability insurance
coverage since August 1991. To date, the Company has not received or encountered
any formal claims for liability due to a defective or malfunctioning device made
by it. However, it is possible that the Company may be subject to such claims in
the future and corresponding litigation should one or more of its products fail
to perform or meet certain minimum specifications.
INTELLECTUAL PROPERTY
Proprietary information and know-how are important to the Company's
commercial success. The trademark "Boonton" was registered in the United States
Patent and Trademark Office. There can be no assurance that others will not
either develop independently the same or similar information or obtain and use
proprietary information of the Company. Certain key employees have signed
confidentiality and non-competition agreements regarding the Company's
proprietary information.
The Company believes that its products do not infringe the proprietary
rights of third parties. There can be no assurance, however, that third parties
will not assert infringement claims in the future.
ENVIRONMENTAL PROTECTION
The New Jersey Department of Environmental Protection (the "NJDEP") had
conducted an investigation in 1982 concerning disposal at a facility in New
Jersey previously leased by the Company's Boonton operations. Involved were
certain materials formerly used by Boonton's manufacturing operations at that
site and the possible effect of such disposal on the aquifer underlying the
property. The disposal practices and the use of the materials in question were
discontinued in 1978. The Company has cooperated with the NJDEP investigation
and has been diligently pursuing the matter in an attempt to resolve it as
rapidly as NJDEP operating procedures permit. The above referenced activities
were conducted by Boonton prior to the acquisition of that entity in 2000.
The Company and the NJDEP have agreed upon a plan to correct ground
water contamination at the site, located in the township of Parsippany-Troy
Hills, pursuant to which wells have been installed by the Company. The plan
contemplates that the wells will be operated and that soil and water samples
will be taken and analyzed until such time, which the Company is unable to
predict, that contamination levels are satisfactory to the NJDEP. Expenditures
incurred by the Company during the year ended December 31, 2004 in connection
with the site amounted to approximately $13,000. The Company estimates that
expenditures in this regard, including the costs of operating the wells and
taking and analyzing soil and water samples, will amount to approximately
$12,000 per annum until the NJDEP determines that testing is complete.
EMPLOYEES
As of March 25, 2005, the Company had 106 full-time employees,
including its officers, 62 of whom are engaged in manufacturing and repair
services, 11 in administration and financial control, 19 in engineering and
research and development, and 14 in marketing and sales.
None of its employees are covered by a collective bargaining agreement
or are represented by a labor union. The Company considers its relationship with
its employees to be satisfactory.
The design and manufacture of the Company's products require
substantial technical capabilities in many disparate disciplines, from mechanics
and computer science to electronics and mathematics. While the Company believes
that the capability and experience of its technical employees compares favorably
with other similar manufacturers, there can be no assurance that it can retain
existing employees or attract and hire the highly capable technical employees it
may need in the future on terms deemed favorable to the Company.
7
ITEM 2. PROPERTIES
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In September 2002, the Company relocated its corporate headquarters and
noise generation operations to the 45,700 square foot facility occupied by its
Boonton Electronics subsidiary in Hanover Township, Parsippany, New Jersey. The
term of this lease agreement is for ten years beginning on October 1, 2001 and
ending September 30, 2011. The lease also contains an option to terminate
effective September 30, 2006. The lease of the Company's previous headquarters
in Paramus, New Jersey was terminated on favorable terms.
The Company leased a 23,100 square foot facility located in Livingston,
New Jersey, which was occupied by Microlab/FXR. The original term of the lease
was for ten years commencing on March 4, 1996. During the year 2003, the Company
exercised an option to cancel the lease as of the last day of February 2004.
Additionally, the Company agreed to a separate three-month lease extension
through May 31, 2004 and another two-month lease extension through July 31,
2004. As of July 2004, Microlab/FXR relocated its operations to the Hanover
Township, Parsippany facility.
The Company also owns a 44,000 square foot facility located in Mahwah,
New Jersey. In November 2000, the Company entered into a lease agreement with an
unrelated third party for the entire facility. The triple net lease runs through
August 1, 2013 and the tenant has an option to purchase the property up through
August 1, 2012 during the lease term.
ITEM 3. LEGAL PROCEEDINGS
-----------------
Reference is made to the discussion in Item 1 above regarding an
investigation by the NJDEP concerning certain discontinued practices of the
Company and their effect on the soil and ground water at a certain facility
formerly occupied by the Company. No administrative or judicial proceedings have
been commenced in connection with such investigation. The owner of the
Parsippany-Troy Hills facility has notified the Company, that if the
investigation proves to interfere with the sale of the property, it may seek to
hold the Company liable for any resulting damages. Since May 1983, the owner has
been on notice of this problem and has failed to institute any legal proceedings
with respect thereto. While this does not bar the owner from instituting a suit,
it is the opinion of the Company's legal counsel that it is doubtful that the
owner would prevail on any claim due to the fact that such a claim would be
barred by the statute of limitations. There are no material legal proceedings
known to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Not applicable.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
AND ISSUER PURCHASES OF EQUITY SECURITIES
------------------------------------------
The Common Stock of the Company has traded on the American Stock
Exchange under the name Wireless Telecom Group, Inc. (Symbol: WTT) since
September 12, 1994. The following table sets forth the high and low sales prices
of the Company's Common Stock for the periods indicated as reported on the
American Stock Exchange.
2004 Fiscal Year High Low
---------------- ---- ---
1st Quarter $3.85 $2.70
2nd Quarter 3.33 2.75
3rd Quarter 2.92 2.30
4th Quarter 3.15 2.32
2003 Fiscal Year
----------------
1st Quarter $2.07 $1.63
2nd Quarter 2.51 1.93
3rd Quarter 2.83 2.12
4th Quarter 3.25 2.23
On March 24, 2005, the closing price of the Common stock of the Company
as reported was $2.57. On March 24, 2005, the Company had 654 stockholders of
record.
In May 2001, the Company reinstated a dividend policy. The table below
details quarterly dividends declared for the past two years.
Quarterly Dividends Per Share
-----------------------------
1st 2nd 3rd 4th
--- --- --- ---
2004 $.03 $.03 $.03 $.03
2003 $.02 $.02 $.02 $.03
On March 18, 2005, the Company declared a cash dividend of $.03 per
share. It is the Company's present intention to maintain a quarterly dividend
policy.
9
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The selected financial data presented below as of December 31, 2004,
2003, 2002, 2001 and 2000 was derived from the Company's financial statements
after restatement for the merger with Boonton Electronics Corporation. The
Selected Statement of Operations Data and the Selected Per Share Data for 2004,
2003 and 2002 includes the results of Microlab/FXR. The Selected Balance Sheet
Data for 2004, 2003, 2002 and 2001 also includes the balances of Microlab/FXR.
The information set forth below is qualified in its entirety by reference to,
and should be read in conjunction with the financial statements and related
notes contained elsewhere in this Form 10-K.
------------------------------------------ ---------------- ----------------- ----------------- ---------------- -----------------
SELECTED STATEMENT OF
OPERATIONS DATA: 2004 2003 2002 2001 2000
---- ---- ---- ---- ----
------------------------------------------ ---------------- ----------------- ----------------- ---------------- -----------------
Net sales $22,105,207 $19,724,240 $20,747,707 $19,041,838 $18,450,518
------------------------------------------ ---------------- ----------------- ----------------- ---------------- -----------------
Income from continuing operations 2,620,877 2,575,577 2,590,768 3,279,271 3,362,702
before income taxes
------------------------------------------ ---------------- ----------------- ----------------- ---------------- -----------------
Provision for income taxes 289,400 812,582 823,150 2,062,000 1,231,462
------------------------------------------ ---------------- ----------------- ----------------- ---------------- -----------------
Net income from continuing operations 2,331,477 1,762,995 1,767,618 1,217,271 2,131,240
------------------------------------------ ---------------- ----------------- ----------------- ---------------- -----------------
SELECTED PER SHARE DATA:
------------------------
------------------------------------------ ---------------- ----------------- ----------------- ---------------- -----------------
Net income from continuing operations $.13 $.10 $.10 $.07 $.11
per common share - diluted
------------------------------------------ ---------------- ----------------- ----------------- ---------------- -----------------
Shares used in computation of earnings 17,578,185 17,113,472 17,340,264 18,046,498 19,724,188
per share - diluted
------------------------------------------ ---------------- ----------------- ----------------- ---------------- -----------------
Cash dividends per common share $.12 $.09 $.08 $.04 $.00
------------------------------------------ ---------------- ----------------- ----------------- ---------------- -----------------
SELECTED BALANCE SHEET DATA:
----------------------------
------------------------------------------ ---------------- ----------------- ----------------- ---------------- -----------------
Working capital $23,559,525 $23,971,858 $23,510,803 $23,318,264 $27,553,331
Total assets 35,406,868 33,624,211 32,215,596 32,905,258 37,656,273
Total liabilities 5,928,036 5,404,159 4,328,638 4,798,158 5,273,235
Shareholders' equity 29,478,832 28,220,052 27,886,958 28,107,100 32,383,038
------------------------------------------ ---------------- ----------------- ----------------- ---------------- -----------------
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
INTRODUCTION
------------
Wireless Telecom Group, Inc., and its operating subsidiaries, Boonton
Electronics Corporation and Microlab/FXR (collectively, the "Company"), develop,
manufacture and market a wide variety of electronic noise sources, electronic
testing and measuring instruments including power meters, voltmeters and
modulation meters and high-power passive microwave components. The Company's
products have historically been primarily used to test the performance and
capability of cellular/PCS and satellite communication systems and to measure
the power of RF and microwave systems. Other applications include radio, radar,
wireless local area network (WLAN), digital television and high-speed digital
design.
The financial information presented herein includes: (i) Condensed
Consolidated Balance Sheets as of December 31, 2004 and as of December 31, 2003
(ii) Condensed Consolidated Statements of Operations for the three years ended
December 31, 2004, 2003 and 2002 (iii) Condensed Consolidated Statement of
Changes in Shareholders' Equity for the three years ended December 31, 2004,
2003 and 2002 (iv) Condensed Consolidated Statements of Cash Flows for the three
years ended December 31, 2004, 2003 and 2002.
FORWARD-LOOKING STATEMENTS
--------------------------
The statements contained in this Annual Report on Form 10-K that are
not historical facts, including, without limitation, the statements under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," are forward-looking statements as defined in the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements may be identified
by, among other things, the use of forward-looking terminology such as
"believes," "expects," "intends," "plans," "may," "will," "should,"
"anticipates" or "continues" or the negative thereof of other variations thereon
or comparable terminology, or by discussions of strategy that involve risks and
uncertainties. These statements are based on the Company's current expectations
of future events and are subject to a number of risks and uncertainties that may
cause the Company's actual results to differ materially from those described in
the forward-looking statements. These risks and uncertainties include, continued
ability to maintain positive cash flow from results of operations, continued
evaluation of goodwill for impairment and the Company's development and
production of competitive technologies in our market sector, among others.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, estimated or projected. These risks and uncertainties are
disclosed from time to time in the Company's filings with the Securities and
Exchange Commission, the Company's press releases and in oral statements made by
or with the approval of authorized personnel. The Company assumes no obligation
to update any forward-looking statements as a result of new information or
future events or developments.
The following discussion and analysis provides information to which the
Company's management believes is relevant to an assessment and understanding of
the Company's results of operations and financial condition. This information is
presented after restatement for the merger with Boonton and the acquisition of
Microlab/FXR on December 21, 2001. Microlab/FXR's Balance Sheets are included in
the Condensed Consolidated Balance Sheets at December 31, 2004 and 2003.
Microlab/FXR's results of operations and cash flows for the years ended December
31, 2004, 2003 and 2002 are included in the Condensed Consolidated Statements of
Operations and Cash Flows, and Management's Discussion and Analysis of
Operations. This discussion should be read in conjunction with the financial
statements and notes thereto included elsewhere herein.
11
CRITICAL ACCOUNTING POLICIES
----------------------------
Management's discussion and analysis of the financial condition and
results of operations are based upon the consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires the Company to make estimates and judgments that affect the
reported amount of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amount
of revenues and expenses for each period. The following represents a summary of
the Company's critical accounting policies, defined as those policies that the
Company believes are: (a) the most important to the portrayal of our financial
condition and results of operations, and (b) that require management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effects of matters that are inherently uncertain.
Estimates and assumptions are made by management to assess the overall
likelihood that an accounting estimate or assumption may require adjustment.
Management assumptions have been reasonably accurate in the past, and future
estimates or assumptions are likely to be calculated on the same basis.
ALLOWANCES FOR DOUBTFUL ACCOUNTS
The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
A key consideration in estimating the allowance for doubtful accounts has been,
and will continue to be, our customer's payment history and aging of its
accounts receivable balance. For example, based upon our receivable balances,
for every additional 1% increase needed in our reserve, we will have to increase
our allowance by approximately $32,000 and record a similar charge to
operations.
INCOME TAXES
As part of the process of preparing the consolidated financial
statements, the Company is required to estimate its income taxes in each of the
jurisdictions in which it operates. The process incorporates an assessment of
the current tax exposure together with temporary differences resulting from
different treatment of transactions for tax and financial statement purposes.
Such differences result in deferred tax assets and liabilities, which are
included within the consolidated balance sheet. The recovery of deferred tax
assets from future taxable income must be assessed and, to the extent that
recovery is not likely, the Company establishes a valuation allowance. Increases
in valuation allowances result in the recording of additional tax expense.
Further, if the ultimate tax liability differs from the periodic tax provision
reflected in the consolidated statements of operations, additional tax expense
may be recorded. Our deferred tax asset at December 31, 2004, aggregates
approximately $1,085,000. We must continue to be profitable in order to be able
to utilize this asset in future periods.
VALUATION OF LONG-LIVED ASSETS
The Company assesses the potential impairment of long-lived tangible
and intangible assets whenever events or changes in circumstances indicate that
the carrying value may not be recoverable. Long-lived assets, other than
goodwill, are reviewed for impairment not less than annually and whenever events
or changes in circumstances indicate that the carrying value of any such asset
may be impaired. The Company's management evaluates the recoverability of such
assets by estimating future cash flows. If the sum of the undiscounted cash
flows, expected to result from the use of the assets and their eventual
disposition, is less than the carrying amount of the assets, management will
recognize an impairment loss to the extent of the excess of the carrying amount
of the assets over the discounted cash flow.
SFAS No. 142 requires that the Company perform an assessment of whether
there is an indication that goodwill is impaired on an annual basis unless
events or circumstances warrant a more frequent assessment. The impairment
assessment involves, among other things, an estimation of the fair value of the
reporting unit based on the discounted cash flow methodology. Significant
assumptions used in our analysis include annual revenue growth rate from 8% to
13% and a discount rate of approximately 18%. If the assessment indicates that
the fair value is less than the carrying value, then the goodwill would be
subject to an impairment loss adjustment.
12
If the impairment review of goodwill, intangible assets, and other
long-lived assets differ significantly from actual results, it could have a
material adverse effect on the Company's results of operations and financial
condition.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2004 COMPARED TO 2003
---------------------------------------------
Net sales for the year ended December 31, 2004 were $22,105,207 as
compared to $19,724,240 for the year ended 2003, an increase of $2,380,967 or
12.1%. This increase was primarily the result of increased sales activity in
2004 of the Company's peak power meter instruments - mainly due to product
upgrades, as well as a general economic improvement in the test and measurement
industry for all of the Company's product lines.
The Company's gross profit on net sales for the year ended December 31,
2004 was $11,783,291 or 53.3% as compared to $10,259,362 or 52.0% as reported in
the previous year. Gross profit margins are higher in 2004 than in 2003
primarily due to higher sales volume, the result of increased demand for the
Company's products, and lower manufacturing labor and direct overhead costs.
Additionally, the Company completed its consolidation in the third quarter of
2004, thus lowering duplicate overhead costs. Prices have remained relatively
stable along with modest increases in manufacturing labor costs. The Company can
experience variations in gross profit based upon the mix of product sales as
well as variations due to revenue volume and economies of scale. The Company
continues to rigidly monitor costs associated with material acquisition,
manufacturing and production.
Operating expenses for the year ended December 31, 2004 were $9,461,819
or 42.8% of net sales as compared to $8,125,284 or 41.2% of net sales for the
year ended December 31, 2003. For the year ended December 31, 2004 as compared
to the prior year, operating expenses increased in dollars by $1,336,535. The
increases in amount and percentage are primarily due to a one-time payout to the
Company's former CEO, increased efforts in sales and marketing in 2004 including
the addition of sales personnel, and an increased marketing campaign.
Interest income increased by $39,119 for the year ended December 31,
2004. This increase was primarily due to increased returns on short-term
investments in 2004. Other income decreased by $184,140 for the year ended
December 31, 2004. This decrease was primarily due to realized losses in a
working capital management account, classified as cash equivalents due to the
fact that they were highly liquid and readily convertible to cash, and intended
to be liquidated by the Company on a short-term basis.
Net income was $2,331,477 or $.13 per share on a diluted basis, for the
year ended December 31, 2004 as compared to $1,762,995 or $.10 per share on a
diluted basis, for the year ended December 31, 2003, an increase of $568,482 or
32.2%.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003 COMPARED TO 2002
---------------------------------------------
Net sales for the year ended December 31, 2003 were $19,724,240 as
compared to $20,747,707 for 2002, a decrease of $1,023,467 or 4.9%. This
decrease was primarily due to a slight reduction in demand for the Company's
passive microwave components due to general economic conditions.
The Company's gross profit on net sales for the year ended December 31,
2003 was $10,259,362 or 52.0% as compared to $10,466,842 or 50.4% as reported in
the previous year. Gross profit margins are higher in 2003 than in 2002
primarily due to higher gross margins at Noise Com and Boonton. Historically,
Noise Com and Boonton have reported higher gross margins due to the nature of
their products, active RF and microwave instrumentation, compared to passive
devices, which are more competitive in pricing. Management expects these margins
to continue in current operations. The Company can experience variations in
gross profit based upon the mix of product sales as well as variations due to
revenue volume and economies of scale. The Company continues to rigidly monitor
costs associated with material acquisition, manufacturing and production.
13
Operating expenses for the year ended December 31, 2003 were $8,125,284
or 41.2% of net sales as compared to $7,678,996 or 37.0% of net sales for the
year ended December 31, 2002. For the year ended December 31, 2003 as compared
to the prior year, operating expenses increased in dollars by $446,288. The
increases in amount and percentage are primarily due to increased efforts in
sales and marketing in 2003 including the addition of sales personnel and an
increased marketing campaign. The increase was also due to focused spending on
the research and development of new products.
Interest income increased by $170,250 for the year ended December 31,
2003. The increase was primarily due to increased returns on short-term
investments in 2003. Other income increased by $465,611 for the year ended
December 31, 2003. This increase was primarily due to declining interest rates
on short-term investments in 2002 and a one-time write down in 2002 of an
investment in a non-affiliated company.
Net income was $1,762,995 or $.10 per share on a diluted basis, for the
year ended December 31, 2003 as compared to $1,767,618 or $.10 per share on a
diluted basis, for the year ended December 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's working capital has decreased by $412,333 to $23,559,525
at December 31, 2004, from $23,971,858 at December 31, 2003. At December 31,
2004, the Company had a current ratio of 9.6 to 1, and a ratio of debt to net
worth of .20 to 1. At December 31, 2003, the Company had a current ratio of 11.9
to 1, and a ratio of debt to net worth of .19 to 1.
Net cash provided from operations has allowed the Company to meet its
liquidity requirements, research and development activities and capital
expenditures. Operating activities provided $2,281,169 in cash for the year
ending December 31, 2004 compared to $2,661,582 and $3,093,762 in cash flows for
the years ending December 31, 2003 and 2002, respectively. For 2004, cash
provided by operations was primarily due to net income, a decrease in prepaid
expenses and other current assets, an increase in income taxes payable, an
increase in accounts payable and accrued expenses, and a non-cash adjustment for
depreciation and amortization, partially offset by an increase in inventories
and a non-cash adjustment for deferred income tax benefit. For 2003, cash
provided by operations was primarily due to net income, an increase in income
taxes payable, an increase in accounts payable and accrued expenses, and a
non-cash adjustment for depreciation and amortization, partially offset by an
increase in inventories. For 2002, cash provided by operations was primarily due
to net income, a decrease in inventories, a non-cash adjustment for depreciation
and amortization and a non-cash adjustment for the write-down on an investment,
partially offset by a decrease in accounts payable and accrued expenses and an
increase in accounts receivable.
The Company has historically been able to turn over its accounts
receivable approximately every two months. This average collection period has
been sufficient to provide the working capital and liquidity necessary to
operate the Company.
The Company is aware of a potential event that might impact its
liquidity in 2005, relating to the lease of the space it occupies in Hanover
Township, Parsippany, New Jersey. The ten-year lease, which expires in 2011,
provides for the Company, at its option, to terminate the lease on September 30,
2006. The exercise of this option requires a one-year advance notice and the
payment of $205,500. At this time, the Company does not expect to exercise this
option or have to pay this amount.
Net cash used for investing activities for 2004 amounted to $1,650,092
compared to $451,695 and $686,775 for the years ending December 31, 2003 and
2002, respectively. For the year ended December 31, 2004, the primary use of
cash was for capital expenditures and for costs associated with a potential
acquisition. In 2003 and 2002, the primary use of cash was for capital
expenditures.
Net cash used for financing activities was $1,113,026, $1,467,302 and
$2,022,447 for the years ending December 31, 2004, 2003 and 2002, respectively.
In 2004, the primary use of this cash was for the payment of dividends. In 2003
and 2002, the primary uses of this cash were for the payment of dividends and
for the acquisition of treasury stock. Cash outlays were partially offset by
proceeds from the exercise of stock options in 2004, 2003 and 2002.
14
For details of dividends paid in the years ended December 31, 2004 and
2003, refer to Item 5. It is the Company's present intention to maintain a
quarterly dividend policy.
Table of Contractual Obligations
--------------------------------
Payments Due by Period
----------------------
Less than More than
Total 1 Year 1-3 Years 4-5 Years 5 Years
----- ------ --------- --------- -------
Long-Term Debt $3,088,880 $43,485 $97,448 $113,301 $2,834,646
Operating Lease 3,061,900 418,917 875,917 929,233 837,833
Equipment Lease 212,908 53,113 104,496 55,299 -
--------- ------- -------- -------- ---------
$6,363,688 $515,515 $1,077,861 $1,097,833 $3,672,479
========= ======= ========= ========= =========
The Company believes that its financial resources from working capital
provided by operations are adequate to meet its current needs.
INFLATION AND SEASONALITY
The Company does not anticipate that inflation will significantly
impact its business nor does it believe that its business is seasonal.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The response to this item is submitted in a separate section of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not Applicable.
ITEM 9A. CONTROLS AND PROCEDURES
-----------------------
Based on their evaluation as of the end of the period covered by this
Annual Report on Form 10-K, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Exchange Act)
are effective to ensure that information required to be disclosed by the Company
in reports that it files or submits under the Exchange Act are recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.
There were no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
ITEM 9B. OTHER INFORMATION
-----------------
Not Applicable.
15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information required under this item is set forth in the
Company's Definitive Proxy Statement relating to the Company's 2005 annual
meeting of shareholders to be held on or about June 24, 2005 and is incorporated
herein by reference. Such Proxy Statement will be filed with the Commissions
within 120 days of the Company's year-end.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information required under this item is set forth in the
Company's Definitive Proxy Statement relating to the Company's 2005 annual
meeting of shareholders to be held on or about June 24, 2005 and is incorporated
herein by reference. Such Proxy Statement will be filed with the Commissions
within 120 days of the Company's year-end.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS
---------------------------
The information required under this item is set forth in the
Company's Definitive Proxy Statement relating to the Company's 2005 annual
meeting of shareholders to be held on or about June 24, 2005 and is incorporated
herein by reference. Such Proxy Statement will be filed with the Commissions
within 120 days of the Company's year-end.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information required under this item is set forth in the
Company's Definitive Proxy Statement relating to the Company's 2005 annual
meeting of shareholders to be held on or about June 24, 2005 and is incorporated
herein by reference. Such Proxy Statement will be filed with the Commissions
within 120 days of the Company's year-end.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
--------------------------------------
The information required under this item is set forth in the
Company's Definitive Proxy Statement relating to the Company's 2005 annual
meeting of shareholders to be held on or about June 24, 2005 and is incorporated
herein by reference. Such Proxy Statement will be filed with the Commissions
within 120 days of the Company's year-end.
16
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
---------------------------------------
(a) (1) Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2004 and 2003
Consolidated Statements of Operations for the Three Years in the
Period ended December 31, 2004
Consolidated Statements of Changes in Shareholders' Equity for
the Three Years in the Period ended December 31, 2004
Consolidated Statements of Cash Flows for the Three Years in the
Period ended December 31, 2004
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because the required
information is included in the financial statements or notes
thereto or because they are not required.
(3) Exhibits
3.1 Certificate of Incorporation, as amended (1)
3.2 Amended and Restated By-laws (1)
3.3 Amendment to the Certificate of Incorporation (2)
3.4 Amendment to the Certificate of Incorporation (3)
4.2 Form of Stock Certificate (1)
10.1 Summary Plan Description of Profit Sharing Plan of the
Registrant (1)
10.2 Incentive Stock Option Plan of the Registrant and related
agreement (1)
10.3 Amendment to Registrant's Incentive Stock Option Plan and
related agreement (3)
10.4 Form of Manufacturers Representative Agreement (1)
10.5 Lease between the Company and Paramus Parkway Building
Associates (4)
10.6 Asset Purchase Agreement, dated as of January 7, 1999,
between the Company and Telecom Analysis Systems, Inc.(5)
10.7 Non-Competition Agreement, dated March 11, 1999, between
the Company and Telecom Analysis Systems, Inc. relating
to the Test Equipment Assets (5)
10.8 Non-Competition Agreement, dated March 11, 1999, between
the Company and Telecom Analysis Systems, Inc. relating
to the Noise Assets (5)
10.9 Agreement and Plan of Reorganization dated March 2, 2000
among the Company, WTT Acquisition Corp. and Boonton
Electronics Corp.(6)
10.10 Amendment No. 1 to the Agreement and Plan of
Reorganization dated April 28, 2000 among the Company,
WTT Acquisition Corp. and Boonton Electronics Corp.(7)
17
10.11 Wireless Telecom Group, Inc. 2000 Stock Option Plan (8)
10.12 Stock Purchase Agreement dated December 21, 2001, by and
among the Company, Microlab/FXR and Harry A. Augenblick (9)
10.13 Stock Purchase Agreement made as of December 21,
2001, by and among the Company and Microlab/FXR
Employees Stock Ownership Plan (9)
10.14 Amended Employment Agreement dated as of January 25, 2002,
by and among Edward Garcia and the Company (10)
10.15 Amended and Restated Stock Purchase Agreement, dated as of
March 29, 2005, among the Company, Willtek Communications
GmbH, Investcorp Technology Ventures, L.P., and Damany
Holding GmbH (11)
10.16 Amended and Restated Loan Agreement, dated March 29, 2005,
by and among Investcorp Technology Ventures, L.P., Willtek
Communications GmbH and Wireless Telecom Group, Inc. (11)
10.17 Severance Agreement, dated March 29, 2005, between Wireless
Telecom Group, Inc. and Paul Genova filed herewith
10.18 Stock option Grant Certificate, granting options to
purchase 100,000 shares of common stock, to Karabet "Gary"
Simonyan filed herewith
11.1 Computation of Per Share Earnings filed herewith
14 Code of Ethics (12)
23.1 Consent of Independent Auditors (Lazar Levine & Felix LLP)
filed herewith
31.1 Certification pursuant to section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification pursuant to section 302 of the Sarbanes-Oxley
Act of 2002
32.1 Certification pursuant to 18 U.S.C. section 1350
32.2 Certification pursuant to 18 U.S.C. section 1350
-------------------
(1) Filed as an exhibit to the Company's Registration Statement on Form S-18
(File No.33-42468-NY) and incorporated by reference herein.
(2) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 1994 and incorporated by reference herein.
(3) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 1995 and incorporated by reference herein.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 1996 and incorporated by reference herein.
(5) Filed as an exhibit to the Company's Current Report on Form 8-K, dated
March 11, 1999, filed with the Commission on March 26, 1999 and
incorporated by reference herein.
(6) Filed as an exhibit to the Current Report on Form 8-K, dated
March 2, 2000, filed with the Securities and Exchange Commission on
March 8, 2000.
18
(7) Filed as Annex B to the Company's Registration Statement on Form S-4/A,
filed on June 13, 2000 and incorporated by reference herein.
(8) Filed as Annex B to the Definitive Proxy Statement of the Company filed
on July 17, 2000 and incorporated by reference herein.
(9) Filed as an exhibit to the Company's Current Report on Form 8-K, dated
December 21, 2001, filed with the Commission on January 4, 2002 and
incorporated by reference herein.
(10) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 2001 and incorporated by reference herein.
(11) Filed as an exhibit to the Company's Current Report on Form 8-K, dated
March 29, 2005, filed with the Commission on March 29, 2005 and
incorporated by reference herein.
(12) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 2003 and incorporated by reference herein.
19
S I G N A T U R E S
-------------------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WIRELESS TELECOM GROUP, INC.
Date: March 30, 2005 By: /s/ Karabet Simonyan
--------------------
Karabet Simonyan
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ Karabet Simonyan Chairman of the Board, Chief March 30, 2005
-------------------- Executive Officer
Karabet Simonyan
/s/ Paul Genova President, Chief Financial Officer March 30, 2005
--------------- and Director
Paul Genova
/s/ Henry Bachman Director March 30, 2005
-----------------
Henry Bachman
-------------
/s/ John Wilchek Director March 30, 2005
----------------
John Wilchek
/s/ Michael Manza Director
-----------------
Michael Manza March 30, 2005
/s/ Andrew Scelba Director
-----------------
Andrew Scelba March 30, 2005
/s/ Reed DuBow Controller
--------------
Reed DuBow March 30, 2005
20
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
WIRELESS TELECOM GROUP, INC.
PAGE(S)
Independent Report of Registered Public Accounting Firm F - 2
Consolidated Financial Statements:
Balance Sheets as of December 31, 2004 and 2003 F - 3
Statements of Operations for the Three Years in the Period
Ended December 31, 2004 F - 4
Statement of Changes in Shareholders' Equity for the Three
Years in the Period Ended December 31, 2004 F - 5
Statements of Cash Flows for the Three Years in the Period
Ended December 31, 2004 F - 6
Notes to Consolidated Financial Statements F - 7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
To the Shareholders and Board of Directors
Wireless Telecom Group, Inc.
Parsippany, New Jersey
We have audited the accompanying consolidated financial statements of Wireless
Telecom Group, Inc. as listed in the index under item 15 in this Form 10-K as
well as the financial statement schedule listed in Part IV, Item 15(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Wireless Telecom
Group, Inc. as of December 31, 2004 and 2003 and the results of its operations
and its cash flows for the three years in the period ended December 31, 2004 in
conformity with accounting principles generally accepted in the United States of
America.
/s/ LAZAR LEVINE & FELIX LLP
----------------------------
LAZAR LEVINE & FELIX LLP
New York, New York
March 11, 2005, except
for Note 11, which is dated
March 29, 2005
F-2
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
WIRELESS TELECOM GROUP, INC.
-ASSETS-
December 31,
-------------------------------
2004 2003
------------- -----------
CURRENT ASSETS:
Cash and cash equivalents $15,783,816 $16,265,765
Accounts receivable - net of allowance for doubtful accounts of
$190,155 and $175,399 for 2004 and 2003, respectively 3,196,750 3,076,080
Inventories 6,780,445 5,903,191
Current portion of deferred tax benefit 198,266 264,880
Prepaid expenses and other current assets 338,144 665,366
------------- -----------
TOTAL CURRENT ASSETS 26,297,421 26,175,282
------------- -----------
PROPERTY, PLANT AND EQUIPMENT - NET 5,937,788 5,528,931
------------ -----------
OTHER ASSETS:
Goodwill 1,351,392 1,351,392
Deferred tax benefit 886,741 383,861
Other assets 933,526 184,745
------------- -----------
TOTAL OTHER ASSETS 3,171,659 1,919,998
------------- -----------
TOTAL ASSETS $35,406,868 $33,624,211
============= ===========
- LIABILITIES AND SHAREHOLDERS' EQUITY -
CURRENT LIABILITIES:
Accounts payable $ 1,915,707 $ 1,795,658
Accrued expenses and other current liabilities 778,704 367,437
Current portion of mortgage payable 43,485 40,329
------------ ------------
TOTAL CURRENT LIABILITIES 2,737,896 2,203,424
------------ ------------
LONG TERM LIABILITIES:
Mortgage payable 3,045,395 3,088,880
Deferred rent payable 144,745 111,855
------------ ------------
TOTAL LONG TERM LIABILITIES 3,190,140 3,200,735
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, 2,000,000 shares authorized, none issued - -
Common stock, $.01 par value, 75,000,000 shares authorized, 20,511,001
and 19,992,378 shares issued for 2004 and 2003, respectively, 17,461,301
and 16,942,678 shares outstanding for 2004 and 2003, respectively 205,110 199,924
Additional paid-in capital 14,086,756 13,100,857
Retained earnings 22,888,395 22,620,700
Treasury stock, at cost - 3,049,700 shares (7,701,429) (7,701,429)
----------- -----------
29,478,832 28,220,052
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $35,406,868 $33,624,211
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
WIRELESS TELECOM GROUP, INC.
For the Year Ended December 31,
----------------------------------------------
2004 2003 2002
----------- ----------- -----------
NET SALES $22,105,207 $19,724,240 $20,747,707
----------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales 10,321,916 9,464,878 10,280,865
Selling, general and administrative expenses 9,461,819 8,125,284 7,678,996
Interest (income) 418,017) (378,898) (208,648)
Interest expense 235,206 238,133 240,849
Other (income) expense (116,594) (300,734) 164,877
----------- ------------ ------------
TOTAL COSTS AND EXPENSES 19,484,330 17,148,663 18,156,939
----------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 2,620,877 2,575,577 2,590,768
Provision for income taxes 289,400 812,582 823,150
----------- ----------- -----------
NET INCOME $ 2,331,477 $ 1,762,995 $ 1,767,618
=========== =========== ===========
NET INCOME PER COMMON SHARE:
Basic $0.14 $0.10 $0.10
Diluted $0.13 $0.10 $0.10
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 17,192,728 16,904,036 17,080,648
Diluted 17,578,185 17,113,472 17,340,264
The accompanying notes are an integral part of these financial statements.
F-4
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
WIRELESS TELECOM GROUP, INC.
Additional Treasury
Common Paid-in Retained Stock
Stock Capital Earnings at Cost Total
--------- ----------- ----------- ----------- -----------
Balance at December 31, 2001 $198,077 $12,792,657 $21,979,416 $(6,863,050) $28,107,100
Dividends - $.08 per share - - (1,367,701) - (1,367,701)
Stock options exercised 677 111,932 - - 112,609
Purchase of treasury stock - - - (732,668) (732,668)
Net income - - 1,767,618 - 1,767,618
--------- ---------- ----------- ----------- -----------
Balance at December 31, 2002 198,754 12,904,589 22,379,333 (7,595,718) 27,886,958
Dividends - $.09 per share - - (1,521,628) - (1,521,628)
Stock options exercised 1,170 196,268 - - 197,438
Purchase of treasury stock - - - (105,711) (105,711)
Net income - - 1,762,995 - 1,762,995
--------- ---------- ----------- ----------- -----------
Balance at December 31, 2003 199,924 13,100,857 22,620,700 (7,701,429) 28,220,052
DIVIDENDS - $.12 PER SHARE - - (2,063,782) - (2,063,782)
STOCK OPTIONS EXERCISED 5,186 985,899 - - 991,085
NET INCOME - - 2,331,477 - 2,331,477
--------- ---------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 2004 $205,110 $14,086,756 $22,888,395 $(7,701,429) $29,478,832
========= =========== =========== ============ ===========
The accompanying notes are an integral part of these financial statements.
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
WIRELESS TELECOM GROUP, INC.
For the Year Ended December 31,
------------------------------------------------
2004 2003 2002
------------- ------------- --------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 2,331,477 $ 1,762,995 $ 1,767,618
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 491,257 497,599 592,611
Deferred rent 32,890 68,478 -
Deferred income (benefit) taxes (436,266) (155,785) 11,971
Provision for losses on accounts receivable 14,756 (439) 11,889
Write down of investment - other assets - - 499,000
Other income - - (11,096)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (135,426) 12,343 (232,334)
(Increase) decrease in inventory (877,255) (418,568) 831,463
Decrease (increase) in prepaid expenses and other current assets 328,420 (149,485) 46,378
Increase (decrease) in accounts payable and accrued expenses 531,316 1,044,444 (423,738)
(Decrease) increase in income taxes (164,650) 150,650 (218,391)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,281,169 2,661,582 3,093,762
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Costs associated with potential acquisition (787,119) - -
Purchase of investment - other assets - - (16,000)
Capital expenditures (896,913) (450,816) (666,072)
Officers' life insurance 33,940 (879) (4,703)
------------ ------------ ------------
NET CASH (USED FOR) INVESTING ACTIVITIES (1,650,092) (451,695) (686,775)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of mortgage note (40,329) (37,401) (34,687)
Dividends paid (2,063,782) (1,521,627) (1,367,701)
Proceeds from exercise of stock options 991,085 197,437 112,609
Acquisition of treasury stock - (105,711) (732,668)
------------ ------------ ------------
NET CASH (USED FOR) FINANCING ACTIVITIES (1,113,026) (1,467,302) (2,022,447)
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (481,949) 742,585 384,540
Cash and cash equivalents, at beginning of year 16,265,765 15,523,180 15,138,640
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, AT END OF YEAR $ 15,783,816 $ 16,265,765 $ 15,523,180
============ ============ ============
SUPPLEMENTAL INFORMATION:
Cash paid during the year for:
Taxes $ 772,336 $ 195,039 $ 869,580
Interest $ 235,206 $ 238,133 $ 240,849
The accompanying notes are an integral part of these financial statements.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
WIRELESS TELECOM GROUP, INC.
NOTE 1 - DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION:
Wireless Telecom Group, Inc. and Subsidiaries (the Company), develops
and manufactures a wide variety of electronic noise sources, testing
and measurement instruments and high-power, passive microwave
components, which it sells to customers throughout the United States
and worldwide through its foreign sales corporation and foreign
distributors to commercial and government customers in the electronics
industry. The consolidated financial statements include the accounts of
Wireless Telecom Group, Inc. and its wholly-owned subsidiaries, Boonton
Electronics Corporation, Microlab/FXR, WTG Foreign Sales Corporation
and NC Mahwah, Inc.
USE OF ESTIMATES:
In preparing financial statements in accordance with accounting
principles generally accepted in the United States of America,
management makes certain estimates and assumptions, where applicable,
that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. While actual results could differ
from those estimates, management does not expect such variances, if
any, to have a material effect on the financial statements.
CONCENTRATIONS OF CREDIT RISK AND FAIR VALUE:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash investments
and accounts receivable.
The Company maintains significant cash investments primarily with two
financial institutions. The Company performs periodic evaluations of
the relative credit rating of these institutions as part of its
investment strategy.
Concentrations of credit risk with respect to accounts receivable are
limited due to the Company's large customer base. However, at December
31, 2004, primarily all of the Company's receivables do pertain to the
telecommunications industry.
The carrying amounts of cash and cash equivalents, trade receivables,
other current assets, accounts payable and long-term debt approximate
fair value.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments purchased with a
remaining maturity of three months or less to be cash equivalents. Cash
and cash equivalents consist of bank and money market accounts and
commercial paper, all stated at cost, which approximates market value.
As of December 31, 2004 and 2003, the Company had approximately
$13,600,000 and $14,200,000 invested in commercial paper and government
backed securities, respectively.
ACCOUNTS RECEIVABLE:
The Company accounts for uncollectible accounts under the allowance
method. Potentially uncollectible accounts are provided for throughout
the year and actual bad debts are written off to the allowance in a
timely fashion.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
WIRELESS TELECOM GROUP, INC.
NOTE 1 - DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED):
INVENTORIES:
Raw material inventories are stated at the lower of cost (first-in,
first-out method) or market. Finished goods and work-in-process are
valued at average cost of production, which includes material, labor
and manufacturing expenses.
Inventories consist of:
December 31,
---------------------------
2004 2003
---------- ----------
Raw materials $4,621,649 $4,084,932
Work-in-process 1,203,986 757,436
Finished goods 954,810 1,060,823
---------- ----------
$6,780,445 $5,903,191
FIXED ASSETS AND DEPRECIATION:
Fixed assets are reflected at cost, less accumulated depreciation.
Depreciation and amortization are provided on a straight-line basis
over the following useful lives:
Building and improvements 39 years
Machinery and equipment 5-10 years
Furniture and fixtures 5-10 years
Transportation equipment 3-5 years
Leasehold improvements are amortized over the term of the lease.
Repairs and maintenance are charged to operations as incurred; renewals
and betterments are capitalized.
INTANGIBLE ASSETS:
On December 21, 2001, the Company acquired Microlab/FXR, which was
recorded under the purchase method of accounting for financial
statement purposes. The purchase price was allocated to assets acquired
and liabilities assumed based on estimated fair market value at the
date of acquisition while the balance of $1,351,392 was recorded as
goodwill. In accordance with Statement of Financial Accounting
Standards No. 142, this goodwill will not be amortized, but will be
tested for impairment periodically. It is the responsibility of
management to test this goodwill for impairment. Management considered
a number of factors, including valuations of the future cash flows of
the business. The conclusion of this valuation was that this goodwill
was not impaired under the Statement of Financial Accounting Standards
No. 142 requirements for goodwill impairment testing and consequently
no adjustment to goodwill was necessary.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
WIRELESS TELECOM GROUP, INC.
NOTE 1 - DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED):
REVENUE RECOGNITION:
Revenue from product sales, net of trade discounts and allowances, is
recognized once delivery has occurred provided that persuasive evidence
of an arrangement exists, the price is fixed or determinable, and
collectibility is reasonably assured. Delivery is considered to have
occurred when title and risk of loss have transferred to the customer.
Sales to international distributors are recognized in the same manner.
There are no post-shipment obligations that exist in any sales
arrangement.
RESEARCH AND DEVELOPMENT COSTS:
Research and development costs are charged to operations when incurred
and are included in operating expenses. The amounts charged for the
years ended December 31, 2004, 2003 and 2002 were $1,946,250,
$2,045,747 and $1,918,593, respectively.
ADVERTISING COSTS:
Advertising expenses are charged to operations during the year in which
they are incurred and aggregated $602,216, $488,038 and $492,070 for
the years ended December 31, 2004, 2003 and 2002, respectively.
STOCK BASED COMPENSATION:
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options because
the alternative fair value accounting provided for under FASB Statement
No. 123, "Accounting for Stock-Based Compensation" requires use of
option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is
recognized.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of
its employee stock options.
Pro forma information regarding net income and earnings per share is
required by FASB Statement 123, and has been determined as if the
Company had accounted for its employee stock options under the fair
value method of that Statement. The fair values for these options were
estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted average assumptions for 2004, 2003
and 2002, respectively; risk-free interest rates of 3.5%, 2.4% and
3.5%, dividend yields of 10%, 8% and 2%; volatility factors of the
expected market price of the Company's common stock of 86%, 86% and
76%; and a weighted average expected life of the options of seven
years.
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
WIRELESS TELECOM GROUP, INC.
NOTE 1 - DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED):
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period. The
following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions
of FASB Statement No. 123, Accounting for Stock-Based Compensation, to
stock-based employee compensation:
2004 2003 2002
---- ---- ----
Net income:
As reported $2,331,477 $1,762,995 $1,767,618
Less: stock based compensation
expense net of tax (117,015) (126,739) (204,632)
---------- ---------- ---------
Pro forma 2,214,462 1,636,256 1,562,986
========== ========== =========
Basic earnings per share:
As reported $.14 $.10 $.10
Pro forma .13 .10 .09
Diluted earnings per share:
As reported $.13 $.10 $.10
Pro forma .13 .10 .09
INCOME TAXES:
The Company utilizes SFAS 109, "Accounting for Income Taxes" which
requires use of the asset and liability approach of providing for
income taxes. This statement requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of
events that have been included in the financial statements or tax
returns. Under this method, deferred tax liabilities and assets are
determined based on the differences between the financial statement and
tax basis of assets and liabilities using enacted tax rates in effect
for the year in which the differences are expected to reverse. Under
Statement 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes
the enactment date. The Company recognized the benefit of Boonton's net
operating loss carryforward applying a valuation allowance, which
requires that the tax benefit be limited based on the weight of
available evidence and the probability that some portion of the
deferred tax asset will not be realized.
INCOME PER COMMON SHARE:
The Company utilizes SFAS 128 "Earnings Per Share" ("SFAS 128"), which
changed the method for calculating earnings per share. SFAS 128
requires the presentation of "basic" and "diluted" earnings per share
on the face of the income statement. Income per common share is
computed by dividing net income by the weighted average number of
common shares and common equivalent shares outstanding during each
period. Shares re-acquired by the Company and denoted as treasury stock
are not included in this calculation.
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
WIRELESS TELECOM GROUP, INC.
NOTE 1 - DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED):
RECENT ACCOUNTING PRONOUNCEMENTS:
In November 2004, the FASB issued Statement No. 151, "Inventory Costs".
This statement amends the guidance in ARB 43 (Chapter 4 - Inventory
Pricing) to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs and wasted material
(spoilage). SFAS No. 151 requires that such items be recognized as
current period charges. SFAS 151 is effective for fiscal years
beginning after June 15, 2005 and is not expected to have a material
impact on the Company's financial statements and results of operations.
In December 2004, the FASB issued Statement No. 152, "Accounting for
Real Estate Time-Sharing Transactions". This statement amends SFAS No.
66 (Accounting for Sales of Real Estate) and SFAS No. 67 (Accounting
for Costs and Initial Rental Operations of Real Estate Projects). This
standard, which is effective for financial statements for fiscal years
beginning after June 15, 2005, is not applicable to the Company's
current operations.
In December 2004, the FASB issued SFAS No. 153 "Exchange of
Non-monetary Assets - an amendment of APB Opinion No. 29". Statement
153 eliminates the exception to fair value for exchanges of similar
productive assets and replaces it with a general exception for exchange
transactions that do not have commercial substance, defined as
transactions that are not expected to result in significant changes in
the cash flows of the reporting entity. This statement is effective for
exchanges of non-monetary assets occurring after June 15, 2005. The
application of this statement is not expected to have an impact on the
Company's financial statements considering the Company's intermittent
participation in exchanges of non-monetary assets.
In December 2004, the FASB issued a revision of SFAS No. 123
"Share-Based Payment" (No. 123R). The statement establishes standards
for the accounting for transactions in which an entity exchanges its
equity instruments for goods and services. It also addresses
transactions in which an entity incurs liabilities in exchange for
goods or services that are based on the fair value of the entity's
equity instruments or that may be settled by the issuance of those
equity instruments. The statement does not change the accounting
guidance for share-based payments with parties other than employees.
The statement requires a public entity to measure the cost of employee
service received in exchange for an award of equity instruments based
on the grant-date fair value of the award (with limited exception).
That cost will be recognized over the period during which an employee
is required to provide service in exchange for the award (usually the
vesting period). A public entity will initially measure the cost of
employee services received in exchange for an award of a liability
instrument based on its current fair value; the fair value of that
award will be re-measured subsequently at each reporting date through
the settlement date. Changes in fair value during the requisite service
period will be recognized as compensation over that period. The
grant-date fair value of employee share options and similar instruments
will be estimated using option-pricing models adjusted for the unique
characteristics of these instruments. The Company believes this
pronouncement, which is effective for periods beginning after December
15, 2005, will not have a material effect on their financial position.
RECLASSIFICATIONS:
Certain prior years information has been reclassified to conform to the
current year's reporting presentation.
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
WIRELESS TELECOM GROUP, INC.
NOTE 2 - PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, consists of the following:
December 31,
---------------------------
2004 2003
---------- ----------
Building and improvements $3,557,186 $3,557,186
Machinery and equipment 3,488,681 3,018,939
Furniture and fixtures 613,563 600,926
Transportation equipment 148,429 91,841
Leasehold improvements 1,155,230 797,282
---------- ----------
8,963,089 8,066,174
Less: accumulated depreciation and amortization 3,725,301 3,237,243
---------- ----------
5,237,788 4,828,931
Add: land 700,000 700,000
---------- ----------
$5,937,788 $5,528,931
========== ==========
NOTE 3 - OTHER ASSETS:
Other assets include the costs associated with a potential acquisition
of $787,119 in 2004, an investment in equity securities of a
non-affiliated company, and security deposits relating to the Company's
leased properties. In early 2000, the Company invested $500,000 in an
investment bank focused on technology start-ups. In December 2002 the
investment was determined to be substantially overvalued and a write
down of $499,000 was recorded as other expense. The Company does not
have any other investments in equity securities.
NOTE 4 - MORTGAGE PAYABLE:
In December 1999, the Company exercised its option to purchase a
facility, which was previously being leased, for a purchase price of
$4,225,000 (including land). At the time of closing, the Company
assumed the mortgage note, on this property, in the amount of
$3,263,510. This note bears interest at an annual rate of 7.45%,
requires monthly payments of principal and interest of $23,750 and
matures in August 2013.
Maturities of mortgage principal payments for the next five years are
$43,485, $46,889, $50,559, $54,517, and $58,784, respectively and
$2,834,646 thereafter.
NOTE 5 - SHAREHOLDERS' EQUITY:
The Company paid quarterly cash dividends aggregating $2,063,782,
$1,521,627 and $1,367,701 for the years ending December 31, 2004, 2003
and 2002, respectively.
The Company's 1995 Incentive Stock Option Plan ("the Plan") has
authorized the grant of options, to purchase up to a maximum of
1,750,000 shares of common stock, to officers and other key employees.
Prior to 1995, the Company had established an Incentive Stock Option
Plan under which options to purchase up to 1,500,000 shares of common
stock were available to be granted to officers and other key employees.
All options granted have 10-year terms and vest and become fully
exercisable after a maximum of five years from the date of grant.
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
WIRELESS TELECOM GROUP, INC.
NOTE 5 - SHAREHOLDERS' EQUITY (CONTINUED):
During 2000, the stockholders approved the Company's 2000 Stock Option
Plan. The 2000 Plan provides for the grant of ISOs and NQSOs in
compliance with the Code to employees, officers, directors, consultants
and advisors of the Company who are expected to contribute to the
Company's future growth and success. 1,500,000 shares of Common Stock
are reserved for issuance upon the exercise of options under the 2000
Plan. All options granted have 10-year terms and vest and become fully
exercisable after a maximum of five years from the date of grant. Under
the Company's stock option plans, options may be granted to purchase
shares of the Company's common stock exercisable at prices generally
equal to the fair market value on the date of the grant.
A summary of stock option activity, and related information for the
years ended December 31, follows:
Weighted Average
Options Exercise Price
--------- ----------------
Outstanding, December 31, 2001 2,297,580 $2.51
Weighted average fair value of options
granted during the year 2.51
Granted 465,000 2.31
Exercised (59,867) 1.88
Canceled (56,000) 2.50
---------
Outstanding, December 31, 2002 2,646,713 2.49
Weighted average fair value of options
granted during the year 0.86
Granted 265,000 2.14
Exercised (117,000) 1.69
Canceled (321,633) 2.70
---------
Outstanding, December 31, 2003 2,473,080 2.47
WEIGHTED AVERAGE FAIR VALUE OF OPTIONS
GRANTED DURING THE YEAR 1.06
GRANTED 130,000 2.90
EXERCISED (518,623) 1.91
CANCELED (340,360) 2.54
---------
OUTSTANDING, DECEMBER 31, 2004 1,744,097 2.52
=========
OPTIONS EXERCISABLE:
December 31, 2002 1,234,955 2.63
December 31, 2003 1,524,699 2.52
DECEMBER 31, 2004 1,290,165 2.69
Exercise prices for options outstanding as of December 31, 2004 ranged
from $1.69 to $6.75. The weighted average remaining contractual life of
these options is seven years.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
WIRELESS TELECOM GROUP, INC.
NOTE 5 - SHAREHOLDERS' EQUITY (CONTINUED):
The options outstanding as of December 31, 2004 are summarized as
follows:
Options outstanding:
Range of Weighted average Options Weighted average
exercise prices exercise price Outstanding remaining life
--------------- -------------- ----------- --------------
$1.69 - $2.25 $2.01 550,810 6.3 years
$2.37 - $3.13 $2.73 1,089,887 6.0 years
$4.17 - $6.75 $5.25 103,400 .6 years
---------
1,744,097
=========
Options exercisable:
Range of Weighted average Options
exercise prices exercise price exercisable
--------------- -------------- -----------
$1.69 - $2.25 $1.99 417,310
$2.37 - $3.13 $2.73 769,455
$4.17 - $6.75 $5.25 103,400
----------
1,290,165
==========
EQUITY COMPENSATION PLANS:
The following table summarizes information, as of December 31, 2004,
relating to equity compensation plans of the Company pursuant to which
grants of options or other rights to acquire shares may be granted from
time to time:
EQUITY COMPENSATION PLAN INFORMATION
-----------------------------------------------------------------------------------------------------------------
(a) (b) (c)
-----------------------------------------------------------------------------------------------------------------
Number of securities to Weighted-average Number of securities remaining
be issued upon exercise exercise price of available for future issuance under
Plan Category of outstanding options, outstanding options, equity compensation plans (excluding
warrants and rights warrants and rights securities reflected in column (a))
-----------------------------------------------------------------------------------------------------------------
Equity
compensation
plans approved by 1,744,097 $2.52 939,993
security holders
(1)
-----------------------------------------------------------------------------------------------------------------
Equity
compensation
plans not 0 0 0
approved by
security holders
-----------------------------------------------------------------------------------------------------------------
Total 1,744,097 $2.52 939,993
-----------------------------------------------------------------------------------------------------------------
(1) These plans include the Company's 1995 and 2000 Stock Option Plans.
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
WIRELESS TELECOM GROUP, INC.
NOTE 6 - OPERATIONAL INFORMATION AND EXPORT SALES:
SALES:
The Company and its subsidiaries develop and manufacture various types
of electronic test equipment and are aggregated into a single operating
segment based on similar economic characteristics, products, services,
customers, U.S. Government regulatory requirements, manufacturing
processes and distribution channels. All of the Company's assets are
domestic.
For the year ended December 31, 2004, no customer accounted for more
than 10% of total sales. For the year ended 2003, one customer
accounted for 11% of total sales. For the year ended 2002, no customer
accounted for more than 10% of total sales.
In addition to its in-house sales staff, the Company uses various
manufacturers' representatives to sell its products. For the year ended
December 31, 2004, one representative accounted for more than 10% of
total sales. In 2003 and 2002, no representative accounted for more
than 10% of total sales.
Export sales which are all transacted in US dollars, were approximately
32%, 33% and 34% of total sales for the years ended December 31, 2004,
2003 and 2002, respectively. Export sales by geographic location are as
follows:
2004 2003 2002
---------- ---------- ----------
Asia $2,742,000 $2,959,000 $3,391,000
Europe 3,714,000 2,921,000 3,047,000
Other 695,000 655,000 655,000
---------- ---------- ----------
$7,151,000 $6,535,000 $7,093,000
========== ========== ==========
PURCHASES:
No third party supplier accounted for more than 10% of the Company's
total inventory purchases for 2004, 2003 or 2002.
NOTE 7 - 401(K) PROFIT SHARING PLAN:
During the year ended December 31, 1990, the Company adopted a
resolution to institute a 401(k) profit sharing plan effective January
1, 1991, to cover all eligible employees. Company contributions to the
plan for the years ended December 31, 2004, 2003 and 2002 aggregated
$108,045, $106,214 and $99,947, respectively.
NOTE 8 - INCOME TAXES:
The components of income tax expense related to income are as follows:
December 31,
--------------------------------------
2004 2003 2002
--------- --------- --------
Current:
Federal $ 443,392 $619,226 $553,887
State 153,850 355,434 193,263
Deferred:
Federal (248,000) (155,785) 57,000
State (59,842) (6,293) 19,000
--------- --------- --------
$ 289,400 $ 812,582 $823,150
========= ========= ========
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
WIRELESS TELECOM GROUP, INC.
NOTE 8 - INCOME TAXES (CONTINUED):
The following is a reconciliation of the maximum statutory federal tax
rate to the Company's effective tax rate:
December 31,
--------------------------------------
2004 2003 2002
-------- -------- --------
% OF % of % of
PRE TAX Pre Tax Pre Tax
EARNINGS Earnings Earnings
-------- -------- --------
Statutory federal income tax rate 34.0% 34.0% 34.0%
State income tax net of federal tax benefit 5.9 8.3 5.4
Benefits from foreign sales (23.8) (6.1) (6.5)
Other, including research and development
credit, net operating loss (5.1) (4.7) (1.1)
----- ----- -----
11.0% 31.5% 31.8%
===== ===== =====
The components of deferred income taxes are as follows:
December 31,
-------------------------
2004 2003
---------- ----------
Deferred tax assets:
Uniform capitalization of inventory costs for tax purposes $ 189,852 $185,950
Allowances for doubtful accounts 76,062 78,930
Deferred costs 140,000 -
Tax effect of goodwill impairment 500,759 845,914
Net operating loss carryforward 1,082,400 1,087,602
---------- ----------
1,989,073 2,198,396
Valuation allowance for deferred tax assets (791,198) (1,160,109)
---------- ----------
1,197,875 1,038,287
Deferred tax liabilities:
Tax over book depreciation (112,868) (389,546)
---------- ----------
Net deferred tax asset $1,085,007 $648,741
========== ==========
NOTE 9 - COMMITMENTS AND CONTINGENCIES:
WARRANTIES:
The Company provides one-year warranties on of all its products
covering both parts and labor. The Company, at its option, repairs or
replaces products that are defective during the warranty period if the
proper preventive maintenance procedures have been followed by its
customers. The costs related to these warranties are not certain and
cannot be reasonably estimated. In addition, based upon past
experience, these costs have been minimal and therefore, no provision
for these costs has been made.
LEASES:
The Company leases a 45,700 square foot facility located in Hanover
Township, Parsippany, New Jersey, which is currently being used as its
principal corporate headquarters and manufacturing plant. The term of
the lease agreement is for ten years beginning on October 1, 2001 and
ending September 30, 2011. The lease also contains an option to
terminate the lease effective September 30, 2006.
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
WIRELESS TELECOM GROUP, INC.
NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED):
LEASES (CONTINUED):
The Company leased a 23,100 square foot facility located in Livingston,
New Jersey, which was occupied by Microlab/FXR. The original term of
the lease was for ten years commencing on March 4, 1996. During the
year 2003, the Company exercised an option to cancel the original lease
as of the last day of February 2004. Additionally, the Company agreed
to a separate three-month lease extension through May 31, 2004 and
another two-month lease extension through July 31, 2004. As of July
2004, Microlab/FXR relocated its operations to the Hanover Township,
Parsippany facility.
The Company is also responsible for its proportionate share of the cost
of utilities, repairs, taxes, and insurance. The future minimum lease
payments are shown below:
2005 $ 418,917
2006 434,150
2007 441,767
2008 457,000
2009 472,233
Thereafter 837,833
----------
$3,061,900
==========
Rent expense for the years ended December 31, 2004, 2003 and 2002 was
$591,291, $663,658 and $561,361, respectively.
On July 14, 1998 the Company entered into a 15-year lease for a 44,000
square foot facility located in Mahwah, New Jersey. This new facility
was leased to serve as the headquarters and manufacturing plant for one
of the Company's divisions, which was sold in 1999. In December 1999,
the Company exercised its option to purchase this building. In November
2000, the Company entered into an agreement to lease this property to
an unrelated third party. Rental income for 2004 was $379,219. This
lease, which terminates in 2013, provides for annual rental income of
$379,219 throughout the lease term.
The Company leases certain equipment under operating lease
arrangements. These operating leases expire in various years through
2009. All leases may be renewed at the end of their respective leasing
periods. Future payments consist of the following at December 31, 2004:
2005 $ 53,113
2006 52,248
2007 52,248
2008 51,271
2009 4,028
--------
$212,908
========
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
WIRELESS TELECOM GROUP, INC.
NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED):
ENVIRONMENTAL CONTINGENCIES:
Following an investigation by the New Jersey Department of
Environmental Protection (NJDEP) in 1982, of the waste disposal
practices at a certain site formerly leased by Boonton, the Company put
a ground water management plan into effect as approved by the NJDEP.
Costs associated with this site are charged directly to income as
incurred. The owner of this site has notified the Company that if the
NJDEP investigation proves to have interfered with a sale of the
property, the owner may seek to hold the Company liable for any loss it
suffers as a result. However, corporate counsel has informed management
that, in their opinion, the lessor would not prevail in any lawsuit
filed due to the imposition by law of the statute of limitations.
Costs charged to operations in connection with the water management
plan amounted to approximately $13,000 and $10,000 for the years ended
December 31, 2004 and 2003, respectively. The Company estimates the
expenditures in this regard for the fiscal year ending December 31,
2005 will amount to approximately $12,000. The Company will continue to
be liable under the plan, in all future years, until such time as the
NJDEP releases it from all obligations applicable thereto.
NOTE 10 - RELATED PARTY TRANSACTIONS:
In 2004 and 2003, the Company utilized the advertising service of SGW
Integrated Marketing Communications. One of the Directors of the
Company, Mr. Andrew Scelba, served as President and Chairman of the
Board of SGW. He retired from this position in 2000 and currently
performs consulting services on a limited basis. Total fees paid to SGW
in 2004 and 2003 were approximately $49,000 and $59,000, respectively.
In January 2002, the Company paid $140,000 to GALEG, LLC for its
services in connection with the identification and acquisition of
Microlab/FXR. Mr. Karabet "Gary" Simonyan and members of his immediate
family are among the members of GALEG, LLC. Mr. Simonyan is the
Company's founder, Non-Executive Chairman of the Board and past Chief
Executive Officer and President. These services and compensation all
occurred before Mr. Simonyan rejoined the Board as a Director in March
2002.
NOTE 11 - PROPOSED ACQUISITION/SUBSEQUENT EVENTS:
On October 5, 2004, the Company entered into a stock purchase agreement
(the "Original Purchase Agreement") with Willtek Communications GmbH, a
German private limited liability company ("Willtek"), Damany Holding
GmbH, a German private limited liability company and the owner of
approximately 20% of Willtek's outstanding capital stock ("Damany
Holding"), and Investcorp Technology Ventures, L.P., a Cayman Islands
limited partnership and the owner of approximately 80% of Willtek's
outstanding capital stock ("Investcorp" and, together with Damany
Holding, the "Willtek Shareholders"), pursuant to which the Company
agreed to acquire all of the outstanding share capital of Willtek from
the Willtek Shareholders. Willtek, based in Ismaning, Germany, is a
leading provider of solutions that enable manufacturers and operators
of wireless communications devices to test mobile phones, air
interface, and base stations of cellular networks. Willtek's products
include high-speed, state-of-the-art test and measurement solutions for
handsets and wireless devices, as well as for radio frequencies and
network testing tasks. Under the terms of the Original Purchase
Agreement, the Company agreed to purchase all of the outstanding share
capital of Willtek in exchange for an aggregate purchase price of
$7,000,000 in cash and 8,000,000 shares of the Company's common stock
(the "Original Purchase Price"). As a result of the proposed
acquisition, Willtek will become a wholly-owned subsidiary of the
Company.
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
WIRELESS TELECOM GROUP, INC.
NOTE 11 - PROPOSED ACQUISITION/SUBSEQUENT EVENTS (CONTINUED):
On March 29, 2005, the Company, Willtek and the Willtek Shareholders
entered into an amended and restated stock purchase agreement (the
"Amended Purchase Agreement"), which modifies the terms of the Original
Purchase Agreement. The terms were modified, in part, due to the
operating results of Willtek during the past six months and the
parties' desire to conserve the Company's existing cash resources.
Under the terms of the Amended Purchase Agreement, the Original
Purchase Price was reduced by eliminating the $7.0 million cash
component. The purchase price now consists solely of 8,000,000 shares
of the Company's common stock (the "Purchase Price"). Based on the
$2.54 closing price of a share of the Company's common stock as
reported on the American Stock Exchange on March 28, 2005, the dollar
value of the Purchase Price is approximately $20.3 million. Based on
the number of shares of the Company's common stock outstanding on March
28, 2005, giving effect to the proposed acquisition, the Willtek
Shareholders would own in the aggregate approximately 31.4% of the
outstanding shares of the Company's common stock. As was the case with
the Original Purchase Agreement, the Amended Purchase Agreement does
not provide for an adjustment in the number of shares of the Company's
common stock to be issued to the Willtek Shareholders in the
acquisition in the event of a fluctuation in the market price of the
Company's common stock.
In connection with the acquisition, substantial changes will be made to
the composition of the Company's board of directors and to its senior
management team, including the appointment of Cyrille Damany, Willtek's
current Chief Executive Officer, as the Company's new Chief Executive
Officer, and the appointment of two designees of Investcorp to the
Company's seven-member board of directors at the closing of the
acquisition, one of whom will be appointed Chairman of the Board. It is
currently anticipated that, at the closing of the acquisition, Karabet
"Gary" Simonyan will continue to serve on the board as non-executive
Vice Chairman of the Board. Paul Genova, the Company's President and
Chief Financial Officer, will continue as such and report directly to
Mr. Damany following completion of the acquisition. Investcorp will
continue to be entitled to designate up to two individuals for
nomination for election to the Company's board of directors, provided
Investcorp's level of beneficial ownership of the Company's common
stock continuously equals or exceeds certain percentage thresholds.
As a result of the substantial changes that will be made to the
composition of the Company's board of directors and to its senior
management upon completion of the acquisition, the Company's
compensation committee took the opportunity to evaluate senior
executive employment, severance and compensation arrangements and
determined to approve a severance agreement with Mr. Genova, which
provides that if Mr. Genova's employment is terminated by the Company
without "cause," or if Mr. Genova terminates his employment for "good
reason," whether before or after the acquisition, then Mr. Genova will
be entitled to receive (1) at the sole discretion of the Company,
either a lump-sum cash payment equal to 75% of his annual base
compensation then in effect (which, based on Mr. Genova's current
annual base compensation would be approximately $135,000), payable
within 30 days after termination, or continuation of his base
compensation then in effect for a period of nine months after
termination, and (2) the continuation of all benefits in which he
currently participates for a period of nine months following his
termination. Also, the compensation committee approved the grant to Mr.
Simonyan of incentive stock options to purchase 100,000 shares of the
Company's common stock, at an exercise price of $2.57 per share,
representing the closing price of the Company's common stock as
reported on the American Stock Exchange on March 22, 2005, the date of
grant. The options will vest over a period of three years from the date
of grant, with one third vesting on each anniversary of the date of
grant.
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
WIRELESS TELECOM GROUP, INC.
NOTE 11 - PROPOSED ACQUISITION/SUBSEQUENT EVENTS (CONTINUED):
In connection with the Amended Purchase Agreement, Willtek entered into
an amended and restated loan agreement, dated March 29, 2005, with
Investcorp, pursuant to which Investcorp will waive its right to
terminate an existing loan agreement, dated March 12, 2003, between
Willtek and Investcorp upon completion of the acquisition and collect
the (Euro Dollar)3.5 million outstanding principal amount thereunder
(approximately $4.6 million), together with all interest accrued and
then unpaid under the existing loan agreement at the rate of 8% per
year through the closing date of the acquisition (as of February 28,
2005, approximately (Euro Dollar)478,000, or approximately $634,000).
The Company signed the amended loan agreement to guaranty payment of
any amounts payable by Willtek to Investcorp under the amended loan
agreement. The amended loan agreement will not become effective until
the closing date of the acquisition, at which time the existing loan
agreement will be terminated. Under the terms of the amended loan
agreement, following the acquisition, the loan will bear interest at
the rate of 4% per year accruing at the end of each calendar quarter
and will be due and payable in one lump sum on December 31, 2006. The
amended loan agreement will not be secured by any assets of the Company
or Willtek. Investcorp may terminate the amended loan agreement under
certain circumstances set forth therein. The Company believes that the
terms of the amended loan agreement with Investcorp are no less
favorable than loan terms available from an independent third party.
Completion of the acquisition is subject to approval by the Company's
shareholders, as well as other customary closing conditions. The
parties have already received the required antitrust clearances in
Germany. The Company's board of directors intends to present a proposal
to approve the acquisition of Willtek by the Company and the issuance
of the Company's common stock to the Willtek Shareholders in the
acquisition at the Company's upcoming 2005 annual meeting of
shareholders. Pending the approval of the Company's shareholders and
satisfaction or, where permissible, waiver of all of the other closing
conditions, the transaction is expected to close in the second or third
calendar quarter of 2005.
NOTE 12 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
The following is a summary of selected quarterly financial data (in
thousands, except per share amounts).
2004 QUARTER
---- -----------------------------------------
1ST 2ND 3RD 4TH
------ ------ ------ ------
NET SALES $5,486 $5,584 $5,944 $5,090
GROSS PROFIT 3,091 3,028 3,175 2,488
OPERATING INCOME 120 953 929 320
NET INCOME 188 647 785 712
DILUTED NET INCOME PER SHARE $.01 $.04 $.05 $.04
2003 Quarter
---- ------------------------------------------
1st 2nd 3rd 4th
------ ------ ------ ------
Net sales $4,153 $4,836 $5,187 $5,549
Gross profit 2,084 2,383 2,815 2,977
Operating income 83 447 912 692
Net income 118 367 647 631
Diluted net income per share $.01 $.02 $.04 $.04
F-20
WIRELESS TELECOM GROUP, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS ENDED DECEMBER 31,
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Balance at
Beginning of Balance at
year Provisions Deductions end of year
------------ ---------- ------------ -----------
2004 $ 175,399 $ 14,756 $ - $ 190,155
2003 175,838 - (439) 175,399
2002 113,950 61,888 - 175,838
ALLOWANCE FOR DEFERRED TAX VALUATION:
Balance at
beginning of Balance at
year Provisions Reductions end of year
------------ ---------- ------------ -----------
2004 $ 1,160,109 $ - $ (368,911) $ 791,198
2003 466,413 693,696 - 1,160,109
2002 1,362,891 - (896,478) 466,413
