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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, 2003
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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
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(State or other jurisdiction (I.R.S. Employer
of 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
(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
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Common Stock, par value $.01 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
none
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(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 23, 2004: $53,034,949
Number of shares of Wireless Telecom Group, Inc. Common Stock,
$.01 par value, outstanding as of March 23, 2004:
17,020,611
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DOCUMENTS INCORPORATED BY REFERENCE
Part III - In the Company's Proxy Statement to be filed with the
Items 11, 12, Securities and Exchange Commission no later than April
13 and 14 29, 2004.
Part IV - Certain Prior filings made by the Company under the Securities Act
exhibits listed of 1933 and the Securities Exchange Act of 1934.
in response
to Item 15(a)(3)
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 and
Related Stockholder Matters 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
PART III
Item 10. Directors and Executive Officers of the Registrant 16
Item 11. Executive Compensation 18
Item 12. Security Ownership of Certain Beneficial Owners and Management 18
Item 13. Certain Relationships and Related Transactions 18
Item 14. Principal Accountant Fees and Services 18
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 19
Signatures 21
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) and digital television. 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, 2003 and 2002. Microlab/FXR's
results of operations and cash flows for 2003 and 2002 are included in the
Consolidated Statements of Operations and Cash Flows, and Management's
Discussion and Analysis of Operations. However, their results of operations and
cash flows for 2001 are not included in the Consolidated Statements of
Operations and Cash Flows or 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 67% of
the Company's sales in fiscal 2003 were derived from commercial applications.
The remaining sales (approximately 33%) 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
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 $1,000
and $7,500 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 5% of fiscal 2003 sales.
Marketing and Sales
As of March 8, 2004, the Company's in-house marketing and sales force
consisted of seventeen 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
62% and 60% of the Company's sales for the years ended December 31, 2003 and
2002, respectively. For the years ended December 31, 2003 and 2002, 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 2003, approximately 67% of sales were
derived from commercial applications. The remaining sales were comprised of
government and military applications.
For fiscal 2003, one customer accounted for approximately 11% 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 2003 were $6,535,000, or approximately 33% of
total sales. These sales were made predominantly to customers in Asia
($2,959,000 or 15% of total sales) and Europe ($2,921,000 or 15% 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 (seventeen
individuals as of March 8, 2004) 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 $2,046,000 and $1,919,000 for the years ended December 31, 2003
and 2002, 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 $3,900,000 at
December 31, 2003, compared to approximately $2,500,000 at December 31, 2002. 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 2003.
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, 2003 in connection
with the site amounted to approximately $10,000. 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 8, 2004, the Company had 106 full-time employees, including
its officers, 60 of whom are engaged in manufacturing and repair services, 12 in
administration and financial control, 17 in engineering and research and
development, and 17 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
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 also leases a 23,100 square foot facility located in
Livingston, New Jersey, which is 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. As of June 1, 2004, Microlab/FXR will relocate
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.
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
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.
2003 Fiscal Year High Low
1st Quarter $2.07 $1.63
2nd Quarter 2.51 1.93
3rd Quarter 2.83 2.12
4th Quarter 3.25 2.23
2002 Fiscal Year
1st Quarter $5.00 $2.84
2nd Quarter 3.33 2.03
3rd Quarter 2.20 1.55
4th Quarter 2.08 1.51
On March 8, 2004, the closing price of the Common stock of the Company
as reported was $3.18. On March 8, 2004, the Company had 640 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
2003 $.02 $.02 $.02 $.03
2002 $.02 $.02 $.02 $.02
On March 19, 2004, 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, 2003,
2002, 2001, 2000 and 1999 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 2003
and 2002 includes the results of Microlab/FXR. The Selected Balance Sheet Data
for 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: 2003 2002 2001 2000 1999
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Net sales $19,724,240 $20,747,707 $19,041,838 $18,450,518 $13,187,719
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Income from continuing
operations
before income taxes 2,575,577 2,590,768 3,279,271 3,362,702 2,992,768
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Provision for income taxes 812,582 823,150 2,062,000 1,231,462 959,572
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Net income from continuing
operations 1,762,995 1,767,618 1,217,271 2,131,240 2,033,196
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Selected Per Share Data:
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Net income from continuing
operations per common share -
diluted $.10 $.10 $.07 $.11 $.11
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Shares used in computation of
earnings per share - diluted 17,113,472 17,340,264 18,046,498 19,724,188 19,327,264
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Cash dividends per common share $.09 $.08 $.04 $.00 $.00
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Selected Balance Sheet Data:
- ------------------------------------------------------------------------------------------------------
Working capital $23,971,858 $23,510,803 $23,318,264 $27,553,331 $26,105,601
Total assets 33,624,211 32,215,596 32,905,258 37,656,273 36,763,982
Total liabilities 5,404,159 4,328,638 4,798,158 5,273,235 6,647,373
Shareholders' equity 28,220,052 27,886,958 28,107,100 32,383,038 30,116,609
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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) and digital television.
The financial information presented herein includes: (i) Condensed
Consolidated Balance Sheets as of December 31, 2003 and as of December 31, 2002
(ii) Condensed Consolidated Statements of Operations for the three years ended
December 31, 2003, 2002 and 2001 (iii) Condensed Consolidated Statement of
Changes in Shareholders' Equity for the three years ended December 31, 2003,
2002 and 2001 (iv) Condensed Consolidated Statements of Cash Flows for the three
years ended December 31, 2003, 2002 and 2001.
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 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, 2003 and 2002.
Microlab/FXR's results of operations and cash flows for the years ended December
31, 2003 and 2002 are included in the Condensed Consolidated Statements of
Operations and Cash Flows, and Management's Discussion and Analysis of
Operations, but their results of operations and cash flows for the year ended
December 31, 2001 are not included. 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.
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.
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.
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. Changes in the operating strategy can
significantly reduce the estimated useful life of such assets.
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 the year ended 2002, a decrease of $1,023,467 or
4.9%.
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. 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, 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.
12
In 2003 and 2002 there was no impairment of goodwill, but in December
2001, the Company identified certain conditions, including an overall weakness
in the telecommunications market relating to the noise generation product line,
as indicators of asset impairment. These conditions led to forecasted future
results that were substantially less than had originally been anticipated at the
time of acquisition. In accordance with the Company's policy, management
assessed the recoverability of goodwill, and as a result, the Company recognized
full impairment of this goodwill and recorded a non-cash expense of $2,032,051
for the 2001 year. This impairment impacted the Company's income before taxes
for financial reporting purposes, but not for income tax purposes. Therefore,
the Company's effective tax rate in 2001 was substantially higher than usual.
Interest, dividend and other income increased by $638,577 for the year
ended December 31, 2003. The increase was primarily due to an increase in
interest income, partially offset by 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.
Results Of Operations
Year Ended December 31, 2002 Compared to 2001
Net sales for the year ended December 31, 2002 were $20,747,707 as
compared to $19,041,838 for 2001, an increase of $1,705,869 or 9.0%.
The Company's gross profit on net sales for the year ended December 31,
2002 was $10,466,842 or 50.4% as compared to $10,366,581 or 54.4% as reported in
the previous year.
Operating expenses for the year ended December 31, 2002 were $7,678,996
or 37.0% of net sales as compared to $5,856,839 or 30.8% of net sales for the
year ended December 31, 2001. For the year ended December 31, 2002 as compared
to the prior year, operating expenses increased in dollars by $1,822,157. The
increases in amount and percentage are primarily due to the acquisition of
Microlab/FXR and the inclusion of their results.
In 2002 there was no impairment of goodwill, but in December 2001, the
Company identified certain conditions, including an overall weakness in the
telecommunications market relating to the noise generation product line, as
indicators of asset impairment. These conditions led to forecasted future
results that were substantially less than had originally been anticipated at the
time of acquisition. In accordance with the Company's policy, management
assessed the recoverability of goodwill using a cash flow projection based on
the remaining amortization period of twelve years. Based on this projection, the
cumulative cash flow over the remaining amortization period was insufficient to
recover the remaining unamortized goodwill. As a result, the Company recognized
full impairment of this goodwill and recorded a non-cash expense of $2,032,051
for the 2001 year. This impairment impacted the Company's income before taxes
for financial reporting purposes, but not for income tax purposes. Therefore,
the Company's effective tax rate in 2001 was substantially higher than usual.
Interest, dividend and other income decreased by $998,658 for the year
ended December 31, 2002. The decrease was primarily due to a write down of an
investment in a non-affiliated company and a decrease in interest rates during
2002.
Net income increased to $1,767,618 or $.10 per share on a diluted
basis, for the year ended December 31, 2002 as compared to $1,217,271 or $.07
per share on a diluted basis, for the year ended December 31, 2001. The
explanation of this increase can be derived from the operational analysis
provided above and the income tax impact of the goodwill impairment in 2001.
13
Liquidity and Capital Resources
The Company's working capital has increased by $461,055 to $23,971,858
at December 31, 2003, from $23,510,803 at December 31, 2002. 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. At December 31, 2002, the Company had a current ratio of 20.6
to 1, and a ratio of debt to net worth of .16 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 $2,661,582 in cash for the year
ending December 31, 2003 compared to $3,093,762 and $2,706,679 in cash flows for
the years ending December 31, 2002 and 2001, respectively. 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 inventory. For 2002, cash provided by operations was primarily due
to net income, a decrease in inventory, a non-cash adjustment for depreciation
and amortization and a non-cash adjustment for the write-down on an investment.
For 2001, cash provided by operations was primarily due to net income, a
non-cash impairment of goodwill, a decrease in accounts receivable and a
non-cash adjustment for depreciation and amortization, partially offset by a
decrease in accounts payable and accrued expenses and an increase in inventory.
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 2003 amounted to $451,695
compared to $686,775 and $3,493,918 for the years ending December 31, 2002 and
2001, respectively. For the years ending December 31, 2003 and 2002, the primary
use of cash was for capital expenditures. For the year ending December 31, 2001,
the primary use of this cash was for the investment in Microlab/FXR.
Net cash used for financing activities was $1,467,302, $2,022,447 and
$5,525,377 for the years ending December 31, 2003, 2002 and 2001, respectively.
In 2003, 2002 and 2001, 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 2003, 2002 and 2001.
For details of dividends paid in the years ended December 31, 2003 and
2002, 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 $3,129,209 $40,329 $90,374 $105,076 $2,893,430
Operating Lease 3,546,135 484,235 853,067 898,767 1,310,066
Equipment Lease 275,263 60,713 101,268 97,844 15,438
---------- -------- ---------- ---------- ----------
$6,950,607 $585,277 $1,044,709 $1,101,687 $4,218,934
========== ======== ========== ========== ==========
The Company believes that its financial resources from working capital
provided by operations are adequate to meet its
current needs.
14
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.
15
PART III
Item 10. Directors and Executive Officers of the Registrant
The current directors and executive officers of the Company are as
follows:
Name Age Position
Paul Genova ......................... 48 Acting Chief Executive Officer,
President, Chief Financial Officer
and Director
Bent Hessen-Schmidt.................. 42 Executive Vice President, Marketing
Karabet 'Gary' Simonyan (1)(2)....... 68 Director, Non-Executive Chairman of
the Board
Henry L. Bachman (3)................. 74 Director
John Wilchek (2)(3).................. 63 Director
Franklin H. Blecher ................. 75 Director
Michael Manza (1)(3)................. 68 Director
Andrew Scelba (1)(2)................. 72 Director
- ------------------------------------------------------
(1) Member of Nominating and Governance Committee
(2) Member of Compensation Committee
(3) Member of Audit Committee
The Stock Option Committee was absorbed into, and will now be
administered through, the Compensation Committee.
The Audit Committee has adopted an Audit Committee charter and
all of its members are independent. The Company has determined that Mr. Henry
Bachman is the "Financial Expert" on the Audit Committee.
All directors hold office until the next annual meeting of
shareholders or until their successors are elected and qualify. Executive
officers hold office until their successors are chosen and qualify, subject to
earlier removal by the Board of Directors.
Until March 19, 2004, Mr. Edward Garcia served as the
Company's CEO, President and Chairman of the Board of Directors. Subsequent to
this date he will continue to consult for the Company. Mr. Terence McCoy will
serve as the Company's CEO and will join the Board of Directors effective April
14, 2004.
Set forth below is a biographical description of each director
and executive officer of the Company based on information supplied by each of
them.
Paul Genova joined the Company in September 2003 and serves as
the Company's Acting Chief Executive Officer until April 14, 2004, President,
Chief Financial Officer and Director. From 1994 to 2002, Mr. Genova served as
Chief Financial Officer with Wilson Logistics, Inc., a supply chain management
and industrial services provider, which is a wholly owned subsidiary of Wilson
Logistics Holdings, AB Sweden. From 1985 to 1994, Mr. Genova worked with
Deloitte & Touche as a Senior Audit Manager, working with various global
manufacturing companies. Mr. Genova earned his New York CPA certificate in 1983
and has a Bachelor of Science degree in Accounting from Manhattan College.
16
Bent Hessen-Schmidt rejoined the Company in June 2002 and
serves as the Company's Executive Vice President and Vice President of
Marketing. Mr. Hessen-Schmidt previously worked for the Company from 1988 to
1998, serving in various positions leading up to Vice President of Sales and
Marketing. From 1998 until 2002, Mr. Hessen-Schmidt was employed at SiGe
Semiconductor, Inc. in Ottawa, where he held various positions including Vice
President of Sales, Marketing and Business Development. Mr. Hessen-Schmidt has
more than 20 years of experience in Sales, Marketing and Engineering Management,
15 of which include Test and Measurement. Mr. Hessen-Schmidt has a Masters
degree in Electrical Engineering from Denmark's Technical University.
Karabet 'Gary' Simonyan became a director of the Company in
March 2002 and non-executive Chairman of the Board in March 2004. Mr. Simonyan
founded the Company in 1985. From 1985 until his official retirement from the
Company in 1997, Mr. Simonyan served in several capacities including Chairman of
the Board, Chief Executive Officer, President and Director. From 1978 until he
joined the Company, he worked for Micronetics, Inc., a manufacturer of
electronic products, in several capacities, including President. From 1977
through 1978, he served as President of Laser Management Associates, an
electronics consulting firm, which he founded. Mr. Simonyan has a Bachelor of
Science degree in Applied Physics and has undertaken graduate studies in
electrical engineering and in business administration.
Henry L. Bachman became a director of the Company in January
1999 and has had a career of over 50 years in the electronics industry. From
1951 to 1996, Mr. Bachman served as Vice President of Hazeltine, a subsidiary of
Marconi Aerospace Systems Inc., Advanced Systems Division, on a full-time basis
and currently provides consulting services to them on a part-time basis. Mr.
Bachman was President of The Institute of Electrical and Electronics Engineers
(IEEE). Mr. Bachman has a Bachelor degree and Masters degree from Polytechnic
University as well as completed the Advanced Management Program at Harvard Sloan
School of Management.
John Wilchek became a director of the Company in May 1993. He
was the founder, President, CEO and Chairman of Zenith Knitting Mills until his
retirement in 1991.
Franklin H. Blecher, Ph.D. became a director of the Company in
November 1994. In a thirty-seven year career with AT&T Bell Laboratories, Dr.
Blecher held several significant positions including Executive Director of the
Technical Information Systems Division from 1987 to 1989 and Executive Director
of the Integrated Circuit Design Division from 1982 to 1987 and previously
Director of the Mobile Communications Laboratory. Dr. Blecher has made
significant contributions in the area of transistor design for computer
applications. He has also developed widely used telephone and cellular
transmission systems. His laboratory's work in the cellular field was used by
the FCC to establish standards for commercial cellular systems. Dr. Blecher
received his Ph.D. from New York Polytechnic University where he is presently a
member of the Corporate Board and is a member of the National Academy of
Engineering. Dr. Blecher will not continue on Wireless Telecom Group's Board of
Directors following the expiration of his current term.
Michael Manza became a director of the Company in March 2002.
From 1988 until his retirement in 1999, Mr. Manza was a Partner at M.J. Meehan &
Co., served on its Management Committee, and was a Market Maker in stocks. From
1979 to 1988, Mr. Manza worked for L.F. Rothschild Unterberg Towbin as a Partner
and Managing Director. From 1952 until 1979, Mr. Manza worked for Josephthal &
Co. in several capacities including Partner and Manager. Mr. Manza received his
Bachelor's degree in Business from New York University and his Master's degree
in Finance from The New York Institute of Finance.
Andrew Scelba became a director of the Company in January
2003. In 1980, Mr. Scelba established ANR advertising, a technical agency
specializing in electronic and telecommunication accounts, servicing both
national and international accounts. In 1990, the name was changed to SSD&W and
subsequently to SGW. Mr. Scelba served as President and later Chairman of the
Board. In 2000, Mr. Scelba retired, but continued to consult for the agency. Mr.
Scelba has a Bachelor of Science degree in Advertising and a MBA in Marketing
from Fairleigh Dickenson University.
17
Item 11. Executive Compensation
The information required under this item is set forth in the
Company's Proxy Statement relating to the Company's annual meeting of
shareholders to be held on or about May 21, 2004 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
The information required under this item is set forth in the
Company's Proxy Statement relating to the Company's annual meeting of
shareholders to be held on or about May 21, 2004 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 Proxy Statement relating to the Company's annual meeting of
shareholders to be held on or about May 21, 2004 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 Proxy Statement relating to the Company's annual meeting of
shareholders to be held on or about May 21, 2004 and is incorporated herein by
reference. Such Proxy Statement will be filed with the Commissions within 120
days of the Company's year-end.
18
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 2003 and 2002
Consolidated Statements of Operations for the Three Years in
the Period ended December 31, 2003
Consolidated Statements of Changes in Shareholders' Equity for
the Three Years in the Period ended December 31, 2003
Consolidated Statements of Cash Flows for the Three Years in
the Period ended December 31, 2003
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)
19
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)
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)
11.1 Computation of Per Share Earnings filed here with
14 Code of Ethics filed here with
23.1 Consent of Independent Auditors (Lazar Levine & Felix
LLP) included herein as Exhibit 23.1
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.
(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.
(b) No report on Form 8-K has been filed during the last quarter of the period
covered by this Report.
(c) See Item 15(a)(3), above.
(d) See Item 15(a)(2), above.
20
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 26, 2004 By: /s/ Paul Genova
------------------------------
Paul Genova
Acting 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/ Paul Genova President, Chief Financial Officer March 26, 2004
- --------------------------- and Director
Paul Genova
/s/ Karabet Simonyan Director, Non-Executive Chairman of March 26, 2004
- --------------------------- the Board
Karabet Simonyan
/s/ Henry Bachman Director March 26, 2004
- ---------------------------
Henry Bachman
/s/ John Wilchek Director March 26, 2004
- ---------------------------
John Wilchek
/s/ Franklin H. Blecher Director March 26, 2004
- ---------------------------
Franklin H. Blecher
/s/ Michael Manza Director March 26, 2004
- ---------------------------
Michael Manza
/s/ Andrew Scelba Director March 26, 2004
- ---------------------------
Andrew Scelba
/s/ Reed DuBow Controller March 26, 2004
- ---------------------------
Reed DuBow
21
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Wireless Telecom Group, Inc.
Page(s)
Independent Auditors' Report F - 2
Consolidated Financial Statements:
Balance Sheets as of December 31, 2003 and 2002 F - 3
Statements of Operations for the Three Years in the Period
Ended December 31, 2003 F - 4
Statement of Changes in Shareholders' Equity for the Three
Years in the Period Ended December 31, 2003 F - 5
Statements of Cash Flows for the Three Years in the Period
Ended December 31, 2003 F - 6
Notes to Consolidated Financial Statements F - 7
F-1
INDEPENDENT AUDITORS' REPORT
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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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, 2003 and 2002 and the results of its operations
and its cash flows for the three years in the period ended December 31, 2003 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 3, 2004
Except for Note 11 which
is dated March 19, 2004
F-2
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
Wireless Telecom Group, Inc.
ASSETS
December 31,
-------------------------------
2003 2002
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $16,265,765 $15,523,180
Accounts receivable - net of allowance for doubtful accounts of
$175,399 and $175,838 for 2003 and 2002, respectively 3,076,080 3,087,983
Inventories 5,903,191 5,484,622
Current portion of deferred tax benefit 264,880 106,000
Prepaid expenses and other current assets 665,366 508,447
------------- -------------
TOTAL CURRENT ASSETS 26,175,282 24,710,232
------------- -------------
PROPERTY, PLANT AND EQUIPMENT - NET 5,528,931 5,573,316
------------- -------------
OTHER ASSETS:
Goodwill 1,351,392 1,351,392
Deferred tax benefit 383,861 386,956
Other assets 184,745 193,700
------------- -------------
TOTAL OTHER ASSETS 1,919,998 1,932,048
------------- -------------
TOTAL ASSETS $33,624,211 $32,215,596
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,256,672 $ 692,383
Accrued expenses and other current liabilities 367,437 469,645
Current portion of mortgage payable 40,329 37,401
Income taxes payable 538,986 -
------------- -------------
TOTAL CURRENT LIABILITIES 2,203,424 1,199,429
------------- -------------
LONG TERM LIABILITIES:
Mortgage payable 3,088,880 3,129,209
Deferred rent payable 43,377 -
Deferred revenue 68,478 -
------------- -------------
TOTAL LONG TERM LIABILITIES 3,200,735 3,129,209
------------- -------------
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, 19,992,378
and 19,875,378 shares issued for 2003 and 2002, respectively 199,924 198,754
Additional paid-in capital 13,100,857 12,904,589
Retained earnings 22,620,700 22,379,333
Treasury stock, at cost - 3,049,700 and 2,994,500 shares for 2003 and
2002, respectively (7,701,429) (7,595,718)
------------- -------------
28,220,052 27,886,958
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $33,624,211 $32,215,596
============= =============
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,
----------------------------------------------
2003 2002 2001
----------- ----------- -----------
NET SALES $19,724,240 $20,747,707 $19,041,838
----------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales 9,464,878 10,280,865 8,675,257
Selling, general and administrative expenses 8,125,284 7,678,996 5,856,839
Impairment of goodwill - - 2,032,051
Interest, dividends and other (income) expense (441,499) 197,078 (801,580)
----------- ----------- -----------
TOTAL COSTS AND EXPENSES 17,148,663 18,156,939 15,762,567
----------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 2,575,577 2,590,768 3,279,271
Provision for income taxes 812,582 823,150 2,062,000
----------- ----------- -----------
NET INCOME $ 1,762,995 $ 1,767,618 $ 1,217,271
=========== =========== ===========
NET INCOME PER COMMON SHARE:
Basic $0.10 $0.10 $0.07
Diluted $0.10 $0.10 $0.07
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 16,904,036 17,080,648 17,746,979
Diluted 17,113,472 17,340,264 18,046,498
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, 2000 $197,817 $12,748,855 $21,466,402 $(2,030,036) $32,383,038
Dividends - $.04 per share - - (704,257) - (704,257)
Stock options exercised 260 43,802 - - 44,062
Purchase of treasury stock - - - (4,833,014) (4,833,014)
Net income - - 1,217,271 - 1,217,271
--------- ------------ ------------ ------------ ------------
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
======== ============ ============ ============ ============
F-5
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Wireless Telecom Group, Inc.
For the Year Ended December 31,
----------------------------------------------
2003 2002 2001
------------ ------------ ------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 1,762,995 $ 1,767,618 $ 1,217,271
Adjustments to reconcile net income to net cash provided
by operating activities:
Impairment of goodwill - - 2,032,051
Depreciation and amortization 497,599 592,611 539,743
Deferred revenue 68,478 - -
Deferred income (benefit) taxes (155,785) 11,971 (294,492)
Provision for losses on accounts receivable (439) 11,889 43,192
Write down of investment - other assets - 499,000 -
Other income - (11,096) (66,672)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 12,343 (232,334) 868,953
(Increase) decrease in inventory (418,568) 831,463 (745,317)
(Increase) decrease in prepaid expenses and other current assets (149,485) 46,378 (259,019)
Increase (decrease) in accounts payable and accrued expenses 505,458 (259,088) (779,681)
Increase (decrease) increase in income taxes 538,986 (164,650) 150,650
------------ ------------ ------------
Net cash provided by operating activities 2,661,582 3,093,762 2,706,679
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Microlab/FXR net of cash received
of $2,965,125 - - (3,170,206)
Purchase of investment - other assets - (16,000) -
Capital expenditures (450,816) (666,072) (315,159)
Officers' life insurance (879) (4,703) (8,553)
------------ ------------ ------------
Net cash (used for) investing activities (451,695) (686,775) (3,493,918)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of mortgage note (37,401) (34,687) (32,168)
Dividends paid (1,521,627) (1,367,701) (704,257)
Proceeds from exercise of stock options 197,437 112,609 44,062
Acquisition of treasury stock (105,711) (732,668) (4,833,014)
------------ ------------ ------------
Net cash (used for) financing activities (1,467,302) (2,022,447) (5,525,377)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 742,585 384,540 (6,312,616)
Cash and cash equivalents, at beginning of year 15,523,180 15,138,640 21,451,256
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, AT END OF YEAR $16,265,765 $15,523,180 $15,138,640
============ ============ ============
SUPPLEMENTAL INFORMATION:
Cash paid during the year for:
Taxes $ 195,039 $ 869,580 $ 2,397,853
Interest $ 238,133 $ 240,849 $ 243,367
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 and
testing and measurement instruments, 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.
As a result of foreign trade agreements entered into by the U.S.
government, a company's ability to avail themselves of a FSC has been
removed as of December 31, 2002, and as such, the tax benefits
generated by such an entity have been eliminated. The U.S. government
has established new tax rules applicable to foreign sales, therefore
these tax benefits will no longer be available to the Company in 2003.
The Company, nevertheless, will continue to service its overseas
customers.
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. 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 $1,351,000 was recorded as goodwill at December 31, 2001.
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 systems market, which
facilitates seamless wireless coverage throughout the insides of
buildings and building complexes.
The following pro forma results were developed assuming the
acquisition had occurred at the beginning of the earliest period
presented.
Unaudited Pro Forma Information
For The Year Ended December 31,
2001
-----------
Net sales $26,179,930
Net income 1,552,890
Earnings per share:
Basic $0.09
Diluted $0.09
This unaudited pro forma information is not necessarily indicative of
the combined results that would have occurred had the acquisition
taken place on January 1, 2001, nor are they necessarily indicative of
results that may occur in the future.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Wireless Telecom Group, Inc.
NOTE 1 - DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued):
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
three 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, 2003, 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, 2003 and 2002, the Company had approximately
$14,200,000 and $12,500,000 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-8
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,
----------------------------
2003 2002
----------- -----------
Raw materials $4,084,932 $4,204,838
Work-in-process 757,436 332,506
Finished goods 1,060,823 947,278
----------- -----------
$5,903,191 $5,484,622
=========== ===========
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:
Goodwill related to the purchase of the noise generation product line
in 1999, aggregating $2,500,000, was to be amortized on a straight
line basis over 15 years.
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 142 requires goodwill to be
tested for impairment under certain circumstances, and written off
when impaired, rather than being amortized as previous standards
required. SFAS 142 is effective for fiscal years beginning after
December 15, 2001.
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Wireless Telecom Group, Inc.
NOTE 1 - DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued):
Intangible Assets (Continued):
In December 2001, the Company identified certain conditions, including
an overall weakness in the telecommunications market relating to the
noise generation product line, as indicators of asset impairment.
These conditions led to forecasted future results that were
substantially less than had originally been anticipated at the time of
acquisition. In accordance with the Company's policy, management
assessed the recoverability of goodwill using a cash flow projection
based on the remaining amortization period of twelve years. Based on
this projection, the cumulative cash flow over the remaining
amortization period was insufficient to recover the remaining
unamortized goodwill. As a result, the Company recognized full
impairment of this goodwill and recorded a non-cash expense of
$2,032,051 for the 2001 year.
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 on the accompanying Consolidated Balance Sheet at
December 31, 2001. In accordance with Statement of Financial
Accounting Standards No. 142, this goodwill will not be amortized, but
will be tested for impairment periodically. This goodwill was tested
for impairment by an independent valuation consulting firm for the
year ended December 31, 2003. 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.
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.
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, 2003, 2002 and 2001 were $2,045,747,
$1,918,593 and $1,152,985, respectively.
Advertising Costs:
Advertising expenses are charged to operations during the year in
which they are incurred and aggregated $488,038, $492,070 and $534,168
for the years ended December 31, 2003, 2002 and 2001, respectively.
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Wireless Telecom Group, Inc.
NOTE 1 - DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued):
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 (see Recent Accounting Pronouncements - SFAS No. 148,
below).
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.
Recent Accounting Pronouncements:
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation- Transition and Disclosure - an Amendment to
FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting
for Stock-Based Compensation," to provide alternative methods for
transition to SFAS No. 123's fair value method of accounting for
stock-based compensation. As amended by SFAS No. 148, SFAS No. 123
also requires additional disclosure regarding stock-based compensation
in annual and condensed interim financial statements. The new
disclosure requirements are effective immediately and are reflected in
Note 5.
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Wireless Telecom Group, Inc.
NOTE 1 - DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued):
Recent Accounting Pronouncements (Continued):
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." This statement
amends and clarifies financial accounting and reporting for
derivatives and for hedging activities under SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." This standard is
effective for contracts entered into or modified after June 30, 2003.
This standard had no impact on the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Instruments with Characteristics of Both Liabilities and Equity." This
standard requires that certain financial instruments embodying an
obligation to transfer assets or to issue equity securities be
classified as liabilities. It is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is
generally effective July 1, 2003. This standard had no impact on the
Company's financial statements.
Reclassifications:
Certain prior years information has been reclassified to conform to
the current year's reporting presentation.
NOTE 2 - PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, consists of the following:
December 31,
-----------------------------
2003 2002
------------ ------------
Building and improvements $3,557,186 $3,557,186
Machinery and equipment 3,018,939 2,881,906
Furniture and fixtures 600,926 551,745
Transportation equipment 91,841 115,318
Leasehold improvements 797,282 576,518
------------ ------------
8,066,174 7,682,673
Less: accumulated depreciation
and amortization 3,237,243 2,809,357
----------- ------------
4,828,931 4,873,316
Add: land 700,000 700,000
------------ ------------
$5,528,931 $5,573,316
============ ============
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Wireless Telecom Group, Inc.
NOTE 3 - OTHER ASSETS:
Other assets consist primarily of 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 an 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
$40,329, $43,485, $46,889, $50,559, and $54,517, respectively and
$2,893,430 thereafter.
NOTE 5 - SHAREHOLDERS' EQUITY:
The Company paid quarterly cash dividends aggregating $1,521,627,
$1,367,701 and $704,257 for the years ending December 31, 2003, 2002
and 2001, respectively.
In June 1998, the Company retained J.W. Genesis as its financial
adviser. In connection with this appointment, the Company issued to
J.W. Genesis, warrants to acquire 250,000 shares of the Company's
common stock at a price of $3.0625 per share, the fair market value at
the date of issuance. These warrants expired in June 2003.
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.
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.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Wireless Telecom Group, Inc.
NOTE 5 - SHAREHOLDERS' EQUITY (Continued):
A summary of stock activity, and related information for the years
ended December 31, follows:
Weighted Average
Option Exercise Price
--------- ----------------
Outstanding, December 31, 2000 2,203,580 $2.49
Weighted average fair value of options
granted during the year 2.41
Granted 147,000 2.69
Exercised (26,000) 1.69
Canceled (27,000) 2.63
----------
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
==========
Options exercisable:
December 31, 2001 821,031 2.78
December 31, 2002 1,234,955 2.63
December 31, 2003 1,524,699 2.52
Exercise prices for options outstanding as of December 31, 2003 ranged from
$1.69 to $6.75. The weighted average remaining contractual life of these options
is seven years.
Equity Compensation Plans:
The following table summarizes information, as of December 31, 2003, 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:
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Wireless Telecom Group, Inc.
NOTE 5 - SHAREHOLDERS' EQUITY (Continued):
EQUITY COMPENSATION PLAN INFORMATION
- ----------------------------------------------------------------------------------------
(a) (b) (c)
- ----------------------------------------------------------------------------------------
Number of securities Weighted-average Number of securities remaining
to be issued upon exercise price of available for future issuance
Plan Category exercise of outstanding options, under equity compensation
outstanding options, warrants and rights plans (excluding securities
warrants and rights reflected in column (a))
- ----------------------------------------------------------------------------------------
Equity
compensation
plans
approved by
security
holders (1) 2,473,080 $2.47 743,633
- ----------------------------------------------------------------------------------------
Equity
compensation
plans not
approved by
security
holders 0 0 0
- ----------------------------------------------------------------------------------------
Total 2,473,080 $2.47 743,633
- ----------------------------------------------------------------------------------------
(1) These plans include the Company's 1995 and 2000 Stock Option Plans.
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 2003, 2002 and 2001, respectively; risk-free interest rates of
2.4%, 3.5% and 4.5%, dividend yields of 8%, 2% and 2%; volatility factors of the
expected market price of the Company's common stock of 86%, 76% and 63%; and a
weighted average expected life of the options of seven years.
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Wireless Telecom Group, Inc.
NOTE 5 - SHAREHOLDERS' EQUITY (Continued):
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.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period. The
Company's pro forma information follows:
2003 2002 2001
---- ---- ----
Net income:
As reported $1,762,995 $1,767,618 $1,217,271
Pro forma 1,636,256 1,562,986 1,051,239
Basic earnings per share:
As reported $.10 $.10 $.07
Pro forma .10 .09 .06
Diluted earnings per share:
As reported $.10 $.10 $.07
Pro forma .10 .09 .06
NOTE 6 - OPERATIONAL INFORMATION AND EXPORT SALES:
Sales:
The Company's operations are in a single industry segment and involve
the manufacture of various types of electronic test equipment. All of
the Company's assets are domestic.
For the years ended December 31, 2003, one customer accounted for 11%
of total sales. This customer had an accounts receivable balance of
approximately $475,000 at December 31, 2003. For the years ended 2002
and 2001, 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 years
ended December 31, 2003 and 2002, no representative accounted for more
than 10% of total sales. For the year ended 2001, one representative
accounted for 10% of total sales.
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Wireless Telecom Group, Inc.
NOTE 6 - OPERATIONAL INFORMATION AND EXPORT SALES (Continued):
Export sales which are all transacted in US dollars, were
approximately 33%, 34% and 37% of total sales for the years ended
December 31, 2003, 2002 and 2001, respectively. Export sales by
geographic location are as follows:
2003 2002 2001
----------- ---------- ----------
Asia $2,959,000 $3,391,000 $2,162,000
Europe 2,921,000 3,047,000 3,074,000
Other 655,000 655,000 1,750,000
----------- ---------- ----------
$6,535,000 $7,093,000 $6,986,000
========== ========== ==========
Purchases:
No third party supplier accounted for more than 10% of the Company's
total inventory purchases for 2003 or 2002. One third party supplier
accounted for approximately 15% of the Company's total inventory
purchases for 2001.
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. Contributions to the plan
for the years ended December 31, 2003, 2002 and 2001 aggregated
$106,214, $99,947 and $70,548, respectively.
NOTE 8 - INCOME TAXES:
The components of income tax expense related to income are as follows:
December 31,
------------------------------------------
2003 2002 2001
----------- ----------- ------------
Current:
Federal $ 619,226 $553,887 $2,156,780
State 355,434 193,263 496,890
Deferred:
Federal (155,785) 57,000 (556,400)
State (6,293) 19,000 (35,270)
----------- ----------- ------------
$ 812,582 $ 823,150 $2,062,000
=========== =========== ============
F-17
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,
---------------------------------------
2003 2002 2001
------ ------ ------
% 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 8.3 5.4 5.6
Benefits from Foreign Sales Corporation 0.0 (6.5) (0.6)
Benefit from deferred tax adjustment (6.1) 0.0 0.0
Other, including research and development credit (4.7) (1.1) (1.2)
Non deductible impairment charge 0.0 0.0 25.1
------ ------- ------
31.5% 31.8% 62.9%
====== ======= ======
The components of deferred income taxes are as follows:
December 31,
----------------------------
2003 2002
----------- -----------
Deferred tax assets:
Uniform capitalization of inventory costs for tax purposes $ 185,950 $37,927
Allowances for doubtful accounts 78,930 100,338
Deferred costs - 98,425
Tax effect of goodwill impairment 845,914 298,798
Net operating loss carryforward 1,087,602 541,034
----------- -----------
2,198,396 1,076,522
Valuation allowance for deferred tax assets (1,160,109) (466,413)
----------- -----------
1,038,287 610,109
Deferred tax liabilities:
Tax over book depreciation (389,546) (75,829)
Other - (41,324)
----------- -----------
Net deferred tax asset $648,741 $492,956
=========== ===========
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.
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Wireless Telecom Group, Inc.
NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued):
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.
The Company also leases a 23,100 square foot facility located in
Livingston, New Jersey, which is 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. As of June 1, 2004, Microlab/FXR will relocate 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:
2004 $ 484,235
2005 418,917
2006 434,150
2007 441,767
2008 457,000
Thereafter 1,310,066
-----------
$3,546,135
===========
Rent expense for the years ended December 31, 2003, 2002 and 2001 was
$663,658, $561,361 and $567,439, 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 2003 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. One of these leases may be renewed at the end of three years.
Future payments consist of the following at December 31, 2003:
2004 $ 60,713
2005 51,042
2006 50,226
2007 50,226
2008 47,618
Thereafter 15,438
---------
$275,263
=========
F-19
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 $10,000 and $18,000 for the years ended
December 31, 2003 and 2002, respectively. The Company estimates the
expenditures in this regard for the fiscal year ending December 31,
2004 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 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 2003 were approximately $59,000.
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 - SUBSEQUENT EVENT:
On March 19, 2004, the Company announced the resignation of Mr. Edward
Garcia as Chairman of the Board, Chief Executive Officer and President
of the Company. As per the terms of his separation agreement, Mr.
Garcia was paid $685,000. This event has been disclosed in a form 8-K
filed by the Company and will be recorded as an expense in the first
quarter results of 2004.
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Wireless Telecom Group, Inc.
NOTE 12 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
The following is a summary of selected quarterly financial data
(in thousands, except per share amounts).
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
2002 Quarter
-------------------------------------------------
1st 2nd 3rd 4th
------- ------- ------- -------
Net sales $5,082 $5,541 $5,106 $5,019
Gross profit (1) 2,357 2,788 2,534 2,788
Operating income (2) 530 807 648 803
Net income 369 536 432 431
Diluted net income per share $.02 $.03 $.03 $.02
(1) Restated for the reclassification of research and development expense.
(2) Restated for the reclassification of building depreciation expense.
F-21
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
---------- ---------- ---------- -----------
2003 $ 175,838 $ - $ (439) $ 175,399
2002 113,950 61,888 - 175,838
2001 70,758 43,192 - 113,950
Allowance for deferred tax valuation:
Balance at
beginning of Balance at
year Provisions Reductions end of year
---------- ---------- ---------- -----------
2003 $ 466,413 $ 693,696 $ - $ 1,160,109
2002 1,362,891 - (896,478) 466,413
2001 271,742 1,091,149 - 1,362,891