ITEM 1. BUSINESS
Wireless Telecom Group, Inc. (the "Company"), develops, manufactures and markets a wide variety of test instruments and electronic noise sources for wireless telecommunications. The Company's products are primarily used to test the performance and capability of cellular/PCS and satellite communications systems. Other applications include radio, radar, wireless local area network (WLAN) and digital television. To further address the needs of the ever-evolving wireless telecommunications industry, the Company has been developing and marketing test instruments designed to fulfill the requirements of such customers. The Company is expanding its product offerings to these customers as this emerging industry is expected to provide an opportunity for substantial growth.
MARKET
Since the Company's incorporation in the State of New Jersey in 1985, it has been primarily engaged in supplying noise source products to various customers. In 1993, the product line was expanded to include test equipment designed specifically for use by commercial customers in wireless communications. Through the constant introduction of new instruments, as well as the increased demand by commercial users for pre-existing products, approximately 95% of the Company's sales in fiscal 1997 were derived from commercial applications. The remaining sales (approximately 5%) were comprised of sales made to the United States government (particularly the armed forces) and prime defense contractors.
The emergence of the wireless telecommunications field continues to provide the Company with many opportunities. Frost and Sullivan, in a July 1994 report, projected that the US communications test equipment market would reach $1.3 billion by the year 2000. In 1997, the Company increased its sales by 21% due to continued expansion into the wireless industry. The Company has combined its expertise in noise generation with sophisticated hardware and software to provide versatile and powerful test equipment solutions for various wireless applications. The Company's commitment to educating its market as to the advantages of its products continues to be paramount in achieving growth. All of the Company's products are considered test devices; therefore management considers the Company to operate within a single segment.
PRODUCTS
Since 1993, the Company has introduced 19 test instruments specifically designed to serve the wireless telecommunications market. These products perform a variety of tests which are required for performance verification during the development of wireless communication equipment. They are also used to monitor the performance of installed equipment. These state-of-the-art instruments simplify complex measurements and perform analysis of the devices being tested. Innovative and user-friendly software combined with powerful hardware are used to create highly accurate, versatile products.
In 1997, the Company continued the expansion of its product line with the introduction of CATS(TM) (CDMA Automated Test Software), a testing control and interface management software solution. This software works in conjunction with the Company's test stations to provide complete and accurate testing of CDMA-based mobile phones and base stations. The Company's hardware and CATS(TM) software were selected by the CTIA (Cellular Telecommunications Industry Association) and the CDMA Development Group (CDG) for its
certification program. The Company's equipment will be used to determine whether CDMA handsets conform to industry standards.
The Company's products can perform many different testing functions. For example, one test is the emulation of multipath fading effects on a wireless communication link. This test mimics the real world condition of a temporary fading and/or loss of signals as a mobile receiver (i.e. car phone) moves through the environment. The user can create multiple scenarios depending on geographical conditions (i.e. city vs. rural landscape) and determine how the device under test will perform.
In digital communications systems, bit error rate testing is another common application of the Company's technology. Noise is added to a signal which is applied to a receiver and the performance of the receiver is then analyzed. The noise added by the Company's instrument is measurable and repeatable which allows the user to determine the performance of the device or devices being tested. The user also has the ability to compare similar devices to determine which product is better suited to a particular application. Other tests that can be performed are distortion measurements of transmitters and receivers which operate in high density signal environments, noise figure measurements, and generation of precision carrier to noise ratios. The selling prices for individual products range from $18,000 to over $100,000 per unit with most sales occurring between $25,000 to $70,000 per unit. Selling prices for complete test stations approximate $200,000.
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. 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.
The Company's noise source products are widely used in radar systems as part of built-in test equipment to continuously monitor the radar receiver. The Company has also continually experienced sales growth in the area of 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'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. 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. Prices of noise source devices range from approximately $200 to $50,000 per unit, with most sales occurring between $700 and $2,500 per unit.
The Company's products have extended useful lives but are generally recalibrated every year to ensure their accuracy. The Company provides recalibration services
for a fee to its domestic and international customers and also calibrates test equipment manufactured by others. Although such services accounted for less than 2% of fiscal 1997 sales, the Company feels this area will continue to grow as more products are sold into the global marketplace.
MARKETING AND SALES
The Company's in-house marketing and sales force currently consists of 10 individuals. The Company attempts to promote 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.
The Company's products are sold globally through its in-house sales people and by over thirty non-exclusive manufacturers' representatives. Generally, representatives do not stock inventories of the Company's products. Manufacturers' representatives accounted for an aggregate of 49% and 42% of the Company's sales for the years ended December 31, 1997 and 1996, respectively. For the years ended December 31, 1997 and 1996, one of the Company's representatives accounted for approximately 18% and 15% of sales, respectively. 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 run for one year renewable periods 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. One of its representatives oversees and supervises its international sales through foreign representatives. 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, the Company has sold its products to more than 1,000 customers. The Company has experienced continued growth in its commercial business, and will continue to offer additional products to this market. The Company currently sells the majority of its products to various commercial users in the wireless communications field. Other sales are made to large defense contractors which incorporate them into their products for sale to the U.S. and foreign governments, multi-national concerns and Fortune 500 companies. In fiscal 1997, approximately 95% of sales were derived from commercial applications. The remaining sales were comprised of government and military applications.
For fiscal 1997, no one customer accounted for more than 10% 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.
Export sales for Fiscal 1997, were $8,356,000 or approximately 31% of total sales. These sales were made predominantly to customers in Asia ($4,853,000 or 18%) and Europe ($3,002,000 or 11%). 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. See Note 4 of Notes to the Financial Statements.
RESEARCH AND DEVELOPMENT
In 1998, the Company opened an office in San Diego, California to expand its research and development efforts. The Company maintains an engineering staff (24 individuals as of February 2, 1998, including 2 located in the Company's San Diego facility) 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 $2,468,000 and $1,653,000 for the years ended December 31, 1997 and 1996, respectively. See Note 1 of Notes to the Financial Statements.
The Company intends to continue and increase its research and development activities and considers these efforts to be vital to its future business expansion and success.
COMPETITION
With regard to its products, the Company competes against many companies which utilize similar technology. Some of them are larger and have substantially greater resources in financial, technical and marketing areas than the Company. The Company's competitors include Hewlett Packard, Telecom Analysis Systems and English Electric Valve.
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 $3,000,000 at December 31, 1997 and $5,400,000 at December 31, 1996. It is anticipated that all 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. To date, because of its multiple sources of supply, the Company has experienced only minimal difficulties in obtaining components and materials for its manufacturing and assembly process. 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 1997.
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 does not manufacture nor assemble its products on a continuous mass-production basis. Instead, small lot production techniques are used. The Company also uses external contract manufacturers for routine tasks such as printed circuit board assembly and mechanical assembly. The Company anticipates that its use of contract manufacturers will continue to increase. 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 plant, and it charges its customers a fee for those service items that are not covered by warranty. The Company usually does not offer its customers any formal written service contracts.
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 Company holds no patents nor owns any trademarks. 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.
EMPLOYEES
On February 2, 1998 the Company had 90 full-time employees, including its officers, of whom 44 were engaged in manufacturing and repair services, 12 in administration and financial control, 24 in engineering and research and development, and 10 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.
ITEM 2.
ITEM 2. PROPERTIES
The Company leases a 25,000 square foot facility in Paramus, New Jersey which is used as its principal corporate headquarters and manufacturing plant. In 1998, the Company has leased an additional 600 square foot facility in San Diego, California. See Note 8 of Notes to the Financial Statements.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company knows of no material litigation or proceeding, pending or threatened, to which the Company is or may become a party.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
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. This table has been adjusted to give retroactive effect for the 2-for-1 stock split paid on May 28, 1996.
On February 2, 1998, the closing price of the Common Stock of the Company as reported was $6.19. On February 2, 1998 the Company had 479 stockholders of record.
Quarterly dividends on the Company's Common Stock have been declared since June 1993. The table below details quarterly dividends declared for the past two years. This table has been adjusted to give retroactive effect for the 2-for-1 stock split paid on May 28, 1996.
It is the Company's present intention to maintain a quarterly dividend policy.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below as of December 31, 1997, 1996, 1995, 1994 and 1993 were derived from the Company's financial statements. 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.
- --------------------
(1) Common share data has been adjusted to reflect the 2-for-1, 3-for-2 and 2-for-1 stock splits paid on May 28, 1996, July 18, 1995 and November 28, 1994, respectively. Dividends paid in 1993 include a special dividend of $.03 per share paid in February, 1993.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 discussion should be read in conjunction with the financial statements and notes thereto included elsewhere herein.
This report contains forward-looking statements and information that is based on management's beliefs and assumptions, as well as information currently available to management. When used in this document, the words "anticipate," "estimate," "expect," "intend," and similar expressions are intended to identify forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or expected. Among the key factors that may have a direct bearing on the Company's operating results are fluctuations in the global economy, the degree and nature of competition, the risk of delay in product development and release dates and acceptance of, and demand for, the Company's products.
RESULTS OF CONTINUING OPERATIONS YEAR ENDED DECEMBER 31, 1997 COMPARED TO 1996
Net sales for the year ended December 31, 1997 were $27,266,649 as compared to $22,463,029 for 1996, an increase of $4,803,620 or 21.4%. This volume increase is the result of the continued growth of commercial applications of the Company's products of which the most notable are the sales of the Company's wireless telecommunications instruments. Approximately 95% of the Company's revenues are derived from commercial applications of its products. The remaining 5% of sales consist of products sold for government and military applications.
The Company's gross profit on net sales for the year ended December 31, 1997 was $19,142,323 or 70.2% as compared to $16,624,799 or 74.0% as reported in the previous year. Variations in gross profit are attributed to an increase in labor costs due to the hiring of additional personnel to support the Company's expanding product line and other associated costs such as factory maintenance and depreciation due to its expanding workforce and larger facility. In addition, 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, 1997 were $7,101,048 or 26.0% of net sales as compared to $5,356,260 or 23.8% of net sales for the year ended December 31, 1996. For the year ended December 31, 1997 as compared to the prior year, operating expenses increased in dollars by $1,744,788. Approximately 47% of this increase is due to increased expenditures for research and development of new products. An additional 25% of this increase is attributable to greater advertising, promotional and selling expenses incurred to generate sales and to expand customer awareness of the Company's wireless telecommunications instruments. Additional personnel, wage increases and bonuses accounted for 8% of the increase in dollars for 1997. Also, increased rent expense for the Company's larger facility accounted for 6% of the dollar increase from 1996.
Interest, dividend and other income increased by $77,126 for the year ended December 31, 1997. The increase was due to a larger average investment balance during 1997.
Net income increased to $7,944,873 or $.45 per share on a diluted basis, for the year ended December 31, 1997 as compared to $7,450,457 or $.42 per share on a diluted basis, for the year ended December 31, 1996. The explanation of this increase can be derived from the operational analysis provided above.
RESULTS OF CONTINUING OPERATIONS YEAR ENDED DECEMBER 31, 1996 COMPARED TO 1995
Net sales for the year ended December 31, 1996 were $22,463,029 as compared to $16,040,537 for 1995, an increase of $6,422,492 or 40.0%. This volume increase is the result of the continued growth of commercial applications of the Company's products of which the most notable are the sales of the Company's wireless telecommunications instruments. Approximately 96% of the Company's revenues are derived from commercial applications of its products. The remaining 4% of sales consist of products sold for government and military applications.
The Company's gross profit on net sales for the year ended December 31, 1996 was $16,624,799 or 74.0% as compared to $11,797,603 or 73.5% as reported in the previous year. The Company rigidly monitors costs associated with material acquisition, manufacturing and production. Gross profit margins can vary based upon the mix of product sales.
Operating expenses for the year ended December 31, 1996 were $5,356,260 or 23.8% of net sales as compared to $4,074,619 or 25.4% of net sales for the year ended December 31, 1995. For the year ended December 31, 1996 as compared to prior year, operating expenses increased in dollars by $1,281,641. Approximately 34% of this increase is attributable to greater advertising, promotional and selling expenses incurred to generate sales and to expand customer awareness of the Company's wireless telecommunications instruments. An additional 32% of this increase is due to increased expenditures for research and development of new products. Bonuses, increased salaries and additional personnel accounted for 19% of the increase in dollars for 1996. Operating expenses when viewed as a percentage of net sales have declined by 1.6% due to the fixed nature of many of these costs and the economies of scale resulting from the increase in sales volume.
Interest, dividend and other income decreased by $40,879 for the year ended December 31, 1996. The decrease was due to the recognition in 1995 of a gain of $101,298 on the sale of the Company's available-for-sale holdings in a highly liquid mutual fund. The Company's overall investment balance increased in 1996 and an additional $60,419 in interest income was generated in 1996, excluding the effect of the $101,298 gain mentioned above. The increase in the Company's investment balance is due to additional cash generated by the business.
Net income increased to $7,450,457 or $.42 per share on a diluted basis, for the year ended December 31, 1996 as compared to $5,050,708 or $.29 per share on a diluted basis, for the year ended December 31, 1995. The explanation of this increase can be derived from the operational analysis provided above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital has increased by $3,269,352 to $19,452,489 at December 31, 1997, from $16,183,137 at December 31, 1996. At December 31, 1997 the Company had a current ratio of 11.5 to 1, and a ratio of debt to net worth of less than .1 to 1. At December 31, 1996 the Company had a current ratio of 12.7 to 1, and a ratio of debt to net worth of less than .1 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 $4,556,733 in cash for the year ending December 31, 1997 versus $5,255,044 and $2,739,952 in cash flows for the years ending December 31, 1996 and 1995, respectively. Cash provided by operations was primarily due to net income offset by increases in accounts receivable and 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.
Due to the Company's expanding product line, the volume of items and accordingly the total dollar value of inventory has increased. As the Company plans to further expand its product line, inventory is being monitored closely to balance production requirements while maintaining manageable levels of goods on hand.
Net cash used for investing activities were $1,733,068, $756,435 and $326,588 for the years ending December 31, 1997, 1996 and 1995, respectively. Capital expenditures for the Company's increasing product line and workforce were the primary use of funds. In addition, funds were used for premiums on life insurance for certain of the Company's officers and other key employees.
Net cash used for financing activities were $3,316,168, $2,299,346 and $373,682 for the years ending December 31, 1997, 1996 and 1995, respectively. The payment of quarterly cash dividends were the primary use of these funds. The Company also reacquired 20,000 shares of its common stock in the open market during the second quarter of 1997. These cash outlays were partially offset by proceeds from the exercise of stock options. The Company increased its quarterly cash dividend payout by 34% in 1997 and 82% in 1996.
The Company entered into an agreement with its bank which provides for an unsecured line of credit in the amount of $7,000,000 at the bank's prime lending rate. As of December 31, 1997 the Company had no debt outstanding under this line of credit. The line of credit agreement, which was renewed, expires on September 30, 1998.
For details of dividends paid in the years ended December 31, 1997 and 1996 refer to Item 5. It is the Company's present intention to maintain a quarterly dividend policy.
On January 26, 1998, the Company announced the declaration of a quarterly cash dividend of $.05 per share to shareholders of record on March 23, 1998. This cash dividend will be paid on April 1, 1998.
The Company believes that its financial resources from working capital provided by operations and its bank line of credit are adequate to meet its current needs.
IMPACT OF THE YEAR 2000 ISSUE:
The year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could potentially result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in other similar normal business activities. The Company had already planned on upgrading its computer software to increase operational efficiencies and information analysis and will ensure that the new systems properly utilize dates beyond December 31, 1999. The cost of this upgrade project, as it relates to the year 2000 issue, is not expected to have a material effect on the operations of the Company and will be funded through operating cash flows.
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 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in a separate section of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The current directors and executive officers of the Company are as follows:
- -------------------- (1) Member of Stock Option Committee (2) Trustee for Profit Sharing Plan (3) Member of Compensation Committee (4) Member of 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.
Set forth below is a biographical description of each director and executive officer of the Company based on information supplied by each of them.
Dale Sydnor has served as Chairman of the Board since May 1997. He was elected Chief Executive Officer and as a member of the Board of Directors in May 1996 and he has served as the Company's President since July 1995. Mr. Sydnor also held the position of Chief Operating Officer from April 1991 until August 1996. Mr. Sydnor has been associated with the Company since 1988. Mr. Sydnor has a bachelor's degree in Electrical Engineering and has undertaken graduate studies in Business Administration.
Edward Garcia joined the Company in 1990 and has served in various positions including Chief Engineer since 1992. Mr. Garcia was elevated to Vice President of Operations in October 1995 and elected Executive Vice President and Chief Operating Officer in August 1996. He has a bachelor's degree in Electrical Engineering.
Eugene Ferrara, a certified public accountant, has served as the Company's Chief Financial Officer since August 1994. Mr. Ferrara has also served as Executive Vice President since October 1996 and Secretary since July 1997. He joined the Company as Controller in October 1993. Prior to joining the Company, he was employed by Witco Corporation and Coopers & Lybrand. He has a bachelor's degree in Accounting.
Bent Hessen-Schmidt joined the Company in 1988 as an engineer and later served as the Company's sales and marketing manager. Mr. Hessen-Schmidt, was elected to the office of Vice President of Sales and Marketing in May 1996. He has a master's degree in Electrical Engineering.
Inho Alex Kim was elected Vice President of Business Development in 1997. Since joining the Company in January 1995, Mr. Kim has worked in various positions including Business Development Manager and Marketing Manager. Prior to joining the Company, Mr. Kim was Vice President of Marketing at Fibersense, a fiber optic component manufacturer. Mr. Kim has a bachelor's degree in Electrical Engineering from the Massachusetts Institute of Technology and has also obtained master's degrees in both Electrical Engineering and Business Administration.
Dominick Scaringella became a Director of the Company in August 1991. From 1988 to date, he has served as President of Precision Electronics, Inc., a manufacturer of electronics products. Previously, Mr. Scaringella served as a Director and Vice President of MSI Electronics, a manufacturer of semiconductors.
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.
Demir Richard Eden is and has been since its founding in 1979, the President, CEO and the Chairman of Intra Computer, Inc., a manufacturing and engineering consulting company. Mr. Eden has a Master of Science degree in Electronics and Business Administration from Istanbul Technical University as well as an MS in Computer Science from New York Polytechnic University. Mr. Eden became a director of the Company in May 1993.
Franklin H. Blecher, Ph.D. became a director of the Company in November 1994. In a distinguished 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 Past Chairman of the Engineering Foundation.
The information relating to compliance with Section 16(a) of the Exchange Act will be set forth in the Company's proxy statement to be filed with the Securities and Exchange Commission within 120 days of the Company's 1997 year end and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item will be set forth in the Company's proxy statement to be filed with the Securities and Exchange Commission within 120 days of the Company's 1997 year end and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item will be set forth in the Company's proxy statement to be filed with the Securities and Exchange Commission within 120 days of the Company's 1997 year end and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Report of Independent Auditors Consolidated Balance Sheets as of December 31, 1997 and 1996 Consolidated Statements of Operations for the Three Years in the Period ended December 31, 1997 Consolidated Statements of Changes in Shareholders' Equity for the Three Years in the Period ended December 31, 1997 Consolidated Statements of Cash Flows for the Three Years in the Period ended December 31, 1997 Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
All 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* 3.2 -- Amended and Restated By-laws* 3.3 -- Amendment to the Certificate of Incorporation*** 3.4 -- Amendment to the Certificate of Incorporation**** 4.2 -- Form of Stock Certificate* 10.3 -- Summary Plan Description of Profit Sharing Plan of the Registrant* 10.4 -- Incentive Stock Option Plan of the Registrant and related agreement* 10.4a -- Amendment to Registrant's Incentive Stock Option Plan and related agreement**** 10.7 -- Form of Manufacturers Representative Agreement* 10.11 -- Credit Agreement with Chemical Bank dated August 10, 1992** 10.11a -- Amendment to Credit Agreement with Chemical Bank**** 10.11b -- Amendment to Credit Agreement with Chase Manhattan Bank***** 10.11c -- Amendment to Credit Agreement with Chase Manhattan Bank 10.12 -- Lease between the Registrant and Paramus Parkway Building Associates***** 11.1 -- Computation of Per Share Earnings 23.0 -- Consent of Independent Auditors (Lazar Levine & Felix LLP) 27.0 -- Financial Data Schedule (EDGAR version only) - -------------------- * These exhibits were filed as exhibits to the Company's registration statement on Form S-18 (File No. 33-42468-NY) and are incorporated herein by reference. ** Filed as Exhibits to the Company's Annual Report on Form 10-K for the year ended December 1992. *** Filed as Exhibits to the Company's Annual Report on Form 10-K for the year ended December 1994. **** Filed as Exhibits to the Company's Annual Report on Form 10-K for the year ended December 1995. ***** Filed as Exhibits to the Company's Annual Report on Form 10-K for the year ended December 1996. (b) Reports on Form 8-K -- None (c) See Item 14(a)(3), above. (d) See Item 14(a)(2), above.
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: February 12, 1998 By: /s/ Dale Sydnor ----------------------------------- Dale Sydnor, Chairman of the Board, 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.
/s/ Dale Sydnor February 12, 1998 - ----------------------------------------- Dale Sydnor, Chairman of the Board, Chief Executive Officer
/s/ Eugene Ferrara February 12, 1998 - ----------------------------------------- Eugene Ferrara, Chief Financial Officer and Secretary
/s/ Dominick Scaringella February 12, 1998 - ----------------------------------------- Dominick Scaringella, Director
/s/ John Wilchek February 12, 1998 - ----------------------------------------- John Wilchek, Director
/s/ Demir Richard Eden February 12, 1998 - ----------------------------------------- Demir Richard Eden, Director
/s/ Franklin H. Blecher February 12, 1998 - ----------------------------------------- Franklin H. Blecher, Director
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- WIRELESS TELECOM GROUP, INC.
PAGE -----
Independent Auditors' Report F - 1
Consolidated Financial Statements:
Balance Sheets as of December 31, 1997 and 1996 F - 2
Statements of Operations for the Three Years in the Period Ended December 31, 1997 F - 3
Statements of Changes in Shareholders' Equity for the Three Years in the Period Ended December 31, 1997 F - 4
Statements of Cash Flows for the Three Years in the Period Ended December 31, 1997 F - 5
Notes to Consolidated Financial Statements F - 6
INDEPENDENT AUDITORS' REPORT
To The Board of Directors Wireless Telecom Group, Inc. Paramus, New Jersey
We have audited the accompanying consolidated financial statements of Wireless Telecom Group, Inc. as listed in the Index under Item 14 in this Form 10-K. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit 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, 1997 and 1996 and the results of its operations and its cash flows for the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.
/s/ Lazar levine & FElix LLP ---------------------------- LAZAR LEVINE & FELIX LLP
New York, New York January 26, 1998
CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- WIRELESS TELECOM GROUP, INC.
- ASSETS -
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS - -------------------------------------------------------------------------------- WIRELESS TELECOM GROUP, INC.
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY - -------------------------------------------------------------------------------- WIRELESS TELECOM GROUP, INC.
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- WIRELESS TELECOM GROUP, INC.
The accompanying notes are an integral part of these financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- WIRELESS TELECOM GROUP, INC.
1. DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION:
Wireless Telecom Group, Inc. and Subsidiary (the Company), manufactures a wide variety of test equipment for wireless telecommunications which it sells to customers throughout the United States and through its foreign sales corporation to certain foreign customers. The consolidated financial statements include the accounts of Wireless Telecom Group, Inc. and its wholly-owned subsidiary, WTG Foreign Sales Corporation. All intercompany balances and transactions have been eliminated. The Company's accounting policies are in accordance with generally accepted accounting principles. Outlined below are those policies which are considered particularly significant.
REVENUE RECOGNITION:
The Company recognizes revenue from all product sales at the time of shipment.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments with an original 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, 1997 and 1996, the Company had approximately $6,000,000 and $5,000,000, respectively invested in commercial paper.
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 one financial institution. The Company performs periodic evaluations of the relative credit rating of this institution 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, 1997 primarily all of the Company's receivables do pertain to the wireless telecommunications industry.
The carrying amounts of cash and cash equivalents, trade receivables, other current assets and accounts payable approximate fair value.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- WIRELESS TELECOM GROUP, INC.
1. DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
INVESTMENTS IN EQUITY SECURITIES:
Effective January 1, 1994, the Company adopted the provisions of SFAS 115 Accounting for Certain Investments in Debt and Equity Securities which requires greater disclosure of these instruments including the methods to be used in determining fair value, and when to record unrealized holding gains and losses in earnings or in a separate component of shareholders' equity.
In October 1995, the Company sold its entire available-for-sale holdings which were invested in a highly liquid mutual fund. The Company received proceeds in the amount of $2,519,973 and realized a gain of $101,298.
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:
FIXED ASSETS AND DEPRECIATION:
Fixed assets are reflected at cost. Depreciation and amortization are provided on a straight-line basis over the following useful lives:
Machinery and equipment 8 years Furniture and fixtures 5 years Transportation equipment 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.
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, 1997, 1996 and 1995 were $2,467,879, $1,653,224, and $1,248,726, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- WIRELESS TELECOM GROUP, INC.
1. DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
INCOME TAXES:
The Company has adopted 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 difference 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.
INCOME PER COMMON SHARE:
The Company has adopted SFAS 128 "Earnings Per Share" ("SFAS 128"), which has 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. Prior period earnings per share data has been restated in accordance with Statement 128. 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.
USE OF ESTIMATES:
In preparing financial statements in accordance with generally accepted accounting principles, 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.
ADVERTISING COSTS:
Advertising expenses are charged to operations during the year in which they are incurred, and aggregated $665,573, $537,300 and $406,665 for the years ended December 31, 1997, 1996 and 1995, respectively.
POSTRETIREMENT BENEFITS:
During 1997, the Company provided certain health care and life insurance benefits for its former Chairman and CEO, who retired during the year. The costs incurred for health benefits were charged to operations while the insurance benefits are reflected as a corporate asset for the cash surrender value of the life insurance.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- WIRELESS TELECOM GROUP, INC.
1. DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
POSTRETIREMENT BENEFITS (CONTINUED):
The Company does not currently provide any other Postretirement benefits. However, the Company will utilize the provisions of SFAS 106 "Employers' Accounting for Postretirement Benefits Other than Pensions", if such a plan is established.
NEW ACCOUNTING PRONOUNCEMENTS:
SFAS 130 "Reporting Comprehensive Income" is effective for years beginning after December 15, 1997 and early adoption is permitted. This statement prescribes standards for reporting comprehensive income and its components. Since the Company currently does not have any items of other comprehensive income, a statement of comprehensive income is not yet required.
SFAS 131 "Disclosures About Segments of an Enterprise and Related Information", is effective for years beginning after December 15, 1997 and early adoption is encouraged. The Company does not presently believe that it operates in more than one identifiable segment.
See also Income Per Common Share, above.
IMPACT OF THE YEAR 2000 ISSUE:
The year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could potentially result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in other similar normal business activities. The Company had already planned on upgrading its computer software to increase operational efficiencies and information analysis and will ensure that the new systems properly utilize dates beyond December 31, 1999. The cost of this upgrade project, as it relates to the year 2000 issue, is not expected to have a material effect on the operations of the Company and will be funded through operating cash flows.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- WIRELESS TELECOM GROUP, INC.
2. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following (see also Note 1):
3. SHAREHOLDERS' EQUITY:
On October 27, 1995, the shareholders approved a proposal to amend the Company's Certificate of Incorporation to increase its number of authorized Common Shares to 30,000,000.
On May 13, 1996, the Company announced the declaration of a two-for-one common stock split. The split was effective for shareholders of record on May 22, 1996 and was paid by May 28, 1996. On June 12, 1995, the Company announced the declaration of a three-for-two common stock split. The split was effective for shareholders of record on July 5, 1995 and was paid by July 18, 1995. All share and per share data, as appropriate, reflect the effects of these splits.
The Company has paid quarterly cash dividends aggregating $3,489,646, $2,602,215 and $1,430,755 for the years ending December 31, 1997, 1996 and 1995, respectively.
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, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation" requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
The 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 be granted 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 5 years from the date of grant.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- WIRELESS TELECOM GROUP, INC.
3. SHAREHOLDERS' EQUITY (CONTINUED):
Pro forma information regarding net income and earnings per share is required by 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
value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1997, 1996 and 1995, respectively: risk-free interest rates of 6.1%, 6.8% and 8.4%; dividend yields of 2.6%, 1.8% and 1.8%; volatility factors of the expected market price of the Company's common stock of 65%, 65% and 69%; and a weighted-average expected life of the options of 7 years.
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:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- WIRELESS TELECOM GROUP, INC.
3. SHAREHOLDERS' EQUITY (CONTINUED):
A summary of stock activity, and related information for the years ended December 31, follows:
Exercise prices for options outstanding as of December 31, 1997 ranged from $.74 to $11.63. The weighted-average remaining contractual life of these options is 8 years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- WIRELESS TELECOM GROUP, INC.
4. OPERATIONAL INFORMATION AND EXPORT SALES:
The Company's operations are in a single industry segment and involve the manufacture of various types of test equipment. All of the Company's assets are domestic.
For the years ended December 31, 1997, 1996 and 1995, 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, 1997, 1996 and 1995, one representative accounted for 18%, 15% and 10% of sales, respectively.
Export sales, which are all transacted in US dollars, were approximately 31%, 35% and 28% of total sales for the years ended December 31, 1997, 1996 and 1995, respectively. Export sales by geographic location are as follows:
5. 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. The Company's contributions to the plan are discretionary but may not exceed 6% of participants' compensation. Contributions to the plan for the years ended December 31, 1997, 1996 and 1995 aggregated $48,485, $42,013, and $34,810, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- WIRELESS TELECOM GROUP, INC.
6. INCOME TAXES:
The components of income tax expense are as follows (see Note 1):
The components of deferred income taxes are as follows:
The following is a reconciliation of the maximum statutory federal tax rate to the Company's effective tax rate:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- WIRELESS TELECOM GROUP, INC.
7. REVOLVING CREDIT LINE:
The Company has renewed its agreement with its bank which provides for an unsecured line of credit in the amount of $7,000,000 with interest at the bank's prime rate. As of December 31, 1997, there were no direct borrowings under this agreement. This agreement currently expires on September 30, 1998.
8. COMMITMENTS AND CONTINGENCIES:
The Company provides one year warranties on 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.
The Company currently leases a 25,000 square foot facility in Paramus, New Jersey which is used as its principal corporate headquarters and manufacturing plant. Rent expense for the years ended December 31, 1997, 1996 and 1995 was $378,930, $188,302 and $114,530, respectively. The lease on this facility includes an option for the Company to rent additional space within the complex. The lease on this space terminates in 2006 and the Company has an option to renew this lease for an additional 5 year term. In 1998, the Company has leased an additional 600 square foot facility in San Diego, California.
The Company is also responsible for its proportionate cost of utilities, repairs, taxes and insurance. The future minimum lease payments are shown below:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- WIRELESS TELECOM GROUP, INC.
9. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
The following is a summary of selected quarterly financial data (in thousands, except per share amounts).