The Company accounts for its stock-based compensation in accordance with SFAS No. 123(R) “Share Based Payment” (No. 123R). The statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods and services. It also addresses transactions in which an entity incurs liabilities in exchange for goods and services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. The statement requires a public entity to measure the cost of employee service received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exception). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award (usually the vesting period). The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of these instruments using the modified prospective approach. Due to the Company’s limited history with respect to forfeitures of incentive stock options, there is no estimate of expired or canceled options included in the option valuation.
Revenue from product sales, net of trade discounts and allowances, is recognized once delivery has occurred provided that persuasive evidence of an arrangement exists, the price is fixed or determinable, and collectibility is reasonably assured. Delivery is considered to have occurred when title and risk of loss have transferred to the customer. Sales to international distributors are recognized in the same manner.
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.
Assets and liabilities of the Company’s foreign subsidiaries are translated at period-end exchange rates, while income and expenses are translated at average rates for the period. Translation gains and losses are reported as a component of accumulated other comprehensive income on the statement of shareholders’ equity in accordance with SFAS No. 130, “Reporting Comprehensive Income”.
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. A key consideration in estimating the allowance for doubtful accounts has been, and will continue to be, our customer’s payment history and aging of its accounts receivable balance. For example, each additional 1% allowance required on our accounts receivable would reduce our income before taxes by approximately $94,000.
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. We must continue to be profitable in order to be able to utilize this asset in future periods.
Valuation of long-lived assets
The Company assesses the potential impairment of long-lived tangible and intangible assets, subject to amortization, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. These assets, other than goodwill, are reviewed for impairment not less than annually and whenever events or changes in circumstances indicate that the carrying value of any such asset may be impaired. The Company’s management evaluates the recoverability of such assets by estimating future cash flows. If the sum of the undiscounted cash flows, expected to result from the use of the assets and their eventual disposition, is less than the carrying amount of the assets, management will recognize an impairment loss to the extent of the excess of the carrying amount of the assets over the fair value of the assets.
SFAS No. 142 requires that the Company perform an assessment of whether there is an indication that goodwill is impaired on an annual basis unless events or circumstances warrant a more frequent assessment. The impairment assessment involves, among other things, an estimation of the fair value of the reporting unit based on the discounted cash flow methodology. Significant assumptions used in our analysis include annual revenue growth rates from 12% to 15% and a discount rate of approximately 15%. If the assessment indicates that the fair value is less than the carrying value, then the goodwill would be subject to an impairment loss adjustment.
If the impairment review of goodwill, intangible assets subject to amortization, and other long-lived assets differ significantly from actual results, it could have a material adverse effect on the Company’s results of operations and financial condition. For example, at December 31, 2007 a 1% impairment adjustment on goodwill and other intangibles would reduce income before taxes by approximately $240,000 and $116,000, respectively.
Results Of Operations
Year Ended December 31, 2007 Compared to 2006
Net sales for the year ended December 31, 2007 were $56,602,050 as compared to $53,763,249 for the year ended 2006, an increase of $2,838,801 or 5.3%. This increase was primarily the result of continued strong demand for our Willtek mobile terminal test, Boonton instruments and Microlab in-building wireless products.
The Company’s gross profit on net sales for the year ended December 31, 2007 was $31,537,641 or 55.7% as compared to $29,270,041 or 54.4% as reported in the previous year. Gross profit margins are higher in 2007 than in 2006 primarily due to an increase in sales contribution from Willtek, whose products generally contribute higher gross profit margins within the Company’s product mix, and the result of increased overall demand for the Company’s products. Prices have remained relatively stable along with modest increases in manufacturing labor costs. The Company can experience variations in gross profit based upon the mix of product sales as well as variations due to revenue volume and economies of scale. The Company continues to rigidly monitor costs associated with material acquisition, manufacturing and production.
Operating expenses for the year ended December 31, 2007 were $28,374,952 or 50.1% of net sales as compared to $25,082,645 or 46.7% of net sales for the year ended December 31, 2006. For the year ended December 31, 2007 as compared to the prior year, operating expenses increased in dollars by $3,292,307. Operating expenses are higher due to increased spending in the areas of both research and development and sales and marketing. Furthermore, this increase is consistent with the Company’s strategic plan to focus its spending on these critical operational functions in order for the Company to further expand into the worldwide marketplace and continue to improve top-line revenue growth.
Interest income decreased by $19,297 for the year ended December 31, 2007. This decrease was primarily due to a lower cash investment balance and consequently decreased returns on short-term investments in 2007. Other income increased by $769,457 for the year ended December 31, 2007.This increase was primarily due to a realized gain on foreign currency exchange booked on the Company’s Germany based subsidiary.
Net incomewas $3,456,656 or $0.13 per share on a diluted basis, for the year ended December 31, 2007 as compared to $3,524,111 or $0.14 per share on a diluted basis, for the year ended December 31, 2006, a decrease of $67,455 or 1.9%. The decrease was primarily due to the analysis mentioned above.
17
Liquidity and Capital Resources
The Company’s working capital has increased by $3,792,950 to $25,738,738 at December 31, 2007, from $21,945,788 at December 31, 2006. At December 31, 2007, the Company had a current ratio of 4.7 to 1, and a ratio of debt to tangible net worth of .7 to 1. At December 31, 2006, the Company had a current ratio of 2.6 to 1, and a ratio of debt to tangible net worth of 1.3 to 1.
Operating activities used $209,810 in cash for the year ending December 31, 2007. For the year ended December 31, 2006, operating activities provided $1,059,825 in cash flows. For 2007, cash used for operations was primarily due to net income, a non-cash charge for depreciation and amortization, a decrease in accounts receivable, and a non-cash charge for stock compensation expense, partially off-set by a decrease in accounts payable and accrued expenses, an increase in inventory, and a non-cash adjustment for a deferred income tax benefit. For 2006, cash provided by operations was primarily due to net income, a non-cash adjustment for depreciation and amortization, and an increase in accounts payable and accrued expenses, partially off-set by an increase in accounts receivable, an increase in inventories, a decrease in long-term liabilities, and an increase in prepaid expenses and other assets.
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.
Net cash used for investing activities for 2007 amounted to $765,392 compared to $839,328 for the year ending December 31, 2006. For 2007 and 2006, the primary use of cash was for capital expenditures.
Financing activities used $4,457,780 in cash for the year ended December 31, 2007. The primary use of these funds was for payment made to satisfy the note payable due to Investcorp. Net cash provided by financing activities was $1,675,177 for the year ending December 31, 2006. In 2006, the primary source of these funds was from proceeds relating to the sale of the Company’s treasury stock, and increases in notes payable to both a third-party institution and majority shareholder.
Table of Contractual Obligations
| | | | | | Payments Due by Period |
| | | | | | Less than | | | | | | | More than |
| | | Total | | 1 Year | | 1–3 Years | | 4-5 Years | | 5 Years |
| Mortgage | | $ | 2,947,946 | | $ | 54,517 | | $ | 190,517 | | $ | 2,702,912 | | | - |
| Facilities Leases | | | 4,348,263 | | | 1,412,147 | | | 2,848,399 | | | 63,794 | | | 23,923 |
| Bank Note Payable | | | 2,313,631 | | | 192,803 | | | 1,156,815 | | | 771,210 | | | 192,803 |
| Operating/Equipment Leases | | | 392,105 | | | 135,499 | | | 219,948 | | | 36,658 | | | - |
| | $ | 10,001,945 | | $ | 1,794,966 | | $ | 4,415,679 | | $ | 3,574,574 | | $ | 216,726 |
On January 17, 2008, the Board of Directors authorized the repurchase of up to 5% of the Company’s common stock. During the first quarter of 2008, the Company has made purchases from time to time in the open market. The stock repurchase authorization does not have an expiration date and the timing and amount of shares repurchased will be determined by a number of factors including the levels of cash generation from operations, cash requirements for investments, and current share price. The stock repurchase program may be modified or discontinued at any time.
The Company believes that its financial resources from working capital provided by operations are adequate to meet its current needs.
18
Inflation and Seasonality
The Company does not anticipate that inflation will significantly impact its business nor does it believe that its business is seasonal.
RecentAccounting Pronouncements Affecting the Company
In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes”. It also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and it provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective as of the beginning of the first fiscal year beginning after December 15, 2006. The Company adopted the provisions of FIN 48 on January 1, 2007. The Company had no adjustment as a result of the adoption of FIN 48.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements,” or SFAS No. 157, which defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. SFAS No. 157 is effective for the Company as of January 1, 2008. We expect that the financial impact, if any, of the adoption of SFAS No. 157 will not be material on our financial statements upon the initial adoption of SFAS 157.
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — An Amendment of FASB Statements No. 87, 88, 106, and 132(R)”. SFAS 158 requires the Company to fully recognize in its financial statements its obligations associated with defined benefit pension plans, retiree healthcare plans, and other postretirement plans. Specifically, it requires recognition of a liability for a plan’s underfunded or overfunded status within the balance sheet and recognition of changes in the funded status of a plan through comprehensive income in the year in which the changes occur. On December 31, 2006, the Company adopted the recognition and disclosure provisions of SFAS 158. The adoption of this standard in 2006 had the effect of increasing stockholders’ equity by approximately $130,000 as a result of fully recognizing the obligations associated with the Company sponsored defined benefit pension and other postretirement plans.
In February 2007, FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 allows companies to choose to measure many financial instruments and certain other items at fair value. The statement requires that unrealized gains and losses on items for which the fair value option has been elected to be reported in earnings. SFAS No. 159 also amends certain provisions of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, although earlier adoption is permitted. The Company does not expect the adoption of this standard to have a material effect on its financial position or results of operations.
In December 2007, the FASB issued two new statements: (a.) SFAS No. 141 (revised 2007), “Business Combinations”, and (b.) SFAS No. 160 “Non-controlling Interests in Consolidated Financial Statements”. These statements are effective for fiscal years beginning after December 15, 2008 and the application of these standards will improve, simplify and converge internationally the accounting for business combinations and the reporting of non-controlling interests in consolidated financial statements. The Company is in the process of evaluating the impact, if any, on SFAS 141(R) and SFAS 160 and does not anticipate that the adoption of these standards will have any impact on its consolidated financial statements.
19
(a.) SFAS No. 141(R) requires an acquiring entity in a business combination to: (i) recognize all (and only) the assets acquired and the liabilities assumed in the transaction, (ii) establish an acquisition-date fair value as the measurement objective for all assets acquired and the liabilities assumed, and (iii) disclose to investors and other users all of the information they will need to evaluate and understand the nature of, and the financial effect of, the business combination, and (iv) recognize and measure the goodwill acquired in the business combination or a gain from bargain purchase.
(b.) SFAS No. 160 will improve the relevance, comparability and transparency of financial information provided to investors by requiring all entities to: (i) report non-controlling (minority) interests in subsidiaries in the same manner, as equity but separate from the parent’s equity, in consolidated financial statements, (ii) net income attributable to the parent and to the non-controlling interest must be clearly identified and presented on the face of the consolidated statement of operations, and (iii) any changes in the parent’s ownership interest while the parent retains the controlling financial interest in its subsidiary be accounted for consistently.
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The Company’s bank loan and the associated interest expense are not sensitive to changes in the level of interest rates. The Company’s note is interest free through June 2008 and will bear interest at the annual rate of 4% beginning July 2008. The note requires twelve half-yearly payments beginning December 2008 until maturity at June 2014. As a result, the Company is not subject to market risk for changes in interest rates and will not be subjected to increased or decreased interest payments if market rates fluctuate and the Company is in a borrowing mode.
Foreign Exchange Rate Risk
The Company has one foreign subsidiary in Germany. The Company does business in more than seventy countries and currently generates approximately 57% of its revenues from outside of the Americas. The Company’s ability to sell its products in foreign markets may be affected by changes in economic, political or market conditions in the foreign markets in which the Company does business.
The Company’s total assets in its foreign subsidiary was $14.7 million at December 31, 2007, translated into US dollars at the closing exchange rates. The company also acquires certain inventory from foreign suppliers and, as such, faces risk due to adverse movements in foreign currency exchange rates. These risks could have a material impact on the Company’s results in future periods. The potential loss based on end of period balances and prevailing exchange rates resulting from a hypothetical 10% strengthening of the dollar against foreign currencies was not material in the period ended December 31, 2007. The Company does not currently employ any currency derivative instruments, futures contracts or other currency hedging techniques to mitigate its risks in this regard.
Industry Risk
The electronic test and measurement industry is cyclical which can cause significant fluctuations in sales, gross profit margins and profits, from year to year. It is difficult to predict the timing of the changing cycles in the electronic test and measurement industry.
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
None.
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Item 9A.Controls and Procedure
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, as of the end of the period covered by this report, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Act of 1934, as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of the period covered by this report, our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be included in our Securities and Exchange Commission (“SEC”) reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, relating to Wireless Telecom Group, Inc., including our consolidated subsidiaries, and was made known to them by others within those entities, particularly during the period when this report was being prepared.
(b) Management’s Report on Internal Control over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s principal executive officer and principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurances with respect to financial statement preparation and presentation. Additionally, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. As of December 31, 2007, management assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria for effective internal control over financial reporting established in “Internal Control — Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Based on the assessment, management determined that the Company maintained effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria. This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in the annual report.
(c) Changes in Internal Controls over Financial Reporting
In connection with the evaluation required by paragraph (d) of Rule 13a-15 under the Exchange Act, there was no change identified in our internal control over financial reporting that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.Other Information
The audit committee periodically conducts a self-evaluation. The results of the most recent self-assessment, which were communicated to the Company’s Board of Directors, concluded the committee performed effectively.
21
PART III
Item 10.Directors and Executive Officers of the Registrant
The information required under this item is set forth in the Company’s Definitive Proxy Statement relating to the Company’s 2008 annual meeting of shareholders to be held on or about June 12, 2008 and is incorporated herein by reference. Such Proxy Statement will be filed with the Commissions within 120 days of the Company’s year-end.
Item 11.Executive Compensation
The information required under this item is set forth in the Company’s Definitive Proxy Statement relating to the Company’s 2008 annual meeting of shareholders to be held on or about June 12, 2008 and is incorporated herein by reference. Such Proxy Statement will be filed with the Commissions within 120 days of the Company’s year-end.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related StockholderMatters
The information required under this item is set forth in the Company’s Definitive Proxy Statement relating to the Company’s 2008 annual meeting of shareholders to be held on or about June 12, 2008 and is incorporated herein by reference. Such Proxy Statement will be filed with the Commissions within 120 days of the Company’s year-end.
Item 13.Certain Relationships and Related Transactions
The information required under this item is set forth in the Company’s Definitive Proxy Statement relating to the Company’s 2008 annual meeting of shareholders to be held on or about June 12, 2008 and is incorporated herein by reference. Such Proxy Statement will be filed with the Commissions within 120 days of the Company’s year-end.
Item 14.Principal Accountant Fees and Services
The information required under this item is set forth in the Company’s Definitive Proxy Statement relating to the Company’s 2008 annual meeting of shareholders to be held on or about June 12, 2008 and is incorporated herein by reference. Such Proxy Statement will be filed with the Commissions within 120 days of the Company’s year-end.
22
PART IV
Item 15.Exhibits and Financial Statement Schedules
| (a) | | (1) | | Report of Independent Registered Public Accounting Firm |
| | | | | Consolidated Balance Sheets as of December 31, 2007 and 2006 |
| | | | | Consolidated Statements of Operations for the Two Years in the Period ended December 31, 2007 |
| | | | | Consolidated Statements of Changes in Shareholders’ Equity for the Two Years in the Period ended December 31, 2007 |
| | | | | Consolidated Statements of Cash Flows for the Two Years in the Period ended December 31, 2007 |
| | | | | 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 | | Wireless Telecom Group, Inc. 2000 Stock Option Plan (4) |
| | | | | | |
| | | | | 10.5 | | Stock Purchase Agreement dated December 21, 2001, by and among the Company, Microlab/FXR and Harry A. Augenblick (5) |
| | | | | | | |
| | 10.6 | | Stock Purchase Agreement made as of December 21, 2001, by and among the Company and Microlab/FXR Employees Stock Ownership Plan (5) |
| | | | | | | |
| | | | | 10.7 | | Amended and Restated Stock Purchase Agreement, dated as of March 29, 2005, among the Company, Willtek Communications GmbH, Investcorp Technology Ventures, L.P., and Damany Holding GmbH (6) |
23
| | 10.8 | | Amended and Restated Loan Agreement, dated March 29, 2005, by and among Investcorp Technology Ventures, L.P., Willtek Communications GmbH and Wireless Telecom Group, Inc. (6) |
| | | |
| 10.9 | | Severance Agreement, dated March 29, 2005, between Wireless Telecom Group, Inc. and Paul Genova (8) |
| | | |
| 10.10 | | Employment and Severance Agreement, dated January 23, 2006, between Wireless Telecom Group, Inc. and James M. Johnson |
| | | |
| 10.11 | | Employment and Severance Agreement, dated February 6, 2007, between Wireless Telecom Group, Inc. and Lawrence Henderson |
| | | |
| 11.1 | | Computation of Per Share Earnings filed herewith |
| | | |
| 14 | | Code of Ethics (7) |
| | | |
| 23.1 | | Consent of Independent Registered Public Accounting Firm (PKF) filed herewith 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 Annex B to the Definitive Proxy Statement of the Company filed on July 17, 2000 and incorporated by reference herein. |
| (5) | | 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. |
| (6) | | Filed as an exhibit to the Company’s Current Report on Form 8-K, dated March 29, 2005, filed with the Commission on March 29, 2005 and incorporated by reference herein. |
| (7) | | Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated by reference herein. |
| (8) | | Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 and incorporated by reference herein. |
24
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 27, 2008 | By: | /s/ James M. Johnson | |
| | | James M. Johnson |
| | | 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/Savio Tung | | | Chairman of the Board | | March27,2008 |
| Savio Tung | | | | | | |
| |
| /s/James M. Johnson | | | Chief Executive Officer and Vice | | March27,2008 |
| James M. Johnson | | Chairman of the Board | | | | |
| |
| /s/Paul Genova | | | President, Chief Financial Officer | | March27,2008 |
| Paul Genova | | | | | | | |
| | | | | | | |
| /s/Henry Bachman | | | Director | | March27,2008 |
| Henry Bachman | | | | | | |
| |
| /s/Rick Mace | | | Director | | March27,2008 |
| Rick Mace | | | | | | |
| |
| /s/Adrian Nemcek | | | Director | | March27,2008 |
| Adrian Nemcek | | | | | | |
| |
| /s/Joseph Garrity | | | Director | | | | |
| Joseph Garrity | | | | March27,2008 |
| |
| s/ Hazem Ben-Gacem | | | Director | | | | |
| Hazem Ben-Gacem | | | | March27,2008 |
25
| INDEX TO CONSOLIDATED FINANCIAL STATEMENTS |
| Wireless Telecom Group, Inc. |
| | Page(s) |
| Report of Independent Registered Public Accounting Firm | | F -2 | |
| | | | |
| Consolidated Financial Statements: | | | |
| | | | |
| Balance Sheets as of December 31, 2007 and 2006 | | F -3 | |
| | | | |
| Statements of Operations for the Two Years | | | |
| Ended December 31, 2007 | | F -4 | |
| | | | |
| Statement of Changes in Shareholders’ Equity for the Two | | | |
| Years Ended December 31, 2007 | | F -5 | |
| | | | |
| Statements of Cash Flows for the Two Years | | | |
| Ended December 31, 2007 | | F -7 | |
| | |
| Notes to Consolidated Financial Statements | | F -8 | |
| | | | |
| Schedule II – Valuation and Qualifying Accounts for the Two Years Ended December 31, 2007 | | F- 23 | |
F – 1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
Wireless Telecom Group, Inc.
Parsippany, NJ
We have audited the accompanying consolidated balance sheets of Wireless Telecom Group, Inc. and Subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations, changes in shareholders’ equity, cash flows and the schedule listed in the accompanying index for the years then ended. These consolidated financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements and the schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting amounts and disclosures in the consolidated financial statements and the schedule. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements and the schedule. 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. and Subsidiaries at December 31, 2007 and 2006 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the schedule presents fairly, in all material respects, the information set forth therein.
| | /s/ PKF |
| |
| | Certified Public Accountants |
| | A Professional Corporation |
| |
| |
| March 25, 2008 | |
| New York, New York | |
F – 2
| CONSOLIDATED BALANCE SHEETS |
| Wireless Telecom Group, Inc. |
| -ASSETS- |
| | December 31, | |
| | 2007 | | | 2006 | |
| CURRENT ASSETS: | | | | | | | |
| Cash and cash equivalents | $ | 10,387,250 | | | $ | 15,683,411 | |
| Accounts receivable - net of allowance for doubtful accounts of | | | | | | | |
| $139,553 and $298,290 for 2007 and 2006, respectively | | 9,273,360 | | | | 9,499,555 | |
| Inventories | | 11,988,610 | | | | 9,733,008 | |
| Deferred income taxes - current | | 121,581 | | | | 121,581 | |
| Prepaid expenses and other current assets | | 961,151 | | | | 1,023,399 | |
| TOTAL CURRENT ASSETS | | 32,731,952 | | | | 36,060,954 | |
| |
| PROPERTY, PLANT AND EQUIPMENT - NET | | 6,470,411 | | | | 6,486,830 | |
| |
| OTHER ASSETS: | | | | | | | |
| Goodwill | | 24,113,284 | | | | 24,113,284 | |
| Other intangible assets – net | | 11,550,000 | | | | 12,730,000 | |
| Deferred income taxes – non-current, net | | 885,894 | | | | 656,363 | |
| Other assets | | 3,942,736 | | | | 3,281,671 | |
| TOTAL OTHER ASSETS | | 40,491,914 | | | | 40,781,318 | |
| |
| TOTAL ASSETS | $ | 79,694,277 | | | $ | 83,329,102 | |
| |
| - LIABILITIES AND SHAREHOLDERS’ EQUITY - |
| |
| CURRENT LIABILITIES: | | | | | | | |
| Accounts payable | $ | 3,234,060 | | | $ | 3,616,094 | |
| Accrued expenses and other current liabilities | | 3,363,578 | | | | 5,514,403 | |
| Note payable - shareholder | | - | | | | 4,621,050 | |
| Current portion of note payable - bank | | 192,803 | | | | - | |
| Income tax payable | | 148,256 | | | | 313,000 | |
| Current portion of mortgage payable | | 54,517 | | | | 50,619 | |
| TOTAL CURRENT LIABILITIES | | 6,993,214 | | | | 14,115,166 | |
| |
| LONG TERM LIABILITIES: | | | | | | | |
| Note payable - bank | | 2,120,828 | | | | 2,073,927 | |
| Deferred income taxes | | 4,066,216 | | | | 4,481,576 | |
| Mortgage payable | | 2,893,429 | | | | 2,947,886 | |
| Deferred rent payable | | 105,640 | | | | 125,009 | |
| Other long-term liabilities | | 1,964,267 | | | | 2,689,787 | |
| TOTAL LONG TERM LIABILITIES | | 11,150,380 | | | | 12,318,185 | |
| |
| 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, | | | | | | | |
| 28,753,861 and 28,653,551 shares issued for 2007 and 2006, respectively, | | | | | | | |
| 25,954,161 and 25,853,851 shares outstanding for 2007 and 2006, respectively | | 287,539 | | | | 286,536 | |
| Additional paid-in capital | | 36,785,310 | | | | 36,070,025 | |
| Retained earnings | | 31,217,993 | | | | 27,761,337 | |
| Accumulated other comprehensive income (loss) | | 328,770 | | | | (153,218 | ) |
| Treasury stock, at cost – 2,799,700 shares | | (7,068,929 | ) | | | (7,068,929 | ) |
| | | 61,550,683 | | | | 56,895,751 | |
| |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 79,694,277 | | | $ | 83,329,102 | |
The accompanying notes are an integral part of these consolidated financial statements.
F – 3
| CONSOLIDATED STATEMENTS OF OPERATIONS |
| Wireless Telecom Group, Inc. |
| | For the Year Ended December 31, | |
| | 2007 | | | 2006 | |
| NET SALES | $ | 56,602,050 | | | $ | 53,763,249 | |
| |
| COST OF SALES | | 25,064,409 | | | | 24,493,208 | |
| |
| GROSS PROFIT | | 31,537,641 | | | | 29,270,041 | |
| |
| OPERATING EXPENSES | | | | | | | |
| Research and development | | 8,758,858 | | | | 6,592,910 | |
| Sales and marketing | | 12,318,501 | | | | 11,233,545 | |
| General and administrative | | 7,297,593 | | | | 7,256,190 | |
| TOTAL OPERATING EXPENSES | | 28,374,952 | | | | 25,082,645 | |
| |
| OPERATING INCOME | | 3,162,689 | | | | 4,187,396 | |
| |
| OTHER (INCOME) EXPENSE | | | | | | | |
| Interest (income) | | (319,777 | ) | | | (339,074 | ) |
| Interest expense | | 224,975 | | | | 228,645 | |
| Other (income) – net | | (884,148 | ) | | | (114,691 | ) |
| TOTAL OTHER (INCOME) | | (978,950 | ) | | | (225,120 | ) |
| |
| INCOME BEFORE PROVISION FOR INCOME TAXES | | 4,141,639 | | | | 4,412,516 | |
| |
| PROVISION FOR INCOME TAXES | | 684,983 | | | | 888,405 | |
| |
| NET INCOME | $ | 3,456,656 | | | $ | 3,524,111 | |
| |
| |
| |
| |
| NET INCOME PER COMMON SHARE: | | | | | | | |
| Basic | $ | 0.13 | | | $ | 0.14 | |
| Diluted | $ | 0.13 | | | $ | 0.14 | |
| |
| |
| |
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | | | | | | | |
| Basic | | 25,896,547 | | | | 25,820,909 | |
| Diluted | | 26,007,367 | | | | 25,919,663 | |
The accompanying notes are an integral part of these consolidated financial statements.
F – 4
| CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY |
| Wireless Telecom Group, Inc. |
| | | | | | | | | Accumulated | | | | |
| | | | | Additional | | | | Other | | | | |
| | | Common | | Paid-in | | Retained | | Comprehensive | | Treasury | | |
| | | Stock | | Capital | | Earnings | | Income(Loss) | | Stock at Cost | | Total |
| BALANCE AT | | | | | | | | | | | | | | | | | | | | | |
| DECEMBER | | | | | | | | | | | | | | | | | | | | | |
| 31, 2005 | | $ | 286,476 | | $ | 35,737,185 | | $ | 24,237,226 | | $ | 52,075 | | | $ | (7,701,429 | ) | | $ | 52,611,533 | |
| |
| |
| Net income | | | - | | | - | | | 3,524,111 | | | - | | | | - | | | | 3,524,111 | |
| |
| Foreign currency | | | | | | | | | | | | | | | | | | | | | |
| translation | | | - | | | - | | | - | | | (335,770 | ) | | | - | | | | (335,770 | ) |
| |
| Amount recognized | | | | | | | | | | | | | | | | | | | | | |
| for SFAS No. | | | | | | | | | | | | | | | | | | | | | |
| 158 | | | - | | | - | | | - | | | 130,477 | | | | - | | | | 130,477 | |
| |
| Comprehensive | | | | | | | | | | | | | | | | | | | | | |
| income | | | - | | | - | | | - | | | - | | | | - | | | | 3,318,818 | |
| |
| Stock options | | | | | | | | | | | | | | | | | | | | | |
| expensed | | | - | | | 287,775 | | | - | | | - | | | | - | | | | 287,775 | |
| |
| Stock options | | | | | | | | | | | | | | | | | | | | | |
| exercised | | | 60 | | | 10,065 | | | - | | | - | | | | - | | | | 10,125 | |
| |
| Sale of treasury | | | | | | | | | | | | | | | | | | | | | |
| stock | | | - | | | 35,000 | | | - | | | - | | | | 632,500 | | | | 667,500 | |
| |
| BALANCE AT | | | | | | | | | | | | | | | | | | | | | |
| DECEMBER 31, | | | | | | | | | | | | | | | | | | | | | |
| 2006 | | $ | 286,536 | | $ | 36,070,025 | | $ | 27,761,337 | | $ | (153,218 | ) | | $ | (7,068,929 | ) | | $ | 56,895,751 | |
F – 5
| CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY |
| Wireless Telecom Group, Inc. |
| | | | | | | | | Accumulated | | | | |
| | | | | Additional | | | | Other | | | | |
| | | Common | | Paid-in | | Retained | | Comprehensive | | Treasury | | |
| | | Stock | | Capital | | Earnings | | Income(Loss) | | Stock at Cost | | Total |
| Net income | | | - | | | - | | | 3,456,656 | | | - | | | | - | | | | 3,456,656 | |
| |
| Foreign currency | | | | | | | | | | | | | | | | | | | | | |
| translation | | | - | | | - | | | - | | | (50,185 | ) | | | - | | | | (50,185 | ) |
| |
| Amount | | | | | | | | | | | | | | | | | | | | | |
| recognized for | | | | | | | | | | | | | | | | | | | | | |
| SFAS No. 158 | | | - | | | - | | | - | | | 532,173 | | | | - | | | | 532,173 | |
| |
| Comprehensive | | | | | | | | | | | | | | | | | | | | | |
| income | | | - | | | - | | | - | | | - | | | | - | | | | 3,938,644 | |
| |
| Stock options | | | | | | | | | | | | | | | | | | | | | |
| expensed | | | - | | | 502,459 | | | - | | | - | | | | - | | | | 502,459 | |
| |
| Stock options | | | | | | | | | | | | | | | | | | | | | |
| exercised | | | 1,003 | | | 212,826 | | | - | | | - | | | | - | | | | 213,829 | |
| |
| BALANCE AT | | | | | | | | | | | | | | | | | | | | | |
| DECEMBER | | | | | | | | | | | | | | | | | | | | | |
| 31, 2007 | | $ | 287,539 | | $ | 36,785,310 | | $ | 31,217,993 | | $ | 328,770 | | | $ | (7,068,929 | ) | | $ | 61,550,683 | |
F – 6
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| Wireless Telecom Group, Inc. |
| |
| | For the Year Ended December 31, | |
| | 2007 | | | 2006 | |
| CASH FLOW FROM OPERATING ACTIVITIES: | | | | | | | |
| Net income | $ | 3,456,656 | | | $ | 3,524,111 | |
| Adjustments to reconcile net income to net cash provided | | | | | | | |
| by operating activities: | | | | | | | |
| Depreciation | | 962,038 | | | | 1,048,334 | |
| Amortization of purchased intangibles – net | | 926,002 | | | | 923,157 | |
| Stock compensation expense | | 502,459 | | | | 287,775 | |
| Deferred rent | | (19,369 | ) | | | (31,931 | ) |
| Deferred income taxes | | (644,891 | ) | | | (319,467 | ) |
| Provision for losses on accounts receivable | | (166,586 | ) | | | (79,253 | ) |
| Changes in assets and liabilities: | | | | | | | |
| Accounts receivable | | 1,102,740 | | | | (1,550,765 | ) |
| Inventory | | (1,930,417 | ) | | | (1,356,258 | ) |
| Income taxes payable | | (120,288 | ) | | | (227,699 | ) |
| Prepaid expenses and other current assets | | (182,158 | ) | | | (717,128 | ) |
| Other long-term liabilities | | (752,007 | ) | | | (1,042,601 | ) |
| Accounts payable and accrued expenses | | (3,343,989 | ) | | | 601,550 | |
| Net cash (used for) provided by operating activities | | (209,810 | ) | | | 1,059,825 | |
| |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | |
| Capital expenditures | | (809,019 | ) | | | (867,116 | ) |
| Proceeds from dispositions of property plant and equipment | | 43,627 | | | | 27,788 | |
| Net cash (used for) investing activities | | (765,392 | ) | | | (839,328 | ) |
| |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | |
| Payments of mortgage note | | (50,559 | ) | | | (46,889 | ) |
| Proceeds from sale of treasury stock | | - | | | | 667,500 | |
| Increase in notes payable | | - | | | | 1,044,441 | |
| Repayment of notes payable | | (4,621,050 | ) | | | - | |
| Proceeds from exercise of stock options | | 213,829 | | | | 10,125 | |
| Net cash (used for) provided by financing activities | | (4,457,780 | ) | | | 1,675,177 | |
| |
| Effect of foreign currency on cash and cash equivalents | | 136,821 | | | | (63,383 | ) |
| |
| NET (DECREASE) INCREASE IN CASH AND CASH | | | | | | | |
| EQUIVALENTS | | (5,296,161 | ) | | | 1,832,291 | |
| |
| Cash and cash equivalents, at beginning of year | | 15,683,411 | | | | 13,851,120 | |
| |
| CASH AND CASH EQUIVALENTS, AT END OF YEAR | $ | 10,387,250 | | | $ | 15,683,411 | |
| |
| SUPPLEMENTAL INFORMATION: | | | | | | | |
| |
| Cash paid during the year for: | | | | | | | |
| Taxes | $ | 1,474,536 | | | $ | 1,345,635 | |
| Interest | $ | 977,980 | | | $ | 233,469 | |
The accompanying notes are an integral part of these consolidated financial statements.
F – 7
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Wireless Telecom Group, Inc. |
NOTE 1 - DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Basis of Presentation:
Wireless Telecom Group, Inc. and Subsidiaries (the Company), develops and manufactures a wide variety of electronic noise sources, testing and measurement instruments and high-power, passive microwave components, which it sells to customers throughout the United States and worldwide through its foreign sales corporation and foreign distributors to commercial and government customers in the electronics industry. The consolidated financial statements include the accounts of Wireless Telecom Group, Inc. and its wholly-owned subsidiaries, Boonton Electronics Corporation, Microlab/FXR, Willtek Communications GmbH, WTG Foreign Sales Corporation and NC Mahwah, Inc. All intercompany transactions are eliminated in consolidation.
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 consolidated 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 withtwo 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, 2007, 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 and accounts payable approximate fair value due to the short-term nature of these instruments. The carrying value of notes and mortgage payable approximate fair value based on their terms which reflect market conditions existing as of December 31, 2007.
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, 2007 and 2006, the Company had approximately $6,890,000 and $12,300,000 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 on a timely basis.
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. Inventory carrying value is net of inventory reserves of $3,277,024 and $3,532,260 for the years ended December 31, 2007 and 2006, respectively.
Inventories consist of:
| | December 31, |
| | 2007 | | 2006 |
| Raw materials | | $ | 6,265,451 | | $ | 4,801,523 |
| Work-in-process | | | 3,274,551 | | | 2,989,838 |
| Finished goods | | | 2,448,608 | | | 1,941,647 |
| | $ | 11,988,610 | | $ | 9,733,008 |
Property, Plant and Equipment:
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 remaining term of the lease and reflect the estimated life of the improvements. Repairs and maintenance are charged to operations as incurred; renewals and betterments are capitalized.
Goodwill:
On July 1, 2005, the Company acquired Willtek Communications GmbH, (see Note 2) 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 value at the date of acquisition while the balance of $22,761,892 was recorded as goodwill. In accordance with Statement of Financial Accounting Standards No. 142, (“SFAS No. 142”) Goodwill and Other Intangible Assets, this goodwill will not be amortized, but will be tested for impairment periodically by management. Management considered a number of factors, including valuations of the future cash flows of the business and concluded that this goodwill was not impaired and consequently no adjustment to goodwill was necessary at December 31, 2007.
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 value at the date of acquisition while the balance of $1,351,392 was recorded as goodwill. In accordance with SFAS No. 142, this goodwill will not be amortized, but will be tested for impairment periodically by management. Management considered a number of factors, including valuations of the future cash flows of the business and concluded that this goodwill was not impaired and consequently no adjustment to goodwill was necessary at December 31, 2007.
F – 9
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Wireless Telecom Group, Inc. |
NOTE 1 - DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
Other Intangible Assets:
Other intangible assets of $11,550,000 at December 31, 2007 consist of developed technology, trade names and trademarks, and customer lists associated with the acquisition of Willtek. This current balance represents the original gross asset amount of $14,500,000 less accumulated amortization of $2,950,000. Amortization expense for 2007 and 2006 was $1,180,000 and $1,180,000, respectively.
Revenue Recognition:
Revenue from product sales, net of trade discounts and allowances, is recognized once delivery has occurred provided that persuasive evidence of an arrangement exists, the price is fixed or determinable, and collectibility is reasonably assured. Delivery is considered to have occurred when title and risk of loss have transferred to the customer. Sales to international distributors are recognized in the same manner.
Research and Development Costs:
Research and development costs are charged to operations when incurred. The amounts charged for the years ended December 31, 2007 and 2006 were $8,758,858 and $6,592,910, respectively.
Advertising Costs:
Advertising expenses are charged to operations during the year in which they are incurred and aggregated $690,130 and $794,978 for the years ended December 31, 2007 and 2006, respectively.
Other Comprehensive Income:
Assets and liabilities of the Company’s foreign subsidiaries are translated at period-end exchange rates, while income and expenses are translated at average rates for the period. Translation gains and losses are reported as a component of accumulated other comprehensive income on the statement of shareholders’ equity in accordance with SFAS No. 130, “Reporting Comprehensive Income”.
During the fiscal years ended December 31, 2007 and 2006, included in other comprehensive income (loss) was an adjustment for employee benefit obligations due to the adoption of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”.
Stock-Based Compensation:
The Company accounts for its stock-based compensation in accordance with SFAS No. 123(R) “Share-Based Payment” (No. 123R). The statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods and services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. The statement requires a public entity to measure the cost of employee service received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exception). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award (usually the vesting period). The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of these instruments using the modified prospective approach. Due to the Company’s limited history with respect to forfeitures of incentive stock options, there is no estimate of expired or canceled options included in the option valuation.
F – 10
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Wireless Telecom Group, Inc. |
NOTE 1 - DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
Income Taxes:
The Company utilizes SFAS No. 109, “Accounting for Income Taxes” (SFAS No. 109) 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 SFAS No. 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 carry-forward by 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:
Basic earnings per share is calculated by dividing income available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is calculated by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period adjusted to reflect potentially dilutive securities. In accordance with SFAS No. 128 “Earnings Per Share” (“SFAS No. 128”), the following table reconciles basic shares outstanding to fully diluted shares outstanding.
| | Years Ended December 31, |
| | 2007 | | 2006 |
| Weighted average number of common shares outstanding — Basic | | 25,896,547 | | 25,820,909 |
| Incremental shares for assumed conversions of stock options | | 110,820 | | 98,754 |
| Weighted average number of common and equivalent shares outstanding-Diluted | | 26,007,367 | | 25,919,663 |
RecentAccounting Pronouncements Affecting the Company:
In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes”. It also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and it provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective as of the beginning of the first fiscal year beginning after December 15, 2006. The Company adopted the provisions of FIN 48 on January 1, 2007. The Company had no adjustment as a result of FIN 48.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements,” or SFAS No. 157, which defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. SFAS No. 157 is effective for the Company as of January 1, 2008. We expect that the financial impact, if any, of the adoption of SFAS No. 157 will not be material on our financial statements upon the initial adoption of SFAS 157.
F – 11
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Wireless Telecom Group, Inc. |
NOTE 1 - DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — An Amendment of FASB Statements No. 87, 88, 106, and 132(R)”. SFAS 158 requires the Company to fully recognize in its financial statements its obligations associated with defined benefit pension plans and other postretirement plans. Specifically, it requires recognition of a liability for a plan’s underfunded or overfunded status within the balance sheet and recognition of changes in the funded status of a plan through comprehensive income in the year in which the changes occur. During the fourth quarter of 2006, the Company adopted the recognition and disclosure provisions of SFAS 158. SFAS No. 158 also prescribes the measurement date of a plan to be the year-end balance sheet date effective for years ending after December 15, 2008. The Company was not affected by adopting the latter component of SFAS No. 158.
In February 2007, FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 allows companies to choose to measure many financial instruments and certain other items at fair value. The statement requires that unrealized gains and losses on items for which the fair value option has been elected to be reported in earnings. SFAS No. 159 also amends certain provisions of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, although earlier adoption is permitted. The Company does not expect the adoption of this standard to have a material effect on its financial position or results of operations.
In December 2007, the FASB issued two new statements: (a.) SFAS No. 141 (revised 2007), Business Combinations, and (b.) No. 160 Non-controlling Interests in Consolidated Financial Statements. These statements are effective for fiscal years beginning after December 15, 2008 and the application of these standards will improve, simplify and converge internationally the accounting for business combinations and the reporting of non-controlling interests in consolidated financial statements. The Company is in the process of evaluating the impact, if any, on SFAS 141(R) and SFAS 160 and does not anticipate that the adoption of these standards will have any impact on its consolidated financial statements.
(a.) SFAS No. 141(R) requires an acquiring entity in a business combination to: (i) recognize all (and only) the assets acquired and the liabilities assumed in the transaction, (ii) establish an acquisition-date fair value as the measurement objective for all assets acquired and the liabilities assumed, and (iii) disclose to investors and other users all of the information they will need to evaluate and understand the nature of, and the financial effect of, the business combination, and , (iv) recognize and measure the goodwill acquired in the business combination or a gain from bargain purchase.
(b.) SFAS No. 160 will improve the relevance, comparability and transparency of financial information provided to investors by requiring all entities to: (i) report non-controlling (minority) interests in subsidiaries in the same manner, as equity but separate from the parent’s equity, in consolidated financial statements, (ii) net income attributable to the parent and to the non-controlling interest must be clearly identified and presented on the face of the consolidated statement of income, and (iii) any changes in the parent’s ownership interest while the parent retains the controlling financial interest in its subsidiary be accounted for consistently.
Reclassifications:
Certain prior years’ information has been reclassified to conform to the current year’s reporting presentation.
F – 12
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Wireless Telecom Group, Inc. |
NOTE 2 - ACQUISITION:
The assets acquired and liabilities assumed in business combinations were recorded on the Company’s Consolidated Balance Sheets as of the respective acquisition date based upon their estimated fair values at such date. The results of operations of businesses acquired by the Company have been included in the Company’s Statements of Operations since their respective date of acquisition. The excess of the purchase price over the estimated fair values of the underlying assets acquired, including identifiable intangible assets, and liabilities assumed was allocated to goodwill, which will be subject to annual impairment review. In certain circumstances, the allocations of the excess purchase price are based upon preliminary estimates and assumptions. Accordingly, the allocations are subject to revision when the Company receives final information, including appraisals and other analyses. Revisions to the fair values, which may be significant, will be recorded by the Company as further adjustments to the purchase price allocations.
On July 1, 2005, the Company acquired all of the outstanding equity of Willtek Communications GmbH, a limited liability corporation organized under the laws of Germany (“Willtek”), in exchange for 8,000,000 shares of WTT’s common stock having an aggregate value of $21,440,000, based on a closing sale price of $2.68 per share of WTT’s common stock on July 1, 2005. Additionally, there was $2,969,572 in closing costs and $1,800,016 of reorganization costs identified in our formal plan for reorganization at the acquisition date. The business combination has been accounted for as a purchase in accordance with SFAS No. 141 allocating the purchase price to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The total purchase price of $26,106,826, net of cash acquired of $102,763 included the closing costs discussed above.
The acquisition was recorded by allocating the cost of the assets acquired, including intangible assets and liabilities assumed, based on estimated fair values at the acquisition date. The excess of the cost of the acquisition over the net of amounts assigned to the fair value of the assets acquired and the liabilities assumed is recorded as goodwill. The valuation of the assets and liabilities has been determined and the purchase price has been allocated as follows:
| Accounts receivable | | $ | 3,279,729 | |
| Inventory | | | 2,895,257 | |
| Other current assets | | | 472,956 | |
| Property, plant and equipment and other long-term assets | | | 2,898,174 | |
| Amortizable intangible assets | | | 14,500,000 | |
| Goodwill | | | 22,761,892 | |
| Accounts payable and accrued liabilities | | | (3,494,282 | ) |
| Short-term and long-term debt | | | (3,703,365 | ) |
| Other long-term liabilities | | | (8,430,535 | ) |
| Deferred taxes – net | | | (5,073,000 | ) |
| Total purchase price – net of cash acquired | | $ | 26,106,826 | |
F – 13
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Wireless Telecom Group, Inc. |
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, consists of the following:
| | December 31, |
| | 2007 | | 2006 |
| Building and improvements | | $ | 4,164,056 | | $ | 4,053,441 |
| Machinery and equipment | | | 9,697,008 | | | 9,129,926 |
| Furniture and fixtures | | | 605,043 | | | 998,483 |
| Transportation equipment | | | 140,693 | | | 164,621 |
| Leasehold improvements | | | 974,255 | | | 1,155,230 |
| | | 15,581,055 | | | 15,501,701 |
| |
| Less: accumulated depreciation | | | 9,810,644 | | | 9,714,871 |
| | | 5,770,411 | | | 5,786,830 |
| Add: land | | | 700,000 | | | 700,000 |
| | $ | 6,470,411 | | $ | 6,486,830 |
Depreciation expense of $962,038 and $1,048,334 was recorded for the years ended December 31, 2007 and 2006 respectively.
NOTE 4 - OTHER ASSETS:
Other assets for 2007 include the costs associated with the cash surrender value of the pension insurance for Willtek Communications GmbH of $1,790,922 and $294,325 relating to a technology license.
Similarly for 2006, other assets include the costs associated with the cash surrender value of the pension insurance for Willtek Communications GmbH of $1,797,295 and $305,829 relating to a technology license.
NOTE 5 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued expenses and other current liabilities consists of the following:
| | December 31, |
| | 2007 | | 2006 |
| Interest | | $ | 128,144 | | $ | 1,321,471 |
| Payroll and related benefits | | | 1,346,940 | | | 1,419,028 |
| VAT payable | | | 365,591 | | | 552,510 |
| Professional fees | | | 103,103 | | | 101,003 |
| Commissions | | | 256,317 | | | 221,517 |
| Goods received not invoiced | | | 170,098 | | | 306,948 |
| Warranty reserve | | | 56,611 | | | 63,418 |
| Other miscellaneous expenses | | | 936,774 | | | 1,528,508 |
| Total | | $ | 3,363,578 | | $ | 5,514,403 |
NOTE 6 - MORTGAGE AND NOTE PAYABLE – LONG TERM:
The Company has a mortgage payable secured by certain properties in the amount of $2,947,946. 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 $54,517, $58,784, $63,386, $68,347 and $73,697 respectively and $2,629,215 thereafter.
F – 14
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Wireless Telecom Group, Inc. |
NOTE 6 - MORTGAGE AND NOTE PAYABLE – LONG TERM (Continued):
During 2005, Willtek Communications GmbH received a bank loan in the amount of $1,505,136, which is recorded in long-term notes payable. The outstanding balance as of December 31, 2007 is $2,313,631. This note is interest free through June 2008 and will bear interest at the annual rate of 4% beginning July 2008. The note requires twelve semi-annual payments beginning December 2008 until maturity at June 2014. The loan proceeds may only be used for research and development projects in Germany.
Maturities of bank loan principal payments for the next five years are $192,803, $385,605, $385,605 $385,605 and $385,605 respectively and $578,408 thereafter.
NOTE 7 - OTHER LONG-TERM LIABILITIES:
Other long-term liabilities consist of the following:
| | December 31, |
| | 2007 | | 2006 |
| Pension provision and similar obligations | | $ | 1,619,538 | | $ | 1,889,796 |
| Deferred rent – acquisition | | | 316,643 | | | 616,643 |
| Other miscellaneous | | | 28,086 | | | 183,348 |
| Total | | $ | 1,964,267 | | $ | 2,689,787 |
NOTE 8 - SHAREHOLDERS’ EQUITY:
The Company suspended its distribution of cash dividends during fiscal year ended December 31, 2006. Therefore, no dividends were paid during the periods ending 2007 and 2006.
During 2000, the stockholders approved the Company’s 2000 Stock Option Plan. The 2000 Plan provides for the grant of Incentive Stock Options (“ISOs”) and Non-Qualified Stock Options (“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. Prior to 2000, the Company had established an Incentive Stock Option Plan under which options to purchase up to 1,750,000 shares of common stock were available to be granted to officers and other key employees.
On July 6, 2006, the Company’s Amended and Restated 2000 Stock Option Plan, which authorizes the granting of options relating to an additional 2,000,000 shares of common stock, was approved by shareholder vote.
All options granted have 10-year terms and vest and become fully exercisable after a maximum of five years from the date of grant. Under the Company’s stock option plans, options may be granted to purchase shares of the Company’s common stock exercisable at prices generally equal to the fair market value on the date of the grant.
In December 2005, the Board of Directors approved the acceleration of the vesting of all unvested stock options granted by the Company. As a result of the vesting acceleration, options to purchase 249,000 shares of the Company's common stock became exercisable immediately including 96,000 held by executive officers, 34,000 held by non-employee directors and 119,000 held by other employees.
F – 15
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Wireless Telecom Group, Inc. |
NOTE 8 - SHAREHOLDERS’ EQUITY (Continued):
A summary of stock option activity, and related information for the years ended December 31, follows:
| | | | | Weighted Average |
| | Options | | Exercise Price |
| Outstanding, December 31, 2005 | | 1,251,630 | | | 2.51 |
| |
| Weighted average fair value of options | | | | | |
| granted during the year | | | | | 1.04 |
| |
| Granted | | 1,305,000 | | | 2.48 |
| Exercised | | (6,000 | ) | | 1.69 |
| Canceled | | (188,733 | ) | | 2.84 |
| Outstanding, December 31, 2006 | | 2,361,897 | | | 2.47 |
| |
| Weighted average fair value of options | | | | | |
| granted during the year | | | | | 0.95 |
| |
| Granted | | 493,000 | | | 2.70 |
| Exercised | | (100,310 | ) | | 2.13 |
| Canceled | | (85,600 | ) | | 2.29 |
| Outstanding, December 31, 2007 | | 2,668,987 | | | 2.53 |
| |
| Options exercisable: | | | | | |
| December 31, 2006 | | 1,056,897 | | | 2.46 |
| December 31, 2007 | | 1,313,070 | | | 2.51 |
The options outstanding and exercisable as of December 31, 2007 are summarized as follows:
| Range of | | Weighted average | | Options | | Options | | Weighted average |
| exercise prices | | exercise price | | Outstanding | | Exercisable | | remaining life |
| $1.69 - $2.25 | | $1.93 | | | 207,000 | | | | 207,000 | | | 3.3 years |
| $2.28 - $3.13 | | $2.58 | | | 2,461,987 | | | | 1,106,070 | | | 6.3 years |
| | | | | 2,668,987 | | | | 1,313,070 | | | |
The unearned compensation related to Company granted incentive stock options as of December 31, 2007 is $1,172,156.
The fair value of options awarded during 2007 was estimated on the date of grant using the Black-Scholes option-pricing model and included the following range of assumptions; dividend yield of 0%, risk-free interest rate of 4.7% to 5.0%, and expected option lives of 4 years. Volatility assumptions ranged from 57% to 58%. The forfeiture rate was assumed to be 0%.
These plans include the Company’s 1995, 2000 and “Amended and Restated” 2000 Stock Option Plans.
F – 16
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Wireless Telecom Group, Inc. |
NOTE 9 - OPERATIONAL INFORMATION AND EXPORT SALES:
Sales:
The Company and its subsidiaries develop and manufacture various types of electronic test equipment and are aggregated into a single operating segment based on similar economic characteristics, products, services, customers, U.S. Government regulatory requirements, manufacturing processes and distribution channels.
For the years ended December 31, 2007 and 2006, no customer accounted for more than 3% 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, 2007 and 2006, no representative accounted for more than 10% of total sales.
Regional Assets and Sales:
The Company, in accordance with SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information”, has disclosed the following segment information:
| | As of December 31, |
| Long-lived assets | | 2007 | | 2006 |
| United States | | $ | 5,365,285 | | $ | 5,686,967 |
| Europe | | | 1,105,126 | | | 799,863 |
| | $ | 6,470,411 | | $ | 6,486,830 |
| |
| | For the Twelve Months |
| | Ended December 31, |
| Revenues by Region | | 2007 | | 2006 |
| Americas | | $ | 24,560,835 | | $ | 25,838,846 |
| Europe, Middle East, Africa (EMEA) | | | 23,356,704 | | | 19,895,845 |
| Asia | | | 8,684,511 | | | 8,028,558 |
| | $ | 56,602,050 | | $ | 53,763,249 |
Purchases
In 2007 and 2006, one third-party supplier accounted for more than 20% and 19% of the Company’s total inventory purchases, respectively.
NOTE 10 - RETIREMENT PLANS:
The Company has a 401(k) profit sharing plan covering all eligible employees. Company contributions to the plan for the years ended December 31, 2007 and 2006 aggregated $344,716 and $257,435, respectively.
The Company also maintains a non-contributory, defined benefit pension plan covering 16 active and 29 former employees of our German subsidiary. The Company uses a December 31 measurement date for its defined benefit pension plan. The accumulated benefit obligation as of 2007 and 2006 was $1,937,842 and $2,225,491, respectively. As of December 31, 2007 and 2006, the pension liability of $1,619,538 and $1,889,796, respectively, was recorded in other long-term liabilities. There were no contributions made to this plan by the Company in 2007 and there are no plans to make any contributions in 2008.
The Company purchased life insurance to cover the actual net present value of the pension obligations. The cash surrender value of these insurance policies amounted to approximately $1,791,000 and $1,797,000 as of December 31, 2007 and 2006, respectively. The amounts are independent of the defined benefit plan and do not constitute assets of the plan.
F – 17
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Wireless Telecom Group, Inc. |
NOTE 10 - RETIREMENT PLANS (Continued):
The funded status of the defined benefit plans is as follows:
| | 2007 | | 2006 |
| Change in projected benefit obligation: | | | | | | | | |
| Beginning of year | | $ | 2,260,259 | | | $ | 2,063,104 | |
| Service cost | | | 38,510 | | | | 48,246 | |
| Interest cost | | | 97,933 | | | | 92,169 | |
| Actuarial (gain) | | | (532,173 | ) | | | (124,143 | ) |
| Benefits paid and expenses | | | (85,678 | ) | | | (55,307 | ) |
| Effect of foreign currency translation | | | 222,966 | | | | 236,190 | |
| Projected benefit obligation at end of year | | $ | 2,001,817 | | | $ | 2,260,259 | |
| |
| Change in fair value of plan assets: | | | | | | | | |
| Beginning of year | | $ | 370,463 | | | $ | 338,214 | |
| Actual return on plan assets | | | 11,542 | | | | (10,802 | ) |
| Employer contribution | | | - | | | | - | |
| Settlement of capital | | | (37,719 | ) | | | - | |
| Effect of foreign currency translation | | | 37,993 | | | | 43,051 | |
| Fair value of plan assets at end of year | | $ | 382,279 | | | $ | 370,463 | |
| |
| | 2007 | | 2006 |
| Excess of projected benefit obligation over fair value of plan | | | | | | | | |
| assets | | $ | 1,619,538 | | | $ | 1,889,796 | |
| Unrecognized gain | | | 665,411 | | | | 130,477 | |
| Accrued pension cost | | $ | 2,284,949 | | | $ | 2,020,273 | |
| |
| Required incremental asset under SFAS No. 158 | | | (665,411 | ) | | | (130,477 | ) |
| Accrued pension cost at end of period | | $ | 1,619,538 | | | $ | 1,889,796 | |
The weighted average assumptions used to determine net pension cost and benefit obligations for the years ended December 31, 2007 and 2006 are as follows:
| | 2007 | | 2006 |
| Discount rate – benefit obligation | | 4.50 | % | | 4.25 | % |
| Discount rate – pension cost | | 4.50 | % | | 4.25 | % |
| Expected long-term return on plan assets | | 3.00 | % | | 3.00 | % |
| Rate of compensation increase (Staff plan only) | | 2.00 | % | | 1.50 | % |
The following table presents the components of net periodic pension cost for the years ended December 31, 2007 and 2006:
| | 2007 | | 2006 |
| Service cost | | $ | 38,510 | | | $ | 48,246 | |
| Interest cost | | | 97,933 | | | | 92,169 | |
| Expected return on plan assets | | | (11,542 | ) | | | 10,802 | |
| Recognized net actuarial (gain) | | | (2,761 | ) | | | (21,605 | ) |
| Net periodic pension expense | | $ | 122,140 | | | $ | 129,612 | |
F – 18
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Wireless Telecom Group, Inc. |
NOTE 10 - RETIREMENT PLANS (Continued):
The investment objectives for the pension plan’s assets are designed to generate returns that will enable the plan to meet its future obligation. The precise amounts for which this obligation will be settled depend on future events. The obligations are estimated using actuarial assumptions, based on the current economic environment. The pension plan’s investment strategies utilize fixed income insurance annuity investments to provide income and to preserve capital. Risks include, among others, the likelihood of the pension plan becoming under funded, therby increasing the pension plan’s dependence on contributions of the Company. Professional advisors manage the pension plan’s assets and performance is evaluated by management and adjusted periodically based on market conditions.
At December 31, 2007 and 2006, plan asset allocations by category were as follows:
Fixed income insurance annuities 100%
The following benefit payments are expected to be paid as follows:
| 2008 | | $87,870 |
| 2009 | | 101,011 |
| 2010 | | 108,641 |
| 2011 | | 111,278 |
| 2012 | | 113,361 |
| 2013-2017 | | 636,661 |
NOTE 11 - INCOME TAXES:
The components of income tax expense (benefit) related to income are as follows:
| | Year Ended December 31, |
| | 2007 | | 2006 |
| Current: | | | | | | | | |
| Federal | | $ | 790,976 | | | $ | 766,263 | |
| State | | | 392,280 | | | | 361,000 | |
| Foreign | | | 49,343 | | | | 3,924 | |
| Deferred: | | | | | | | | |
| Federal | | | (513,116 | ) | | | (219,456 | ) |
| State | | | (34,500 | ) | | | (23,326 | ) |
| | $ | 684,983 | | | $ | 888,405 | |
The following is a reconciliation of the maximum statutory federal tax rate to the Company’s effective tax rate:
| | Year Ended December 31, |
| | 2007 | | 2006 |
| | % of | | % of |
| | Pre Tax | | Pre Tax |
| | Earnings | | Earnings |
| Statutory federal income tax rate | | | 34.0 | % | | | 34.0 | % |
| State income tax net of federal tax benefit | | | 6.3 | | | | 5.1 | |
| Extraterritorial income exclusion | | | - | | | | (3.2 | ) |
| Utilization of net operating loss carry-forward | | | (10.8 | ) | | | (5.9 | ) |
| Valuation allowance | | | (2.8 | ) | | | (0.8 | ) |
| Over/under accrual adjustment | | | (2.2 | ) | | | (6.6 | ) |
| Other, including research and development | | | | | | | | |
| credit | | | (8.0 | ) | | | (2.5 | ) |
| | | 16.5 | % | | | 20.1 | % |
F – 19
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Wireless Telecom Group, Inc. |
NOTE 11 - INCOME TAXES (Continued):
The components of deferred income taxes are as follows:
| | December 31, |
| | 2007 | | 2006 |
| Deferred tax assets: | | | | | | | | |
| Uniform capitalization of inventory costs for tax purposes | | $ | 44,070 | | | $ | 110,809 | |
| Allowances for doubtful accounts | | | 32,191 | | | | 80,033 | |
| Accrued bonus’ | | | 139,735 | | | | - | |
| Tax effect of goodwill | | | 191,884 | | | | 294,588 | |
| Book depreciation over tax | | | 115,795 | | | | 47,780 | |
| Net operating loss carryforward | | | 6,834,028 | | | | 6,333,463 | |
| Other | | | - | | | | (24,703 | ) |
| | | 7,357,703 | | | | 6,841,970 | |
| Valuation allowance for deferred tax assets | | | (6,350,228 | ) | | | (6,064,026 | ) |
| | $ | 1,007,475 | | | $ | 777,944 | |
| |
| Deferred tax liability due to acquisition | | $ | 4,066,216 | | | $ | 4,481,576 | |
The Company has a domestic net operating loss carryforward at December 31, 2007 of approximately $1,800,000 which expires in 2013. The Company also has a foreign net operating loss carryforward at December 31, 2007 of approximately $19,800,000 which has no expiration.
Realization of the Company’s deferred tax assets is dependent upon the Company generating sufficient taxable income in the appropriate tax jurisdictions in future years to obtain benefit from the reversal of net deductible temporary differences and from utilization of net operating losses and tax credit carryforwards. The Company has recorded a valuation allowance due to the uncertainty related to the realization of certain deferred tax assets existing at December 31, 2007. The amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income are changed. Management believes that is more likely than not that the Company will realize the benefits of its deferred tax assets, net of valuation allowances as of December 31, 2007.
The Company files income tax returns in the U.S. (federal and various states), German and French taxing jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal and state tax examinations in its major tax jurisdictions for periods before 2005. The Company is no longer subject to tax examinations in Germany and France for periods before 2002.
The Company does not have any significant unrecognized tax benefits and does not anticipate significant increase or decrease in unrecognized tax benefits within the next twelve months. Amounts recognized for income tax related interest and penalties as a component of the provision for income taxes are immaterial for the years ended December 31, 2007 and 2006.
NOTE 12 - 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.
F – 20
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Wireless Telecom Group, Inc. |
NOTE 12 - 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 and can be renewed for one five-year period at fair market value to be determined at term expiration.
Additionally, the Company leases a 36,000 square foot facility located in Ismaning, Germany, which is currently being used as Willtek’s headquarters and manufacturing plant. The lease terminates on December 31, 2010 and can be renewed for two five-year periods twelve months prior to the end of the expiring term.
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:
| 2008 | | | 1,412,147 |
| 2009 | | | 1,225,451 |
| 2010 | | | 1,255,918 |
| 2011 | | | 367,030 |
| 2012 | | | 31,897 |
| Thereafter | | | 55,820 |
| | $ | 4,348,263 |
Rent expense for the years ended December 31, 2007 and 2006 was $1,372,598 and $1,404,766, 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. The Company leases certain property to an unrelated third party. This lease, which terminates in 2013, provides for annual rental income of $385,992 throughout the lease term. The current tenant has an exclusive option to purchase the property, at a predetermined purchase price of approximately $3,500,000, up through August 1, 2012 during the lease term.
The Company leases certain equipment under operating lease arrangements. These operating leases expire in various years through 2012. All leases may be renewed at the end of their respective leasing periods. Future payments consist of the following at December 31, 2007:
| 2008 | | $ | 135,499 |
| 2009 | | | 73,316 |
| 2010 | | | 73,316 |
| 2011 | | | 73,316 |
| 2012 | | | 36,658 |
| | $ | 392,105 |
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 owner would not prevail in any lawsuit filed due to the imposition by law of the statute of limitations.
F – 21
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Wireless Telecom Group, Inc. |
NOTE 12 - COMMITMENTS AND CONTINGENCIES (Continued):
Costs charged to operations in connection with the water management plan amounted to approximately $200 and $18,000 for the years ended December 31, 2007 and 2006, respectively. The Company estimates the expenditures in this regard for the fiscal year ending December 31, 2008 will amount to approximately $18,000. 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 13 - RELATED PARTY TRANSACTIONS:
The note payable-current amount of $4,621,050 at December 31, 2006 was paid to a shareholder, Investcorp Technology Ventures, on January 3, 2007. The total amount of this payment was for $5,372,464 which included the principal amount stated above plus interest payable on the note of $751,414. This interest payable was recorded in accrued expenses.
NOTE 14 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
The following is a summary of selected quarterly financial data (in thousands, except per share amounts).
| 2007 | | | Quarter |
| | 1st | | 2nd | | 3rd | | 4th |
| Net sales | | $ | 14,129 | | $ | 14,274 | | $ | 13,992 | | $ | 14,207 |
| Gross profit | | | 7,626 | | | 7,962 | | | 7,831 | | | 8,119 |
| Operating income | | | 790 | | | 742 | | | 744 | | | 887 |
| Net income | | | 663 | | | 1,004 | | | 942 | | | 848 |
| Diluted net income per share | | | $.03 | | | $.04 | | | $.04 | | | $.03 |
| |
| 2006 | | | Quarter |
| | 1st | | 2nd | | 3rd | | 4th |
| Net sales | | $ | 13,823 | | $ | 12,155 | | $ | 13,658 | | $ | 14,127 |
| Gross profit | | | 7,542 | | | 6,571 | | | 7,623 | | | 7,534 |
| Operating income | | | 1,152 | | | 494 | | | 1,225 | | | 1,316 |
| Net income | | | 1,016 | | | 190 | | | 1,128 | | | 1,190 |
| Diluted net income per share | | | $.04 | | | $.01 | | | $.04 | | | $.05 |
NOTE 15 - SUBSEQUENT EVENT:
On January 17, 2008 the Board of Directors authorized the repurchase of up to 5% of the Company’s common stock. During the first quarter of 2008, the Company has made purchases from time to time in the open market. The stock repurchase authorization does not have an expiration date and the timing and amount of shares repurchased will be determined by a number of factors including the levels of cash generation from operations, cash requirements for investments, and current share price. The stock repurchase program may be modified or discontinued at any time.
F – 22
WIRELESS TELECOM GROUP, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE TWO YEARS ENDED DECEMBER 31,
Allowance for doubtful accounts:
| | Balance at | | | | | | | | | | | | | |
| | Beginning of | | | | | | | | | Translation | | Balance at |
| | year | | Provisions | | Deductions | | adjustment | | end of year |
| 2007 | | $ | 298,290 | | $ | 160,315 | | $ | (326,901 | ) | | $ | 7,849 | | $ | 139,553 |
| 2006 | | | 377,543 | | | 201,991 | | | (302,036 | ) | | | 20,792 | | | 298,290 |
| | | | | | | | | | | | | | | | | |
Allowance for deferred tax valuation: |
| | | | | | | | | | | | | | | | | |
| | Balance at | | | | | | | | | | | | | |
| | beginning of | | | | | | Translation | | Balance at |
| | year | | Provisions | | Reductions | | adjustment | | end of year |
| 2007 | | $ | 6,064,026 | | $ | - | | $ | (338,798 | ) | | $ | 625,000 | | $ | 6,350,228 |
| 2006 | | | 5,165,121 | | | - | | | (106,095 | ) | | | 1,005,000 | | | 6,064,026 |
| | | | | | | | | | | | | | | | | |
Reserves for inventories: |
| | | | | | | | | | | | | | | | |
| | Balance at | | | | | | | | | | | | | |
| | beginning of | | | | | | | | | Translation | | Balance at |
| | year | | Provisions | | Reductions | | adjustment | | end of year |
| 2007 | | $ | 3,532,260 | | $ | 51,066 | | $ | (553,188 | ) | | $ | 246,886 | | $ | 3,277,024 |
| 2006 | | | 3,429,876 | | | 202,701 | | | (369,206 | ) | | | 268,889 | | | 3,532,260 |
F – 23
