UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________________ TO _________________
COMMISSION FILE NUMBER
1-11916
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WIRELESS TELECOM GROUP, INC.
----------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
New Jersey 22-2582295
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
25 Eastmans Road
Parsippany, New Jersey 07054
ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(973) 386-9696
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Not Applicable
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE
LAST REPORT)
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Number of shares of Common Stock outstanding as of November 10, 2006: 25,854,451
Number of non-affiliated shares of Common Stock outstanding as of November 10,
2006: 19,308,785
WIRELESS TELECOM GROUP, INC.
Table of Contents
PART I. FINANCIAL INFORMATION Page(s)
Item 1 -- Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 2006 (unaudited)
and December 31, 2005 3
Condensed Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 2006 (unaudited) and 2005 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2006 (unaudited) and 2005 (unaudited) 5
Notes to Interim Condensed Consolidated Financial Statements (unaudited) 6 - 11
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 15
Item 3 -- Quantitative and Qualitative Disclosures About Market Risk 15 - 16
Item 4 -- Controls and Procedures 16
PART II. OTHER INFORMATION
Item 1 -- Legal Proceedings 17
Item 1A -- Risk Factors 17
Item 2 -- Unregistered Sales of Equity Securities and Use of Proceeds 17
Item 3 -- Defaults upon Senior Securities 17
Item 4 -- Submission of Matters to a Vote of Security Holders 17
Item 5 -- Other Information 17
Item 6 -- Exhibits 18
Signatures 19
Exhibit Index 20
2
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
WIRELESS TELECOM GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
- ASSETS -
SEPTEMBER 30, DECEMBER 31,
2006 2005
-------------- --------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 15,106,771 $ 13,851,120
Accounts receivable - net of allowance for doubtful accounts of
$298,553 and $377,543 for 2006 and 2005, respectively 8,993,612 7,869,537
Inventories 9,075,731 8,376,750
Deferred income taxes-current 198,266 198,266
Prepaid expenses and other current assets 1,165,682 873,053
-------------- --------------
TOTAL CURRENT ASSETS 34,540,062 31,168,726
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT - NET 6,625,335 6,681,696
-------------- --------------
OTHER ASSETS:
Goodwill 24,156,284 24,066,284
Other intangible assets - net 13,025,000 13,910,000
Deferred income taxes - non-current 782,005 752,256
Cash surrender value of foreign pension insurance and other assets 3,170,713 2,714,888
-------------- --------------
TOTAL OTHER ASSETS 41,134,002 41,443,428
-------------- --------------
TOTAL ASSETS $ 82,299,399 $ 79,293,850
============== ==============
- LIABILITIES AND SHAREHOLDERS' EQUITY -
CURRENT LIABILITIES:
Accounts payable $ 3,519,722 $ 3,655,008
Accrued expenses and other current liabilities 5,572,807 4,873,939
Note payable - shareholder 4,440,800 4,145,400
Income tax payable 524,794 540,699
Current portion of mortgage payable 49,646 46,889
-------------- --------------
TOTAL CURRENT LIABILITIES 14,107,769 13,261,935
-------------- --------------
LONG TERM LIABILITIES:
Notes payable - bank 1,993,031 1,505,136
Deferred income taxes 4,585,416 4,896,936
Mortgage payable 2,960,915 2,998,505
Deferred rent payable 120,290 156,940
Provision for pension liability and other long term liabilities 3,083,670 3,862,865
-------------- --------------
TOTAL LONG TERM LIABILITIES 12,743,322 13,420,382
-------------- --------------
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, 28,653,551
and 28,647,551 shares issued for 2006 and 2005, 25,853,851
and 25,597,851 shares outstanding for 2006 and 2005, respectively 286,536 286,476
Additional paid-in-capital 35,866,765 35,737,185
Retained earnings 26,571,236 24,237,226
Accumulated other comprehensive (loss) income (207,300) 52,075
Treasury stock at cost, 2,799,700 and 3,049,700 shares for 2006
and 2005, respectively (7,068,929) (7,701,429)
-------------- --------------
TOTAL SHAREHOLDERS' EQUITY 55,448,308 52,611,533
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 82,299,399 $ 79,293,850
============== ==============
See accompanying notes
3
WIRELESS TELECOM GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------------ ---------------------------------
2006 2005 2006 2005
------------- ------------- -------------- --------------
NET SALES $ 13,657,988 $ 12,463,164 $ 39,636,017 $ 24,474,017
------------- ------------- -------------- --------------
COSTS AND EXPENSES:
Cost of sales 6,034,742 5,810,587 17,899,902 11,477,014
Operating expenses 6,397,572 6,014,744 18,864,642 9,926,170
Interest (income) (88,512) (57,668) (250,938) (234,365)
Interest expense 56,980 57,912 172,109 174,346
Other expense (income) 14,480 (36,758) (99,226) (145,016)
------------- ------------- -------------- --------------
TOTAL COSTS AND EXPENSES 12,415,262 11,788,817 36,586,489 21,198,149
------------- ------------- -------------- --------------
INCOME BEFORE INCOME TAXES 1,242,726 674,347 3,049,528 3,275,868
PROVISION FOR INCOME TAXES 115,089 50,388 715,518 522,438
------------- ------------- -------------- --------------
NET INCOME $ 1,127,637 $ 623,959 $ 2,334,010 $ 2,753,430
============= ============= ============== ==============
NET INCOME PER COMMON
SHARE:
BASIC $ 0.04 $ 0.02 $ 0.09 $ 0.14
============= ============= ============== ==============
DILUTED $ 0.04 $ 0.02 $ 0.09 $ 0.14
============= ============= ============== ==============
See accompanying notes
4
WIRELESS TELECOM GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months
Ended September 30,
---------------------------------
2006 2005
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,334,010 $ 2,753,430
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 824,334 726,162
Amortization of purchased intangibles 660,000 517,878
Stock compensation expense 84,515 --
Deferred rent (36,650) 24,668
Deferred income taxes (341,269) 31,616
Provision for losses on accounts receivable (78,990) (18,003)
Changes in assets and liabilities, net of effect of acquisition:
(Increase) in accounts receivable (1,045,085) (2,038,471)
(Increase) decrease in inventory (698,981) 470,237
(Increase) in prepaid expenses and other assets (748,453) (79,353)
Increase (decrease) in accounts payable and accrued expenses 563,582 (1,319,750)
(Decrease) in pension liability and other long-term liabilities (779,195) --
(Decrease) in income taxes payable (15,905) (10,394)
-------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 721,913 1,058,020
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (774,492) (540,705)
Proceeds from disposal of property, plant and equipment -- 47,282
Purchase of intangible assets -- (202,130)
Costs associated with acquisition -- (2,000,817)
-------------- --------------
NET CASH (USED FOR) INVESTING ACTIVITIES (774,492) (2,696,370)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of mortgage note (34,833) (32,305)
Proceeds from sale of treasury stock 667,500 --
Dividends paid -- (1,621,361)
Increase in note payable to shareholder 295,400 --
Proceeds from bank loan 487,894 --
(Decrease) from bank overdraft -- (3,525)
Proceeds from exercise of stock options/warrants 10,125 261,945
-------------- --------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 1,426,086 (1,395,246)
-------------- --------------
Foreign exchange rate adjustment (117,856) 4,058
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,255,651 (3,029,538)
Cash and cash equivalents, at beginning of year 13,851,120 15,783,816
-------------- --------------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 15,106,771 $ 12,754,278
============== ==============
SUPPLEMENTAL INFORMATION:
Cash paid during the period for:
Taxes $ 1,046,506 $ 364,903
Interest $ 176,089 $ 174,346
See accompanying notes
5
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND POLICIES
The condensed, consolidated balance sheet as of September 30, 2006 and the
condensed, consolidated statements of operations for the three and nine
month periods ended September 30, 2006 and 2005 and the condensed,
consolidated statements of cash flows for the nine month periods ended
September 30, 2006 and 2005 have been prepared by the Company without
audit. 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., collectively the "Company".
In the opinion of management, the accompanying condensed consolidated
financial statements referred to above contain all necessary adjustments,
consisting of normal accruals and recurring entries, which are necessary
to present fairly the Company's results for the interim periods being
presented.
The accounting policies followed by the Company are set forth in Note 1 to
the Company's financial statements included in its annual report on Form
10-K for the year ended December 31, 2005, which note is incorporated
herein by reference. Specific reference is made to that report for a
description of the Company's securities and the notes to financial
statements included therein, since certain information and footnote
disclosures normally included in financial statements in accordance with
accounting principles generally accepted in the United States of America
have been condensed or omitted from this report.
The results of operations for the three and nine-month periods ended
September 30, 2006 and 2005 are not necessarily indicative of the results
to be expected for the full year.
On July 1, 2005, the Company acquired Willtek Communications GmbH, a
limited liability corporation organized under the laws of Germany
("Willtek"), for the net purchase price of $26,149,826. The acquisition of
Willtek was recorded under the purchase method of accounting for financial
statement purposes. Willtek's Balance Sheets are included in the Condensed
Consolidated Balance Sheet at September 30, 2006 and at December 31, 2005.
Willtek's results of operations and cash flows for the three and
nine-months ended September 30, 2006 are included in the Condensed
Consolidated Statements of Operations and Cash Flows, but for the
nine-months ended September 30, 2005 only their results of operations and
cash flows for the three months ended September 30, 2005 are included. See
also Note 6.
Certain prior years' information has been reclassified to conform to the
current year's reporting presentation.
NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans", which
requires an employer to (a) recognize in its statement of financial
position an asset for a plan's overfunded status or a liability for a
plan's underfunded status, (b) measure a plan's assets and its obligations
that determine its funded status as of the end of the employer's fiscal
year, and (c) recogonize changes in the funded status of a defined benefit
postretirement plan in the year in which the changes occur. The
requirement to recognize the funded status of a benefit plan and the
disclosure requirements are effective as of the end of the fiscal year
ending after December 15, 2006. The requirement to measure plan assets and
benefit obligations as of the date of the employer's fiscal year-end
statement of financial position becomes effective for fiscal years ending
after December 15, 2008. The Company is currently evaluating what impact,
if any, this statement will have on its consolidated financial statements.
6
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 derecognition,
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 does not
believe adoption of FIN 48 will have a material impact on the Company's
consolidated financial statements.
NOTE 3 - 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 are
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 128 "Earnings Per Share" ("SFAS 128"), the presentation of "basic"
and "diluted" earnings per share on the face of the income statement is
required.
NOTE 4 - SHAREHOLDERS' EQUITY
During the nine months ended September 30, 2006, no shares were
repurchased by the Company under the stock repurchase program authorized
by the Board of Directors on November 27, 2000 and as amended on October
5, 2001.
On February 16, 2006, the Board of Directors approved the sale of 250,000
shares of the Company's treasury stock at the market rate of $2.67 per
share to a key employee in the Company's German subsidiary. Total funds
received for this transaction were $667,500, which increased the Company's
shareholders' equity.
NOTE 5 - GOODWILL AND OTHER INTANGIBLE ASSETS
On July 1, 2005, the Company acquired Willtek Communications GmbH, 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 $22,804,892 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 September 30, 2006.
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 September 30,
2006.
7
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - ACCOUNTING FOR STOCK OPTIONS
Effective January 1, 2006, the Company's 2000 Stock Option Plan is
accounted for in accordance with the recognition and measurement
provisions of Statement of Financial Accounting Standards ("FAS") No. 123
(revised 2004), Share-Based Payment ("FAS 123(R)"), which replaces FAS No.
123, Accounting for Stock-Based Compensation, and supersedes Accounting
Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to
Employees, and related interpretations. FAS 123(R) requires compensation
costs related to share-based payment transactions, including employee
stock options, to be recognized in the financial statements. In addition,
the Company adheres to the guidance set forth within Securities and
Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 107,
which provides the Staff's views regarding the interaction between FAS
123(R) and certain SEC rules and regulations and provides interpretations
with respect to the valuation of share-based payments for public
companies.
Prior to January 1, 2006, the Company accounted for similar transactions
in accordance with APB No. 25 which employed the intrinsic value method of
measuring compensation cost. Accordingly, compensation expense was not
recognized for fixed stock options if the exercise price of the option
equaled or exceeded the fair value of the underlying stock at the grant
date.
While FAS No. 123 encouraged recognition of the fair value of all
stock-based awards on the date of grant as expense over the vesting
period, companies were permitted to continue to apply the intrinsic
value-based method of accounting prescribed by APB No. 25 and disclose
certain pro-forma amounts as if the fair value approach of FAS No. 123 had
been applied. In December 2002, FAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of SFAS No. 123, was
issued, which, in addition to providing alternative methods of transition
for a voluntary change to the fair value method of accounting for
stock-based employee compensation, required more prominent pro-forma
disclosures in both the annual and interim financial statements. The
Company complied with these disclosure requirements for all applicable
periods prior to January 1, 2006.
In adopting FAS 123(R), the Company applied the modified prospective
approach to transition. Under the modified prospective approach, the
provisions of FAS 123(R) are to be applied to new awards and to awards
modified, repurchased, or cancelled after the required effective date.
Additionally, compensation cost for the portion of awards for which the
requisite service has not been rendered that are outstanding as of the
required effective date shall be recognized as the requisite service is
rendered on or after the required effective date. The compensation cost
for that portion of awards shall be based on the grant-date fair value of
those awards as calculated for either recognition or pro-forma disclosures
under FAS 123.
As a result of the adoption of FAS 123(R), the Company's results for the
three and nine-month periods ended September 30, 2006 include share-based
compensation expense totaling $31,241 and $84,515, respectively. Such
amounts have been included in the Condensed Consolidated Statements of
Operations within operating expenses.
Stock option compensation expense is the estimated fair value of options
granted amortized on a straight-line basis over the requisite service
period. The weighted average estimated fair value of stock options granted
in the nine-months ended September 30, 2006 and 2005 was $2.48 and $2.57,
respectively.
8
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The fair value of options at the date of grant was estimated using the
Black-Scholes option pricing model. During 2006, the Company took into
consideration guidance under FAS 123(R) and SEC Staff Accounting Bulletin
No. 107 (SAB 107) when reviewing and updating assumptions. The expected
volatility is based upon historical volatility of our stock and other
contributing factors. The expected term is based upon observation of
actual time elapsed between date of grant and exercise of options for all
employees. Previously such assumptions were determined based on historical
data.
The assumptions and resulting fair values of options granted are as
follows:
Nine Months
Three Months Ended Ended
September 30, September 30,
2006 2005 2006 2005
---- ----- ----- -----
Expected term (in years) 4.0 5.0 3.0 6.0
Expected volatility 10% 51.1% 20.2% 63.7%
Expected dividend yield 0.0% 10% 0.0% 10%
Risk-free interest rate 4.9% 3.5% 4.6% 3.5%
The following table addresses the additional disclosure requirements of
FAS 123(R) in the period of adoption. The table illustrates the effect on
net income and earnings per share as if the fair value recognition
provisions of FAS No. 123 had been applied to all outstanding and unvested
awards in the prior year comparable period.
For the Three Months For the Nine Months
Ended Ended
September 30, 2005 September 30, 2005
-------------------- -------------------
Net income attributable to common
stockholders, as reported $623,959 $2,753,430
Less: Stock-based compensation - based
on fair value 34,696 133,826
-------- ----------
Pro forma net income attributable to
common stockholders $589,263 $2,619,604
======== ==========
Net income per share:
Basic and diluted income per share - as
reported $0.02 $0.14
Basic and diluted income per share - pro
forma $0.02 $0.13
The Company granted 500,000, 120,000 and 685,000 options under the Plan
during the first, second and third quarters of 2006 at an exercise price
of $2.70, $2.72 and $2.28 per share, respectively.
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9
The following table represents our stock options granted, exercised, and
forfeited during 2006:
Weighted Weighted
Average Average Aggregate
Number of Exercise Remaining Intrinsic
Shares Price per share Contractual Term Value
--------- --------------- ---------------- ---------
Stock Options
Outstanding at January 1, 2006 1,251,630 $ 2.51
Granted 1,305,000 2.48
Exercised (6,000) 1.69
Forfeited/cancelled (179,333) 2.64
Outstanding at September 30, 2006 2,371,297 $ 2.49 6.2 $ 98,614
---------
Exercisable at September 30, 2006 1,066,297 $ 2.49 5.7 $ 98,614
=========
During the second quarter of 2006, 6,000 stock options were exercised.
However, no options were exercised during the first and third quarters of
2006. During the first, second and third quarters of 2005, 12,250, 40,000
and 70,300 options were exercised, respectively. 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.
NOTE 7 - ACQUISITION
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. Including $2,969,572 in closing costs and $1,753,017 of
reorganization costs, less cash acquired of $102,763, the total purchase
price was $26,149,826. 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 allocation resulted in recording
intangibles of $14,500,000 and goodwill of $22,804,892.
During the nine months ended September 30, 2006, the amortizable
intangibles resulted in an amortization charge of $885,000. During this
same period, this amortization charge is partially off-set by a purchase
accounting adjustment of $225,000 which relates to unused rental space,
adjusted for fair market value, at the Company's German facility.
The following unaudited pro forma financial information for the
nine-months ended September 30, 2005 presents the combined results of
operations of the Company and Willtek as if the acquisition had occurred
at January 1, 2005, the beginning of the earliest period presented. The
pro forma results presented below for 2005 combine the results of the
Company for 2005 and historical results of Willtek from January 1, 2005
through September 30, 2005.
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10
The unaudited pro forma financial information is not intended to represent
or be indicative of the Company's consolidated results of operations or
financial condition that would have been reported had the acquisition been
completed as of the beginning of the periods presented and should not be
taken as indicative of the Company's future consolidated results of
operations.
For the Nine Months
Ended September 30,
2005
-------------------
Net revenue $37,303,000
===========
Net(loss) $(833,000)
=========
Diluted (loss) per common share $(0.03)
======
NOTE 8 - SEGMENT INFORMATION: 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 September 30, As of December 31,
Long-lived assets 2006 2005
----------------- ------------------- ------------------
United States $5,849,183 $5,858,343
Europe 776,152 823,353
---------- ----------
$6,625,335 $6,681,696
========== ==========
For the Nine Months For the Three Months
Ended September 30, Ended September 30,
Revenues by region 2006 2005 2006 2005
------------------ ----------- ----------- ----------- -----------
Americas $ 6,546,631 $ 5,699,010 $19,213,607 $14,542,422
Europe 3,225,444 3,586,312 9,858,013 4,964,953
Asia 2,160,302 1,544,729 6,209,705 3,313,442
Other 1,725,611 1,633,113 4,354,692 1,653,200
----------- ----------- ----------- -----------
$13,657,988 $12,463,164 $39,636,017 $24,474,017
=========== =========== =========== ===========
NOTE 9 - COMMITMENTS AND 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. Costs charged to operations in connection with the
water management plan amounted to approximately $13,000 for the year ended
December 31, 2005.
The Company estimates the expenditures in this regard for the fiscal year
ending December 31, 2006 will amount to approximately $14,000. 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.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
11
Wireless Telecom Group, Inc., and its operating subsidiaries, Boonton
Electronics Corporation, Microlab/FXR and Willtek Communications GmbH, acquired
on July 1, 2005, (collectively, the "Company"), develop, manufacture and market
a wide variety of electronic noise sources, electronic testing and measuring
instruments including power meters, voltmeters and modulation meters, high-power
passive microwave components and handset production testers for wireless
products. The Company's products have historically been primarily used to test
the performance and capability of cellular/PCS and satellite communication
systems and to measure the power of RF and microwave systems. Other applications
include radio, radar, wireless local area network (WLAN) and digital television.
The financial information presented herein includes:
(i) Condensed Consolidated Balance Sheets as of September 30, 2006 and as of
December 31, 2005 (ii) Condensed Consolidated Statements of Operations for the
three and nine month periods ended September 30, 2006 and 2005 and (iii)
Condensed Consolidated Statements of Cash Flows for the nine month periods ended
September 30, 2006 and 2005.
Willtek's Balance Sheets are included in the Condensed Consolidated Balance
Sheets at September 30, 2006 and at December 31, 2005. Willtek's results of
operations and cash flows for the three and nine months ended September 30, 2006
are included in the Condensed Consolidated Statements of Operations and Cash
Flows, but for the nine-months ended September 30, 2005 only their results of
operations and cash flows for the three months ended September 30, 2005 are
included.
FORWARD LOOKING STATEMENTS
The statements contained in this Quarterly Report on Form 10-Q that are not
historical facts, including, without limitation, the statements under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," are forward-looking statements as defined in the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements may be identified
by, among other things, the use of forward-looking terminology such as
"believes," "expects," "intends," "plans," "may," "will," "should,"
"anticipates" or "continues" or the negative thereof of other variations thereon
or comparable terminology, or by discussions of strategy that involve risks and
uncertainties. These statements are based on the Company's current expectations
of future events and are subject to a number of risks and uncertainties that may
cause the Company's actual results to differ materially from those described in
the forward-looking statements. These risks and uncertainties include, but are
not limited to, product demand and development of competitive technologies in
our market sector, the impact of competitive products and pricing, the loss of
any significant customers, the effects of adoption of newly announced accounting
standards, the effects of economic conditions and trade, legal and other
economic risks, among others. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, estimated or projected. These risks
and uncertainties are disclosed from time to time in the Company's filings with
the Securities and Exchange Commission, the Company's press releases and in oral
statements made by or with the approval of authorized personnel. The Company
assumes no obligation to update any forward-looking statements as a result of
new information or future events or developments.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
CRITICAL ACCOUNTING POLICIES
12
Management's discussion and analysis of the financial condition and results of
operations are based upon the Company's condensed consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires the Company to make estimates and judgments that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses for each period. The following
represents a summary of the Company's critical accounting policies, defined as
those policies that the Company believes are: (a) the most important to the
portrayal of its financial condition and results of operations, and (b) that
require management's most difficult, subjective or complex judgments, often as a
result of the need to make estimates about the effects of matters that are
inherently uncertain.
ALLOWANCES FOR DOUBTFUL ACCOUNTS
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of any of its customers were to decline, additional
allowances might be required.
INCOME TAXES
As part of the process of preparing the condensed 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 condensed 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 condensed consolidated statements of
operations, additional tax expense may be recorded.
VALUATION OF LONG-LIVED ASSETS
The Company assesses the potential impairment of long-lived tangible and
intangible assets whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Changes in the operating strategy can
significantly reduce the estimated useful life of such assets.
RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations
should be read in conjunction with our interim condensed consolidated financial
statements and the notes to those statements included in Part I, Item I of this
Quarterly Report on Form 10-Q and in conjunction with the consolidated financial
statements contained in our Annual Report on Form 10-K for the year ended
December 31, 2005.
For the nine months ended September 30, 2006 as compared to the corresponding
period of the previous year, net sales increased to $39,636,000 from $24,474,000
an increase of $15,162,000 or 61.9%. For the three months ended September 30,
2006 as compared to the corresponding period of the previous year, net sales
increased to $13,658,000 from $12,463,000 an increase of $1,195,000 or 9.5%. The
increase is primarily the result of the inclusion of Willtek's sales, which
aggregated $6,679,000 and $19,567,000 for the three and nine-month periods ended
September 30, 2006, respectively. Additionally, the sales activity in the
Company's pre-acquisition business units resulted in an overall increase in
sales for both the three and nine-month periods ended September 2006 as compared
to the corresponding periods of the previous year, and is primarily due to
increased demand in the Company's existing products across all three domestic
businesses.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
13
Gross profit on net sales for the nine months ended September 30, 2006 was
$21,736,000 or 54.8% as compared to $12,997,000 or 53.1% of net sales for the
nine months ended September 30, 2005. Gross profit on net sales for the three
months ended September 30, 2006 was $7,623,000 or 55.8% as compared to
$6,653,000 or 53.4% of net sales for the three months ended September 30, 2005.
Gross profit margins are higher due to the inclusion of Willtek, whose products
generally contribute a higher gross profit margin within the mix of the
Company's products, as well as, lower labor costs, and lower direct overhead
costs. The Company can experience variations in gross profit based upon the mix
of products sold as well as variations due to revenue volume and economies of
scale. The Company continues to carefully monitor costs associated with material
acquisition, manufacturing and production.
Operating expenses for the nine months ended September 30, 2006 were $18,865,000
or 47.5% of net sales as compared to $9,926,000 or 40.6% of net sales for the
nine months ended September 30, 2005. Operating expenses for the quarter ended
September 30, 2006 were $6,398,000 or 46.8% of net sales as compared to
$6,015,000 or 48.3% of net sales for the quarter ended September 30, 2005.
Operating expenses are higher primarily due to the inclusion of Willtek's
operating expenses of $10,612,000 and $3,432,000 for the nine and three-months
ended September 30, 2006, respectively, as compared to the same periods last
year. Additionally during the first nine months of 2006, the Company incurred
$885,000 of amortization expense associated with the acquisition of Willtek and
accrued compensation expense of $600,000 for an incentive based compensation
plan for all of the Company's employees. The increase is partially offset by an
overall reduction in operating expenses across all business groups resulting
from the Company's implementation of an effective cost reduction plan in the
prior year and ongoing operational synergies.
Interest income increased by $31,000 and $17,000 for the three and nine months
ended September 30, 2006, respectively, as compared to the corresponding periods
of the previous year. These increases were primarily due to higher returns in a
working capital management account, classified as cash equivalents, due to the
fact that they were highly liquid and readily convertible to cash and were
intended to be liquidated by the Company on a short-term basis.
For the three and nine months ended September 30, 2006, other income decreased
by $51,000 and $46,000, respectively. These decreases are due to the
reclassification of $119,000 from operating expenses to other expenses.
Net income decreased to $2,334,000, or $.09 per share (diluted), for the nine
months ended September 30, 2006 as compared to $2,753,000, or $.14 per share
(diluted) for the nine months ended September 30, 2005. The Company realized net
income for the quarter ended September 30, 2006 of $1,128,000 or $.04 per share
(diluted) as compared to $624,000 or $.02 per share (diluted) for the three
months ended September 30, 2005. The explanation of the change in net income can
be derived from the analysis given above of operations for the nine and
three-month periods ending September 30, 2006 and 2005, respectively. For the
nine-month period ending September 30, 2006, the decrease in earnings per share
can be further explained by the issuance of 8,000,000 shares of the Company's
common stock relating to the Willtek purchase agreement, which increases the
number of common shares outstanding further diluting earnings on a per share
basis.
LIQUIDITY AND CAPITAL RESOURCES:
The Company's working capital has increased by $2,525,000 to $20,432,000 at
September 30, 2006, from $17,907,000 at December 31, 2005. At September 30,
2006, the Company had a current ratio of 2.5 to 1, and a ratio of debt to
tangible net worth of 1.47 to 1. At December 31, 2005, the Company had a current
ratio of 2.4 to 1, and a ratio of debt to tangible net worth of 1.82 to 1. In
2005, the Company's current ratio was affected by current liabilities assumed
and cash paid for the acquisition of Willtek.
The Company realized cash provided by operating activities of $722,000 in cash
flows for the nine-month period ending September 30, 2006. The primary source of
these funds was provided by net income of $2,334,000, a non-cash adjustment for
depreciation and amortization of $824,000, a non-cash adjustment for
amortization of intangible assets of $660,000, and an increase in accounts
payable and accrued expenses of $564,000, partially offset by an increase in
accounts receivable of $1,045,000, a decrease in pension liability and other
long-term liabilities of $779,000, an increase in prepaid expenses and other
assets of $748,000 and an increase in inventory of $699,000.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
14
The Company has historically been able to collect its account receivables
approximately every two months. This average collection period has been
sufficient to provide the working capital and liquidity necessary to operate the
Company. The Company continues to monitor production requirements and delivery
times while maintaining manageable levels of goods on hand.
The Company realized cash provided by operations of $1,058,000 for the
comparable period in 2005. The primary source of these funds was provided by net
income of $2,753,000, a non-cash adjustment for depreciation and amortization of
$726,000, a non-cash adjustment for amortization of intangible assets of
$518,000 and a decrease in inventories of $470,000, partially offset by an
increase in accounts receivable of $2,038,000 and a decrease in accounts payable
and accrued expenses of $1,320,000.
Net cash used for investing activities for the nine months ended September 30,
2006 was $774,000. The use of these funds was for capital expenditures. In 2005,
net cash used for investing activities was $2,696,000. The primary use of these
funds was for costs associated with the acquisition of Willtek and capital
expenditures of $2,001,000 and $541,000, respectively.
Cash provided by financing activities for the nine months ended September 30,
2006 was $1,426,000. The primary source of these funds was from the sale of
250,000 shares of treasury stock for $667,500 and an additional bank loan of
$488,000 by Willtek, the proceeds of which must be used for research and
development. For the nine months ended September 30, 2005, net cash used for
financing activities was $1,395,000. The primary use of these funds was for the
payment of dividends of $1,621,000, partially offset by proceeds from the
exercise of stock options of $262,000.
The Company does not anticipate that its use of cash for operations will
adversely impact its ability to meet its financing requirements for at least the
next twelve-month period. The Company does not believe it will need to borrow
additional funds during the next twelve-month period.
INFLATION AND SEASONALITY
The Company does not anticipate that inflation will significantly impact its
business or its results of operations nor does it believe that its business is
seasonal.
ITEM 3 - 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 fixed 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 significant market risk for changes in interest rates and will not be
materially 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 located in Germany. The Company does
business in more than fifty countries and currently generates approximately 52%
of its revenues from outside North America. 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 $12,000,000 at
September 30, 2006, translated into US dollars at the applicable 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 September 30, 2006. The Company
does not currently employ any currency derivative instruments, futures contracts
or other currency hedging techniques to mitigate its risks in this regard.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
15
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 4 - CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to ensure that
information required to be disclosed in reports filed under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the specified time periods. As of the end of the period covered
by this report, the Company's Chief Executive Officer and Chief Financial
Officer evaluated, with the participation of the Company's management, the
effectiveness of the Company's disclosure controls and procedures. Based on the
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective.
There were no changes in the Company's internal control over financial reporting
that occurred during the Company's most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
16
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is not aware of any material legal proceeding against
the Company or in which any of their property is subject.
Item 1A. RISK FACTORS
The Company is not aware of any material changes from risk factors
as previously disclosed its Form 10-K for the year ended December
31, 2005.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On February 16, 2006, the Board of Directors approved the sale of
250,000 shares of Wireless Telecom Group, Inc. treasury stock at the
market rate of $2.67 per share to a key employee in the Company's
German subsidiary. Total funds received for this transaction were
$667,500, which increased the Company's shareholders' equity. The
Company relied on section 4(2) of the Securities Act of 1933 as the
basis for an exemption from registering the sale of these shares of
treasury stock. The proceeds of such sale were used for working
capital.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Registrant held its Annual Meeting of Stockholders on July
6, 2006. The following proposal was adopted by the votes indicated.
(b) (c) (1) Seven directors were elected at the Annual Meeting to
serve until the Annual Meeting of Stockholders in 2007. The names of
these Directors and votes cast in favor of their election and shares
withheld are as follows:
NAME VOTES FOR VOTES WITHHELD
Savio Tung 20,856,737 2,102,366
James M. ("Monty") Johnson 20,525,938 2,433,165
Hazem Ben-Gacem 20,857,432 2,101,671
Henry L. Bachman 20,925,538 2,033,565
John Wilchek 20,551,654 2,407,449
Michael Manza 20,612,899 2,346,204
Andrew Scelba 20,984,393 1,974,710
(d) Proposals information:
Proposal (2) Approval of the Amended and Restated 2000 Stock Option
Plan, to Authorize Options relating to an additional 2,000,000
shares of common stock:
VOTES FOR VOTES AGAINST VOTES ABSTAIN BROKER NON-VOTE
10,730,769 4,544,830 49,672 7,633,832
Item 5. OTHER INFORMATION
None.
17
Item 6. EXHIBITS
Exhibit No. Description
----------- -----------
10.1* 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.
10.2** Shareholders' Agreement, dated as of July 1, 2005, among
Wireless Telecom Group, Inc., Investcorp Technology Ventures,
L.P. and Damany Holding GmbH.
10.3** Indemnification Escrow Agreement, dated as of July 1, 2005, by
and among Wireless Telecom Group, Inc., Investcorp Technology
Ventures, L.P., Damany Holding GmbH and American Stock Transfer
& Trust Company.
11.1 Computation of per share earnings
31.1 Certification Pursuant to Section 302 of The Sarbanes-Oxley Act
of 2002 (Principal Executive Officer)
31.2 Certification Pursuant to Section 302 of The Sarbanes-Oxley Act
of 2002 (Principal Financial Officer)
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
(Principal Executive Officer)
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
(Principal Financial Officer)
_________________
* Previously filed as an Exhibit to WTT's Current Report on Form 8-K, dated
March 29, 2005, and incorporated herein by reference.
**Previously filed as an Exhibit to WTT's Current Report on Form 8-K, dated July
1, 2005, and incorporated herein by reference.
18
SIGNATURES
Pursuant to the requirements 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.
----------------------------
(Registrant)
Date: November 10, 2006 /S/James M. Johnson
-------------------------
James M. Johnson
Chief Executive Officer
Date: November 10, 2006 /S/Paul Genova
-------------------------
Paul Genova
President, Chief Financial Officer
19
EXHIBIT LIST
Exhibit No. Description
----------- -----------
10.1* 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.
10.2** Shareholders' Agreement, dated as of July 1, 2005, among
Wireless Telecom Group, Inc., Investcorp Technology Ventures,
L.P. and Damany Holding GmbH.
10.3** Indemnification Escrow Agreement, dated as of July 1, 2005, by
and among Wireless Telecom Group, Inc., Investcorp Technology
Ventures, L.P., Damany Holding GmbH and American Stock Transfer
& Trust Company.
11.1 Computation of per share earnings
31.1 Certification Pursuant to Section 302 of The Sarbanes-Oxley Act
of 2002 (Principal Executive Officer)
31.2 Certification Pursuant to Section 302 of The Sarbanes-Oxley Act
of 2002 (Principal Financial Officer)
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
(Principal Executive Officer)
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
(Principal Financial Officer)
_________________
* Previously filed as an Exhibit to WTT's Current Report on Form 8-K, dated
March 29, 2005, and incorporated herein by reference.
**Previously filed as an Exhibit to WTT's Current Report on Form 8-K, dated July
1, 2005, and incorporated herein by reference.
20
