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 JUNE 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 August 10, 2006: 25,854,451
Number of non-affiliated shares of Common Stock outstanding as of August 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 June 30, 2006
(unaudited) and December 31, 2005 3
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2006 (unaudited)
and 2005 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 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 -
JUNE 30, DECEMBER 31,
2006 2005
----------- ------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $13,942,138 $13,851,120
Accounts receivable - net of allowance for doubtful accounts of
$180,413 and $377,543 for 2006 and 2005, respectively 8,683,275 7,869,537
Inventories 9,461,679 8,376,750
Deferred income taxes-current 198,266 198,266
Prepaid expenses and other current assets 1,295,316 873,053
----------- -----------
TOTAL CURRENT ASSETS 33,580,674 31,168,726
----------- -----------
PROPERTY, PLANT AND EQUIPMENT - NET 6,741,739 6,681,696
----------- -----------
OTHER ASSETS:
Goodwill 24,156,284 24,066,284
Other intangible assets - net 13,320,000 13,910,000
Deferred income taxes - non-current 771,008 752,256
Cash surrender value of foreign pension insurance and other assets 3,045,586 2,714,888
----------- -----------
TOTAL OTHER ASSETS 41,292,878 41,443,428
----------- -----------
TOTAL ASSETS $81,615,291 $79,293,850
=========== ===========
- LIABILITIES AND SHAREHOLDERS' EQUITY -
CURRENT LIABILITIES:
Accounts payable $ 3,908,110 $ 3,655,008
Accrued expenses and other current liabilities 5,142,902 4,873,939
Note payable - shareholder 4,392,850 4,145,400
Income tax payable 728,000 540,699
Current portion of mortgage payable 48,792 46,889
----------- -----------
TOTAL CURRENT LIABILITIES 14,220,654 13,261,935
----------- -----------
LONG TERM LIABILITIES:
Notes payable - bank 1,971,511 1,505,136
Deferred income taxes 4,689,256 4,896,936
Mortgage payable 2,973,672 2,998,505
Deferred rent payable 161,960 156,940
Provision for pension liability and other long term liabilities 3,227,856 3,862,865
----------- -----------
TOTAL LONG TERM LIABILITIES 13,024,255 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 35,835,524 35,737,185
Retained earnings 25,443,599 24,237,226
Accumulated other comprehensive income (126,348) 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 54,370,382 52,611,533
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $81,615,291 $79,293,850
=========== ===========
See accompanying notes
3
WIRELESS TELECOM GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------ -------------------------
2006 2005 2006 2005
----------- ---------- ----------- -----------
NET SALES $12,155,357 $5,962,676 $25,978,029 $12,010,853
----------- ---------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales 5,583,972 2,896,775 11,865,160 5,666,427
Operating expenses 6,077,341 1,855,661 12,467,070 3,911,425
Interest (income) (81,912) (108,389) (162,426) (176,696)
Interest expense 57,346 58,116 115,129 116,434
Other (income) expense (45,505) (70,407) (113,706) (108,258)
----------- ---------- ----------- -----------
TOTAL COSTS AND EXPENSES 11,591,242 4,631,756 24,171,227 9,409,332
----------- ---------- ----------- -----------
INCOME BEFORE INCOME TAXES 564,115 1,330,920 1,806,802 2,601,521
PROVISION FOR INCOME TAXES 374,247 272,050 600,429 472,050
----------- ---------- ----------- -----------
NET INCOME $ 189,868 $1,058,870 $ 1,206,373 $ 2,129,471
=========== ========== =========== ===========
NET INCOME PER COMMON
SHARE:
BASIC $ 0.01 $ 0.06 $ 0.05 $ 0.12
=========== ========== =========== ===========
DILUTED $ 0.01 $ 0.06 $ 0.05 $ 0.12
=========== ========== =========== ===========
See accompanying notes
4
WIRELESS TELECOM GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Months
Ended June 30,
-------------------------
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,206,373 $ 2,129,471
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 547,540 251,838
Amortization of purchased intangibles 440,000 --
Stock compensation expense 53,274 --
Deferred rent 5,020 16,445
Deferred income taxes (226,432) --
Provision for losses on accounts receivable (197,130) 13,595
Changes in assets and liabilities, net of effect of acquisition:
(Increase) in accounts receivable (616,608) (175,416)
(Increase) decrease in inventory (1,084,929) 21,020
(Increase) decrease in prepaid expenses and other assets (752,960) 1,370
Increase (decrease) in accounts payable and accrued expenses 522,065 (887,695)
(Decrease) in pension liability and other long-term liabilities (635,010) --
Increase in income taxes payable 187,301 193,500
----------- -----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (551,496) 1,564,128
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (547,641) (262,843)
Costs associated with acquisition -- (332,492)
----------- -----------
NET CASH (USED FOR) INVESTING ACTIVITIES (547,641) (595,335)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of mortgage note (22,930) (21,333)
Proceeds from sale of treasury stock 667,500 --
Dividends paid -- (1,048,112)
Increase in note payable to shareholder 247,450 --
Proceeds from bank loan 466,375 --
Proceeds from exercise of stock options/warrants 10,125 98,563
----------- -----------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 1,368,520 (970,882)
----------- -----------
Foreign exchange rate adjustment (178,365) --
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 91,018 (2,089)
Cash and cash equivalents, at beginning of year 13,851,120 15,783,816
----------- -----------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $13,942,138 $15,781,727
=========== ===========
SUPPLEMENTAL INFORMATION:
Cash paid during the period for:
Taxes $ 646,300 $ 276,500
Interest $ 115,234 $ 116,434
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 June 30, 2006 and the
condensed, consolidated statements of operations for the three and six
month periods ended June 30, 2006 and 2005 and the condensed, consolidated
statements of cash flows for the six month periods ended June 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.
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 six-month periods ended June
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 June 30, 2006 and at December 31, 2005.
Willtek's results of operations and cash flows for the three and six-months
ended June 30, 2006 are included in the Condensed Consolidated Statements
of Operations and Cash Flows, but their results of operations and cash
flows for the three and six-months ended June 30, 2005 are not included.
See also Note 6.
Certain prior years' information has been reclassified to conform to the
current year's reporting presentation.
NOTE 2 - 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 3 - SHAREHOLDERS' EQUITY
During the six months ended June 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.
6
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 4 - 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 June
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 June 30, 2006.
NOTE 5 - 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 SFAS No.
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 SFAS 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
7
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 six-month periods ended June 30, 2006 include share-based
compensation expense totaling $29,961 and $53,274, respectively. Such
amounts have been included in the 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 six-months ended June 30, 2006 and 2005 was $2.54 and $2.93,
respectively.
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 SFAS 123R 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:
Six Months
Three Months Ended Ended
June 30, June 30,
------------------ -----------
2006 2005 2006 2005
---- ---- ---- ----
Expected term (in years) 4.0 6.0 3.0 6.5
Expected volatility 31.9% 54% 30.8% 65%
Expected dividend yield 0.0% 10% 0.0% 10%
Risk-free interest rate 4.8% 3.5% 4.5% 3.5%
The following table addresses the additional disclosure requirements of
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.
8
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For the Three Months
Ended For the Six Months Ended
June 30, 2005 June 30, 2005
-------------------- ------------------------
Net income attributable to common stockholders,
as reported $1,058,870 $2,129,471
Less: Stock-based compensation - based on
fair value 54,071 99,130
---------- ----------
Pro forma net income attributable to common
stockholders $1,004,799 $2,030,341
========== ==========
Net income per share:
Basic and diluted income per share - as reported $ 0.06 $ 0.12
Basic and diluted income per share - pro forma $ 0.06 $ 0.12
The Company granted 500,000 and 120,000 options under the Plan during the
first and second quarters of 2006 at an exercise price of $2.70 and $2.72
per share, respectively.
The following table represents our stock options granted, exercised, and
forfeited during 2006.
Weighted Weighted
Average Average
Exercise Remaining Aggregate
Number of Price per Contractual Intrinsic
Shares share Term Value
--------- --------- ----------- ----------
Stock Options
Outstanding at January 1, 2006 1,251,630 $2.51
Granted 620,000 2.70
Exercised (6,000) 1.69
Forfeited/cancelled (179,333) 2.64
Outstanding at June 30, 2006 1,686,297 $2.56 6.2 $3,208,000
---------
Exercisable at June 30, 2006 1,066,297 $2.49 4.9 $1,867,000
=========
During the second quarter of 2006, 6000 stock options were exercised,
however no options were exercised during the first quarter of 2006. During
the first and second quarters of 2005, 12,250 and 40,000 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.
9
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - 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 six months ended June 30, 2006, the amortizable intangibles
resulted in an amortization charge of $590,000. During this same period,
this amortization charge is partially off-set by a purchase accounting
adjustment of $150,000 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 three and
six-months ended June 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 June 30, 2005.
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 Three Months For the Six Months
Ended June 30, Ended June 30,
2005 2005
-------------------- ------------------
Net revenue $11,318,000 $24,840,000
=========== ===========
Net (loss) $(1,512,000) $(1,457,000)
=========== ===========
Diluted (loss) per common share $ (0.06) $ (0.06)
=========== ===========
10
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - 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 June 30, As of December 31,
Long-lived assets 2006 2005
----------------- -------------- ------------------
United States $5,914,508 $5,858,343
Europe 827,231 823,353
---------- ----------
$6,741,739 $6,681,696
========== ==========
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
Revenues by region 2006 2005 2006 2005
------------------ ----------- ----------- ----------- -----------
Americas $ 6,533,100 $ 4,332,092 $12,666,976 $ 9,166,672
Europe 2,434,748 656,045 6,632,569 1,228,067
Asia 1,646,913 943,419 4,049,403 1,560,783
Other 1,540,596 31,120 2,629,081 55,331
----------- ----------- ----------- -----------
$12,155,357 $ 5,962,676 $25,978,029 $12,010,853
=========== =========== =========== ===========
NOTE 8 - 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.
11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
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 June 30, 2006 and as of December
31, 2005
(ii) Condensed Consolidated Statements of Operations for the three and six month
periods ended June 30, 2006 and 2005 and (iii) Condensed Consolidated Statements
of Cash Flows for the six month periods ended June 30, 2006 and 2005.
Willtek's Balance Sheets are included in the Condensed Consolidated Balance
Sheets at June 30, 2006 and at December 31, 2005. Willtek's results of
operations and cash flows for the three and six months ended June 30, 2006 are
included in the Condensed Consolidated Statements of Operations and Cash Flows,
but their results of operations and cash flows for the three and six months
ended June 30, 2005 are not 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.
12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of the financial condition and results of
operations are based upon the Company's 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 consolidated financial statements, the
Company is required to estimate its income taxes in each of the jurisdictions in
which it operates. The process incorporates an assessment of the current tax
exposure together with temporary differences resulting from different treatment
of transactions for tax and financial statement purposes. Such differences
result in deferred tax assets and liabilities, which are included within the
consolidated balance sheet. The recovery of deferred tax assets from future
taxable income must be assessed and, to the extent that recovery is not likely,
the Company establishes a valuation allowance. Increases in valuation allowances
result in the recording of additional tax expense. Further, if the ultimate tax
liability differs from the periodic tax provision reflected in the consolidated
statements of operations, additional tax expense may be recorded.
VALUATION OF LONG-LIVED ASSETS
The Company assesses the potential impairment of long-lived tangible and
intangible assets whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Changes in the operating strategy can
significantly reduce the estimated useful life of such assets.
RESULTS OF OPERATIONS
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 six months ended June 30, 2006 as compared to the corresponding period
of the previous year, net sales increased to $25,978,000 from $12,011,000 an
increase of $13,967,000 or 116%. For the three months ended June 30, 2006 as
compared to the corresponding period of the previous year, net sales increased
to $12,155,000 from $5,963,000 an increase of $6,192,000 or 104%. The increase
is primarily the result of the inclusion of Willtek's sales, which aggregated
$12,888,000 and $5,623,000 for the six and three-month periods ended June 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 first and second quarters of 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.
13
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Gross profit on net sales for the six months ended June 30, 2006 was $14,113,000
or 54.3% as compared to $6,344,000 or 52.8% of net sales for the six months
ended June 30, 2005. Gross profit on net sales for the three months ended June
30, 2006 was $6,571,000 or 54.1% as compared to $3,066,000 or 51.4% of net sales
for the three months ended June 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 six months ended June 30, 2006 were $12,467,000 or
48% of net sales as compared to $3,911,000 or 32.6% of net sales for the six
months ended June 30, 2005. Operating expenses for the quarter ended June 30,
2006 were $6,077,000 or 50% of net sales as compared to $1,856,000 or 31.1% of
net sales for the quarter ended June 30, 2005. Operating expenses are higher
primarily due to the inclusion of Willtek's operating expenses of $7,180,000 and
$3,475,000 for the six and three-months ended June 30, 2006, respectively, as
compared to the same periods last year. Additionally during the first and second
quarters of 2006, the Company incurred $590,000 of amortization expense
associated with the acquisition of Willtek and accrued compensation expense of
$400,000 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 decreased by $26,000 and $15,000 for the three and six months
ended June 30, 2006, respectively, as compared to the corresponding periods of
the previous year. These decreases were primarily due to lower 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.
Other income decreased by $25,000 for the three months ended June 30, 2006. For
the six months ended June 30, 2006, other income increased slightly by $5,000.
Net income decreased to $1,206,000, or $.05 per share (diluted), for the six
months ended June 30, 2006 as compared to $2,129,000, or $.12 per share
(diluted) for the six months ended June 30, 2005. The Company realized net
income for the quarter ended June 30, 2006 of $190,000 or $.01 per share
(diluted) as compared to $1,059,000 or $.06 per share (diluted) for the three
months ended June 30, 2005. The explanation of the change in net income can be
derived from the analysis given above of operations for the six and three-month
periods ending June 30, 2006 and 2005, respectively. 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 $1,453,000 to $19,360,000 at June
30, 2006, from $17,907,000 at December 31, 2005. At June 30, 2006, the Company
had a current ratio of 2.4 to 1, and a ratio of debt to tangible net worth of
1.61 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.
Operating activities used $551,000 in cash flows for the six-month period ending
June 30, 2006. The use of these funds was primarily due to an increase in
inventory of $1,085,000, an increase in prepaid expenses and other assets of
$753,000, a decrease in other long-term liabilities of $635,000, and an increase
in accounts receivable of $617,000, partially offset by net income of
$1,206,000, a non-cash adjustment for depreciation and amortization of $548,000,
an increase in accounts payable and accrued expenses of $522,000, and a non-cash
adjustment for amortization of intangible assets of $440,000.
14
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 $1,564,000 for the
comparable period in 2005. The primary source of these funds was provided by net
income of $2,129,000, a non-cash adjustment for depreciation and amortization of
$252,000, and an increase in income taxes payable of $194,000, partially offset
by a decrease in accounts payable and accrued expenses of $888,000 and an
increase in accounts receivable of $175,000.
Net cash used for investing activities for the six months ended June 30, 2006
was $548,000. The use of these funds was for capital expenditures. In 2005, net
cash used for investing activities was $595,000. The use of these funds was for
costs associated with the acquisition of Willtek and capital expenditures of
$332,000 and $263,000, respectively.
Cash provided by financing activities for the six months ended June 30, 2006 was
$1,369,000. 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 $466,000 by
Willtek, the proceeds of which must be used for research and development. For
the six months ended June 30, 2005, net cash used for financing activities was
$971,000. The primary use of these funds was for the payment of dividends of
$1,048,000, partially offset by proceeds from the exercise of stock options of
$99,000.
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 51%
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 June 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 June 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.
15
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
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:
VOTES
NAME VOTES FOR 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: August 10, 2006 /S/ James M. Johnson
----------------------------------------
James M. Johnson
Chief Executive Officer
Date: August 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
