UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 MARCH 31, 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 May 11, 2006: 26,104,451
WIRELESS TELECOM GROUP, INC.
Table of Contents
PART I. FINANCIAL INFORMATION Page(s)
Item 1 -- Consolidated Financial Statements:
Condensed Balance Sheets as of March 31, 2006 (unaudited)
and December 31, 2005 3
Condensed Statements of Operations for the Three Months
Ended March 31, 2006 (unaudited) and 2005 (unaudited) 4
Condensed Statements of Cash Flows for the Three Months
Ended March 31, 2006 (unaudited) and 2005 (unaudited) 5
Notes to Interim Condensed 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
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 17
Signatures 18
Exhibit Index 19
2
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
WIRELESS TELECOM GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
- ASSETS -
MARCH 31, DECEMBER 31,
2006 2005
------------- -------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 15,737,471 $ 13,851,120
Accounts receivable - net of allowance for doubtful accounts of
$378,515 and $377,543 for 2006 and 2005, respectively 8,215,804 7,869,537
Inventories 8,425,469 8,376,750
Deferred income taxes-current 198,266 198,266
Prepaid expenses and other current assets 879,699 873,053
------------- -------------
TOTAL CURRENT ASSETS 33,456,709 31,168,726
------------- -------------
PROPERTY, PLANT AND EQUIPMENT - NET 6,682,765 6,681,696
------------- -------------
OTHER ASSETS:
Goodwill 24,066,284 24,066,284
Other intangible assets - net 13,615,000 13,910,000
Deferred income taxes - non-current 760,462 752,256
Other assets 2,643,824 2,714,888
------------- -------------
TOTAL OTHER ASSETS 41,085,570 41,443,428
------------- -------------
TOTAL ASSETS $ 81,225,044 $ 79,293,850
============= =============
- LIABILITIES AND SHAREHOLDERS' EQUITY -
CURRENT LIABILITIES:
Accounts payable $ 2,841,315 $ 3,655,008
Accrued expenses and other current liabilities 5,402,805 4,873,939
Note payable - shareholder 4,226,600 4,145,400
Income tax payable 863,816 540,699
Current portion of mortgage payable 47,781 46,889
------------- -------------
TOTAL CURRENT LIABILITIES 13,382,317 13,261,935
------------- -------------
LONG TERM LIABILITIES:
Notes payable-bank 1,896,898 1,505,136
Deferred income taxes 4,793,096 4,896,936
Mortgage payable 2,986,221 2,998,505
Deferred rent payable 159,450 156,940
Other long term liabilities 3,756,704 3,862,865
------------- -------------
TOTAL LONG TERM LIABILITIES 13,592,369 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,
and 28,647,551 shares issued for 2006 and 2005, 25,847,851
and 25,597,851 shares outstanding for 2006 and 2005, respectively 286,476 286,476
Additional paid-in-capital 35,795,498 35,737,185
Retained earnings 25,253,731 24,237,226
Accumulated other comprehensive income (16,418) 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 54,250,358 52,611,533
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 81,225,044 $ 79,293,850
============= =============
See accompanying notes
3
WIRELESS TELECOM GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months
Ended March 31,
-------------------------------
2006 2005
------------- -------------
NET SALES $ 13,822,672 $ 6,048,177
------------- -------------
COSTS AND EXPENSES:
Cost of sales 6,281,188 2,769,652
Operating expenses 6,389,729 2,055,764
Interest (income) (80,514) (68,307)
Interest expense 57,783 58,318
Other (income) expense (68,201) (37,851)
------------- -------------
TOTAL COSTS AND EXPENSES 12,579,985 4,777,576
------------- -------------
INCOME BEFORE INCOME TAXES 1,242,687 1,270,601
PROVISION FOR INCOME TAXES 226,182 200,000
------------- -------------
NET INCOME $ 1,016,505 $ 1,070,601
============= =============
NET INCOME PER COMMON
SHARE:
BASIC $ 0.04 $ 0.06
============= =============
DILUTED $ 0.04 $ 0.06
============= =============
See accompanying notes
4
WIRELESS TELECOM GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months
Ended March 31,
-------------------------------
2006 2005
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,016,505 $ 1,070,601
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 261,681 116,229
Amortization of purchased intangibles 295,000 --
Stock compensation expense 23,313 --
Deferred rent 2,510 8,223
Deferred income taxes (103,840) --
Provision for losses on accounts receivable 972 38,370
Changes in assets and liabilities, net of effect of acquisition:
(Increase) in accounts receivable (347,239) (1,033,344)
(Increase) in inventory (48,719) (792)
Decrease in prepaid expenses and other assets 56,213 11,168
(Decrease) in accounts payable and accrued expenses (284,827) (243,545)
(Decrease) in other long-term liabilities (106,162) --
Increase in income taxes payable 323,117 --
------------- -------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,088,524 (33,090)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (266,643) (134,093)
Costs associated with acquisition -- (107,282)
------------- -------------
NET CASH (USED FOR) INVESTING ACTIVITIES (266,643) (241,375)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of mortgage note (11,392) (10,566)
Proceeds from sale of treasury stock 667,500 --
Dividends paid -- (523,857)
Increase in note payable to shareholder 81,200 --
Proceeds from bank loan 391,762 --
Proceeds from exercise of stock options/warrants -- 23,312
------------- -------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 1,129,070 (511,111)
------------- -------------
Foreign exchange rate adjustment (64,600) --
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,886,351 (785,576)
Cash and cash equivalents, at beginning of year 13,851,120 15,783,816
------------- -------------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 15,737,471 $ 14,998,240
============= =============
SUPPLEMENTAL INFORMATION:
Cash paid during the period for:
Taxes $ 13,300 $ --
Interest $ 57,783 $ 58,318
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 March 31, 2006 and the
condensed, consolidated statements of operations for the three month
periods ended March 31, 2006 and 2005 and the condensed, consolidated
statements of cash flows for the three month periods ended March 31, 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-month periods ended March 31, 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 $26,059,826. 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 March 31, 2006 and at December 31, 2005.
Willtek's results of operations and cash flows for the three months ended
March 31, 2006 are included in the Condensed Consolidated Statements of
Operations and Cash Flows, but their results of operations and cash flows
for the three months ended March 31, 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 three months ended March 31, 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
6
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 $22,714,892 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 March 31, 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 March 31,
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 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.
7
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 month period ended March 31, 2006 include share-based compensation
expense totaling $23,313. 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 three months ended March 31, 2006 and 2005 was $2.70 and $2.57,
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:
Three Months Ended
MARCH 31, 2006 March 31, 2005
-------------- --------------
Expected term (in years) 2.5 7.0
Expected volatility 30.32% 86%
Expected dividend yield 0.00% 10%
Risk-free interest rate 4.34% 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
March 31, 2005
--------------
Net income attributable to common
stockholders, as reported $1,070,601
Less: Stock-based compensation - based
on fair value 45,059
----------
Pro forma net income attributable to common
stockholders $1,025,542
==========
Net income per share:
Basic and diluted income per share - as
reported $ 0.06
Basic and diluted income per share - pro forma $ 0.06
The Company granted 500,000 options under the Plan during the three months
ended March 31, 2006 at the exercise price of $2.70 per share.
The following table represents our stock options granted, exercised, and
forfeited during the first quarter of 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 500,000 2.70
Exercised -- --
Forfeited/cancelled (179,333) 2.54
Outstanding at March 31, 2006 1,572,297 $ 2.56 6.8 $ 0.39
-----------
Exercisable at March 31, 2006 71,072,297 $ 2.49 5.3 $ 0.46
===========
No options were exercised during the first quarter of 2006 and 12,250 were
exercised during the first quarter of 2005.
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 $26,059,826. 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 $22,714,892.
9
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
During the three months ended March 31, 2006, the amortizable intangibles
resulted in an amortization charge of $295,000.
The following unaudited pro forma financial information for the three
months ended March 31, 2005 presents the combined results of operations of
the Company and Willtek as if the acquisition had occurred at January 1,
2005, the date of 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 March 31, 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
Ended March 31,
2005
--------------------
Net revenue $13,522,000
===========
Net income $ 55,000
===========
Diluted income per common share $ 0.00
===========
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:
Long-lived assets As of March 31, As of December 31,
----------------- --------------- ------------------
2006 2005
---------- ----------
United States $5,828,454 $5,858,343
Europe 854,311 823,353
---------- ----------
$6,682,765 $6,681,696
========== ==========
Revenues by region For the Three Months Ended March 31,
------------------
2006 2005
----------- ----------
Americas $ 6,133,875 $4,833,999
Europe 4,197,822 572,021
Asia 2,398,155 614,786
Other 1,092,820 27,371
----------- ----------
$13,822,672 $6,048,177
=========== ==========
10
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 March 31, 2006 and as of
December 31, 2005 (ii) Condensed Consolidated Statements of Operations for the
three month periods ended March 31, 2006 and 2005 and (iii) Condensed
Consolidated Statements of Cash Flows for the three month periods ended March
31, 2006 and 2005.
Willtek's Balance Sheets are included in the Condensed Consolidated Balance
Sheets at March 31, 2006 and at December 31, 2005. Willtek's results of
operations and cash flows for the three months ended March 31, 2006 are included
in the Condensed Consolidated Statements of Operations and Cash Flows, but their
results of operations and cash flows for the three months ended March 31, 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.
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
12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 three months ended March 31, 2006 as compared to the corresponding
period of the previous year, net sales increased to $13,823,000 from $6,048,000
an increase of $7,775,000 or 129%. The increase is primarily the result of the
inclusion of Willtek's sales, which aggregated $7,265,000 for the three-month
period ended March 31, 2006. Additionally, the sales activity in the Company's
pre-acquisition business units resulted in an overall increase in sales as
compared to the corresponding period of the previous year.
Gross profit on net sales for the three months ended March 31, 2006 was
$7,542,000 or 55% as compared to $3,278,000 or 54% of net sales for the three
months ended March 31, 2005. Gross profit margins are slightly 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.
13
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Operating expenses for the three months ended March 31, 2006 were $6,390,000 or
46% of net sales as compared to $2,056,000 or 34% of net sales for the three
months ended March 31, 2005. The increase in operating expenses is primarily due
to the inclusion of Willtek's operating expenses of $3,705,000 for the period as
compared to last year, as well as an additional $295,000 of amortization expense
associated with the acquisition of Willtek and accrued compensation expense of
$200,000 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 $12,000 for the three months ended March 31, 2006
as compared to the corresponding period of the previous year. The increase is
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 months ended March 31, 2006, other income increased by $30,000 as
compared to the three months ended March 31, 2005. The increase is primarily due
to realized losses of short-term bonds in the above-mentioned working capital
management account in the corresponding period of the previous year.
Net income decreased slightly to $1,016,000, or $.04 per share (diluted), for
the three months ended March 31, 2006 as compared to $1,071,000, or $.06 per
share (diluted) for the three months ended March 31, 2005. The explanation of
the change in net income can be derived from the analysis given above of
operations for the three-month period ending March 31, 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 $2,167,000 to $20,074,000 at
March 31, 2006, from $17,907,000 at December 31, 2005. At March 31, 2006 the
Company had a current ratio of 2.5 to 1, and a ratio of debt to tangible net
worth of 1.63 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 operations of $1,089,000 for the
three-month period ending March 31, 2006. The primary source of these funds was
provided by net income of $1,017,000, an increase in income taxes payable of
$323,000, a non-cash adjustment for depreciation and amortization of $262,000,
and a non-cash adjustment for amortization of intangible assets of $295,000,
partially offset by an increase in accounts receivable of $347,000, and a
decrease in accounts payable and accrued expenses of $285,000.
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.
Operating activities used $33,000 in cash flows for the comparable period in
2005. The use of this cash was primarily due to an increase in accounts
receivable of $1,033,000 and a decrease in accounts payable and accrued expenses
of $244,000, partially offset by net income of $1,071,000, and a non-cash
adjustment for depreciation and amortization of $116,000.
14
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Net cash used for investing activities for the three months ended March 31, 2006
was $267,000. The use of these funds was for capital expenditures. In 2005, net
cash used for investing activities was $241,000. The use of these funds was for
capital expenditures and costs associated with the acquisition of Willtek of
$134,000 and $107,000, respectively.
Cash provided by financing activities for the three months ended March 31, 2006
was $1,129,000. 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 $392,000 by
Willtek, the proceeds of which must be used for research and development. For
the three months ended March 31, 2005, net cash used for financing activities
was $511,000. The primary use of these funds was for the payment of dividends of
$524,000, partially offset by proceeds from the exercise of stock options of
$23,000.
The Company anticipates that its resources provided by its cash flow from
operations will be sufficient 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 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 in Germany. The Company does business in
more than fifty countries and currently generates approximately 55% 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 $11,900,000 at March
31, 2006, translated into US dollars at the closing exchange rates. The Company
also acquires certain inventory from foreign suppliers and, as such, faces risk
due to adverse movements in foreign currency exchange rates. These risks could
have a material impact on the Company's results in future periods. The potential
loss based on end of period balances and prevailing exchange rates resulting
from a hypothetical 10% strengthening of the dollar against foreign currencies
was not material in the period ended March 31, 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.
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.
15
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.
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 as the basis
for an exemption from registering the sale of these shares of
treasury stock.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
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.
17
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: May 12, 2006 /S/James M. Johnson
--------------------------------
James M. Johnson
Chief Executive Officer
Date: May 12, 2006 /S/Paul Genova
--------------------------------
Paul Genova
President, Chief Financial Officer
18
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.
19
