SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
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__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
Commission file number 0-27231
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Wireless Facilities, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 13-3818604
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4810 Eastgate Mall
San Diego, CA 92121
(858) 228-2000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
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Common Stock, par value $0.001 NASDAQ
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
________________________________________________________
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 ______.
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [_]
The aggregate market value of the voting stock (Common Stock) held by
non-affiliates as of March 22, 2001 was approximately $130 million, based on
the closing sale price on the NASDAQ market exchange on that date. *
The number of shares outstanding of the Registrant's Common Stock was
43,844,089 as of March 22, 2001.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of registrant's proxy statement for the annual meeting to be
held on June 22, 2001 (the "Proxy Statement"), to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after
the close of the Registrant's fiscal year, are incorporated by reference under
Part III of this Form 10-K.
Certain exhibits filed with the registrant's (i) Registration Statement
on Form S-1 (No. 333-85515) and (ii) Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000 are incorporated by reference into Part IV of
this Form 10-K.
* Excludes the common stock held by executive officers, directors and
stockholders whose ownership exceeds 5% of the Common Stock outstanding at
March 22, 2001.
WIRELESS FACILITIES, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
Page No.
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PART I
Item 1. Business 3
Item 2. Properties 21
Item 3. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 22
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 23
Item 6. Selected Financial Data 24
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 25
Item 7a. Quantitative and Qualitative Disclosure about Market Risk 29
Item 8. Financial Statements and Supplementary Data 30
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 30
PART III
Item 10. Directors and Executive Officers of the Registrant 31
Item 11. Executive Compensation 31
Item 12. Security Ownership of Certain Beneficial Owners and Management 31
Item 13. Certain Relationships and Related Transactions 31
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 32
2
PART I
Item 1. Business
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This report contains forward-looking statements. These statements relate to
future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"potential" or "continue," the negative of such terms or other comparable
terminology. These statements are only predictions. Actual events or results
may differ materially. Important factors which may cause actual results to
differ materially from the forward-looking statements are described in the
Section entitled "Risk Factors" in Item 1 in this Form 10-K, and other risks
identified from time to time in our filings with the Securities and Exchange
Commission, press releases and other communications.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of the forward-
looking statements. We are under no obligation to update any of the forward-
looking statements after the filing of the Form 10-K to conform such statements
to actual results or to changes in our expectations.
Description of the business
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Introduction
Wireless Facilities, Inc. is an independent provider of outsourced services
for the wireless communications industry. We were incorporated in the state of
New York on December 19, 1994, began operations in March 1995 and reincorporated
in the state of Delaware in 1998. We completed our initial public offering on
November 5, 1999.
We plan, design, deploy and manage wireless telecommunications networks. This
work involves radio frequency engineering, site development, project management
and the installation of radio equipment networks. We have also expanded our
network management services, which involve day-to-day optimization and
maintenance of wireless networks. As part of our strategy, we are technology and
vendor independent. We believe that this aligns our goals with those of our
customers and enables us to objectively evaluate and recommend specific products
or technologies. We provide network design and deployment services to wireless
carriers such as Verizon and AT&T affiliates Telecorp PCS and Triton PCS;
equipment vendors such as Ericsson and Siemens and wireless data carriers, such
as Sprint and XO Communications.
The wireless telecom industry has experienced rapid growth over the past few
years and carriers have made large capital investments to expand their networks.
As carriers deploy these networks, they have been faced with a proliferation in
both the number and type of competitors. Due to this increasingly competitive
environment, carriers must focus on satisfying customer demand for enhanced
services, seamless and comprehensive coverage, better call quality, faster data
transmission and lower prices. The proliferation in services has also caused
carriers to experience challenges associated with managing complex networks and
new technologies. These changes have put pressure on carriers and equipment
vendors to allocate their resources effectively, which we believe has
increasingly led them to outsource network planning, deployment and management.
Our services are designed to improve our customers' competitive position
through the planning, deployment and management of their networks. We developed
a methodology of planning and deploying wireless networks that allows us to
deliver reliable, scalable network solutions. We offer our services primarily on
a fixed-price basis with scheduled deadlines for completion times, that is, on a
time-certain basis. We believe this enables our customers to more reliably
forecast the costs and timing of network deployment and management. This allows
our customers to focus on their core competencies and rely on us for planning,
deploying and managing their networks.
Since 1995, we have completed projects for more than 130 customers, ranging in
scope from the installation of a single cell site to multi-year, large-scale
deployment contracts. We have expanded our operations internationally and during
2000, were engaged on projects in 54 countries. In addition to our U.S.
operations, as of December 31, 2000, we had ongoing projects in countries
including Argentina, Brazil, Canada, Chile, Czech Republic, France, Germany,
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India, Japan, Kuwait, Mauritius, Mexico, Morocco, Poland, Russia, South Africa,
Spain, Syria, Turkey, United Arab Emirates, the United Kingdom and Venezuela. In
2000, 28% of our revenues was derived from international operations.
Industry Background
Wireless networks are telecom systems built using radio equipment. The
implementation of a wireless network involves several project phases, including
planning, design and deployment. During the planning phase, decisions are made
about the type of equipment to be used, where it will be located and how it will
be configured. These decisions are based on a number of analytical
considerations, including phone subscriber profiles and target markets,
forecasts of call usage, radio engineering analysis and financial modeling and
forecasting. The design phase follows, and involves the coordinated efforts of
radio engineers, site development professionals and other technical disciplines.
Potential equipment sites are identified, based on a range of variables
including radio propagation characteristics, economics, site access, and
construction feasibility.
Once a network design has been accepted, land or building rooftops must be
bought or leased for towers or telecom equipment, including radio base stations,
antennas and supporting electronics. This site development phase requires input
from a number of specialists, including real estate, land use and legal
professionals who work with local jurisdictions to get any necessary land use,
zoning and construction permits. Next, construction and equipment installation
must be performed. Finally, radio frequency engineers commission the new radio
equipment, test it, integrate it with existing networks and tune the components
to optimize performance.
Once placed in service, wireless networks must be continually updated,
recalibrated, tuned and monitored for performance and faults. Traffic patterns
change, trees or buildings may block radio signals and interference may be
encountered from neighboring or competing networks or other radio sources. Usage
patterns may change because of new rate plans, new features or increasing sales.
Optimization is the process of tuning the network to take into account such
changes, and often gives rise to maintenance tasks such as antenna changes, new
equipment installations or the replacement of substandard or failed components.
Growth of the Wireless Telecom Industry
Wireless telecom has been one of the most rapidly growing technologies in the
world, driven by the dramatic increase in wireless telephone usage, as well as
demand for wireless Internet and other data services, also known as wireless
broadband services. In March 2001, Dataquest/Gartner estimated that by 2005, the
worldwide wireless subscriber base will grow to over 1.2 billion from 703
million in 2000. The demand for wireless Internet access and other data services
has accelerated the adoption of new technologies such as those embodied in the
emerging third-generation (3G) standard. High-speed fiber networks are being
coupled with broadband wireless technologies to deliver enhanced telecom
capabilities and features to new customers and markets.
Wireless carriers are under pressure to continuously upgrade their networks
with new technologies and expand into new geographic regions in order to remain
competitive and satisfy the demand for pervasive wireless service. Additionally,
new carriers have entered the market as a result of deregulation, the issuance
of new licenses and the demand for new services, fueling the development of new
networks. As a result, carriers have been deploying new network equipment both
in the U.S. and internationally. New technologies, such as broadband wireless,
are helping to fuel demand for more advanced wireless equipment. In September
2000, Dataquest/Gartner estimated that the market for broadband wireless
equipment in North America would grow from $146.3 million in 1999 to $1.45
billion in 2003, a compound annual growth rate of 77.6%.
Changes in the Wireless Telecom Industry
As carriers deploy their wireless networks, they face significant competition.
Through privatization in the 1980s and deregulation in the 1990s, both
domestically and internationally, the competitive landscape has changed for
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wireless carriers. For carriers to differentiate themselves and remain
competitive in this new environment, they have been required to deploy networks
to:
. provide seamless nationwide coverage and avoid expensive roaming costs on
competitors' networks in markets where carriers do not currently own
infrastructure;
. offer PCS service in new geographic markets;
. offer enhanced services, such as one rate plans, calling party pays, caller
ID, text messaging and emergency 911 locator services;
. implement the new third-generation (3G) network standard to deliver
wireless broadband data services, including Internet access and two-way e-
mail;
. introduce other emerging data networking and broadband technologies, such
as LMDS, MMDS and other point-to-multipoint architectures, for the
provision of high speed data wireless Internet access and other broadband
services; and
. offer wireless local loop systems domestically to bypass incumbent wireline
competitors and in developing countries lacking modern wireline telephone
infrastructure.
The convergence of traditional wireless, wireline and cable services has also
added complexity to the telecom environment as carriers have deployed networks
spanning traditional wireless/wireline boundaries to offer these enhanced
services and new technologies.
New Challenges for Wireless Carriers and Equipment Vendors
Due to this increasingly competitive environment, carriers are focused on
satisfying customer demand for enhanced services, seamless and comprehensive
coverage, better quality, faster data transmission and lower prices. The
proliferation of carriers and new technologies has created an environment where
speed to market is an important component of a wireless carrier's success.
Carriers are also faced with the challenge of managing increasingly complex
networks and technologies. For example, the introduction of wireless Internet
technologies and the growth in broadband wireless services requiring the
transmission of large amounts of data creates additional new technological
hurdles for carriers establishing or upgrading their networks. In this dynamic
environment, customer acquisition and retention are key determinants of success.
In our experience this has led carriers to increasingly prioritize their
resources, focusing on revenue generating activities and outsourcing when they
can do so effectively.
In our experience, the changing environment is also placing significant
operational challenges on carriers. Carriers must make decisions about which
geographic markets to serve and which services and technologies to offer.
Staffing challenges and process implementations can present cost uncertainties
and operational challenges for carriers to deploy and manage their networks.
Additionally, networks are being deployed with equipment from unrelated vendors,
posing system integration challenges. This situation is exacerbated by
consolidation in the industry, which often entails the integration of distinct
networks.
Equipment vendors are also facing numerous challenges as they develop new
generations of equipment with increased features and functionality. Vendors must
provide equipment that can be deployed within a carrier's existing network and
integrate with equipment offered by other vendors. As a result of the rapid pace
of technological change, we believe that equipment vendors have increasingly
focused on offering competitive product solutions and outsourced services such
as network design, deployment and management.
5
The Need for Outsourcing
We believe that carriers and equipment vendors are outsourcing network
planning, deployment and management to focus on their core competencies and
refine their competitive advantage. In our experience, wireless carriers and
equipment vendors who are seeking outsourcing are looking for service providers
who:
. offer turnkey solutions;
. are technology and vendor independent;
. offer fixed-price, time-certain services;
. have sufficient numbers of highly skilled, experienced employees capable of
designing and deploying large-scale domestic and international projects;
and
. update, manage, optimize, monitor and maintain networks.
The WFI Solution
We provide outsourced services to telecom carriers and equipment vendors for
the planning, design, deployment and ongoing optimization and management of
wireless networks. We offer turnkey solutions on a fixed-price, time-certain
basis. We have expertise with all major wireless technologies, and have deployed
equipment supplied by a majority of the world's leading equipment vendors. We
are better able to manage large-scale deployments for our customers, both
domestically and internationally. Our project management process enables us to
meet our customers' needs on time and within budget without compromising
quality.
Turnkey Solutions. Traditionally, carriers engaged a number of firms or used
internal personnel to build and operate their wireless networks. In this case,
the carrier was responsible for the coordination and integration of the various
groups and defined and implemented the process to be used. The end-to-end, or
turnkey, approach that we offer allows the carrier to engage a single
responsible party who is accountable for delivering and managing the network
under a single contract. In contrast to traditional methods, we provide
management services during each phase of the engagement, enabling us to
efficiently schedule processes and resources, reducing the time and cost of
network deployment and management. We provide our customers with a primary point
of accountability and reduce the inefficiencies associated with coordinating
multiple subcontractors. In addition, we eliminate the need for a carrier or
equipment vendor to assemble, train and retain network deployment and management
staff, resulting in cost savings. This allows carriers and vendors to focus
their resources on revenue generating activities.
Technology and Vendor Independence for Both Mobile and Fixed Wireless
Operations. We have experience in all major wireless technologies, including:
conversion of analog, cellular systems to digital capability (CDMA, TDMA, GSM,
and iDEN); deployment of digital PCS systems; migration to 3G network platforms
to provide high speed wireless data internet capability, such as UMTS spectrum
in Europe; and development of emerging broadband technologies in the MMDS and
LMDS spectrums. Two critical components of our ability to meet and exceed
customer expectations are our broad scope of services and our technology
expertise and independence. We are continually keeping abreast of next
generation technologies to maintain technology expertise. Consistent with our
vendor independent policy, we have not aligned ourselves with the products of
any particular vendor. We provide services to many of the largest wireless
carriers and with engineering staff qualified and approved by nearly every major
wireless equipment vendor. Our technology and vendor independence results in
objective recommendations to the customer based on the full profile of the
customer's needs.
Fixed-Price and Time-Certain Delivery. Our services are sold primarily on a
fixed-price, time-certain basis, where our customers pay by the cell site or
project, rather than by the hour. By selling our services primarily on a fixed-
price, time-certain basis, we enable our customers to better forecast their
capital expenditures and more accurately forecast the timing and costs of
network deployment and management.
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This allows them to focus on their core competencies and rely on us for the
cost-effective planning, deployment and management of their networks.
Proven Methodology. Our project management process enables us to meet our
customers' needs on a fixed-price, time-certain basis without compromising
quality. We leverage our experience, obtained from implementing hundreds of
projects, to reduce time to market for new projects. For example, project
managers utilize our project management process to chart project progress and
coordinate the integration of numerous specialized activities during the design
and deployment of a network. We have dedicated staff employed to facilitate
efficient feedback of information among the various specialized activities so
that our project teams work quickly and effectively. Through this coordinated
effort and the use of Dynamic Tracker, our project tracking software tool, we
are able to optimize resource deployment and deliver solutions on time and
within budget.
Depth and Scale. Our principal asset is our staff, 88% of whom work directly
on customer projects. As of December 31, 2000, we had more than 680 engineers,
30% of whom have advanced degrees. Our technological expertise and industry
knowledge has enabled us to form strong customer relationships with early stage
telecom ventures, as well as established carriers and equipment vendors. During
2000, we were engaged on projects in 54 countries. In addition, we have
established corporate resource centers in Mexico, Brazil, India, the United
Kingdom and Sweden. We believe our presence in these countries facilitates our
ability to customize our services to meet international customers' specific
needs.
Strategy
Our objective is to be the global leader in telecom outsourcing. This means
being the leading independent provider of complete outsourced telecom network
services, including network planning; design; deployment; and management. The
key elements of our strategy include:
Focus on customer satisfaction. Our long-term success depends upon our ability
to consistently deliver value to our customers in the form of completed
projects, rendered to the highest professional standards, delivered on time and
within budget. By offering turnkey solutions on a fixed-price, time-certain
basis, we hold ourselves to the expectations set with our customers. We strive
to exceed customer expectations on every project. We believe we have been
successful in developing customer loyalty and trust because of our high
standards and vendor and technology independence. Customer satisfaction is
demonstrated by the fact that a majority of our customers have used WFI services
for repeat projects.
Expand the suite of services we offer and pursue cross-selling opportunities.
Since our inception, we have continually looked for new ways to serve our
customers. Expanding our services provides new channels for revenues and the
ability to cross-sell our suite of services to existing customers. For instance,
we often utilize our pre-deployment consulting services to establish
relationships with customers as soon as a project is conceived. Based on this
relationship, we pursue opportunities for network design and deployment. Once a
network is deployed, we offer ongoing network operations, maintenance and
optimization services. Through our network operations center in Richardson,
Texas, we also centrally manage, monitor and optimize the networks of several of
our customers. Our experience with emerging technologies also offers cross-
selling opportunities for network upgrades and deployment of a carrier's next
generation network. As technologies continue to evolve and networks become more
complex, we will continue to expand our services to meet the changing needs of
our customers.
Remain at the forefront of new technologies. Emerging technologies present
numerous opportunities and challenges for existing carriers and vendors as well
as for new carriers. Our customers depend on us to draw upon our extensive
design and deployment experience to recommend optimal solutions to them. To
achieve this, we have in-house training programs for all technical personnel. We
will continue to actively market our technology expertise to wireless carriers
and equipment vendors that are deploying leading edge technologies. This permits
us to gain valuable experience deploying new technologies, while also adding
value to these customers' products and services offerings. Additionally,
employees in our Advanced Technology Group are members of and participate with
industry standards setting bodies to develop domestic and international
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standards for next generation telecom products by attending standard setting
forums and making contributions to new standards.
Pursue opportunities for international growth. International markets represent
a significant opportunity for future growth. We established corporate resource
centers in Mexico and Brazil in 1998 and India and the United Kingdom in 1999
and have continued this expansion in 2000 by adding a corporate resource center
in Sweden. We intend to increasingly execute international projects with local
professional resources. Initially, our international revenues resulted from
deployment contracts with multinational equipment vendors. However, as we
continue to penetrate foreign markets, we expect to continue to capitalize on
opportunities created by privatization, new licensees and the expansion of
wireless local loop networks.
Continue to attract and retain qualified personnel. Technology drives our
industry. As a result, our engineers and site development teams are critical to
our success. We have implemented an institutional process for career
development, training and advancement. We intend to continue to attract and
retain qualified staff by offering our employees challenging projects and
opportunities to work with emerging technologies within a corporate culture that
fosters innovation and encourages learning and professional development. We
intend to continue to invest in training and professional development.
Capitalize on prior project experience. We have participated in the deployment
of thousands of cell sites. The experience we have gained through these projects
is reflected in our project management process and proprietary project
management tools. This experience allows us to optimize the allocation of our
resources and consistently meet our customers' needs on a fixed-price, time-
certain basis without compromising quality. We will also seek to transfer our
knowledge gained in international markets, such as the deployment of 3G
technology in domestic markets. We will continue to refine our processes,
methodologies and project management tools, matching them to new customer and
technology requirements.
Continue to pursue strategic acquisitions. We intend to continue to pursue
acquisitions that will supplement our technical expertise, allow us to acquire
additional human resources or strategic customer relationships or expand our
presence in key geographic markets where we could more effectively complete a
project or gain access to new contracts. During 2000, we acquired seven
businesses to strengthen our ability to provide ongoing network optimization and
management services, extend our geographic reach, broaden our technical
expertise and add professional resources.
Network Services
We provide a comprehensive suite of network solutions to wireless carriers and
equipment vendors, from feasibility planning, to design, deployment and ongoing
network management.
Pre-Deployment Planning Services: Telecom Strategy Group
We provide pre-deployment planning services for all steps involved in
technology assessment, market analysis, and business plan development.
Market Analysis. The market team studies and analyzes the traffic patterns,
population density, topography and propagation environment in each market under
consideration. We have a well-developed capability in geographic information
systems (GIS) services, which is used for network design as well as deployment.
We have developed a proprietary methodology to assist customers in analysis of
the competitive landscape for broadband services.
Technology Evaluation and Vendor Selection. The Advanced Technology Group, a
group of experts in wireless telecom technologies and applications, assists
customers in determining the best equipment for a particular project, analyzing
the feasibility of a particular technology for a network plan and managing the
bidding process from multiple equipment vendors. Consistent with our
independence from vendors and technology, evaluation and selections are made to
suit the customers profile of needs.
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Strategic and Business Consulting. Our business consulting group utilizes its
expertise and experience to analyze the financial, engineering, competitive
market and technology issues applicable to a proposed technology or network
deployment project. Drawing on the demographic analysis and preliminary network
dimensioning performed by the market analysis team and benchmarks for
deployment-related expenditures from our various functional groups, consultants
create new business strategies or evaluate existing deployment strategies.
Services include:
. defining subscriber profiles and target markets, including competitive and
regulatory analysis;
. developing service offerings and marketing plans that drive usage
forecasting;
. network design and backbone configuration; and
. business plan development and financial modeling.
These services are particularly important to start-up carriers that have
limited resources and access to information for emerging technologies such as 3G
and broadband wireless.
We have worked on a number of high profile business and technology planning
projects in the wireless industry, covering a range of mobile broadband, and
satellite technologies. Although the size of these projects is typically smaller
in scope than design and deployment projects, they are strategically important
to us because they represent opportunities to build relationships and
credibility with customers during the planning phase as well as enhance our
experiences with leading edge technologies. These services are offered on both a
time and materials and fixed price basis.
Design and Deployment Services
We provide a range of services for the full design and deployment of wireless
networks. Such services include:
Radio Frequency Engineering. Radio frequency engineers design each integrated
wireless system to meet the customer's transmission requirements. These
requirements are based upon a projected level of subscriber density and traffic
demand and the coverage area specified by the operator's license or cost-benefit
decisions. Our engineers perform the calculations, measurements and tests
necessary to determine the optimal placement of the wireless equipment. In
addition to meeting basic transmission requirements, the radio frequency network
design must make optimal use of radio frequency and result in the highest
possible signal quality for the greatest portion of subscriber usage within
existing constraints. The constraints may be imposed by cost parameters,
terrain, license limitations, interference with other operators, site
availability, applicable zoning requirements and other factors.
Microwave Relocation. To enable customers to use the radio frequency spectrum
they have licensed, it is often necessary for them to analyze the licensed
spectrum for microwave interference and move incumbent users of this portion of
the spectrum to new frequencies. We assist our customers in accomplishing this
microwave relocation by providing complete point-to-point and point-to-
multipoint line-of-sight microwave engineering and support services. Engineering
and support services include identifying existing microwave paths, negotiating
relocation with incumbent users, managing and tracking relocation progress and
documenting the final decommissioning of incumbent users.
Fixed Network Engineering. Most wireless calls are ultimately routed through a
wireline network. As a result, the traffic from wireless networks must be
connected with switching centers within wireline networks. We establish the
most efficient method to connect cell sites to the wireline backbone, whether by
microwave radio or by landline connections. Our engineers are involved in
specifying, provisioning and implementing fixed network facilities.
Additionally, the convergence of voice and data networks, specifically through
broadband technologies, such as LMDS, MMDS and Fast Ethernet, has created a new
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demand for specialized fixed network engineering skills. These skills include
planning, design, capacity and traffic analysis for packet-switched and Internet
protocol router-based network elements. Engineering teams are trained in
specialized data networking and Internet protocol engineering issues.
Site Development. Site development experts study the feasibility of placing
base stations in the area under consideration from a zoning perspective,
negotiate leases and secure building permits, supervise and coordinate the civil
engineering required to prepare the rooftop or tower site, manage multiple
construction subcontractors and secure the proper electrical and telecom
connections.
Installation and Optimization Services. We install radio frequency equipment,
including base station electronics and antennas, and recommend and implement
location, software and capacity changes required to meet the customer's
performance specifications. We provide installation and optimization services
for all major PCS, cellular and broadband wireless air interface standards and
equipment manufacturers. We also perform initial optimization testing of
installed networks to maximize the efficiency of these networks.
Network Management Services
Network management services are comprised of post-deployment radio frequency
optimization services and network operations and maintenance services. In March
2000, we expanded our network management services by acquiring from Ericsson a
network operations center located in Richardson, Texas, and we are currently
providing centralized network monitoring and optimization services for several
of our customers from this site.
Post-Deployment Radio Frequency Optimization. Upon initial deployment, a
network is optimized to provide wireless service based upon a set of parameters
existing at that time, such as cell density, spectrum usage, base station site
locations and estimated calling volumes and traffic patterns. Over time, call
volumes or other parameters may change, requiring, for example, the relocation
of base stations, addition of new equipment or the implementation of system
enhancements. We offer ongoing radio frequency optimization services to
periodically test network elements, tune the network for optimal performance and
identify elements that need to be upgraded or replaced.
Network Operations and Maintenance. For customers with ongoing outsourcing
needs, we can assume responsibility for day-to-day operation and maintenance of
their wireless networks. The relationship we develop with our customers for this
type of outsourcing contract begins with a team of engineers and other
professional and support staff matched to the customer's specific needs. We take
into account such variables as grade of service and reliability requirements,
equipment manufacturer certification and geographic layout of the system in
question for determining the allocation of site maintenance and other
responsibilities between our service team and the customer's own personnel. We
provide staffing to perform the necessary services for ongoing optimization,
operations, maintenance and repair of critical network elements, including base
station equipment, mobile switching centers and network operating centers to the
extent required by its customers. We also provide training services for the
internal network staff of our customers.
The WFI Methodology
We believe that our project management process is critical for the successful
execution of our business model. Project managers use our methodology and
proprietary tools to coordinate the various specialized activities involved in
bidding, planning, designing, deploying and optimizing networks on an ongoing
basis. Through the coordination of project managers and functional experts, we
are able to integrate and account for the various pieces of a turnkey
engagement.
We have built upon past experiences in developing an analytical framework to
provide scalable solutions to clients. While there are features unique to each
project, there are often similarities among projects. The project management
process is designed to bring the expertise developed during prior engagements to
bear on each new project.
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We continue to dedicate resources to maintaining and improving the project
management process. At the conclusion of each engagement, incremental knowledge
gained during the course of the project is incorporated into a knowledge
database. We believe that the implementation and improvement of the project
management process ultimately benefits clients. The methodology enables us to
leverage technological and industry expertise to deliver reliable networks in a
rapid fashion without sacrificing quality. We are committed to continually
refine the project management process, customizing it for each new customer and
for each new technology opportunity.
Sales and Marketing
We market and sell services through a direct sales force to wireless carriers
and equipment vendors. As of December 31, 2000, we employed 25 full-time sales
and marketing staff. Sales personnel work collaboratively with senior
management, consulting and deployment personnel to develop new sales leads and
secure new contracts. Each salesperson is expected to generate new sales leads
and take responsibility as an account manager for specified accounts with
existing customers. As account manager, the salesperson works with planning and
deployment personnel assigned to that customer to identify opportunities for
performing additional services for that customer.
Customers
We provide network design, deployment and management services to wireless
carriers and equipment vendors. We are also actively targeting carriers
deploying new wireless broadband networks. Additionally, we have provided
services to satellite service providers and wireless tower companies. Since
1995, we have completed projects for more than 130 customers. As of December 31,
2000, we had ongoing projects in 54 countries. A representative list of our
customers during 2000 includes Cingular, AT&T Wireless, Verizon, Ericsson,
Sprint PCS, Triton PCS, Telecorp PCS, Siemens, Telcel, Metricom and XO
Communications.
Employees
As of December 31, 2000, we employed 2,072 full time employees worldwide,
including 1,822 in network and deployment services, 25 in sales and marketing,
and 225 in general and administrative roles. None of our employees, with the
exception of our Scandinavian employees, are represented by a labor union, and
we have not experienced any work stoppages. We consider our employee relations
to be satisfactory.
Competition
Our market is highly competitive and fragmented and is served by numerous
service providers. However, primary competitors are often the internal
engineering departments of carrier and equipment vendor customers. With respect
to radio frequency engineering services, we compete with service providers that
include American Tower CelPlan Technologies, Comsearch (a subsidiary of Allen
Telecom Inc.), LCC International, and Marconi Communications. We compete with
site acquisition service providers that include General Dynamics and Whalen &
Company, Inc. (a subsidiary of Tetra Tech, Inc.). These companies have also
engaged in some site management activities. Competitors that perform civil
engineering work during a build-out are normally regional construction
companies. We compete with engineering and project management companies like
Bechtel Group, Inc., Black & Veatch and Fluor Daniel Inc. for the deployment of
wireless networks. These companies are significant competitors given their
project finance capabilities, reputations and international experience. Many of
these competitors have significantly greater financial, technical and marketing
resources, generate greater revenues and have greater name recognition than we
do.
We believe that the principal competitive factors in our market include the
ability to deliver results within budget and on time, reputation,
accountability, project management expertise, industry experience and
competitive pricing. In addition, expertise in new and evolving technologies,
such as broadband wireless, has become increasingly important. We believe that
the ability to integrate these technologies, as well as equipment from multiple
vendors, gives us a competitive advantage as we can offer the best
11
technology and equipment to meet a customer's needs. We believe our ability to
compete also depends on a number of additional factors which are outside of our
control, including:
. the prices at which others offer competitive services;
. the willingness of our competitors to finance customers' projects on
favorable terms;
. the ability of our customers to perform the services themselves; and
. the extent of our competitors' responsiveness to customer needs.
Industry Segment Information
Our operations are organized along service lines and include three reportable
industry segments: Design and Deployment, Network Management, and Business
Consulting. The following table sets forth the contribution of our industry
segments to revenues and operating income for the fiscal year ended December
31, 2000 (in millions):
Operating
Revenues Income
--------- ------
Design and deployment $205.6 $38.9
Network management $ 42.7 $10.7
Business consulting $ 7.6 $ 2.4
------ -----
Total $255.9 $52.0
====== =====
Geographic Segment Information
In 2000 we realized approximately 28% of our revenues from projects
outside of the U.S. Revenues for the year ended December 31, 2000 and long-term
assets at December 31, 2000 derived by geographic segment are as follows (in
millions):
Revenues Assets
-------- ------
United States $ 183.7 $ 71.5
Foreign $ 72.2 $ 30.3
------- -------
Total $ 255.9 $ 101.8
======= =======
Recent Events
On February 9, 2001, we executed an amended and restated credit
agreement, which increased the aggregate commitment provided by our credit
facility from $50 million to $100 million. The borrowings under this credit
agreement are due in February 2004 and bear interest at either (i) the greater
of the bank prime rate or the Federal Funds Rate plus .5%, plus a margin of
1.25%, the base rate margin, or (ii) at the London Interbank Offering Rate
("LIBOR") plus 2.25%, the LIBOR rate margin, at our discretion. Beginning with
the third quarter of 2001, the base rate margin and the LIBOR rate margin will
be determined based on certain financial ratios as of the end of the most
recently ended fiscal quarter which will result in margins ranging from .75% to
1.50% and 1.75% to 2.50%, respectively. The credit facility is secured by
substantially all of our assets. The agreement contains restrictive covenants,
which, among other things, requires maintenance of certain financial ratios.
On February 23, 2001, we announced that we received notice of contract
suspension and termination from Metricom, Inc., with regard to remaining RF
engineering and deployment services for Metricom's data network buildout, which
would have been provided during the first and second quarter of our fiscal 2001.
Beyond the second quarter, we do not anticipate any material impact related to
Metricom's notice of contract suspension and termination.
On March 2, 2001, the Company's Board of Directors approved a
voluntary stock option cancel and regrant program for employees. The program
provides employees with the opportunity to cancel all of their existing and
outstanding stock options granted to them on or after September 30, 2000 and
before March 30, 2001, and some or all of their existing and outstanding stock
options granted to them prior to September 30, 2000, in exchange for a new
option grant for an equal number of shares to be granted at a future date. The
new options will be issued no earlier than six months and one day after the
cancellation date, March 30, 2001, and the exercise price of the new options is
to be based on the trading price of our common stock on the date of the new
option grants. The exchange program is designed to comply with FASB
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation."
Risk Factors
You should carefully consider the following risk factors and all other
information contained in this Report on Form 10-K. Investing in our common stock
involves a high degree of risk. Risks and uncertainties, in addition to those we
describe below, that are not presently known to us or that we currently believe
are immaterial may also impair our business operations. If any of the following
risks occur, our business could be harmed, the price of our common stock could
decline and you may lose all or part of your investment. See the note regarding
forward-looking statements included at the beginning of Item 1. Business.
-----------------
We expect our quarterly results to fluctuate. If we fail to meet earnings
estimates, our stock price could decline.
Our quarterly and annual operating results have fluctuated in the past and
will vary in the future due to a variety of factors, many of which are outside
of our control. The factors outside of our control include:
. telecom market conditions and economic conditions generally;
. the timing and size of network deployment by our carrier customers and the
timing and size of orders for network equipment built by our vendor
customers;
. fluctuations in demand for our services;
. the length of sales cycles;
. reductions in the prices of services offered by our competitors; and
. costs of integrating technologies or businesses.
The factors substantially within our control include:
. changes in the actual and estimated costs and timing to complete fixed-
price, time-certain projects;
. the timing of expansion into new markets, both domestically and
internationally; and
. the timing and payments associated with possible acquisitions.
Due to these factors, quarterly revenues, expenses and results of operations
could vary significantly in the future. You should take these factors into
account when evaluating past periods, and, because of the potential variability
due to these factors, you should not rely upon results of past periods as an
indication of our future performance. In addition, we may from time to time
provide estimates of our future performance. Such estimates are inherently
uncertain and actual results are likely to deviate, perhaps substantially, from
such estimates as a result of the many risks and uncertainties in our business,
including those set forth in these risk factors. We undertake no duty to update
such estimates if given. In addition, the long-term viability of our business
could be negatively impacted if there were a downward trend in our revenues and
results of operations. Because our operating results may vary significantly from
quarter to quarter based upon the factors described above, results may not meet
the expectations of securities analysts and investors, and this could cause the
price of our common stock to decline significantly.
We have recently begun to experience a negative impact to our earnings and
stock price as a result of the factors that may cause our quarterly results to
fluctuate. We expect that this negative trend may continue for the forseeable
future, and at least through the second quarter of 2001. Due to the recent
downturn in the financial markets in general, and specifically the slowdown in
wireless telecommunications infrastructure spending, some of our customers have
recently cancelled or suspended their contracts with us and many of our
customers or potential customers have postponed entering into new contracts for
our services. As a result, we expect our revenues and earnings to decline from
previously estimated levels. In addition, unfavorable economic conditions are
causing some of our customers to take longer to pay us for services we perform,
increasing the average number of days that our sales are outstanding. Also due
to the difficult financing and economic conditions, some of our customers may
not be able to pay us for services that we have already performed. If we are not
able to collect amounts due to us, we may be required to write-off or convert
significant amounts of our accounts receivable. Because we are not able to
reduce our costs as fast as our revenues may decline, our costs as a percentage
of revenues may increase and, correspondingly, our net earnings may decline
disproportionately to any decrease in revenues. If we restructure our business
in an effort to minimize our expenses, we may incur associated charges. As a
result of these and other factors, it has become extremely difficult to forecast
our future revenues and earnings, and any predictions we make are subject to
significant change and are very uncertain.
Our success is dependent on the continued growth in the deployment of wireless
networks; and to the extent that such growth cannot be sustained our business
may be harmed.
The wireless telecom industry has historically experienced a dramatic rate of
growth both in the United States and internationally. Recently, however, many
telecom carriers have been re-evaluating their network deployment plans in
response to downturns in the capital markets, changing perceptions regarding
industry growth and the adoption of new wireless technologies, and a general
economic slowdown in the United States. It is difficult to predict whether
these changes will result in a sustained downturn in the telecom industry. If
the rate of growth slows and carriers reduce their capital investments in
wireless infrastructure or fail to expand into new geographies, our business
will be significantly harmed.
The uncertainty associated with rapidly changing telecommunications
technologies may also impact the rate of deployment of wireless networks and the
demand for our services. Telecommunications service providers face significant
challenges in assessing consumer demand and acceptance of rapidly changing
enhanced telecommunication capabilities. If telecommunications service providers
perceive that the rate of acceptance of next generation telecommunications
products will grow more slowly than expected, they may slow their development of
next generation technologies. Any significant slowdown will reduce the demand
for our services and adversely affect our financial results.
Our revenues will be negatively impacted if there are delays in the deployment
of new wireless networks.
A significant portion of our revenue is generated from new licensees seeking
to deploy their networks. To date, the pace of network deployment has sometimes
been slower than expected, due in part to difficulty experienced by holders of
licenses in raising the necessary financing, and there can be no assurance that
future bidders for licenses will not experience similar difficulties. There has
also been substantial regulatory uncertainty regarding payments owed to the
United States Government by past successful wireless bidders, and such
uncertainty has delayed network deployments. In addition, factors adversely
affecting the demand for wireless services, such as allegations of health risks
associated with the use of cellular phones, could slow or delay the deployment
of wireless networks. These factors, as well as future legislation, delays in
granting the use of spectrum by the United States Government, legal decisions
and regulation may slow or delay the deployment of wireless networks, which, in
turn, could harm our business.
If our customers do not receive sufficient financing, our business may be
seriously harmed.
Some of our customers and potential customers are companies with limited or no
operating histories and limited financial resources. These customers often must
obtain significant amounts of financing to pay for their spectrum licenses, fund
operations and deploy their networks. Other customers of ours rely upon outside
financing to pay the considerable costs of deploying their networks. In either
instance, we frequently work with such companies prior to their receipt of
financing. If these companies fail to receive adequate financing or experience
delays in receiving financing, particularly after we have begun working with
them, our results of operations may be harmed.
Our success is dependent on the continued trend toward outsourcing wireless
telecom services.
Our success is dependent on the continued trend by wireless carriers and
network equipment vendors to outsource for their network design, deployment and
management needs. If wireless carriers and network equipment vendors elect to
perform more network deployment services themselves, our revenues may decline
and our business would be harmed.
A loss of one or more of our key customers or delays in project timing for
such customers could cause a significant decrease in our net revenues.
We have derived, and believe that we will continue to derive, a significant
portion of our revenues from a limited number of customers. We anticipate that
our key customers will change in the future as current projects are completed
and new projects begin. The services required by any one customer can be limited
by a number of factors, including industry consolidation, technological
developments, economic slowdown and internal budget constraints. None of our
customers is obligated to purchase additional services and most of our customer
contracts can be terminated without cause or penalty by the customer on notice
to us of 90 days or less. As a result of these factors, the volume of work
performed for specific customers is likely to vary from period to period, and a
major customer in one period may not use our services in a subsequent period.
Accordingly, we cannot be certain that present or future customers will not
terminate their network service arrangements with us or significantly reduce or
delay their contracts. Any termination, change, reduction or delay in our
projects could seriously harm our business.
The consolidation of equipment vendors or carriers could impact our business.
Recently, the wireless telecom industry has been characterized by significant
consolidation activity. This consolidation may lead to a greater ability among
equipment vendors and carriers to provide a full suite of network services, and
could simplify integration and installation, which may lead to a reduction in
demand for our services. Moreover, the consolidation of equipment vendors or
carriers could have the effect of reducing the number of our current or
potential customers, which could result in their increased bargaining power.
This potential increase in bargaining power could create competitive pressures
whereby a particular customer may request our exclusivity with them in a
particular market and put downward pressure on the prices we charge for our
services. Accordingly, we may not be able to represent some customers who wish
to retain our services.
12
We may not be able to hire and retain a sufficient number of qualified
engineers or other employees to sustain our growth, meet our contract
commitments or maintain the quality of our services.
To the extent we continue to grow, our future success will depend on our
ability to hire and retain additional highly skilled engineering, managerial,
marketing and sales personnel. Competition for such personnel is intense,
especially for engineers, and project managers and we may be unable to attract
sufficiently qualified personnel in adequate numbers to meet the demand for our
services in the future. In addition, as of December 31, 2000, 20% of our
employees in the United States were working under H-1B visas. H-1B visas are a
special class of nonimmigrant working visas for qualified aliens working in
specialty occupations, including, for example, radio frequency engineers. We are
aware that the Department of Labor has issued interim final regulations that
place greater requirements on H-1B dependent companies, such as ours, and may
restrict our ability to hire workers under the H-1B visa category in the future.
In addition, immigration policies are subject to rapid change and any
significant changes in immigration law or regulations may further restrict our
ability to continue to employ or to hire new workers on H-1B visas and could
harm our business.
13
A significant percentage of our revenue is accounted for on a percentage-of-
completion basis which could cause our quarterly results to fluctuate.
A significant percentage of our revenue is derived from fixed priced contracts
which are accounted for on a percentage-of-completion basis. The portion of our
revenue from fixed price contracts accounted for approximately 70% of our
revenues for the year ended December 31, 2000. With the percentage-of-completion
method, in each period we recognize expenses as they are incurred and we
recognize revenue based on a comparison of the current costs incurred for the
project to the then estimated total costs of the project. Accordingly, the
revenue we recognize in a given quarter depends on the costs we have incurred
for individual projects and our then current estimate of the total remaining
costs to complete individual projects. If in any period we significantly
increase our estimate of the total costs to complete a project, we may recognize
very little or no additional revenue with respect to that project. As a result,
our gross margin in such period and in future periods may be significantly
reduced and in some cases we may recognize a loss on individual projects prior
to their completion. For example, in 1999 we revised the estimated costs to
complete two large contracts which resulted in a reduction of gross margins of
9.9% in the first quarter of 1999 and 6.9% in the second quarter of 1999. To the
extent that our estimates fluctuate over time or differ from actual
requirements, gross margins in subsequent quarters may vary significantly from
our estimates and could harm our business and financial results.
Similarly, the cancellation or modification of a contract which is accounted
for on a percentage-of-completion basis may adversely affect our gross margins
for the period during which the contract is modified or cancelled. Under certain
circumstances, a cancellation or modification of a fixed-price contract could
also result in us being required to reverse revenue that was recognized in a
prior period, which could significantly reduce the amount of revenues recognized
for the period in which the adjustment is made. For example, if we have a three
year fixed price contract where the contract fee is $1 million and the initial
estimated costs associated with the contract are $550,000, and if, during the
first year we incur $220,000 in costs related to the contract and
correspondingly estimate that the contract is 40% complete, then under the
percentage-of-completion accounting method we would recognize 40%, or $400,000
in revenue during the first year of the contract. If, during the second year of
the contract the project is terminated with 35% of the services deemed provided
to the client, then the total revenue for the project would be adjusted downward
to $350,000, and the revenue recognizable during the second year would be the
total revenue earned to date, the $350,000 less the revenue previously
recognized or $400,000, resulting in a reversal of $50,000 of revenue previously
recognized. To the extent we experience adjustments such as those described
above, our revenues and profit margins will be adversely affected.
Our business may be harmed if we maintain or increase our staffing levels in
anticipation of one or more projects and underutilize our personnel because such
projects are delayed, reduced or terminated.
Since our business is driven by large, and sometimes multi-year, contracts,
we forecast our personnel needs for future projected business. If we maintain or
increase our staffing levels in anticipation of one or more projects and such
projects are delayed, reduced or terminated, we may underutilize these
additional personnel, which would increase our general and administrative
expenses, reduce our earnings and possibly harm our business.
Additionally, due to recent market conditions, we are faced with the challenge
of managing the appropriate size of our workforce in light of projected demand
for our services. If we maintain a workforce sufficient to support a resurgence
in demand, then in the meantime our general and administrative expenses will be
high relative to our revenues and our profitability will suffer. Alternatively,
if we reduce the size of our workforce too quickly in response to any decrease
in the demand for our services, then our ability to quickly respond to any
resurgence in demand will be impaired. As a result, to the extent that we fail
to successfully manage this challenge our financial results will be harmed.
Our short operating history and recent growth in expanding services limits our
ability to forecast operating results.
14
We have generated revenues for only six years and, thus, we have only a short
history from which to predict future revenues. This limited operating
experience, together with the dynamic market environment in which we operate,
including fluctuating demand for our services, reduces our ability to
accurately forecast our quarterly and annual revenues. Further, we plan our
operating expenses based primarily on these revenue projections. Because most of
our expenses are incurred in advance of anticipated revenues, we may not be able
to decrease our expenses in a timely manner to offset any unexpected shortfall
in revenues. For further financial information relating to our business, see
"Selected Consolidated Financial Data" and "Management's Discussion and Analysis
of Financial Condition and Operating Results."
15
If we are unable to effectively manage potential growth in the demand for our
services our business will not operate efficiently and our results of operations
will be negatively affected.
We have experienced a period of significant expansion that has placed a
significant strain on our managerial, operational and financial resources. From
January 1, 2000 to December 31, 2000, we increased our number of employees from
828 to 2,072. If demand for our new and existing services continues to grow,
then in order to increase our revenues significantly, we will need to hire a
substantial number of additional employees, including project management,
engineering and direct sales and marketing personnel. The actual number of
employees we will need to hire is not determinable and may fluctuate drastically
depending on the size and number of new contracts we receive and any changes to
the scope of our existing projects.
If we continue to grow at a rapid pace, we will need to manage the expansion
of our operations and personnel. Specifically, we will be required to:
. improve existing and implement new operational, financial and management
controls, reporting systems and procedures;
. complete the implementation of a new financial management and accounting
software program and install other new management information systems; and
. integrate, train, motivate and manage employees.
If we fail to address the issues above or if our business does not continue to
grow, our business may be harmed.
Our operating results may suffer because of competition in the wireless
services industry.
The network services market is highly competitive and fragmented and is served
by numerous companies. Many of these competitors have significantly greater
financial, technical and marketing resources, generate greater revenues and have
greater name recognition and experience than us. We do not know of any
competitors that are dominant in our industry. For a further description of our
competition, see "Business-- Competition."
We believe that the principal competitive factors in our market include the
ability to deliver results within budget and on time, reputation,
accountability, project management expertise, industry experience and pricing.
In addition, expertise in new and evolving technologies, such as wireless
Internet services, has become increasingly important. We also believe our
ability to compete depends on a number of factors outside of our control,
including:
. the prices at which others offer competitive services;
. the ability and willingness of our competitors to finance customers'
projects on favorable terms;
. the ability of our customers to perform the services themselves; and
. the extent of our competitors' responsiveness to customer needs.
We may not be able to compete effectively on these or other bases, and, as a
result, our revenues or income may decline and harm our business.
We must keep pace with rapid technological change, market conditions and
industry developments to maintain or grow our revenues.
The market for wireless and other network system design, deployment and
management services is characterized by rapid change and technological
improvements. Our future success will depend in part on our ability to enhance
our current service offerings to keep pace with technological developments and
to address increasingly sophisticated customer needs. We may not be successful
in developing and marketing in a timely manner service offerings that respond to
the technological advances by others and our services may not adequately or
competitively address the needs of the changing marketplace. If we are not
successful in responding in a timely manner to technological change, market
conditions and industry developments, our revenues may decline and our business
may be harmed.
16
Our business operations could be significantly disrupted if we lose members of
our management team.
Our success depends to a significant degree upon the continued contributions
of our executive officers, both individually and as a group. See "Management--
Directors, Executive Officers and Key Employees", incorporated by reference
herein, for a listing of such executive officers. Our future performance will be
substantially dependent on our ability to retain and motivate them.
We may not be successful in our efforts to identify, acquire or integrate
acquisitions.
Our failure to manage risks associated with acquisitions could harm our
business. An important component of our business strategy is to expand our
presence in new or existing markets by acquiring additional businesses. During
2000, we acquired seven businesses. We are almost continuously engaged in
discussions or negotiations regarding the acquisition of businesses or strategic
investments in businesses, some potentially material in relation to our size. We
may not be able to identify, acquire or profitably manage additional businesses
or integrate successfully any acquired businesses without substantial expense,
delay or other operational or financial problems. Acquisitions involve a number
of risks, including:
. diversion of management's attention;
. difficulty in integrating and absorbing the acquired business, its
employees, corporate culture, managerial systems and processes and
services;
. failure to retain key personnel and employee turnover;
. customer dissatisfaction or performance problems with an acquired firm;
. assumption of unknown liabilities; and
. other unanticipated events or circumstances.
We may not be successful in our efforts to integrate international
acquisitions.
A key component of our business model is to expand our operations into
international markets. We have accomplished this through the establishment of
offices in Brazil, India and Mexico, among others, and through our recent
acquisition of Questus Ltd. in the United Kingdom and Telia Academy and Telia
Contracting in Sweden. International acquisitions pose a challenge to our
business, as we must integrate operations despite differences in culture,
language and legal environments. To date, we have limited experience with
international acquisitions and face certain related risks, including:
. difficulties in staffing, managing and integrating international
operations due to language, cultural or other factors;
. different, or conflicting regulatory or legal requirements;
. foreign currency fluctuations; and
. distractions of significant management time and attention.
17
Our failure to address these risks could inhibit or preclude our efforts to
pursue international acquisitions.
We have recently expanded our operations internationally. Our failure to
effectively manage our international operations could harm our business.
From January 1, 2000 through December 31, 2000, we were engaged on projects
in 54 countries, and we currently have operations overseas, including offices in
Mexico, the United Kingdom, India, Brazil and Sweden. For the year ended
December 31, 2000, international operations accounted for approximately 28% of
our total revenues. We believe that the percentage of total revenues
attributable to international operations will continue to be significant. We
intend to expand our existing international operations and may enter additional
international markets, which will require significant management attention and
financial resources and could adversely affect our operating margins and
earnings. In order to expand our international operations, we will need to hire
additional personnel and develop relationships with potential international
customers. To the extent that we are unable to do so on a timely basis, our
growth in international markets would be limited, and our business would be
harmed.
Our international business operations are subject to a number of material
risks, including, but not limited to:
. difficulties in building and managing foreign operations;
. difficulties in enforcing agreements and collecting receivables through
foreign legal systems and addressing other legal issues;
. longer payment cycles;
. taxation issues;
. fluctuations in the value of foreign currencies; and
. unexpected domestic and international regulatory, economic or political
changes.
To date, we have encountered each of the risks set forth above in our
international operations. If we are unable to expand and manage our
international operations effectively, our business may be harmed.
Fluctuations in the value of foreign currencies could harm our profitability.
The majority of our international sales are currently denominated in U.S.
dollars. As a result of some of our recent acquisitions as well as the growth of
our foreign operations, an increasing portion of our international sales are
denominated in foreign currencies. Fluctuations in the value of the U.S. dollar
and foreign currencies may make our services more expensive than local service
offerings. This could make our service offerings less competitive than local
service offerings, which could harm our business. To date, our experience with
this foreign currency risk has predominately related to the Brazilian real and
Mexican peso. We do not currently engage in currency hedging activities to limit
the risks of exchange rate fluctuations. Therefore, fluctuations in the value of
foreign currencies could have a negative impact on the profitability of our
global operations, which would harm our business and financial results.
We may encounter potential costs or claims resulting from project performance.
Our engagements often involve large scale, highly complex projects. Our
performance on such projects frequently depends upon our ability to manage our
relationship with our customers, effectively administer the project and deploy
appropriate resources, both our own personnel and third party contractors, in a
timely manner. Many of our engagements involve projects that are significant to
the operations of our customers' businesses. Our failure to meet a customer's
expectations in the planning or implementation of a project or the failure of
our personnel or third party contractors to meet project completion deadlines
18
could damage our reputation, result in termination of our engagement and
adversely affect our ability to attract new business. We frequently undertake
projects in which we guarantee performance based upon defined operating
specifications or guaranteed delivery dates. Unsatisfactory performance or
unanticipated difficulties or delays in completing such projects may result in a
direct reduction in payments to us, or payment of damages by us, which could
harm our business.
As of December 31, 2000, executive officers and directors and their affiliates
controlled 55.2% of our outstanding common stock and as a result are able to
exercise control over all matters requiring stockholder approval.
As of December 31, 2000, executive officers and directors and their affiliates
beneficially owned, in the aggregate, approximately 55.2% of our outstanding
common stock. In particular, as of December 31, 2000, our Chairman, Massih
Tayebi, and our Chief Executive Officer, Masood K. Tayebi, beneficially owned,
in the aggregate, approximately 40.3% of the outstanding common stock. In
addition, other members of the Tayebi family owned, as of December 31, 2000, in
the aggregate, approximately 9.9% of our outstanding common stock. As a result,
these stockholders are able to exercise control over matters requiring
stockholder approval, such as the election of directors and approval of
significant corporate transactions, which may have the effect of delaying or
preventing a third party from acquiring control over us. These transactions may
include those that other stockholders deem to be in their best interests and in
which those other stockholders might otherwise receive a premium for their
shares over their current prices. For further information regarding our stock
ownership, see "Security Ownership of Certain Beneficial Owners and Management"
incorporated by reference herein.
Our stock price may be particularly volatile because of the industry of our
business.
The stock market in general has recently experienced extreme price and volume
fluctuations. In addition, the market prices of securities of technology and
telecom companies have been extremely volatile, and have experienced
fluctuations that have often been unrelated to or disproportionate to the
operating performance of such companies. These broad market fluctuations could
adversely affect the price of our common stock. For further information
regarding recent stock trends, see " Market for Registrant's Common Equity and
Related Stockholder Matters".
Provisions in our charter documents and Delaware law may make it difficult for
a third party to acquire our company and could depress our common stock.
Delaware corporate law and our certificate of incorporation and bylaws contain
provisions that could delay, defer or prevent a change in control of our company
or our management. These provisions could also discourage proxy contests and
make it more difficult for our stockholders to elect directors and take other
corporate actions. As a result, these provisions could limit the price that
investors are willing to pay in the future for shares of our common stock. These
provisions include:
. authorizing the board of directors to issue additional preferred stock;
. prohibiting cumulative voting in the election of directors;
. limiting the persons who may call special meetings of stockholders;
. prohibiting stockholder action by written consent; and
. establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
We are also subject to certain provisions of Delaware law which could delay,
deter or prevent us from entering into an acquisition, including Section 203 of
the Delaware General Corporation Law, which prohibits a Delaware corporation
from engaging in a business combination with an interested stockholder unless
specific conditions are met.
19
Item 2. Properties
- -----------------------
Our principal executive offices are located in approximately 93,000 square
feet of office space in San Diego, California. The lease for such space expires
in April 2010. Other executive offices are located in the following locations:
Sao Paulo, Brazil; Mexico City, Mexico; New Delhi, India; Gothenberg, Sweden;
Kalmar, Sweden; and in London, U.K. The leases on these offices are on a month
to month basis. The Company also leases office space to support engineering
services in Reston, Virginia; Cherry Hill, New Jersey; Blackwood, New Jersey;
Los Angeles, California; San Jose, California; Sacramento, California;
Scottsdale, Arizona; Santa Fe, New Mexico; Mexico City; London and Sao Paulo.
The leases on these spaces expire at various times through April 2005.
In conjunction with asset acquisitions that occurred in 2000, we assumed
the operating leases of additional office space in the following locations:
Seattle, Washington; Chicago, Illinois; Houston, Texas; Denver, Colorado;
Milwaukee, Wisconsin; and Portland, Oregon. The Company expects to continue its
growth and will negotiate leased space to accommodate this growth as it occurs.
Item 3. Legal Proceedings
- --------------------------
Subsequent to our initial public offering in November 1999, we received
correspondence from certain former employees (or their stockbrokers) who
presented stock certificates of a predecessor of WFI delivered in 1996 as part
of an employee benefit plan. We did not register these shares in our books and
records because we believed them to have been forfeited in accordance with the
terms of the plan. However, these former employees claimed that such
certificates represented outstanding shares of our common stock issued to them
for services rendered in 1996.
During the six months ended June 30, 2000, we completed settlements of
litigation that we brought against six former employees who had sold or who had
attempted to sell unregistered certificates purportedly representing 97,500 of
our shares. We also settled similar demands for recognition by two other former
employees without litigation. In each of these settlements we have agreed to
recognize a certain number of the shares as having been properly issued in 1996
for services rendered prior to issuance.
On July 25, 2000, we filed a Complaint for Declaratory Relief in the Superior
Court of the State of California for the County of San Diego, against Dr. Rahim
Tafazolli, a former employee/consultant who received an unregistered certificate
purportedly representing 45,000 shares of our common stock. The complaint seeks
a declaration that the subject certificate is invalid due to the forfeiture
provisions of the employee benefit plan and due to Dr. Tafazolli's failure to
perform the agreed services. On August 10, 2000, Dr. Tafazolli filed a related
complaint in the Court of Chancery of the State of Delaware in and for New
Castle County. The related complaint seeks money damages and a declaration that
Dr. Tafazolli is entitled to receive an unrestricted WFI stock certificate for
45,000 shares. We intend to vigorously pursue our action in California and to
vigorously defend against the related action in Delaware.
The total number of shares represented by unregistered certificates delivered
to employees (all in 1996 and early 1997) is approximately 532,500. We have
settled or agreed to settle demands relating to 127,500 of such shares. We have
received no other demands for recognition of shares represented by unregistered
certificates other than the demand by Dr. Tafazolli. If we receive any other
demands, we intend to consider the circumstances surrounding the issuance of the
subject certificates in determining our response. We are therefore not certain
at this time how many of the shares represented by unregistered certificates
will be recognized.
As a result of the foregoing circumstances, we underreported the number of
shares of our common stock outstanding during each of the years ended December
31, 1996 through December 31, 1999. The impact of the additional shares was not
material to the financial statements for the years ended December 31, 1996
through December 31, 1999.
20
Massih Tayebi, our Chairman, and Masood K. Tayebi, our Chief Executive
Officer, were the executive officers and directors of our predecessor entity
during 1996 and collectively owned the substantial majority of outstanding
shares of that entity during that time. They have agreed to transfer shares
owned by them to WFI, share for share, for any shares represented by
unregistered certificates which we recognize as issued and outstanding. Each has
transferred to us one-half of the number of shares recognized during the year
ended December 31, 2000, and each will transfer one-half of any and all shares
recognized in the future as a result of similar circumstances.
Consequently, we have had no net increase in the number of outstanding shares
of our common stock and we expect no impact on the financial statements in
future periods as a result of recognizing unregistered certificates. Such
surrender of outstanding shares held by the Tayebis is not expected to diminish
materially the ownership interests of either of them in WFI.
We do not believe existing demands or future litigation associated with the
unregistered certificates will have a material effect on our financial position
or results of operations. However, there can be no guarantee that existing or
future litigation that might arise out of these circumstances can be settled or
disposed of in the manner we anticipate. Other outcomes could have a material
adverse effect on our financial position or results of operations.
In October 2000, we were notified that Norm Korey, a former employee who was
terminated by us, has asserted that he is owed certain commissions and stock
options and severance pay from us. We were served with a formal arbitration
demand relating to the matter in January 2001, and anticipate that limited
discovery will ensue. We believe the claims of Mr. Korey are without merit and
intend to defend any lawsuit asserting such claims.
In addition to the foregoing matters, from time to time, we may become
involved in various lawsuits and legal proceedings which arise in the ordinary
course of business. However, litigation is subject to inherent uncertainties,
and an adverse result in this or other matters may arise from time to time that
may harm our business.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
21
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
- -------------------------------------------------------------------------
Matters
- -------
(a)
Our common stock is listed on the NASDAQ National Market System, under the
symbol "WFII" and has traded since November 5, 1999.
Our common stock began trading on the NASDAQ National Market System effective
November 5, 1999. Prior to that date, there was no public market for our common
stock. The following table sets forth for the periods indicated the high and low
closing prices for the common stock, as reported by NASDAQ. Such quotation
represents inter-dealer prices without retail markups, markdowns or commissions
and may not necessarily represent actual transactions.
High Low
---- ---
Fiscal Year Ending December 31, 2001
First Quarter (through March 22, 2001) $ 44.19 $ 6.13
Fiscal Year Ended December 31, 2000
First Quarter $157.88 $ 39.63
Second Quarter $ 93.63 $ 32.75
Third Quarter $ 80.50 $ 48.13
Fourth Quarter $ 62.66 $ 31.94
Fiscal Year Ended December 31, 1999
Fourth Quarter (from November 5, 1999) $ 65.50 $ 39.25
On March 22, 2001, there were approximately 43,844,089 shares of Common
Stock outstanding which were held by approximately 322 shareholders of record of
our common stock.
We have not declared any dividends since becoming a public company. Covenants
in our financing arrangements prohibit or limit our ability to declare or pay
cash dividends. We currently intend to retain any future earnings to finance the
growth and development of the business and therefore do not anticipate paying
any cash dividends in the foreseeable future. Any future determination to pay
cash dividends will be at the discretion of the board of directors and will be
dependent upon the future financial condition, results of operations, capital
requirements, general business conditions and other factors that the board of
directors may deem relevant.
On December 11, 2000, we issued an aggregate of 55,194 shares of common stock
to two former shareholders of B. Communications International, Inc. ("BCI"). The
shares were issued pursuant to two Warrant Agreements, dated January 4, 1999,
between WFI and the former BCI shareholders as partial consideration for the
acquisition of certain assets from BCI. The exercise price of $4.16 per share
was paid pursuant to a net exercise provision whereby 4,902 shares of common
stock underlying the warrants, valued at $51.00 per share, were issued as
payment of the exercise price. The issuance of the securities in connection with
these warrant exercises was deemed to be exempt from registration under the
Securities Act of 1933, as amended by virtue of Section 4(2) and/or Regulation D
promulgated thereunder. The recipients represented their intentions to acquire
the securities for investment purposes only and not with a view to the
distribution thereof. Each of the recipients received adequate information about
the Company and the Company reasonably believed that each of the recipients was
an "Accredited Investor", as such term is defined in the Securities Act of 1933,
as amended.
(b)
On November 10, 1999, we completed an initial public offering of our
Common Stock, $0.001 par value per share. The managing underwriters in the
offering were Credit Suisse First Boston, J.P. Morgan Chase and Co. and Thomas
Weisel Partners LLC. The shares of Common Stock sold in our offering were
registered under the Securities Act of 1933 pursuant to a Registration Statement
on Form S-1, as amended (Reg. No. 333-85515) (the "Registration Statement"),
that was declared effective by the Commission on November 4, 1999. All 4,600,000
shares of Common Stock registered under the Registration Statement, including
shares covered by an over-allotment option, were sold at a price to the public
of $15.00 per share. The offering resulted in gross proceeds of $69.0 million,
of which $4.8 million was applied toward commissions to the underwriters.
Expenses related to the offering were approximately $2.3 million.
We have used the net the proceeds from the offering to (i) repay $8.6 million
of short-term debt and notes payable; (ii) fund $40.0 million of acquisitions of
assets or equity interests in other businesses; and (iii) support $13.3 million
of operations. No proceeds from the offering remain.
22
Item 6. Selected Financial Data
- --------------------------------
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and related notes thereto
and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" which are included elsewhere in this report on Form 10-K.
(All amounts except per share data in millions)
Year Ended December 31,
Consolidated Statement of 1996 1997 1998 1999 2000
Operations Data:
Revenues $15.4 $22.7 $51.9 $ 92.7 $255.9
Gross profit $ 8.6 $10.9 $23.8 $ 38.4 $115.8
Operating income $ 6.8 $ 7.0 $10.7 $ 17.6 $ 52.0
Net income $ 6.7 $ 6.8 $ 4.7 $ 9.6 $ 31.8
Net income per share
Basic $0.24 $0.24 $0.17 $ 0.33 $ 0.76
Diluted $0.23 $0.23 $0.15 $ 0.27 $ 0.63
Weighted average shares
Basic 28.5 28.7 28.4 29.1 41.8
Diluted 29.4 29.3 30.7 35.2 50.5
Consolidated Balance Sheet 1996 1997 1998 1999 2000
Data:
Cash and Cash Equivalents $ .3 $ .8 $ 2.9 $ 34.3 $ 18.5
Working capital $ 6.6 $ 9.2 $ 7.7 $ 91.4 $103.7
Total assets $ 7.2 $11.1 $60.3 $134.4 $297.1
Total debt $ 0 $ 0 $16.0 $ 2.7 $ 37.7
Total stockholders equity $ 7.0 $ 9.8 $14.3 $101.4 $198.6
Item 7. Management's Discussion and Analysis of Financial Condition and
- --------------------------------------------------------------------------
Results of Operations ("MD&A")
- ------------------------------
This report contains forward-looking statements. These statements relate to
future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"potential" or "continue," the negative such terms or other comparable
terminology. These statements are only predictions. Actual events or results
may differ materially. Important factors which may cause actual results to
differ materially from the forward-looking statements are described in the
Section entitled "Risk Factors" in Item 1 in this Form 10-K, and other risks
identified from time to time in our filings with the Securities and Exchange
Commission, press releases and other communications.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we, nor any other
person, assume responsibility for the accuracy and completeness of the forward-
looking statements. We are under no obligation to update any of the forward-
23
looking statements after the filing of the Form 10-K to conform this statement
to actual results or to changes in its expectations.
Overview
Wireless Facilities, Inc. offers network business consulting, network
planning, design and deployment, and network operations and maintenance services
to the wireless telecommunications industry. During the years ended December
31, 1999 and December 31, 2000, we increased the number of our contracts, the
scope of our services and our geographic presence. In the final months of 1999,
we entered into our first contracts for network planning which contributed to
increased revenues and net income during the year ended December 31, 2000. For
the year ended December 31, 2000, our business consulting, design and
deployment, and network management segments contributed to 3%, 80% and 17% of
our revenues, respectively. During this period, we also formed a subsidiary in
the United Kingdom, Wireless Facilities International, Ltd. ("WFIL"). WFIL began
servicing existing contracts and entering into new contracts in Europe, the
Middle East and Africa ("EMEA") in April 2000. During the year ended December
31, 2000, we performed work in 54 countries. These contracts include services
performed for many of the latest wireless technologies, including UMTS,
broadband wireless applications, and voice and video applications. Revenues from
our international operations contributed to 28% of our total revenues for the
year ended December 31, 2000.
Revenues from network planning, design and deployment contracts are primarily
fixed price contracts which are recognized using the percentage-of-completion
method. Under the percentage-of-completion method of accounting, expenses on
each project are recognized as incurred, and revenues are recognized based on a
comparison of the current costs incurred for the project to date compared to the
then estimated total costs of the project from start to completion. Accordingly,
revenue recognized in a given period depends on the costs incurred on each
individual project and the current estimate of the total costs to complete a
project, determined at that time. As a result, gross margins for any single
project may fluctuate from period to period. The full amount of an estimated
loss is charged to operations in the period it is determined that a loss will be
realized from the performance of a contract. For business consulting, network
planning, design and deployment contracts offered on a time and expense basis,
we recognize revenues as services are performed. We typically charge a fixed
monthly fee for ongoing radio frequency optimization and network operations and
maintenance services. With respect to these services, we recognize revenue as
services are performed.
Cost of revenues includes direct compensation and benefits, living and travel
expenses, payments to third-party sub-contractors, allocation of overhead, costs
of expendable computer software and equipment, and other direct project-related
expenses.
Selling, general and administrative expenses include compensation and
benefits, computer software and equipment, facilities expenses and other
expenses not related directly to projects. Our sales personnel have, as part of
their compensation package, incentives based on their productivity. During the
year ended December 31, 2000, we completed the first phase of implementing a new
financial management and accounting software program in our domestic operations.
Such software was implemented to better accommodate our growth. We expect to
incur expenses in subsequent periods related to licensing the software package
and related personnel costs associated with phasing in its implementation in our
domestic and international operations. We may also incur expenses related to a
given project in advance of the commencement of the project as we increase our
personnel to work on the project. New hires typically undergo training on our
systems and project management process prior to being deployed on a project.
Due to the recent downturn in the financial markets in general, and
specifically within the telecommunications industry, many of our customers are
having trouble raising money in the capital markets to fund the expansion of
their businesses, including telecom network deployments and upgrades. The recent
volatility of the financial markets and slowdown in the U.S. economy has also
intensified the uncertainty experienced by many of our customers, who are
finding it increasingly difficult to predict demand for their products and
services. As a result, many of our customers are slowing or postponing the
deployment of new wireless networks and the development of new technologies and
products, which has reduced the demand for our services. Some of our customers
have recently cancelled or suspended their contracts with us and many of our
customers or potential customers have postponed entering into new contracts for
our services. As a result, we expect our revenues and earnings to decline
from previously estimated levels. Also due to the difficult financing and
economic conditions, some of our customers may not be able to pay us for
services that we have already performed. If we are not able to collect amounts
owed to us, we may be required to write-off or convert significant amounts of
our accounts receivable. Because we are not able to reduce our costs as fast as
our revenues may decline, our costs as a percentage of revenues may increase
and, correspondingly, our net earnings may decline disproportionately to any
decreases in revenues. As a result of these and other factors, it has become
extremely difficult to forecast our future revenues and earnings, and we
therefore cannot re-affirm estimates of our revenues or projections of our
earnings that we have made in public statements prior to the date of this Annual
Report on Form 10-K.
As a result of the revenue shortfall that we expect due to the foregoing
factors, we are taking steps to reduce our level of expenditures. Additionally,
we expect to continue to review our internal processes throughout 2001 and make
further adjustments as necessary.
24
Results of Operations
Comparison of Results for the Year Ended December 31, 1999 to the Year Ended
December 31, 2000
Revenues. Revenues increased 176% from $92.7 million for the year ended
December 31, 1999 to $255.9 million for the year ended December 31, 2000. The
$163.2 million increase was primarily attributable to the addition of new
contracts from our acquisitions completed during 2000, expanded scope on several
large, existing contracts, and new contracts in our consulting and network
management segments, which generated no revenues in the year ended December 31,
1999. Significant new contracts included contracts acquired through our fiscal
year 2000 acquisitions of The Walter Group, the Dallas network operations
center, and Davis Bay. Revenues also increased from two significant deployment
contracts in the Mexican market serviced in the year ended December 31, 2000.
Revenues from our international markets comprised 34% of our total revenues
during the year ended December 31, 1999, compared to 28% of our total revenues
during the year ended December 31, 2000.
Cost of Revenues. Cost of revenues increased 158% from $54.3 million for the
year ended December 31, 1999 to $140.1 million for the year ended December 31,
2000, primarily due to increased staffing in support of new contracts. Gross
profit was 41% of revenues for the year ended December 31, 1999 compared to 45%
for the year ended December 31, 2000. The increase is primarily due to a more
favorable mix of project revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 186% from $18.7 million for the year ended
December 31, 1999 to $53.5 million for the year ended December 31, 2000. As a
percentage of revenues, selling, general and administrative expenses increased
from 20% for the year ended December 31, 1999 to 21% for the year ended December
31, 2000. The increase is due to staffing increases in overhead departments to
support our growth in operations, the increased support required for a public
company, as well as time charged for new employees during our orientation,
training and assignment processes.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased 390% from $2.1 million for the year ended December 31, 1999 to $10.3
million for the year ended December 31, 2000. The increase is primarily due to
goodwill and other identifiable intangibles resulting from our recent
acquisitions, which also contributed to our increase in revenues and overall
operations.
Net Other Income (Expense). For the year ended December 31, 1999, net other
expense was $0.5 million compared to net other income of $0.2 million for the
year ended December 31, 2000. This increase totaling $0.7 million was primarily
attributable to interest earned on our investments in marketable securities from
the proceeds of our November 1999 initial public offering and the reduction of
net foreign currency losses, partially offset by an increase in interest expense
on increasing balances on our line of credit.
Provision for Income Taxes. Our provisional income tax rate as a percentage of
income before taxes decreased from 42% for the year ended December 31, 1999, to
39% for the year ended December 31, 2000. The decrease is primarily attributable
to increases in our foreign revenues from operations.
Comparison of Results for the Year Ended December 31, 1998 to the Year Ended
December 31, 1999
Revenues. Revenues for the year ended December 31, 1999 increased 79% from
$51.9 for the year ended December 31, 1998 to $92.7 for the year ended December
31, 1999. The $40.8 million increase was primarily attributable to the addition
of new contracts, offset by a reduction in revenue of $5.0 million from the
effects of revised cost estimates related to two fixed-price contracts. The
revenue increase stemmed from the growth in our wireless data deployment
activity, including a large, 26-city contract for Metricom, as well as large
contracts in the WFI de Mexico subsidiary, and new deployment projects from our
established clients in the PCS sector. The percentage growth experienced for
the year ended December 31, 1999 was not typical and resulted from a small
number of large contract awards.
Cost of Revenues. Cost of revenues increased 93% from $28.1 million for the
year ended December 31, 1998 to $54.3 million for the year ended December 31,
1999, primarily due to increased staffing in support of new contracts. Gross
margin was 46% of revenues for the year ended December 31, 1998 compared to 41%
for the year ended December 31, 1999. Gross margin for the year ended December
31, 1999 was reduced primarily due to a reduction in revenue of $5.0 million
from the effects of revised cost estimates related to two fixed-price contracts.
25
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 58% from $11.8 million for the year ended
December 31, 1998 to $18.7 million for the year ended December 31, 1999. The
increase was primarily attributable to increases in executive, administrative,
sales and marketing personnel costs, as well as increases in purchases of
expendable tools and systems in support of our growth. As a percentage of
revenues, selling, general and administrative expenses decreased from 23% for
the year ended December 31, 1998 to 20% for the year ended December 31, 1999,
reflecting consolidation efficiencies following the Entel acquisition.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased 62% from $1.3 million for the year ended December 31, 1998 to $2.1
million for the year ended December 31, 1999. The increase was primarily due to
amortization of goodwill and other identifiable intangibles resulting from the
B. Communication International and C.R.D. acquisitions.
Net Other Income (Expense). For the year ended December 31, 1999, other
expenses were $0.5 million as compared to $0.5 million for the year ended
December 31, 1998. Interest income increased by $0.5 million of which $0.4
million was attributed to the investment of the proceeds from our initial public
offering. This increase was offset by an increase in interest expense primarily
due to higher utilization of the bank line of credit to support working capital
needs, as well as foreign currency losses attributed to our expansion into
Brazil.
Provision for Income Taxes. Our provisional income tax rate as a percentage
of income before taxes decreased from 54% for the year ended December 31, 1998,
to 42% for the year ended December 31, 1999. The decrease was primarily
attributable to increases in our foreign revenues from operations.
Liquidity and Capital Resources
Our sources of cash liquidity included cash and cash equivalents, cash from
operations, amounts available under credit facilities, and other external
sources of funds. As of December 31, 2000, we had cash of $18.5 million and
$24.9 million outstanding on our $50 million line of credit. In February 2001,
the aggregate commitment was increased from $50 million to $100 million.
Cash used in operations is primarily derived from our contracts in process and
changes in working capital. Cash provided by operations was $13.4 million for
the year ended December 31, 1999 and cash used in operations was $38.3 million
for the year ended December 31, 2000.
Cash used in investing activities was $42.9 million and $14.7 million for the
year ended December 31, 1999 and 2000, respectively. Investing activities for
the year ended December 31, 1999 consisted primarily of the investment of IPO
proceeds, cash paid for acquisitions and capital expenditures. Investing
activities for the year ended December 31, 2000 consisted primarily of cash paid
for acquisitions and investments of $47.1 million and capital expenditures of
$5.7 million partially offset by proceeds totaling $38.0 million received from
sales of marketable securities. Acquisitions during the year ended December 31,
2000 included the purchase of assets or securities from The Walter Group,
Comcor, Davis Bay, Questus, Telia Contracting, and Telia Academy, as well as the
purchase of a network operations center, an investment in CommVerge, and an
equity interest in Diverse Networks, Inc.
Cash provided by financing activities for the year ended December 31, 1999
was $61.0 million which was primarily derived from the proceeds from sales of
common stock in our November 1999 initial public offering. Other financing
activities include proceeds from sales of preferred stock totaling $15.0
million, which was offset by net repayments on borrowings totaling $16.3
million. Cash provided by financing activities was $37.5 million for the year
ended December 31, 2000. Financing activities for this period primarily
consisted of $24.9 million from net borrowings under our line of credit and
$12.9 million from sales of common stock issued through our stock option and
employee stock purchase plans.
At December 31, 2000, $24.9 million was outstanding under our line of credit
with a weighted average interest rate of 9.14%. In February 2001, we executed an
amended and restated credit agreement, which increased the aggregate commitment
under our line of credit to $100 million, extended the maturity date to February
2004, and adjusted the interest rate so that borrowings bear interest at either
(i) the greater of the bank prime rate or the Federal Funds Rate plus .5%, plus
a margin of 1.25%, the base rate margin, or (ii) at the London Interbank
Offering Rate ("LIBOR") plus a margin of 2.25%, the LIBOR rate margin, at our
discretion. Beginning in the third quarter of 2001, the base rate margin and
the LIBOR rate margin will be determined based on certain financial ratios as of
the end of the most recently ended fiscal quarter which will result in margins
ranging from .75% to 1.50% and 1.75% to 2.50%, respectively. The line of credit
is secured by substantially all of our assets. The agreement contains
restrictive covenants, which, among other things, require maintenance of certain
financial ratios.
26
We have no material cash commitments other than obligations under our credit
facilities, promissory notes, operating and capital leases. Future capital
requirements will depend upon many factors, including the timing of payments
under contracts and increases in personnel in advance of new contracts.
On November 10, 1999, we completed an initial public offering of our common
stock. In conjunction with the closing of that offering, we issued 4,600,000
shares of common stock for approximately $64.2 million in cash (net of
underwriting discounts but before expenses). As of December 30, 2000, the
proceeds were used as follows: (i) $8.6 million was used to repay short-term
debt and notes payable; (ii) $40.0 million was used to acquire assets or equity
interests in other businesses; and (iii) $15.6 million net of reinvested
interest and asset management fees was used in our operations.
We believe that our cash and cash equivalent balances and funds available
under the existing line of credit will be sufficient to satisfy cash
requirements for the next twelve months. Although we cannot accurately
anticipate the effect of inflation on our operations, we do not believe that
inflation has had, or is likely in the foreseeable future to have, a material
impact on our net revenues or results of operations.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("Statement No. 133"). Statement No. 133, as amended by
statement of Financial Accounting Standards No.137, requires companies to
recognize all derivatives as either assets or liabilities with the instruments
measured at fair value and became effective for the Company on January 1, 2001.
The accounting for changes in fair value gains and losses depends on the
intended use of the derivative and its resulting designation. We have not
completed our determination of the impact of the adoption of Statement No. 133
on our consolidated financial position or results of operations.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------------------
We are exposed to foreign currency risks due to both transactions and
translations between a functional and reporting currency in our Mexican,
Brazilian and United Kingdom subsidiaries. We currently do not hedge any of
these risks in our foreign subsidiaries because (i) cash flows from foreign
operations in Mexico are generally reinvested locally in Mexico, (ii) foreign
operations in Brazil are minimal, (iii) the British pound sterling is relatively
stable against the U.S. dollar, and (iv) we do not believe that to do so is
justified by the current exposure and the cost at this time. We are exposed to
the impact of foreign currency fluctuations due to the operations of and
intercompany transactions with our consolidated foreign subsidiaries. While
these intercompany balances are eliminated in consolidation, exchange rate
changes do affect consolidated earnings. At December 31, 2000, there was $0.2
million, $1.3 million and $3.2 million owed to our U.S. operations from our
Mexican, Brazilian and United Kingdom subsidiaries, respectively. These
intercompany receivables were denominated in U.S. dollars. The potential foreign
currency translation losses from a hypothetical 10% adverse change in the
exchange rates from these intercompany balances are insignificant from Mexico,
$0.1 million from Brazil and $0.3 million from the United Kingdom. In addition,
we estimate that a 10% change in foreign exchange rates would have impacted
reported operating profit for the year ended December 31, 2000 by approximately
$1.2 million. This was estimated using a 10% deterioration factor to the average
monthly exchange rates applied to net income or loss for each of the
subsidiaries in the respective period. Operations with and net income of foreign
subsidiaries were not significant at December 31, 1999.
We do not use derivative financial instruments, derivative commodity
instruments or other market risk sensitive instruments, positions or
transactions in any material fashion. Accordingly, management believes
27
that it is not subject to any material risks arising from changes in interest
rates, foreign currency exchange rates, commodity prices, equity prices or other
market changes that affect market risk sensitive instruments.
As of December 31, 2000, we held a $50 million line of credit with a financial
institution. At December 31, 2000, $24.9 million was outstanding under this line
of credit with a weighted average interest rate of 9.14%. Pursuant to an amended
and restated credit agreement, our aggregate commitment was increased to $100
million in February 2001. The credit facility is due in February 2004 and bears
interest at either (i) the greater of the bank prime rate and the Federal Funds
Rate plus .5%, plus a margin of 1.25%, the base rate margin, or (ii) at the
London Interbank Offering Rate (LIBOR) plus 2.25%, the LIBOR rate margin, at our
discretion. Beginning in the third quarter of 2001, the base rate margin and the
LIBOR rate margin will be determined based on certain financial ratios as of the
end of the most recently ended fiscal quarter which will result in margins
ranging from .75% to 1.50% and 1.75% to 2.50%, respectively. The credit facility
is secured by substantially all of our assets. The credit agreement contains
restrictive covenants, which, among other things, require maintenance of certain
financial ratios. We do not utilize any derivative financial instruments to
hedge the interest rate fluctuation as our balances under the facility are
borrowed over the short term and we currently retain the ability to pay down
amounts borrowed through our operational funds. A hypothetical 10% adverse
change in the weighted average interest rate for 2000 would have reduced net
income by approximately $0.1 million.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
Our consolidated financial statements at December 31, 2000 and 1999 and the
Report of KPMG LLP, Independent Accountants, are included in this report on Form
10-K on pages beginning F-1.
28
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
None
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The information required by this item is incorporated by reference to the
information under the captions "Election of Directors" and "Compliance with
Section 16(a) of the Exchange Act" of the Registrant's definitive Proxy
Statement and notice of our 2001 Annual Meeting of Stockholders which we will
file with the Securities and Exchange Commission within 120 days after the end
of the fiscal year covered by this report.
Item 11. Executive Compensation
- --------------------------------
The information required by this item is incorporated by reference to the
information under the caption "Executive Compensation" of the Registrant's
definitive Proxy Statement and notice of our 2001 Annual Meeting of Stockholders
which we will file with the Securities and Exchange Commission within 120 days
after the end of the fiscal year covered by this report.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information required by this item is incorporated by reference to the
information under the caption "Security Ownership of Certain Beneficial Owners
29
and Management" of the Registrant's definitive Proxy Statement and notice of our
2001 Annual Meeting of Stockholders which we will file with the Securities and
Exchange Commission within 120 days after the end of the fiscal year covered by
this report.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated by reference to the
information under the caption "Certain Relationships and Related Transactions"
of the Registrant's definitive Proxy Statement and notice of our 2001 Annual
Meeting of Stockholders which we will file with the Securities and Exchange
Commission within 120 days after the end of the fiscal year covered by this
report.
30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) 1. Financial Statements and financial statement schedules
------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Page
- ---------------------------------------------------------------------------------------------------------
Independent Auditors' Report F-1
- ---------------------------------------------------------------------------------------------------------
Consolidated Balance Sheets as of December 31, 1999 and 2000 F-2
- ---------------------------------------------------------------------------------------------------------
Consolidated Statements of Operations for the Years Ended December 31, 1998,
1999 and 2000 F-3
- ---------------------------------------------------------------------------------------------------------
Consolidated Statements of Stockholders' Equity for the Years Ended December
31, 1998, 1999 and 2000 F-4
- ---------------------------------------------------------------------------------------------------------
Consolidated Statement of Cash Flows for the Years Ended December 31, 1998,
1999 and 2000 F-6
- ---------------------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements F-8
- ---------------------------------------------------------------------------------------------------------
Schedule II: Valuation and Qualifying Accounts S-1
- ---------------------------------------------------------------------------------------------------------
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
2. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits.
Exhibit
Number Description of Document
3.1 Restated Certificate of Incorporation filed and effective on
November 5, 1999.(1)
3.2 Bylaws in effect since November 5, 1999.(1)
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Speciman Stock Certificate.(1)
10.1 1997 Stock Option Plan.(1)
10.2 Form of Stock Option Agreement pursuant to the 1997 Stock Option
Plan and related terms and conditions.(1)
10.3 1999 Equity Incentive Plan.(1)
10.4 Form of Stock Option Agreement pursuant to the 1999 Equity
Incentive Plan.(1)
10.5 1999 Employee Stock Purchase Plan and related offering
documents.(1)
10.6 R&D Building Lease by and between the Company and Sorrento Tech
Associates as amended.(1)
10.7 Amended and Restated Credit Agreement by and among the Company,
various banks and Credit Suisse First Boston dated as of February
9, 2001.*
10.8 Second Amended and Restated Investor Rights Agreement by and
among the Company and certain stockholders of the Company dated
as of September 17, 1999.(1)
10.9 Employment Offer Letter by and between the Company and Scott Fox
dated as of April 9, 1999.(1)
10.10 Form of Indemnity Agreement by and between the Company and
certain officers and directors of the Company.(1)
10.11 Amended Promissory Note from the Company to Masood K. Tayebi
dated as of August 2, 1999.(1)
10.12 Amended Promissory Note from the Company to Massih Tayebi dated
as of August 2, 1999.(1)
10.13 Amended Promissory Note from the Company to Sean Tayebi dated as
of August 2, 1999.(1)
10.14 Form of Warrant Agreement by and between the Company and each of
Scott Anderson and Scot Jarvis dated as of February 28, 1997.(1)
10.15 Form of Subscription and Representation Agreement by and between
the Company and each of Scott Anderson and Scot Jarvis dated as
of February 28, 1997.(1)
10.16 Form of Warrant Agreement by and between the Company and each of
Scott Anderson and Scot Jarvis dated as of February 1, 1998.(1)
10.17 Form of Bill of Sale and Assignment Agreement by and between the
Company and each of Massih Tayebi and Masood K. Tayebi dated as
of June 30, 1999.(1)
10.18 Assignment of Note by and among the Company, Masood K. Tayebi and
Massih Tayebi dated as of June 30, 1999.(1)
10.19 Form of Promissory Note from each of Masood K. Tayebi and Massih
Tayebi to the Company dated as of June 30, 1999.(1)
10.20 Form of Promissory Note from each of Masood K. Tayebi and Massih
Tayebi to the Company dated as of June 30, 1999.(1)
10.21 Services Agreement by and between WFI de Mexico S. de R.L. de
C.V. and Ericsson Telecom, S.A. de C.V. dated as of August 4,
1999.(1) +
10.22 Amended and Restated Master Services Agreement by and between the
Company and TeleCorp Holding Communications, Inc., dated as of
October 12, 1999.(1) +
10.23 Master Services Agreement by and between the Company and Nextel
Partners Operating Corp. dated as of January 18, 1999.(1) +
10.24 Agreement by and between the Company and Siemens
Aktiengesellschaft, Berlin and Mu"nchen, Federal Republic of
Germany, represented by the Business Unit Mobile Networks.(1) +
10.25 Master Services Agreement by and between the Company and Triton
PCS, Operating Company, L.L.C. dated as of January 19, 1998, as
amended.(1) +
10.26 Microwave Relocation Services Agreement by and between Entel
Technologies, Inc. and Triton PCS Operating Company, L.L.C. dated
as of February 11, 1998.(1) +
10.27 Site Development Services Agreement by and between Entel
Technologies, Inc. and Triton PCS, Inc. dated as of December 10,
1997.(1) +
10.28 Sales Agreement for Products and Services by and between the
Company and Integrated Ventures, LLC dated as of April 19,
1999.(1) +
10.29 Settlement Agreement and Mutual General Release by and between
the Company and Total Outsourcing, Inc dated as of June 30,
1999.(1)
10.30 Straight Note from Scott Fox and Kathleen W. Fox to the Company
dated as of July 8, 1999.(1)
10.31 Master Services Agreement by and between the Company and
Metricom, Inc. dated as of September 21, 1999.(1) +
10.32 Sublease Agreement by and between the Company and Franklin
Templeton Corporate Services, Inc. dated as of April 14, 2000.(2)
10.33 2000 Nonstatutory Stock Option Plan.(2)
10.34 Form of Stock Option Agreement and Grant Notice used in
connection with the 2000 Nonstatutory Stock Option Plan.(2)
21.1 List of subsidiaries.*
23.1 Independent Auditors' Report on Schedule and Consent.
24.1 Power of Attorney. Reference is made to the signature page to
this Report on Form 10-K.
(1) Filed as an exhibit to the Company's Registration Statement on
Form S-1 (No. 333-85515), and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 2000, filed on November
14, 2000 and incorporated herein by reference.
* Filed herewith
+ Certain confidential matters deleted pursuant to Order Granting
Application for Confidential Treatment, issued in connection with
the Registration Statement on Form S-1 (No. 333-85515) dated
November 10, 1999.
(b) Reports on Form 8-K
-------------------
The following reports on Form 8-K were filed after September 30, 2000:
Current Report on Form 8-K filed October 25, 2000 reported earnings for the
fiscal 2000 third quarter and named the following employees as executive
officers: Farzad Ghassemi, Senior Vice President RF Engineering; Frankie
Farjood, Vice President of Program Management; and Naomi Whitacre, Vice
President of Human Resources. Additionally, we announced that Norman Korey,
President of International Operations, was no longer with WFI and no longer
serving as an executive officer.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 29, 2001
Wireless Facilities, Inc.
By: /s/ Masood K. Tayebi, Ph.D.
---------------------------
Masood Tayebi Chief Executive Officer
Power of Attorney
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Massih Tayebi and Masood K. Tayebi, and each of
them his attorneys-in-fact, each with the power of substitutes, for him in any
and all capacities, to sign any amendments to this Annual Report on Form 10-K,
and to file the same, with exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated:
Signature Title Date
/s/ Massih Tayebi, Ph.D. Chairman and Director March 29, 2001
----------------------------
Massih Tayebi
Chief Executive Officer and March 29, 2001
/s/ Masood K. Tayebi, Ph.D.
----------------------------
Masood K. Tayebi Director (Principal Executive
Officer)
/s/ Terry Ashwill Chief Financial Officer (Principal March 29, 2001
----------------------------
Terry Ashwill Financial and Accounting Officer)
/s/ Scott Anderson Director March 29, 2001
----------------------------
Scott Anderson
/s/ Bandel Carano Director March 29, 2001
----------------------------
Bandel Carano
/s/ Scot Jarvis Director March 29, 2001
----------------------------
Scot Jarvis
/s/ William Hoglund Director March 29, 2001
----------------------------
William Hoglund
32
Independent Auditors' Report
The Board of Directors
Wireless Facilities, Inc.
We have audited the accompanying consolidated balance sheets of Wireless
Facilities, Inc. and subsidiaries as of December 31, 1999 and 2000, and the
related statements of operations, stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Wireless Facilities,
Inc. and subsidiaries as of December 31, 1999 and 2000, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America.
KPMG LLP
San Diego, California
February 2, 2001 except
as to the first paragraph
of Note 13, which is as of
February 9, 2001 and the second
paragraph of Note 13 which
is as of March 2, 2001
F-1
WIRELESS FACILITIES, INC.
Consolidated Balance Sheets
December 31, 1999 and 2000
(in millions, except par value)
Assets 1999 2000
-------- -------
Current assets:
Cash and cash equivalents $ 34.3 18.5
Investments in marketable securities 38.0 --
Accounts receivable, net 32.6 119.1
Contract management receivables 14.0 20.8
Income taxes receivable -- 12.7
Other current assets 2.6 14.3
-------- -------
Total current assets 121.5 185.4
Property and equipment, net 5.1 20.0
Goodwill, net 7.1 64.7
Other intangibles, net 0.4 17.1
Investments in unconsolidated affiliates 0.1 9.2
Other assets, net 0.2 0.7
-------- -------
Total assets $ 134.4 297.1
======== =======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 5.5 15.1
Accrued expenses 6.0 17.6
Contract management payables 8.3 9.2
Billings in excess of costs and profits 5.2 0.9
Line of credit payable -- 24.9
Notes payable - current portion -- 1.7
Capital lease obligation - current portion 0.1 3.5
Income taxes payable 5.0 --
Net Deferred income tax liability -- 8.8
-------- -------
Total current liabilities 30.1 81.7
Notes payable - net of current portion 0.9 0.6
Capital lease obligation - net of current portion 1.7 7.0
Common stock to be issued -- 8.6
Accrued rent -- 0.5
-------- -------
Total liabilities $ 32.7 98.4
-------- -------
Minority interest in subsidiary $ 0.3 0.1
Stockholders' equity:
Common stock, $.001 par value,195.0 shares authorized;
39.7 and 43.3 shares issued and outstanding at
December 31, 1999 and 2000, respectively -- --
Additional paid-in capital 90.2 156.9
Retained earnings 11.2 43.0
Accumulated other comprehensive loss -- (1.3)
-------- -------
Total stockholders' equity 101.4 198.6
-------- -------
Total liabilities and stockholders' equity $ 134.4 297.1
======== =======
See accompanying notes to consolidated financial statements.
F-2
DRAFT 3/8/01
WIRELESS FACILITIES, INC.
Consolidated Statements of Operations
Years ended December 31, 1998, 1999, and 2000
(in millions except per share amounts)
1998 1999 2000
--------------- --------------- ---------------
Revenues $ 51.9 92.7 255.9
Cost of revenues 28.1 54.3 140.1
--------------- --------------- ---------------
Gross profit 23.8 38.4 115.8
Selling, general and administrative expenses 11.8 18.7 53.5
Depreciation and amortization 1.3 2.1 10.3
--------------- --------------- ---------------
Operating income 10.7 17.6 52.0
--------------- --------------- ---------------
Other income (expense):
Interest income 0.2 0.7 2.1
Interest expense (0.6) (0.9) (2.0)
Foreign currency loss -- (0.3) --
Equity loss in investment (0.1) -- --
Other income -- -- 0.1
--------------- --------------- ---------------
Total other income (expense) (0.5) (0.5) 0.2
--------------- --------------- ---------------
Income before income taxes and
minority interest in income of
subsidiary 10.2 17.1 52.2
Provision for income taxes 5.5 7.2 20.3
Minority interest in income of subsidiary -- 0.3 0.1
--------------- --------------- ---------------
Net income $ 4.7 9.6 31.8
=============== =============== ===============
Net income per common share:
Basic $ 0.17 $ 0.33 $ 0.76
Diluted $ 0.15 $ 0.27 $ 0.63
Weighted average common shares outstanding:
Basic 28.4 29.1 41.8
Diluted 30.7 35.2 50.5
See accompanying notes to consolidated financial statements.
F-3
WIRELESS FACILITIES, INC.
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1998, 1999 and 2000
(in millions)
Convertible Convertible
Preferred stock - Series A Preferred stock - Series B Common stock
-------------------------- -------------------------- ---------------------
Shares Amount Shares Amount Shares Amount
--------- ---------- --------- ------------ ---------- ---------
Balance, December 31, 1997 -- $ -- -- $ -- 29.1 $ --
Issuance of common stock -- -- -- -- 1.2 --
Issuance of Series A preferred stock 1.7 -- -- -- -- --
Stock-based compensation -- -- -- -- -- --
S Corporation distributions -- -- -- -- -- --
Net income from January 1, 1998
through August 6, 1998 -- -- -- -- -- --
Transfer of undistributed retained
earnings to additional paid-in capital
upon termination of S Corporation -- -- -- -- -- --
Purchase of treasury stock -- -- -- -- (3.3) --
Net income from August 7, 1998 through
December 31, 1998 -- -- -- -- -- --
Comprehensive income -- -- -- -- -- --
------ -------- ------- -------- ------ --------
Balance, December 31, 1998 1.7 -- -- -- 27.0 --
Issuance of common stock -- -- -- -- 0.3 --
Issuance of Series B preferred stock -- -- 2.7 -- -- --
Stock-based compensation -- -- -- -- -- --
Issuance of warrants in acquistion transactions -- -- -- -- -- --
Purchase of treasury stock -- -- -- -- -- --
Conversion of Series A and B preferred stock
to common stock (1.7) -- (2.7) -- 7.8 --
Initital public offering of common stock, net -- -- -- -- 4.6 --
Retirement of treasury stock -- -- -- -- -- --
Net income -- -- -- -- -- --
Comprehensive income -- -- -- -- -- --
------ -------- ------- -------- ------ --------
Balance, December 31, 1999 -- -- -- -- 39.7 --
Issuance of common stock for exercise of stock
options -- -- -- -- 2.4 --
Issuance of common stock under employee stock
purchase -- -- -- -- 0.2 --
Issuance of common stock in acquisition
transactions -- -- -- -- 0.8 --
Issuance of common stock for exercise of
warrants -- -- -- -- 0.2 --
Tax benefit from exercise of stock options -- -- -- -- -- --
Net income -- -- -- -- -- --
Foreign currency translation loss -- -- -- -- -- --
Net unrealized investment losses -- -- -- -- -- --
Comprehensive income -- -- -- -- -- --
------ -------- ------- -------- ------ --------
Balance, December 31, 2000 -- $ -- -- $ -- 43.3 $ --
====== ======== ======= ======== ====== ========
(Continued)
See accompanying notes to consolidated financial statements.
F-4
WIRELESS FACILITIES, INC.
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1998, 1999, and 2000
(in millions)
Accumulated
Additional Treasury stock other Compre-
paid-in Retained ----------------------- comprehensive hensive
capital earnings Shares Amount loss Income Total
------- -------- ------ ------ ------ ------ ----
Balance, December 31, 1997 $ 0.8 $ 9.0 -- $ -- -- $ -- $ 9.8
Issuance of common stock 0.8 -- -- -- -- -- 0.8
Issuance of Series A preferred stock 21.0 -- -- -- -- -- 21.0
Stock-based compensation 0.1 -- -- -- -- -- 0.1
S Corporation distributions -- (8.6) -- -- -- -- (8.6)
Net income from January 1, 1998 through
August 6, 1998 -- 3.1 -- -- -- 3.1 3.1
Transfer of undistributed retained earnings
to additional paid-in capital upon
termination of S Corporation 3.5 (3.5) -- -- -- -- --
Purchase of treasury stock -- -- 3.3 (13.5) -- -- (13.5)
Net income from August 7, 1998 through
December 31, 1998 -- 1.6 -- -- -- 1.6 1.6
-----
Comprehensive income -- -- -- -- -- 4.7 --
------- ------ ----- ------ ------ ===== -------
Balance, December 31, 1998 26.2 1.6 3.3 (13.5) -- 14.3
Issuance of common stock 0.6 -- -- -- -- -- 0.6
Issuance of Series B preferred stock 15.0 -- -- -- -- -- 15.0
Stock-based compensation 0.1 -- -- -- -- -- 0.1
Issuance of warrants in acquisition
transactions 0.1 -- -- -- -- -- 0.1
Purchase of treasury stock -- -- -- (0.2) -- -- (0.2)
Conversion of Series A and B preferred
stock to common stock -- -- -- -- -- -- --
Initial public offering of common stock,
net 61.9 -- -- -- -- -- 61.9
Retirement of treasury stock (13.7) -- (3.3) 13.7 -- -- --
Net income -- 9.6 -- -- -- 9.6 9.6
-----
Comprehensive income -- -- -- -- -- 9.6 --
------- ------ ----- ------ ------ ===== -------
Balance, December 31, 1999 90.2 11.2 -- -- -- 101.4
Issuance of common stock for exercise
of stock options 9.5 -- -- -- -- -- 9.5
Issuance of common stock under employee
stock purchase plan 3.4 -- -- -- -- -- 3.4
Issuance of common stock in acquisition
transaction 37.7 -- -- -- -- -- 37.7
Issuance of common stock for exercise of
warrants 0.5 -- -- -- -- -- 0.5
Tax benefit from exercise of stock options 15.6 -- -- -- -- -- 15.6
Net income -- 31.8 -- -- -- 31.8 31.8
Foreign currency translation loss -- -- -- -- (0.3) (0.3) (0.3)
Net unrealized investment losses -- -- -- -- (1.0) (1.0) (1.0)
-----
Comprehensive income -- -- -- -- -- $30.5 --
------- ------ ----- ------ ------ ===== -------
Balance, December 31, 2000 $156.9 $ 43.0 -- $ -- $ (1.3) $198.6
======= ====== ===== ====== ====== =======
See accompanying notes to consolidated financial statements.
F-5
WIRELESS FACILITIES, INC.
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1999, and 2000
(in millions)
1998 1999 2000
------- ------- -------
Operating activities:
Net income $ 4.7 9.6 31.8
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 1.5 2.5 10.7
Stock-based compensation 0.1 0.1 --
Accrued rent -- -- 0.5
Gain on sale of investment -- (0.1) --
Provision for deferred income taxes 1.3 (1.7) 9.1
Tax benefit from exercise of stock options -- -- 15.6
Minority interest in income of subsidiary -- 0.3 0.1
Equity earnings in unconsolidated affiliates -- -- (0.1)
Changes in assets and liabilities, net of the effect of acquisitions:
Accounts receivable, net (12.1) (7.2) (84.3)
Contract management receivables (24.2) 10.2 (6.8)
Other current assets 0.4 (2.2) (12.3)
Other assets -- (0.1) (0.3)
Accounts payable 7.2 (4.9) 8.2
Accrued expenses 3.9 1.2 10.7
Contract management payables 9.3 (1.1) 0.9
Billings in excess of costs and profits 0.1 5.1 (4.4)
Income taxes receivable 3.9 1.6 (17.7)
Other long-term liabilities -- 0.1 --
------- ------- -------
Net cash (used in) provided by operating activities (3.9) 13.4 (38.3)
------- ------- -------
Investing activities:
Capital expenditures (0.7) (3.2) (5.7)
Investment in marketable securities -- (38.0) --
Cash paid for acquisitions, net of cash acquired (3.3) (1.7) (38.1)
Cash paid for investments (0.6) (0.1) (9.0)
Distributions from investments -- 0.1 38.0
Proceeds from disposition of property and equipment -- -- 0.1
------- ------- -------
Net cash used in investing activities (4.6) (42.9) (14.7)
------- ------- -------
Financing activities:
Proceeds from issuance of preferred stock 21.0 15.0 --
Proceeds from issuance of common stock 0.8 62.5 12.9
Stockholder distributions (3.1) -- --
Purchase of treasury stock (13.5) (0.2) --
Net borrowings (repayment) under line of credit 3.0 (3.0) 24.9
Repayment of lease obligation -- -- (1.3)
Repayment of officer notes receivable -- -- 0.6
Borrowings (repayment) from officer notes payable 3.8 (3.8) --
Repayment of subordinated stockholder notes payable -- (5.5) --
Borrowings (repayment) of notes payable (1.5) (4.0) 0.4
------- ------- -------
Net cash provided by financing activities 10.5 61.0 37.5
------- ------- -------
Effect of exchange rate on cash 0.1 (0.1) (0.3)
------- ------- -------
Net increase (decrease) in cash and cash equivalents 2.1 31.4 (15.8)
Cash and cash equivalents at beginning of year 0.8 2.9 34.3
------- ------- -------
Cash and cash equivalents at end of year $ 2.9 34.3 18.5
======= ======= =======
(continued)
See accompanying notes to consolidated financial statements.
F-6
WIRELESS FACILITIES, INC.
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1999, and 2000
(in millions)
1998 1999 2000
------- ------- -------
Supplemental disclosures of noncash transactions:
Fair value of assets acquired in acquisitions $ 8.8 3.4 88.6
Cash paid for acquisitions (3.5) (2.1) (38.7)
Issuance of common stock for acquisitions -- -- (37.7)
Issuance of notes payable for acquisition (5.2) (0.8) (1.5)
Common stock to be issued -- -- (8.6)
Issuance of warrants in acquisitions -- (0.1) --
------- ------- -------
Liabilities assumed in acquisitions $ 0.1 0.4 2.1
Property and equipment acquired under capital leases -- 1.8 10.0
Reduction of accounts receivable in exchange for investment securities -- -- 1.1
Decrease in fair value of investment securities available for sale -- -- (1.0)
Reduction of note payable in lieu of consideration for exercise of warrants -- -- 0.5
Issuance of notes payable for stockholder distribution 5.5 -- --
Receipt of note for sale of investment $ -- 0.2 --
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 0.1 1.3 1.8
Cash paid during the year for income taxes $ 0.4 5.6 9.6
See accompanying notes to consolidated financial statements.
F-7
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 2000
(1) Organization and Summary of Significant Accounting Policies
(a) Description of Business
Wireless Facilities, Inc. ("WFI") was formed in the state of New York
on December 19, 1994, began operations in March 1995 and was
reincorporated in 1998, in Delaware. WFI provides a full suite of
outsourcing services to wireless carriers and equipment vendors,
including the design, deployment and management of client networks.
WFI's customers include both early-stage and mature providers of
cellular, PCS, and broadband data services and equipment. WFI's
engagements range from small contracts for the deployment of a single
cell site, to large multi-year turnkey contracts. These services are
billed either on a time and materials basis or a fixed-price, time-
certain basis.
In November 1999, WFI completed an initial public offering of
4.6 million shares of common stock. Prior to the initial public
offering, there was no public market for WFI's common stock.
The net proceeds of the offering, after deducting applicable
underwriting discounts and offering expenses, were approximately $61.9
million.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of WFI and
its wholly-owned and majority-owned subsidiaries. WFI and its
subsidiaries are collectively referred to herein as the "Company." As
of December 31, 1998, the wholly-owned subsidiaries include Entel
Technologies, Inc., WFI de Mexico, and Wireless Facilities Latin
America Ltda. In November 1999, WFI formed a wholly-owned subsidiary,
WFI International, Ltd., based in London, England, which began
operations in April of 2000. In March 2000, the Company acquired the
assets of a network operations center and business segment located in
Dallas, Texas. In conjunction with this purchase, the Company formed
WFI Network Management Services Corporation, a wholly-owned subsidiary
incorporated in the state of Delaware, to operate the center. In May
2000, the Company acquired a 16.67% interest in the operations of
Diverse Networks, Inc., which is accounted for using the equity method
of accounting. In August 2000, the Company acquired Questus, Ltd.,
("Questus") a privately held company incorporated in the United
Kingdom in a stock purchase acquisition. Questus is a provider of
management consulting and network development services in the European
wireless services market. The acquisition included Questus' wholly-
owned subsidiaries, Questus Scandinavia, A.B., incorporated in
Stockholm, Sweden, and Questus GmbH, incorporated in Vienna, Austria.
In September 2000, the Company formed a wholly-owned subsidiary WFI-
UK, Ltd., based in London, England, to act as a holding company. The
Company acquired Telia Contracting AB and Telia Academy AB in October
2000 and December 2000, respectively. Telia Contracting AB, a Swedish
corporation located in Gothenburg, Sweden, is a global provider of
network management consulting services with geographic emphasis in
Asia, Scandinavia, South America, and Europe. Telia Academy AB, a
Swedish limited liability corporation located in Kalmar, Sweden, is a
provider of management training and consultancy services to the global
telecommunications industry.
All intercompany transactions have been eliminated in consolidation.
Investments accounted for using the cost method include companies in
which the Company owns less than 20% and for which the Company has no
significant influence. Investments accounted for using the equity
method include companies in which the Company owns more than 20% but
less than 50%, or for which the Company is considered to have
significant influence.
F-8
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 2000
(c) Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash
equivalents were $26.7 million and $0 as of December 31, 1999 and
2000, respectively.
(d) Investment Securities
Investment securities, which the Company has the ability and intent to
hold to maturity, are carried at amortized cost, which approximates
market value. All held-to-maturity securities consisted of debt
instruments that matured within one year at various dates through
December 2000. Securities available for sale are carried at fair value
with unrealized gains or losses reported in a separate component of
accumulated other comprehensive income. Securities with remaining
maturities longer than one year are classified as long-term.
Management determines the appropriate classification of investments at
the time of purchase and reevaluates such designation as of each
balance sheet date.
(e) Property and Equipment, Net
Property and equipment consists primarily of computer equipment and is
recorded at cost. Equipment acquired under capital leases is recorded
at the present value of the future minimum lease payments.
Depreciation and amortization are calculated using the straight-line
method over the estimated useful life of each asset, which is one to
three years for computer equipment and five years for furniture and
office equipment. Equipment acquired under capital leases is amortized
over the lease term or the estimated useful life of the asset,
whichever is shorter. Improvements, which add to the useful life of an
asset, are capitalized. Expenditures for maintenance and repairs are
charged to operations.
(f) Goodwill, Net
Goodwill represents the excess of the purchase price over the fair
value of assets purchased from acquired companies. Goodwill is
amortized on a straight-line basis over its estimated period of
benefit from five to twenty years. In determining the useful life of
goodwill the Company considers several factors including industry
technology, competition, demand and other economic factors. The
carrying value of goodwill is evaluated periodically in relation to
the operating performance and future undiscounted cash flows of the
underlying businesses.
(g) Other Intangible Assets, Net
Other intangible assets at December 31, 2000 consist primarily of
acquired customer relationships, acquired workforce, purchased
technology, trade names, noncompete covenants and patents. Other
intangible assets are recorded at cost and are amortized using the
straight-line method over their expected useful lives from one to ten
years. The Company reviews the carrying value of intangibles for
impairment whenever events in circumstances indicate that the carrying
amount may not be recoverable.
(h) Revenue Recognition
Revenue on time and materials contracts is recognized as services are
rendered at contract labor rates plus material and other direct costs
incurred.
Revenue on fixed price contracts is recognized on the percentage-of-
completion method based on the ratio of total costs incurred to date
compared to estimated total costs to complete the contract. Estimates
of costs to complete include material, direct labor, overhead, and
allowable general and administrative expenses. These estimates are
reviewed on a contract-by-contract basis, and are revised periodically
throughout the life of the contract such that adjustments to profit
resulting from revisions are made cumulative to the date of the
revision.
F-9
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 2000
The full amount of an estimated loss is charged to operations in the
period it is determined that a loss will be realized from the
performance of a contract. Included in the accompanying consolidated
balance sheets is "Billings in excess of costs and profits" which
represents billings in excess of costs and profits recognized on
uncompleted projects.
(i) Contract Management Receivables and Payables
During 1999 and 2000, the Company managed contracts whereby the
Company paid for services rendered by third parties on behalf of
customers. The Company passed these expenses through to the customers,
who reimbursed the Company for the expenses plus a management fee. The
management fee is included in revenues in the consolidated statement
of operations. Amounts receivable from the customer or owed to third
parties for the contract management activities are shown separately on
the balance sheets to distinguish them from receivables and
liabilities generated by the Company's own operations. The Company
records no revenues or expenses for these amounts.
(j) Income Taxes
Through August 6, 1998, the Company was an S Corporation whereby
income taxes were the individual responsibility of the stockholders.
On August 7, 1998, in conjunction with the private placement and sale
of Series A preferred stock, the Company elected to be taxed as a C
Corporation under the Internal Revenue Tax Code.
The Company records deferred tax assets and liabilities for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
(k) Common Stock Split
On February 22, 1999, the Company effected a 3-for-1 stock split of
the Company's common stock. All per share and share data in the
consolidated financial statements and notes to the consolidated
financial statements have been retroactively restated to reflect this
stock split.
(l) Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with
SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123
permits entities to recognize as expense over the vesting period the
fair value of all stock-based awards on the date of grant or allows
entities to apply the provisions of Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees.
Under APB Opinion No. 25, compensation expense is recognized as the
difference, if any, between the current market price of the underlying
stock and the exercise price on the date of grant. In accordance with
SFAS No. 123, the Company has elected to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS
No. 123.
F-10
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 2000
(m) Net Income per Common Share
The Company calculates net income per share in accordance with SFAS
No. 128, Earnings Per Share. Under SFAS No. 128, basic net income per
common share is calculated by dividing net income by the weighted
average number of common shares outstanding during the reporting
periods. Diluted net income per common share reflects the effects of
potentially dilutive securities. Weighted average shares used to
compute net income per share are presented below (in millions):
1998 1999 2000
------ ------ ------
Weighted average shares, basic 28.4 29.1 41.8
Dilutive effect of stock options 1.9 5.2 7.7
Dilutive effect of warrants .4 .9 1.0
------ ------ ------
Weighted average shares, diluted 30.7 35.2 50.5
====== ====== ======
Options to purchase .3 million, .2 million, and 4.5 million shares of
common stock, and notes payable convertible into 1.1 million, 0, and 0
shares at December 31, 1998, 1999, and 2000, respectively, were not
included in the calculation of diluted net income per share because
the effect of these instruments was anti-dilutive.
(n) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
Of
The Company reviews long-lived assets and intangibles for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of
an asset to future net undiscounted cash flows without interest
expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair
value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
(o) Fair Value of Financial Instruments
SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
requires that fair values be disclosed for the Company's financial
instruments. The carrying amounts of cash and cash equivalents,
investments in marketable securities, accounts receivable, contract
management receivables, income tax receivable, accounts payable,
accrued expenses and contract management payables approximate fair
value due to the short-term nature of these instruments. The carrying
amounts reported for the Company's line of credit payable and notes
payable approximate their fair value because the underlying
instruments earn interest at rates comparable to current rates offered
to the Company for instruments of similar terms and risk.
(p) Other Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income, establishes rules for
the reporting of comprehensive income and its components.
Comprehensive income for the years ended December 31, 1998, and 1999
consisted of foreign currency translation adjustments. Comprehensive
F-11
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 2000
income for the year ended December 31, 2000 consisted of unrealized
losses on available-for-sale securities and foreign currency
translation adjustments.
(q) Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries where
the functional currency has been determined to be the local currency
are translated into United States dollars using current rates of
exchange for assets and liabilities and rates of exchange that
approximate the rates in effect at the transaction date for revenues,
expenses, gains and losses. Foreign currency translation gains and
losses are included in the accumulated other comprehensive income
account in the stockholders' equity section of the consolidated
balance sheets. The financial statements of the Company's Brazilian
subsidiary are not maintained in the U.S. dollar, which has been
determined to be the functional currency. Accordingly, the books of
record of the Brazilian subsidiary have been remeasured into the U.S.
dollar with gains and losses included in the consolidated statements
of operations.
(r) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amount of revenue and expenses
during the reporting period to prepare these consolidated financial
statements in conformity with accounting principles generally accepted
in the United States of America. Actual results could differ from
those estimates.
(s) Reclassifications
Certain amounts in prior year financial statements have been
reclassified to conform to the 2000 presentation.
(2) Acquisitions
(a) Entel Technologies, Inc. ("Entel")
On February 27, 1998, the Company acquired all of the outstanding
shares of stock of Entel, a Maryland wireless outsourcing company.
Entel rendered site development and project management services to
telecommunications providers in connection with site acquisition,
construction management and microwave relocation projects throughout
the United States. Consideration for the acquisition consisted of $3.5
million in cash and $5.2 million in notes payable to Entel
shareholders. The excess purchase price paid over the fair value of
tangible and identifiable intangible assets acquired was recorded as
goodwill. Goodwill of $7.8 million was recognized in the transaction
and is being amortized over seven years. The Company accounted for
this acquisition using the purchase method of accounting. Thus,
results of operations from this acquired entity are included in the
Company's consolidated financial statements from the acquisition date.
(b) B. Communication International, Inc. ("BCI")
On January 4, 1999, the Company acquired BCI for $2.9 million in cash,
warrants and notes. BCI provided radio frequency engineering and cell
site and switch technician services in the U.S. and Latin America. The
excess purchase price paid over the fair value of tangible and
identifiable intangible assets acquired was recorded as goodwill.
F-12
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 2000
Goodwill of $1.2 million was recognized in the transaction and is
being amortized over seven years. Acquired identifiable intangible
assets of $.5 million consist primarily of noncompete agreements and
are being amortized over two years. The Company accounted for this
acquisition using the purchase method of accounting. Thus, results of
operations from this acquired entity are included in the Company's
consolidated financial statements from the acquisition date.
(c) C.R.D., Inc. ("CRD")
On June 25, 1999, the Company acquired CRD for $.5 million in cash,
warrants, and assumption of debt. CRD installed and maintained cell
site and microwave electronics. The excess purchase price paid over
the fair value of tangible and identifiable intangible assets acquired
was recorded as goodwill. Goodwill of $.3 million was recognized in
the transaction and is being amortized over seven years. The Company
accounted for this acquisition using the purchase method of
accounting. Thus, results of operations from this acquired entity are
included in the Company's consolidated financial statements from the
acquisition date.
(d) WFI de Mexico ("WFIM")
On September 18, 1998, the Company formed and acquired an 88%
ownership interest in a Mexican subsidiary (WFIM). WFIM acquired all
the assets of Cable and Wireless Services, S.C., a Mexican wireless
communications company. Consideration for the acquisition consisted of
$.1 million in cash. The remaining 12% of WFIM's stock was held by
directors and General Manager of WFIM pursuant to Restricted Stock
Agreements which permit WFIM to repurchase and transfer such shares
upon the occurrence of certain events.
On January 21, 2000, the Company acquired all but 2.5% of the minority
ownership interest in WFIM from the General Manager of that
subsidiary. The acquisition was made under the terms of a Restricted
Stock Agreement, pursuant to which the Company issued .4 million
shares of common stock valued at $18.2 million in exchange for shares
in WFIM. The acquisition price was allocated first to reduce the
General Manager's minority interest, with the excess of $17.9 million
recorded as goodwill, which is being amortized over 20 years. The
General Manager is the brother of both the Chairman and the Chief
Executive Officer of the Company. The Company accounted for this
acquisition using the purchase method of accounting. Thus, results of
operations and earnings previously allocated to minority owners are
included in the Company's consolidated financial statements from the
acquisition date.
(e) The Walter Group, Inc. ("TWG")
On January 11, 2000, the Company acquired TWG, a Washington
corporation and a privately-held provider of management consulting and
network development services to the wireless communications market.
Consideration consisted of $5.6 million in cash and approximately
95,000 shares of the Company's common stock valued at $4.1 million.
The excess purchase price paid over the fair value of tangible and
identifiable intangible assets acquired was recorded as goodwill.
Goodwill of $7.7 million was recognized in the transaction and is
being amortized over ten years. Acquired identifiable intangible
assets of $1.6 million consist of noncompete covenants and an
assembled workforce and are being amortized over two to five years.
The Company accounted for this acquisition using the purchase method
of accounting. Thus, results of operations from this acquired entity
are included in the Company's consolidated financial statements from
the acquisition date.
F-13
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 2000
(f) Network Operations Center
On March 13, 2000, the Company acquired the assets of a network
operations center and business segment from Ericsson Inc. for $6.3
million in cash. The center is located in Dallas, Texas. The excess
purchase price paid over the fair value of the tangible and
identifiable intangible assets acquired was recorded as goodwill.
Goodwill of $1.0 million was recognized in the transaction and is
being amortized over seven years. Acquired identifiable intangible
assets of $3.4 million consist primarily of customer relationships and
an assembled workforce and are being amortized over two to five years.
The Company accounted for this acquisition using the purchase method
of accounting. Thus, the results of operations from the acquired
assets are included in the Company's consolidated financial statements
from the acquisition date.
(g) Comcor Advisory Services ("Comcor")
On April 25, 2000, the Company acquired the assets of Comcor, a
privately-held provider of site development services to the wireless
mobility and broadband wireless communications market. The Company
paid $5.4 million in cash as well as issued approximately 21,000
shares of the Company's common stock valued at $1.8 million to Comcor
shareholders for the acquisition. The excess purchase price paid over
the fair value of the tangible and identifiable intangible assets
acquired was recorded as goodwill. Goodwill of $6.6 million was
recognized in the transaction and is being amortized over ten years.
Acquired identifiable intangible assets of $.6 million consist
primarily of an assembled workforce and are being amortized over five
years. The Company accounted for this acquisition using the purchase
method of accounting. Thus, the results of operations from the
acquired assets are included in the Company's consolidated financial
statements from the acquisition date.
(h) Diverse Networks, Inc. ("DNI")
On May 24, 2000, the Company paid $4.0 million in cash to acquire a
16.67% percent interest in DNI, a private company that provides
network management and data center services. In conjunction with the
acquisition, the Company received a warrant for the rights to purchase
up to a 50% interest in DNI over five years. The warrant is
exercisable after May 24, 2001, or upon the occurrence of a material
event as defined in the warrant agreement. The number of shares and
exercise price for the warrant is dependent upon revenues earned by
contracts and agreements provided to DNI by the Company. Exercise of
the warrant may be effected by cash or by using a net issue exercise
feature. The warrant may be exercised in total or in part, and is
assignable and transferable prior to any first exercise. A
representative of the Company holds a position on DNI's Board of
Directors and the Company has entered into other contracts with DNI,
and is therefore considered to have significant influence. This
investment has been accounted for under the equity method of
accounting.
(i) Davis Bay, LLC
On June 26, 2000, the Company acquired the assets of Davis Bay, LLC, a
Washington State limited liability company, for $3.0 million in cash
and approximately 49,000 shares of the Company's common stock valued
at $2.4 million.
F-14
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 2000
Included in the asset purchase agreement is an earn-out provision
whereby the Company agrees to pay Davis Bay's selling shareholders'
additional consideration contingent on certain quarterly earnings
results from existing and potential future contracts secured by Davis
Bay for the Company and executed within 18 months of the acquisition
date. Earn-out payments, are paid quarterly over the life of the
eligible contracts, in stock. These payments are capped at $20.0
million. As of December 31, 2000, the Company recorded $9.5 million in
additional goodwill as a result of the earn-out provision consisting
of approximately .2 million shares of the Company's common stock. The
majority of these shares are issuable in the first quarter of 2001 and
are recorded as a liability as of December 31, 2000. The excess
purchase price paid over the fair value of the tangible and
identifiable intangible assets acquired was recorded as goodwill.
Goodwill of $11.6 million has been recognized as of December 31, 2000
related to the transaction, and is being amortized over ten years from
the acquisition date. Acquired identifiable intangible assets of $1.0
million consist of an assembled workforce and purchased technology and
are being amortized over three to five years. The acquisition was
accounted for as a purchase. Thus, the results of operations from the
acquired assets are included in the Company's consolidated financial
statements from the acquisition date.
(j) CommVerge Solutions, Inc.
On July 21, 2000, the Company acquired convertible preferred stock of
CommVerge Solutions, Inc., a privately-held wireless network planning
and deployment company. The investment totaled $5.0 million in cash
and is accounted for using the cost method of accounting.
(k) Questus, Ltd.
On August 29, 2000, the Company acquired all of the outstanding
capital stock of Questus, Ltd., a private limited company incorporated
in the United Kingdom. Consideration consisted of $10.6 million in
cash, approximately .2 million shares of the Company's common stock
valued at $10.3 million, and promissory notes to one selling
shareholder totaling $1.5 million. Included in the purchase were
Questus' wholly owned subsidiaries, Questus Scandinavia, A.B.,
incorporated in Stockholm Sweden, and Questus GmbH, incorporated in
Vienna, Austria. The excess purchase price paid over the fair value of
tangible and identifiable intangible assets acquired was recorded as
goodwill. Goodwill of $14.0 million was recognized in the transaction
and is being amortized over ten years. Acquired identifiable
intangible assets of $6.8 million consist primarily of customer
relationships, purchased technology, and trade names and are being
amortized over two to five years. The acquisition was accounted for as
a purchase. Thus, the results of operations from the acquired assets
are included in the Company's consolidated financial statements from
the acquisition date.
(l) Telia Contracting AB
On October 12, 2000, the Company acquired all of the outstanding
capital stock of Telia Contracting, AB of Gothenburg, Sweden, a
subsidiary of Telia AB in Sweden. Consideration consisted of $7.8
million in cash. The excess purchase price paid over the fair value of
tangible and identifiable intangible assets acquired was recorded as
goodwill.
F-15
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 2000
Goodwill of $1.8 million was recognized in the transaction and is
being amortized over ten years. Acquired identifiable intangible
assets of $5.5 million consist primarily of customer relationships, an
assembled workforce and purchased technology and are being amortized
over two to five years. The acquisition was accounted for as a
purchase. Thus, the results of operations from the acquired assets are
included in the Company's consolidated financial statements from the
acquisition date.
(m) Telia Academy AB
On December 4, 2000, the Company acquired the assets of Telia Academy
AB, a limited liability company organized under the laws of Sweden.
Consideration consisted of $2.2 million in cash. The excess purchase
price paid over the fair value of tangible and identifiable intangible
assets acquired was recorded as goodwill. Goodwill of $1.2 million was
recognized in the transaction and is being amortized over seven years.
Acquired identifiable intangible assets of $.7 million consist
primarily of customer relationships and an assembled workforce and are
being amortized over one to ten years. The acquisition was accounted
for as a purchase. Thus, the results of operations from the acquired
assets are included in the Company's consolidated financial statements
from the acquisition date.
The following summary presents pro forma consolidated results of operations
for the years ended December 31, 1998, 1999, and 2000 as if the 1998 and
1999 acquisitions described above had occurred at the beginning of the year
ended December 31, 1998, and the 2000 acquisitions described above had
occurred at the beginning of the year ended December 31, 1999, and includes
adjustments that are directly attributable to the transaction or are
expected to have a continuing impact on the Company. Adjustments to
revenues and cost of revenues are taken from the available financial
information by estimating the monthly operating revenue or expense and pro-
rating for the period of time such operations were excluded from the
Company's financial results for the periods presented.
The pro forma results are for illustrative purposes only, and do not
purport to be indicative of the actual results which would have occurred
had the transactions been completed as of the beginning of the periods, nor
are they indicative of results of operations which may occur in the future
(all amounts except per share amounts are in millions).
1998 1999 2000
---- ---- ----
Pro forma revenue $55.8 $126.1 $268.9
Pro forma operating income $11.2 16.4 $ 48.2
Pro forma net income $ 4.9 $ 8.7 $ 28.7
Pro forma net income per common share:
Basic $ .17 $ .29 $ .68
Diluted $ .16 $ .24 $ .57
F-16
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 2000
(3) Balance Sheet Details
The Consolidated Balance Sheets consist of the following at December 31,
1999 and 2000 (in millions):
1999 2000
-------- --------
Accounts receivable, net:
Billed $ 24.0 75.1
Unbilled 9.5 44.9
-------- --------
33.5 120.0
Allowance for doubtful accounts (0.9) (0.9)
-------- --------
Total accounts receivable, net $ 32.6 119.1
======== ========
Contract management receivables:
Billed $ 3.4 6.0
Unbilled 10.6 14.8
-------- --------
Total contract management receivables $ 14.0 20.8
======== ========
Property and equipment, net:
Computer equipment $ 6.4 24.2
Furniture and office equipment 0.5 1.4
-------- --------
6.9 25.6
Accumulated depreciation and amortization (1.8) (5.6)
-------- --------
Total property and equipment, net $ 5.1 20.0
======== ========
Goodwill, net:
Goodwill $ 9.3 71.1
Accumulated amortization (2.2) (6.4)
-------- --------
Total goodwill, net $ 7.1 64.7
======== ========
Other intangibles, net:
Customer relationships $ -- 10.2
Assembled workforce -- 3.9
Purchased technology -- 3.6
Trade names -- 1.1
Noncompete covenants 0.5 0.5
Other 0.1 0.8
-------- --------
0.6 20.1
Accumulated amortization (0.2) (3.0)
-------- --------
Total other intangibles, net $ 0.4 17.1
======== ========
F-17
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 2000
(4) Notes payable and other financing arrangements
(a) Credit Agreement
In August 1999, the Company executed a credit agreement with a group
of financial institutions that provides for a revolving credit
facility. Under the amended credit agreement at December 31, 2000, the
aggregate commitment was $50 million and the credit facility was due
on August 17, 2002. At December 31, 2000, the Company had $24.9
million outstanding under this credit facility with a weighted average
interest rate of 9.14%. In February 2001, the Company executed an
amended and restated credit agreement (see Note 13), which increased
the aggregate commitment to $100 million, extended the maturity date
to February 2002, and adjusted the interest rate so that borrowings
bear interest at either (i) the greater of the bank prime rate (9.5%
at December 31, 2000) or the Federal Funds Rate plus .5% (5.9% at
December 31, 2000) plus a margin of 1.25%, the base rate margin,
(10.75% at December 31, 2000) or (ii) at the London Interbank Offering
Rate ("LIBOR") plus 2.25%, the LIBOR rate margin, (8.25% at December
31, 2000) at the Company's discretion. Beginning in the third
quarter of 2001, the base rate margin and the LIBOR rate margin will
be determined on certain financial ratios as of the end of the most
recently ended fiscal quarter which will result in margins ranging
from .75% and 1.50% and 1.75% to 2.50%, respectively. The credit
facility is secured by substantially all of the Company's assets. The
agreement contains restrictive covenants, which, among other things,
requires maintenance of certain financial ratios.
In December 1999, the financial institutions included in the credit
agreement entered into an intercreditor agreement, which permits the
execution of notes payable not to exceed $1.0 million that are secured
by substantially all of the Company's assets pursuant to the credit
agreement. On February 24, 2000, the Company executed a $1.0 million
note payable under this agreement payable ratably through February
2005 at a 9% interest rate. At December 31, 2000, the Company had
outstanding borrowings of $.8 million under this note payable.
(b) Entel Note Payable
In consideration for the acquisition of Entel in 1998 (see Note 2),
the Company issued three-year convertible notes payable for $5.2
million. These notes incurred interest at 10% per annum and were due
in March 2001. These notes were repaid in full during 1999.
(c) BCI Notes Payable
In January 1999, the Company issued notes payable in consideration for
the BCI acquisition (see Note 2). These notes had a carrying value of
$.9 million at December 31, 1999. Interest was imputed on these notes
at 9.62% and were due in January 2001. These notes were repaid in full
during 2000.
(d) Officer Notes Payable
At December 31, 1998, the Company had unsecured notes payable to two
officers of the Company totaling $3.8 million. Interest was imputed on
these loans at 5.5%. These loans were repaid in full in 1999.
(e) Questus Notes Payable
In consideration for the acquisition of Questus (see Note 2), the
Company issued promissory notes to one selling shareholder totaling
$1.5 million, which are secured by a standing letter of credit. These
notes are due on April 30, 2002; however, the selling shareholder may
demand payment of the outstanding principal balance after March 1,
2001.
F-18
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 2000
These notes bear interest at LIBOR plus a margin of 1% (7% at December
31, 2000).
Maturities of notes payable outstanding at December 31, 2000 are as
follows (in millions):
2001 $ 1.7
2002 0.2
2003 0.2
2004 0.2
------
Total $ 2.3
======
(5) Lease Commitments
The Company leases certain equipment under capital leases with interest
rates ranging from 3.3% to 11.7% that expire at various dates through 2005.
The Company also leases certain facilities and equipment under operating
leases having terms expiring at various dates through 2010. Future minimum
lease payments under capital and operating leases as of December 31, 2000
are as follows (in millions):
Capitalized Operating
leases leases
------------------- -------------------
Year ending December 31,
2001 $ 4.1 $ 5.1
2002 4.0 3.6
2003 2.9 3.3
2004 0.5 3.1
2005 0.2 2.9
Thereafter -- 10.2
-------------- ------------
Total minimum lease payments 11.7 $ 28.2
============
Less amount representing interest (1.2)
--------------
Present value of capital lease obligations 10.5
Less current portion (3.5)
--------------
Long-term capital lease obligations $ 7.0
==============
Equipment recorded under capital leases was $1.8 million and $11.8 million,
with accumulated amortization of $0 and $1.4 million as of December 31,
1999 and 2000, respectively.
Future minimum lease payments have not been reduced by future minimum
sublease rentals of $.8 million under operating leases. Rent expense under
operating leases for the years ended December 31, 1998, 1999, and 2000 was
$.7 million, $.9 million and $3.8 million, respectively.
F-19
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 2000
The lease on the United States office facilities includes scheduled base
rent increases over the term of the lease. The total amount of the base
rent payments is being charged to expense on the straight-line method over
the term of the lease. In addition to the base rent payment, the Company
pays a monthly allocation of the building's operating expenses. The Company
has recorded accrued rent to reflect the excess of rent expense over
cash payments since inception of the lease.
(6) Income Taxes
Income before provision for income taxes for the years ended December 31,
1998, 1999, and 2000 is comprised of the following (in millions):
1988 1999 2000
------ ------ ------
Domestic $ 10.2 10.5 30.7
Foreign -- 6.3 21.4
------ ------ ------
$ 10.2 16.8 52.1
====== ====== ======
Prior to August 7, 1998, the Company was an S Corporation whereby income
taxes were the individual responsibility of the stockholders. The provision
for income taxes for the years ended December 31, 1998, 1999 and 2000 is
comprised of the following (in millions):
1998 1999 2000
----------- --------- ----------
Current:
Federal $ 3.4 5.7 1.7
State 0.8 0.8 0.4
Foreign -- 2.4 4.1
----------- --------- ---------
4.2 8.9 6.2
----------- --------- ---------
Deferred:
Federal 1.1 (1.6) 8.5
State 0.2 (0.3) 1.5
Foreign -- 0.2 4.1
----------- --------- ---------
1.3 (1.7) 14.1
----------- --------- ---------
$ 5.5 7.2 20.3
=========== ========= =========
A reconciliation of total income tax expense to the amount computed by
applying the statutory federal income tax rate of 35% to income before
income tax expense for the years ended December 31, 1998, 1999 and 2000 is
as follows (in millions):
1998 1999 2000
----------- --------- ---------
Income taxes at federal statutory rate $ 3.6 5.9 18.3
State taxes, net of federal tax benefit 0.6 0.3 1.2
Foreign taxes, net of federal tax benefit -- 0.7 0.5
Establishment of deferred income tax upon
change from S Corporation to C Corporation 2.1 -- --
S Corporation earnings not subject to (1.2) -- --
income tax
Other, net 0.4 0.3 0.3
----------- --------- ---------
$ 5.5 7.2 20.3
=========== ========= =========
F-20
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 2000
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of
December 31, 1999 and 2000 are as follows (in millions):
1999 2000
-------------- ------------
Deferred tax assets:
Allowance for doubtful accounts $ 0.3 0.3
Bonus accruals 0.8 0.1
Vacation accruals 0.3 0.8
Property and equipment, principally due to differences in
depreciation 0.5 --
Goodwill and other intangibles, principally due to differences in -- 1.2
amortization
Net operating loss carryforward -- 4.4
Income tax credit carryforwards -- 4.6
Other 0.1 0.2
-------------- -----------
2.0 11.6
Valuation allowance -- (4.1)
-------------- -----------
Total deferred tax assets 2.0 7.5
-------------- -----------
Deferred tax liabilities:
Change from cash to accrual method of accounting for income taxes (1.5) (0.8)
Property and equipment, principally due to differences in
depreciation -- (2.1)
Unearned revenue -- (9.2)
Foreign deferred tax liability (0.2) (4.2)
-------------- -----------
Total deferred tax liability (1.7) (16.3)
-------------- -----------
Net deferred tax asset (liability) $ 0.3 (8.8)
============== ===========
At December 31, 2000, the Company had federal tax loss carryforwards of
$10.5 million and foreign tax credit carryforwards of $4.1 million, which
expire in 2020 and 2004, respectively. The Company also had minimum tax
credit carryforwards of $.5 million, which may be carried forward
indefinitely.
The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets that may not be realized due to the
expiration of foreign tax credit carryforwards after consideration of stock
option deductions available for tax return purposes. In assessing the
realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets
will not be realized. Based upon the level of historical taxable income and
projections for future taxable income, management believes it is more
likely than not the Company will realize the deferred tax assets, net of
valuation allowance as of December 31, 2000.
F-21
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 2000
The total amount of undistributed earnings of foreign subsidiaries for
income tax purposes was $22.5 million at December 31, 2000. It is the
Company's intention to reinvest undistributed earnings of its foreign
subsidiaries and thereby indefinitely postpone their remittance.
Accordingly, no provision has been made for foreign withholding taxes or
United States income taxes which may become payable if undistributed
earnings of foreign subsidiaries were paid as dividends to the Company. The
additional taxes on that portion of undistributed earnings which is
available for dividends are not practicably determinable.
(7) Stockholders' Equity
(a) Common Stock
In November 1999, the Company completed an initial public offering of
4.6 million shares of common stock. Prior to the initial public
offering, there was no public market for the Company's common stock.
The net proceeds of the offering, after deducting applicable
underwriting discounts and offering expenses, were approximately $61.9
million.
Immediately prior to the closing of the initial public offering, and
effective upon the filing of the Company's restated certificate of
incorporation, authorized capital stock consisted of 195.0 million
shares of common stock, $0.001 par value per share, and 5.0 million
shares of preferred stock, $0.001 par value per share.
(b) Preferred Stock
On August 8, 1998, the Company issued 1.7 million shares of Series A
convertible preferred stock in a private placement for $21.0 million.
Series A preferred shares were convertible at the option of the holder
into shares of common stock at an initial conversion rate of 1-to-1
(3-to-1 after the 3-for-1 common stock split). Conversion was
automatic upon the closing of the Company's initial public offering
above a specified price or upon approval by 2/3 of the Series A
stockholders. No Series A convertible preferred stock dividends were
declared. Upon closing of the Company's initial public offering, all
outstanding shares of Series A preferred stock were converted into 5.1
million shares of common stock.
In February 1999, the Board of Directors authorized the issuance of up
to 2.8 million shares of par value $0.01 Series B preferred stock.
Shortly thereafter, the Company sold 2.7 million Series B preferred
shares for $15.0 million, or $5.50 per share. Series B preferred
shares were convertible at the option of the holder into shares of
common stock at the initial conversion rate of 1-to-1. Conversion was
automatic upon the closing of a public offering above a specified
price or upon approval of 2/3 of the Series B stockholders. Upon
closing of the Company's initial public offering, all outstanding
shares of Series B preferred stock were converted into 2.7 million
shares of common stock.
(c) Treasury Stock
Treasury stock is recorded at cost. On August 5, 1998, the Company
purchased 3.3 million shares of common stock for $13.5 million. During
1999, the Company purchased an additional approximate 21,000 shares of
common stock for $.2 million. The treasury stock was retired during
1999.
F-22
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 2000
(e) Common Stock Warrants
In February 1997, the Company issued warrants to purchase .3 million
shares of common stock to two Company directors. One-third of these
warrants vest at the date of issuance, and then annually for the
following two years. These warrants are exercisable at $0.93 per share
of common stock, which was the fair value of the stock at the date of
issuance.
In February 1998, the Company issued warrants to purchase 1.2 million
shares of common stock to two Company directors. One-third of these
warrants vest at the date of issuance, and then annually for the
following two years. These warrants are exercisable at $1.58 per share
of common stock, which was the fair value of the stock at the date of
issuance.
A total of .9 million warrants were outstanding for these two
directors at December 31, 1999 and 2000.
In connection with the acquisition of BCI in January 1999, the Company
issued .2 million common stock warrants exercisable at $4.16 per
share. These warrants vest 25% on each of June 1, 1999, December 1,
1999, June 1, 2000, and December 1, 2000 and expire one year after
their respective vesting date. In June 2000, these warrants were
exchanged for new warrants with the same economic terms other than the
addition of a net exercise provision. During 2000, the outstanding
warrants related to the BCI acquisition were partially exercised using
the net exercise provision contained in the warrants and the remaining
.1 million warrants were exercised by reducing the outstanding balance
of a note payable related to the acquisition.
(g) Stock Option Plans and Employee Stock Purchase Plan
Stock Option Plans
During the years ended 1996 and 1997, the Board of Directors approved
the 1996 Stock Option Plan (the "1996 Plan") and the 1997 Stock Option
Plan (the "1997 Plan"). During 1999, the Board of Directors approved
the 1999 Equity Incentive Plan (the "1999 Plan"). During 2000, the
Board of Directors approved the 2000 Non-statutory Stock Option Plan
(the "2000 Plan"). All stock options under the 1996 Plan were fully
vested at June 1, 1998, and were either exercised or cancelled as of
December 31, 1998. Stock options granted under the 1997 Plan and 1999
Plan may be incentive stock options or non-statutory stock options and
are exercisable for up to ten years following the date of grant. The
Company ceased making grants under the 1997 Plan upon completion of
its initial public offering. The 2000 Plan permits the grant of non-
statutory stock options, which are exercisable for a period following
the date of grant as determined by the Board of Directors, generally
ten years. Stock option exercise prices for the 1997 Plan, 1999 Plan
and 2000 Plan must be equal to or greater than the fair market value
of the common stock on the grant date. A total of 7.5 million, 6.0
million, and 3.0 million shares of common stock have been authorized
for issuance under the 1997 Plan, 1999 Plan and 2000 Plan,
respectively.
In accordance with the provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, the Company applies APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations
in accounting for its 1996 Plan, 1997 Plan, 1999 Plan and 2000 Plan.
Accordingly, the Company recorded compensation expense totaling $.1
million, $.1 million, and $0 for the years ended December 31, 1998,
1999, and 2000, respectively, related to options granted under the
plans.
F-23
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 2000
Stock option transactions are summarized below:
Weighted Weighted Weighted Weighted
average average average average
exercise exercise exercise exercise
1996 Plan price 1997 Plan price 1999 Plan price 2000 Plan price
----------- ----------- --------- --------- ----------- --------- ------------- ----------
Outstanding at
January 1, 1998 658,500 $ 0.01 890,400 $ 1.39 -- $ -- -- $ --
Granted -- 3,464,139 2.51 -- -- -- --
Exercised (591,000) 0.01 (7,200) 1.33 -- -- -- --
Canceled (67,500) 0.01 (773,691) 2.30 -- -- -- --
---------- ----------- ---------- ----------
Outstanding at
December 31, 1998 -- -- 3,573,648 2.26 192,487 47.44 -- --
Granted -- -- 4,288,890 9.74 -- -- -- --
Exercised -- -- (305,312) 1.88 -- -- -- --
Canceled -- -- (781,879) 5.03 -- -- -- --
---------- ----------- ---------- ----------
Outstanding at
December 31, 1999 -- -- 6,775,347 6.74 192,487 47.44 -- --
Granted -- -- -- -- 5,977,752 52.81 1,725,419 45.00
Exercised -- -- (2,357,930) 4.03 (274) 32.75 -- --
Canceled -- -- (663,765) 11.51 (551,954) 54.70 (21,589) 48.90
---------- ----------- ---------- ----------
Outstanding at
December 31, 2000 -- $ -- 3,753,652 $ 7.64 5,618,011 $ 52.44 1,703,830 $ 44.95
========== =========== ========== ==========
F-24
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 2000
The following table summarizes information as of December 31, 2000
concerning options outstanding and exercisable:
Options outstanding Options exercisable
------------------------------------------------------------- ----------------------------------
Weighted Weighted Weighted Weighted
Range of Number average average number average
exercise prices outstanding remaining life exercise price exercisable exercise price
- --------------------- ------------------ ----------------- ------------------ -------------- ------------------
$ 1.33 - 4.16 1,651,523 7.56 $ 3.11 646,044 $ 2.52
5.50 - 12.00 1,371,705 8.43 9.42 360,063 9.02
13.00 - 31.94 1,501,645 9.38 23.47 169,742 14.57
32.75 - 44.94 2,438,259 8.90 41.84 29,581 41.08
45.38 - 57.00 2,753,058 9.31 51.75 77,030 51.40
57.06 - 88.00 1,121,665 9.46 67.22 2,688 59.52
99.75 - 132.06 237,638 9.21 112.28 -- --
------------- -----------
11,075,493 8.87 $ 36.10 1,285,148 $ 9.87
============= ===========
Employee Stock Purchase Plan
In August 1999, the board adopted and the stockholders approved the
1999 Employee Stock Purchase Plan (the "Purchase Plan"). A total of .7
million shares of common stock have been authorized for issuance under
the Purchase Plan. The Purchase Plan is intended to qualify as an
employee stock purchase plan within the meaning of Section 423 of the
Internal Revenue Service Code. The Purchase Plan commenced in November
1999 upon completion of the initial public offering.
Unless otherwise determined by the board, all employees are eligible
to participate in the Purchase Plan so long as they are employed by
the Company (or a subsidiary designated by the board) for at least 20
hours per week and are customarily employed by the Company (or a
subsidiary designated by the board) for at least 5 months per calendar
year.
Employees who participate in an offering may have up to 15% of their
earnings for the period of that offering withheld pursuant to the
Purchase Plan. The amount withheld is used at various purchase dates
within the offering period to purchase shares of common stock. The
price paid for common stock at each such purchase date will equal the
lower of 85% of the fair market value of the common stock at the
commencement date of that offering period or 85% of the fair market
value of the common stock on the relevant purchase date. Employees may
end their participation in the offering at any time during the
offering period, and participation ends automatically on termination
of employment. At December 31, 2000, .2 million shares of common stock
have been issued under the Purchase Plan.
Accounting for Stock-Based Compensation
Under SFAS No. 123, the weighted average fair value of the options
granted during 1998, 1999 and 2000 was $0.72, $7.83 and $42.21,
respectively, on the date of grant. The weighted average estimated
fair values of shares granted under the Purchase Plan during 1998,
1999 and 2000 was $0, $0, and $10.80, respectively. Fair value under
SFAS No. 123 is determined using the Black-Scholes option-pricing
model with the following assumptions:
1998 1999 2000
-------- -------- --------
Expected term:
Stock options 6 years 5 years 5 years
Purchase plan -- -- 11 months
Interest rate 5.50% 5.75% 6.16%
Volatility -- 81% 123%
Dividends -- -- --
Had compensation expense been recognized for stock-based compensation
plans in accordance with SFAS No. 123, the Company would have recorded
the following net income and net income per share amounts (in millions
except per share amounts):
1998 1999 2000
-------- -------- --------
Pro forma net income $ 4.0 5.0 2.6
Pro forma income per common share:
Basic $ 0.14 0.17 0.06
Diluted $ 0.13 0.14 0.05
(8) Employee Benefit Plan
In 1996, the Company implemented a savings plan pursuant to Section
401(k) of the Internal Revenue Code (the "Code"), covering
substantially all employees. Participants in the plan may contribute a
percentage of compensation, but not in excess of the maximum allowed
under the Code. The Company may make contributions at the discretion
of its Board of Directors. The Company made no contributions in 1998,
1999 or 2000.
F-25
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 2000
(9) Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash, accounts
receivable and contract management receivable. At times, cash balances held
in financial institutions are in excess of federally insured limits. The
Company performs periodic evaluations of the relative credit standing of
financial institutions and limits the amount of risk by selecting financial
institutions with a strong relative credit standing.
The Company had sales to three separate customers which comprised 31%, 19%
and 17% of the Company's total sales for the year ended December 31, 1998.
At December 31, 1998, accounts receivable from these customers totaled $2.1
million, $2.0 million and $2.1 million, respectively.
The Company had sales to three separate customers which comprised 14%, 11%
and 10% of the Company's total sales for the year ended December 31, 1999.
At December 31, 1999, accounts receivable from these customers totaled $1.6
million, $3.3 million, and $2.8 million, respectively.
The Company had sales to three separate customers which comprised 22%, 9%
and 9% of the Company's total sales for the year ended December 31, 2000.
At December 31, 2000, accounts receivable from these customers totaled $8.9
million, $7.5 million and $7.3 million, respectively.
(10) Segment Information
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, establishes annual and interim reporting standards for an
enterprise's operating segments and related disclosures about its products,
services, geographic areas and major customers. An operating segment is
defined as a component of an enterprise that engages in business activities
from which it may earn revenues and incur expenses, and about which
separate financial information is regularly evaluated by the chief
operating decision maker in deciding how to allocate resources.
Prior to the year ended 1999, the Company provided only design and
deployment service. In 1999, the Company added network maintenance and
business consulting services. Due to the nature of these services, the
amount of capital assets used in providing services to customers is minor.
Revenue and operating income provided by the Company's industry segments
for the years ended December 31, 1998, 1999, and 2000 are as follows (in
millions):
1998 1999 2000
------------ ------------ ------------
Revenues:
Design and deployment $ 51.9 86.9 205.6
Network management -- 4.5 42.7
Business consulting -- 1.3 7.6
------------ ------------ ------------
Total revenues $ 51.9 92.7 255.9
============ ============ ============
Operating income:
Design and deployment $ 10.7 16.2 38.9
Network management -- 1.1 10.7
Business consulting -- 0.3 2.4
------------ ------------ ------------
Total operating income $ 10.7 17.6 52.0
============ ============ ============
F-26
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 2000
Revenues generated by geographic segment for the years ended December 31,
1998, 1999, and 2000 are as follows (in millions):
1998 1999 2000
------------- ------------ ------------
United States $ 39.7 61.1 183.7
Foreign 12.2 31.6 72.2
------------- ------------ ------------
Total revenues $ 51.9 92.7 255.9
============= ============ ============
Long-lived assets by geographic region for the years ended December 31,
1999, and 2000, which include property and equipment, goodwill, and other
intangibles, are as follows (in millions):
1999 2000
------------ ------------
United States $ 12.3 71.5
Foreign 0.3 30.3
------------- ------------
Total long-lived assets $ 12.6 101.8
============= ============
(11) Related Party Transactions
In August 1998, the Company repurchased a total of 3.2 million shares of
common stock from two officers of the Company. In connection with the
repurchase, the Company borrowed a total of $13.5 million from the two
officers. The Company repaid these loans in August 1998.
In August 1998, the Company paid a dividend to its stockholders. In
connection with the dividend payment, the Company issued promissory notes
for a total of $5.5 million to two executives and one related stockholder.
The notes carried interest at 5% per annum and were repaid in November
1999.
In August 1998, the Company sold 1.7 million shares of Series A convertible
preferred stock to various investors at a purchase price of $12.48 per
share, of which 1.4 million were sold to entities affiliated with a
director of the Company. The Series A shares were convertible into common
stock at an initial conversion rate of 1-to-1, which was subsequently
adjusted to 3-to-1 following the common stock split in February 1999. These
shares were converted into common stock upon closing of the Company's
initial public offering.
In February 1999, the Company sold 2.7 million shares of Series B
convertible preferred stock to various investors at a purchase price of
$5.50 per share, of which 2.3 million were sold to entities affiliated with
a director of the Company. In addition, .4 million shares were sold to
entities which, combined, held greater than 5% of the Company's capital
stock. The Series B convertible shares are convertible into common stock at
a conversion ratio of 1-to-1. These shares were converted into common stock
upon closing of the Company's initial public offering.
In June 1999, the Company sold its 25% ownership interest in Sierra Towers
Investment Group, LLC ("Sierra") and a note receivable from Sierra to two
officers of the Company in exchange for cash and a note payable to the
Company. The note was repaid in September 2000.
During 1999 and 2000, the Company loaned $.5 million and $.2 million,
respectively, to a general manager of the Company. The general manager is
the brother of both the Chairman and the Chief Executive Officer of the
Company. Amounts borrowed in 1999 and 2000 bear interest at 5.57% and 6.45%
per year, respectively, and are due in December 2001.
In January 2000, the Company acquired a portion of the minority ownership
interest in WFIM from the General Manager of that subsidiary. The
acquisition was made under the terms of a Restricted Stock Agreement,
pursuant to which the Company issued shares of common stock valued at $18.2
million in exchange for the shares held by the General Manager.
F-27
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 2000
The General Manager is the brother of both the Chairman and the Chief
Executive Officer of the Company.
(12) Legal Matters
From time to time the Company is involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. Management
believes, based in part through discussion with legal counsel, that the
resolution of such matters will not have a material impact on the Company's
financial position, results of operations or liquidity.
(13) Subsequent Events
On February 9, 2001, the Company executed an amended and restated credit
agreement (see Note 4), which increased the aggregate commitment provided
by the Company's credit facility from $50 million to $100 million.
On March 2, 2001, the Company's Board of Directors approved a voluntary
stock option cancel and regrant program for employees. The program provides
employees with the opportunity to cancel all of their existing and
outstanding stock options granted to them on or after September 30, 2000
and before March 30, 2001, and some or all of their existing and
outstanding stock options granted to them prior to September 30, 2000, in
exchange for a new option grant for an equal number of shares to be granted
at a future date. The new options will be issued no earlier than six months
and one day after the cancellation date, March 30, 2001, and the exercise
price of the new options is to be based on the trading price of the
Company's common stock on the date of the new option grants. The exchange
program is designed to comply with FASB Interpretation No. 44
"Accounting for Certain Transactions Involving Stock Compensation."
(14) Quarterly Financial Data (Unaudited)
The following financial information reflects all normal and recurring
adjustments that are, in the opinion of management, necessary for a fair
statement of the results of the interim periods. Prior to becoming a public
company, the Company did not prepare financial statements on a quarterly
basis. Accordingly, revenue reported for fixed-price contracts for each
quarter in the nine month period ended September 30, 1999 using the
percentage-of-completion method was based on actual or estimated total
contract costs available at the end of September 30, 1999 as opposed to
estimates at the end of each quarter. For the quarter ended December 31,
1999, revenues from fixed-price contracts were reported based upon
estimates of the total costs to complete the contract made during and at
the end of the quarter. Summarized quarterly data for the years ended
December 31, 1999 and 2000, is as follows (in millions, except per share
data):
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Fiscal year 1999
Revenues $ 15.0 $ 18.1 $ 23.8 $ 35.8
Cost of revenues 9.2 11.8 13.1 20.2
-------- -------- -------- --------
Gross profit 5.8 6.3 10.7 15.6
Selling, general and
administrative expenses 3.2 3.5 5.1 9.0
-------- -------- -------- --------
Operating income 2.6 2.8 5.6 6.6
Total other (expense) income (0.4) (0.2) (0.3) 0.4
-------- -------- -------- --------
Income before income
taxes and minority interest 2.2 2.6 5.3 7.0
Provision for income taxes 0.6 1.6 2.1 2.9
Minority interest in income
of subsidiary -- -- 0.4 (0.1)
-------- -------- -------- --------
Net income $ 1.6 $ 1.0 $ 2.8 $ 4.2
======== ======== ======== ========
Net income per common share:
Basic (1) $ 0.06 $ 0.04 $ 0.10 $ 0.12
Diluted (1) $ 0.05 $ 0.03 $ 0.08 $ 0.10
Fiscal year 2000
Revenues $ 43.3 $ 59.4 $ 73.1 $ 80.1
Cost of revenues 25.3 33.0 40.8 41.0
-------- -------- -------- --------
Gross profit 18.0 26.4 32.3 39.1
Selling, general and
administrative expenses 8.7 13.6 18.3 23.2
-------- -------- -------- --------
Operating income 9.3 12.8 14.0 15.9
Total other (expense) income 0.5 0.5 0.2 (1.0)
-------- -------- -------- --------
Income before income
taxes and minority interest 9.8 13.3 14.2 14.9
Provision for income taxes 3.9 5.3 5.3 5.8
Minority interest in income
of subsidiary 0.1 0.1 (0.1) --
-------- -------- -------- --------
Net income $ 5.8 $ 7.9 $ 9.0 $ 9.1
======== ======== ======== ========
Net income per common share:
Basic (1) $ 0.14 $ 0.19 $ 0.21 $ 0.21
Diluted (1) $ 0.12 $ 0.16 $ 0.17 $ 0.18
(1)Net income per share is computed independently for each quarter and the full
year based on the respective average shares outstanding. Therefore, the sum of
the quarterly net earnings per share amounts may not equal the annual amounts
reported.
Schedule II
WIRELESS FACILITIES, INC.
Valuation and Qualifying Accounts (in millions)
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for Doubtful Accounts Balance at Current Year Current Year Balance at
------------------------------- Beginning of Year Provisions Write-offs Other Additions End of Year
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1998 $.1 $.5 - - $.6
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1999 $.6 $.4 $.1 - $.9
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2000 $.9 $.1 $.1 - $.9
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying independent auditor's report
S-1