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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
|_| 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)
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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 |_|
As of November 6, 2001 there were 46,948,177 shares of the Registrant's
$0.001 par value Common Stock outstanding.
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WIRELESS FACILITIES, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
INDEX
Page
No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements ......................................................................................... 3
Consolidated Balance Sheets as of December 31, 2000 (audited) and September 30, 2001 (unaudited) ............. 3
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2000 and 2001
(unaudited) .................................................................................................. 4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 2001
(unaudited) .................................................................................................. 5
Notes to Consolidated Financial Statements (unaudited) ....................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........................ 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk ................................................... 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................................................................ 23
Item 2. Changes in Securities and Use of Proceeds .................................................................... 23
Item 6. Exhibits and Reports on Form 8-K ............................................................................. 23
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WIRELESS FACILITIES, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except par value)
December 31, September 30,
2000 2001
-------------- --------------
(Audited) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ......................................................... $ 18.5 $ 12.0
Accounts receivable, net .......................................................... 119.1 92.1
Contract management receivables, net .............................................. 20.8 8.0
Income taxes receivable ........................................................... 12.7 5.1
Deferred income tax assets, net ................................................... -- 7.8
Other current assets .............................................................. 14.3 13.5
-------------- --------------
Total current assets ......................................................... 185.4 138.5
Property and equipment, net ............................................................ 20.0 20.1
Goodwill, net .......................................................................... 64.7 56.8
Other intangibles, net ................................................................. 17.1 9.7
Investments in unconsolidated affiliates ............................................... 9.2 8.6
Other assets ........................................................................... 0.7 1.8
-------------- --------------
Total assets ................................................................. $ 297.1 $ 235.5
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................................. $ 15.1 $ 10.4
Accrued expenses .................................................................. 17.6 12.0
Contract management payables ...................................................... 9.2 5.4
Billings in excess of costs and profits ........................................... 0.9 0.9
Line of credit payable ............................................................ 24.9 23.0
Notes payable--current portion .................................................... 1.7 0.2
Capital lease obligations--current portion ........................................ 3.5 4.4
Common stock to be issued ......................................................... -- 7.3
Deferred income tax liabilities, net .............................................. 8.8 --
-------------- --------------
Total current liabilities .................................................... 81.7 63.6
Notes payable--net of current portion .................................................. 0.6 0.5
Capital lease obligations--net of current portion ...................................... 7.0 5.1
Common stock to be issued .............................................................. 8.6 --
Other liabilities ...................................................................... 0.5 4.0
-------------- --------------
Total liabilities ............................................................ 98.4 73.2
-------------- --------------
Minority interest in subsidiary ........................................................ 0.1 0.1
-------------- --------------
Stockholders' equity:
Common stock, $0.001 par value, 195.0 shares authorized; 43.3 and 45.3
shares issued and outstanding at December 31, 2000 (audited) and
September 30, 2001 (unaudited), respectively ................................... -- --
Preferred Stock, $0.001 par value, 5.0 shares authorized, none outstanding ........ -- --
Additional paid-in capital ........................................................ 156.9 169.4
Retained earnings (accumulated deficit) ........................................... 43.0 (6.7)
Accumulated other comprehensive loss, net ......................................... (1.3) (0.5)
-------------- --------------
Total stockholders' equity ................................................... 198.6 162.2
-------------- --------------
Total liabilities and stockholders' equity ................................... $ 297.1 $ 235.5
============== ==============
See accompanying notes to unaudited consolidated financial statements.
3
WIRELESS FACILITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in millions, except per share amounts)
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
2000 2001 2000 2001
------ ------ ------ ------
Revenues ................................................................... $ 73.1 $ 54.8 $175.9 $162.2
Cost of revenues ........................................................... 40.8 37.0 99.2 108.6
------ ------ ------ ------
Gross profit ..................................................... 32.3 17.8 76.7 53.6
Selling, general and administrative expenses ............................... 15.4 15.9 34.7 86.5
Depreciation and amortization .............................................. 2.8 5.6 5.8 16.5
Asset impairment charges ................................................... -- -- -- 12.9
------ ------ ------ ------
Operating income (loss) .......................................... 14.1 (3.7) 36.2 (62.3)
------ ------ ------ ------
Other income (expense):
Interest income (expense), net ........................................ (0.1) (0.9) 0.7 (2.6)
Foreign currency gain (loss) .......................................... (0.4) 0.6 (0.3) (1.5)
Other, net ............................................................ 0.6 0.1 0.7 (0.7)
------ ------ ------ ------
Net other income (expense) ....................................... 0.1 (0.2) 1.1 (4.8)
------ ------ ------ ------
Income (loss) before minority interest in subsidiary and
income taxes .................................................. 14.2 (3.9) 37.3 (67.1)
Minority interest in income (loss) of subsidiary ........................... (0.1) -- 0.1 --
Provision (benefit) for income taxes ....................................... 5.3 (1.0) 14.5 (17.4)
------ ------ ------ ------
Net income (loss) ................................................ $ 9.0 $ (2.9) $ 22.7 $(49.7)
====== ====== ====== ======
Net income (loss) per common share:
Basic ................................................................. $ 0.21 $(0.06) $ 0.55 $(1.09)
Diluted ............................................................... $ 0.17 $(0.06) $ 0.45 $(1.09)
Weighted average common shares outstanding:
Basic ................................................................. 42.4 46.4 41.4 45.4
Diluted ............................................................... 51.9 46.4 50.3 45.4
See accompanying notes to unaudited consolidated financial statements.
4
WIRELESS FACILITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in millions)
Nine months ended
September 30,
-------------------------------
2000 2001
-------------- --------------
Net cash provided by (used in) operating activities ..................................... $ (37.7) $ 0.4
-------------- --------------
Investing activities:
Capital expenditures ............................................................... (3.0) (4.3)
Cash paid for acquisitions, net of cash received ................................... (28.2) --
Cash paid for investments .......................................................... (8.9) --
Proceeds from sales of investments ................................................. 34.7 --
-------------- --------------
Net cash used in investing activities ......................................... (5.4) (4.3)
-------------- --------------
Financing activities:
Proceeds from issuance of common stock ............................................. 9.5 5.2
Repayment of notes payable ......................................................... (0.3) (1.6)
Net borrowings from officers ....................................................... 0.6 --
Net borrowing (repayment) under line of credit ..................................... 23.9 (1.9)
Repayment of capital lease obligations ............................................. (0.7) (3.8)
-------------- --------------
Net cash provided by (used in) financing activities ........................... 33.0 (2.1)
-------------- --------------
Effect of exchange rate on cash and cash equivalents .................................... 0.1 (0.5)
-------------- --------------
Net decrease in cash and cash equivalents ............................................... (10.0) (6.5)
Cash and cash equivalents at beginning of period ........................................ 34.3 18.5
-------------- --------------
Cash and cash equivalents at end of period .............................................. $ 24.3 $ 12.0
============== ==============
Supplemental disclosures of non-cash transactions:
Fair value of assets acquired in acquisitions ...................................... $ 85.2 $ --
Cash paid for acquisitions ......................................................... (37.5) --
Issuance of common stock for acquisitions .......................................... (36.8) --
Issuance of notes payable for acquisitions ......................................... (1.5) --
Common stock to be issued .......................................................... (8.6) (7.3)
-------------- --------------
Liabilities assumed in acquisitions ................................................ $ 0.8 $ --
============== ==============
Common stock issued for earn-out provision in acquisition .......................... $ 0.9 $ 8.6
Common stock issued under a cashless exercise of warrants .......................... $ 0.2 $ --
Note receivable issued for stock option exercise ................................... $ 0.1 $ --
Note receivable issued for sale of equipment ....................................... $ -- $ 1.0
Property and equipment acquired under capital leases ............................... $ 9.3 $ 2.8
Reduction of accounts receivable in exchange for notes receivable .................. $ -- $ 1.4
Reduction of note payable in lieu of consideration for exercise of warrants ........ $ 0.5 $ --
Supplemental disclosure of cash flow information:
Cash paid during the period for interest ........................................... $ 1.0 $ 3.4
Net cash paid (received) during the period for income taxes ........................ $ 10.6 $ (9.3)
See accompanying notes to unaudited consolidated financial statements.
5
WIRELESS FACILITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Organization and Summary of Significant Accounting Policies
(a) Description of Business
Wireless Facilities, Inc. ("WFI") was formed under the laws of the state of
New York on December 19, 1994, began operations in March 1995 and was
reincorporated in Delaware in 1998. 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 on a fixed price (turnkey), time
certain basis.
(b) Basis of Presentation
The information as of September 30, 2001, and for the three and nine month
periods ended September 30, 2000 and 2001 is unaudited. In the opinion of
management, these consolidated financial statements include all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
the results of operations for the interim periods presented. Interim operating
results are not necessarily indicative of operating results expected in
subsequent periods or for the year as a whole. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements and the related notes included in WFI's annual consolidated financial
statements for the fiscal year ended December 31, 2000, filed on Form 10-K with
the Securities and Exchange Commission.
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." 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.
(c) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America require management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(d) Reclassifications
Certain prior period amounts have been reclassified to conform with the
current period presentation.
(e) New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 (SFAS No. 141), "Business
Combinations", and Statement No. 142 (SFAS No. 142), "Goodwill and Other
Intangible Assets". SFAS No. 141 supersedes APB Opinion No. 16, "Business
Combinations" and SFAS No. 38, "Accounting for Preacquisition Contingencies of
Purchases Enterprises" and eliminates pooling-of-interests accounting
prospectively. SFAS No. 141 was adopted on July 1, 2001. SFAS No. 142 supersedes
APB Opinion No. 17, "Intangible Assets" and changes the accounting for goodwill
from an amortization method to an impairment-only approach. Under SFAS No. 142,
goodwill will be tested annually and whenever events or circumstances occur
indicating that goodwill might be impaired. The provisions of SFAS No. 142 are
required to be applied starting with fiscal years beginning after December 15,
2001. Upon adoption of SFAS No. 142, amortization of goodwill recorded for
business combinations consummated prior to July 1, 2001 will cease, and
intangible assets acquired prior to July 1, 2001 that do not meet the criteria
for recognition under SFAS No. 141 will be reclassified to goodwill. The
adoption of SFAS No. 141 did not have an impact on the Company's financial
position or results of operations. The Company
6
will adopt SFAS No. 142 on January 1, 2002, upon which time the Company will
cease amortizing goodwill and separately identifiable intangibles in
accordance with the guidelines set forth in the standard. As of the date of
adoption, the Company expects remaining unamortized goodwill and unamortized
other intangible assets to be approximately $54.6 million and $8.6 million,
respectively, all of which will be subject to the transition guidelines of SFAS
No. 142. The Company is currently evaluating the impact that the adoption of
SFAS No. 142 will have on its results of operations and financial position.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 143 (SFAS No. 143), "Accounting for Asset Retirement Obligations," which
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and for the associated asset retirement
costs. The standard applies to tangible long-lived assets that have a legal
obligation associated with their retirement that results from the acquisition,
construction or development or normal use of the asset. SFAS No. 143 requires
that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The fair value of the liability is added to the carrying
amount of the associated asset and this additional carrying amount is
depreciated over the remaining life of the asset. The liability is accreted at
the end of each period through charges to operating expense. The provisions of
SFAS No. 143 are required to be applied during the quarter ending March 31,
2003. To accomplish this, the Company must identify all legal obligations for
asset retirement obligations, if any, and determine the fair value of these
obligations on the date of adoption. The determination of fair value is complex
and will require the Company to gather market information and develop cash flow
models. Additionally, the Company will be required to develop processes to track
and monitor these obligations. It is not anticipated that the financial impact
of this statement will have a material effect on our consolidated financial
statements.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 (SFAS No. 144), "Accounting for the Impairment or Disposal of
Long-Lived Assets," which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," it retains many of the fundamental provisions of SFAS
No. 121, including the recognition and measurement of the impairment of
long-lived assets to be held and used, and the measurement of long-lived assets
to be disposed of by sale. SFAS No. 144 also supersedes the accounting and
reporting provisions of Accounting Principles Board Opinion No. 30 (APB No. 30),
"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business. However,
it retains the requirement in APB No. 30 to report separately discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to owners) or
is classified as held for sale. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001. At this time, the Company does not anticipate
that the adoption of SFAS No. 144 will have a material effect on the Company's
consolidated financial statements.
(2) Asset Impairment Charges
As required by SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," the Company reviews
long-lived assets and intangibles for impairment when events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The recent slowdown in the economy, current economic conditions and
visible trends in the telecommunications industry, triggered an impairment
evaluation by the Company of its goodwill and other intangible assets in the
second quarter of fiscal 2001. Based on the Company's analyses of the results of
operations and projected future cash flows associated with certain goodwill and
other intangible assets, the Company determined that impairment existed.
Accordingly, the Company recorded a $12.9 million impairment charge in the
second quarter of fiscal 2001 determined as the amount by which the carrying
amount of the assets exceeded the present value of the estimated future cash
flows. Assets determined to be impaired included goodwill and contract and
workforce intangibles approximating $8.2 million in the Company's design and
deployment segment and $4.7 million in its network management segment. There
were no impairment charges recorded during the third quarter of fiscal 2001. The
Company does not believe these write-downs will impair or affect the Company's
ongoing operations.
(3) Earn-out Provision for Davis Bay, LLC Acquisition
In June 2000, the Company acquired the assets of Davis Bay, LLC, a
Washington State limited liability company, for $3.0 million in cash and stock.
Of the total purchase price, $2.4 million was paid through the issuance of
approximately 49,000 shares of the Company's common stock. Included in the asset
purchase agreement was an earn-out provision whereby the Company agreed to pay
Davis Bay additional consideration contingent on certain quarterly earnings
results from existing and potential future contracts secured by Davis Bay for
the Company. These earn-out payments were capped at $20.0 million. During the
six months ended June 30, 2001, $10.5 million in additional goodwill was
recorded under the earn-out provision, bringing the total earn-out up to the
$20.0 million maximum allowed under the contract. Effective September 27, 2001,
Davis Bay and the
7
Company executed a second amendment to the original asset purchase agreement
that replaced the remaining, unpaid earn-out with a final earn-out settlement
equal to 1,638,838 shares of the Company's common stock to be issued at the then
current market value. Accordingly, the estimated liability of common stock to be
issued to Davis Bay related to the earn-out agreement decreased from $10.5
million as of June 30, 2001 to $7.3 million as of September 30, 2001, and
goodwill was reduced by $3.2 million. On October 17, 2001, 1,638,838 shares of
the Company's common stock were issued to Davis Bay.
(4) Other Events
As a result of Metricom, Inc.'s filing for bankruptcy protection on July 2,
2001, the Company recorded an allowance for the entire receivable balance of
$13.9 million due from Metricom, Inc., in the quarter ended June 30, 2001. The
Company announced in February 2001 that Metricom, which abandoned plans for a
national rollout of its "Ricochet" wireless modem service, had suspended its
contract with the Company for engineering services.
On July 19, 2001, the Company executed an amendment to its credit facility
which, among other items, changed the minimum EBITDA covenant to exclude unusual
charges up to a specified amount with respect to first and second quarters of
the Company's fiscal 2001 financial results.
On August 29, 2001, one of our customers, US Wireless, filed for
bankruptcy protection. The Company had recorded an allowance of $1.3 million for
its receivable balances in the second quarter of fiscal 2001.
(5) Net Income (Loss) Per Common Share
The Company calculates net income (loss) per share in accordance with SFAS
No. 128, "Earnings Per Share." Under SFAS No. 128, basic net income (loss) per
common share is calculated by dividing net income (loss) by the weighted-average
number of common shares outstanding during the reporting period. Diluted net
income (loss) per common share reflects the effects of potentially dilutive
securities. Weighted average shares used to compute net income (loss) per share
are presented below (in millions):
Three months ended Nine months ended
September 30, September 30,
------------------ -------------------
2000 2001 2000 2001
------ ------ ------ ------
Weighted-average shares, basic .................... 42.4 46.4 41.4 45.4
Dilutive effect of stock options .................. 8.6 -- 7.9 --
Dilutive effect of warrants ....................... 0.9 -- 1.0 --
------ ------ ------ ------
Weighted-average shares, diluted .................. 51.9 46.4 50.3 45.4
====== ====== ====== ======
Options to purchase 0.6 million and 4.2 million shares of common stock for
the three months ended September 30, 2000 and 2001, respectively, were not
included in the calculation of diluted net income (loss) per share because the
effect of these instruments was anti-dilutive. Options to purchase 1.2 million
and 4.8 million shares of common stock for the nine months ended September 30,
2000 and 2001, respectively, were not included in the calculation of diluted net
income per share because the effect of these instruments was anti-dilutive.
(6) Segment Information
The Company's operations are organized along service lines and include
three reportable industry segments: Design and Deployment, Network Management,
and Business Consulting. Due to the nature of these services, the amount of
capital assets used in providing services to customers is not significant.
Revenues and operating income (loss) provided by the Company's industry segments
for the three and nine months ended September 30, 2000 and 2001 are as follows
(in millions):
Three months ended Nine months ended
September 30, September 30,
------------------ -------------------
2000 2001 2000 2001
------ ------ ------ ------
Revenues:
Design and deployment ........................ $ 58.0 $ 42.4 $142.3 $123.8
Network management ........................... 12.8 10.0 28.4 32.1
Business consulting .......................... 2.3 2.4 5.2 6.3
------ ------ ------ ------
Total revenues .......................... $ 73.1 $ 54.8 $175.9 $162.2
====== ====== ====== ======
8
Operating income (loss):
Design and deployment ........................ $ 11.2 $(5.3) $ 26.4 $(50.9)
Network management ........................... 2.3 1.1 7.8 (10.4)
Business consulting .......................... 0.6 0.5 2.0 (1.0)
------ ------ ------ ------
Total operating income (loss) ........... $ 14.1 $(3.7) $ 36.2 $(62.3)
====== ====== ====== ======
Revenues derived by geographic region are as follows (in millions):
Three months ended Nine months ended
September 30, September 30,
------------------ -------------------
2000 2001 2000 2001
------ ------ ------ ------
Revenues:
U.S. ......................................... $ 51.1 $ 35.5 $ 128.4 $ 106.9
Central and South America .................... 17.8 14.4 38.3 35.7
Europe, Middle East and Africa ............... 4.2 4.9 9.2 19.6
------ ------ ------- -------
Total revenues .......................... $ 73.1 $ 54.8 $ 175.9 $ 162.2
====== ====== ======= =======
(7) Subsequent Events
On October 10, 2001, the Company executed an agreement to sell $35.0
million of its Series A Convertible Preferred Stock in a private placement to
investment funds managed by Oak Investment Partners. Pursuant to the agreement,
on October 29, 2001, the investment funds managed by Oak Investment Partners
purchased an aggregate of 63,637 shares of Series A Convertible Preferred Stock
for a common stock equivalent price of $5.50 per share. The shares of Series A
Convertible Preferred Stock have a liquidation preference and price
anti-dilution protection. These shares are not registered under the Securities
Act of 1933 and may not be offered or sold in the United States absent
registration or applicable exemption from registration requirements. Each share
of Series A Convertible Preferred Stock is initially convertible into 100 shares
of common stock at the option of the holder at any time subject to certain
provisions in the agreement. After July 2004, the Series A Convertible Preferred
Stock will automatically convert into shares of the Company's common stock if
and when the Company's common stock trades at or above $11.00 per share for
30 consecutive days after that date. Oak Investment Partners agreed to a lockup
with respect to the shares of Series A Convertible Preferred Stock (and the
underlying shares of common stock). The lockup will expire in stages beginning
18 months from October 29, 2001. On October 30, 2001, the Company received $35.0
million pursuant to this agreement.
Under the agreement for the sale and purchase of the entire issued share
capital of Questus Limited, dated August 29, 2000, the Company agreed to issue
additional stock to the former Questus shareholders if the value of our common
stock decreased to less than the lower collar amount, which is equivalent to 50%
of the price at which the shares were originally issued pursuant to the
agreement. As of August 29, 2001, the last day of the escrow period, based on
the calculation set forth in the agreement, the Company's stock price was less
than the lower collar amount, which triggered the payment of additional shares
of our common stock under the agreement. Pursuant to the agreement, the Company
will issue an aggregate of 146,806 shares of its common stock based on this
lower collar adjustment.
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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.
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-looking statements after the filing of this Quarterly Report on Form
10-Q to conform such statements to actual results or changes in our
expectations.
The following discussion should be read in conjunction with our
consolidated financial statements and the related notes and other financial
information appearing elsewhere in this Form 10-Q. Readers are also urged to
carefully review and consider the various disclosures made by us which attempt
to advise interested parties of the factors which affect our business, including
without limitation to the disclosures made under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations," under
the caption "Risk Factors," and the audited consolidated financial statements
and related notes included in our Annual Report filed on Form 10-K for the year
ended December 31, 2000 and other reports and filings made with the Securities
and Exchange Commission.
Overview
Wireless Facilities, Inc. offers network business consulting, network
planning, design and deployment, and network operations and maintenance services
to the wireless telecommunications industry. For the nine months ended September
30, 2001, our design and deployment, network management and business consulting
segments contributed to 76%, 20% and 4% of our revenues, respectively. During
2000, we 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. These contracts include services performed for many of the latest
wireless technologies, including UMTS (Universal Mobile Telephone Service)
broadband wireless applications, and voice and video applications. Revenues from
our international operations contributed 34% of our total revenues for the nine
months ended September 30, 2001.
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. As of
December 31, 2000, we had completed the first phase of implementing a new
financial management and accounting software program in our domestic operations.
We completed the same software program implementation in Mexico by the second
quarter of fiscal 2001 and as of September 30, 2001, we have started to plan the
initial phases in the United Kingdom with anticipated completion by first
quarter of fiscal 2002. Such software is expected 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 completing its
implementation in our domestic and international operations. We may 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.
10
Due to the recent downturn in the financial markets in general, and
specifically within the telecommunications industry, many of our customers are
having trouble obtaining funding in the capital markets to fund the expansion of
their businesses, including telecom network deployments and upgrades. The
current 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 have and continue to slow and
postpone 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. For example, during the first quarter of 2001,
we announced that we received notice of contract suspension and termination from
Metricom, Inc. 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. For
example, three of our customers, Metricom, Inc., Advanced Radio Telecom and US
Wireless filed for bankruptcy protection this year. This caused us to recognize
bad debt expense of $3.5 million for Advanced Radio Telecom in the first quarter
of fiscal 2001, and $13.9 million for Metricom, Inc. and $1.3 million for US
Wireless in the second quarter of fiscal 2001, which thereby negatively affected
our profitability. Also, some of our contracts with our customers include
billing milestones, whereby we do not bill for work performed until certain
milestones are reached. However, we recognize revenue under the
percentage-of-completion method of accounting. Whereby, if a contract is
terminated by a customer or modified before a milestone is reached, we generally
will be required to renegotiate the terms of payment for work performed but not
yet billed. As a result of the market conditions described above, we began to
experience this during fiscal 2001 with a number of our contracts that contain
billing milestones. Due to the circumstances surrounding such cancellations or
modifications and the financial condition of the related customers, the amount
we ultimately collect from such customers may be, and often is, discounted from
the amount we have previously recorded in unbilled accounts receivable and
revenue. 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. We have experienced this challenge particularly with
respect to managing our employee base, and this has resulted in underutilization
of employees due to the sudden reduction in the demand for our services during
fiscal 2001. In response to these factors and the lack of visibility and
uncertain market conditions, we have taken steps and are continuing to take
steps to reduce our level of expenditures. Specifically, we have reduced our
headcount by approximately 19% since December 31, 2000. We have also implemented
a more stringent expenditure approval policy, in an effort to further reduce our
costs. Additionally, we expect to continue to review our internal processes
throughout 2001 and make further adjustments as necessary.
Results of Operations
Comparison of Results for the Three Months Ended September 30, 2000 to the Three
Months Ended September 30, 2001
Revenues. Revenues decreased 25% from $73.1 million for the three months
ended September 30, 2000 to $54.8 million for the three months ended
September 30, 2001. The $18.3 million decrease was primarily attributable to the
termination and cancellation of certain contracts following the continued
downturn and uncertainty in the economy and the wireless telecommunications
industry.
Cost of Revenues. Cost of revenues decreased 9% from $40.8 million for the
three months ended September 30, 2000 to $37.0 million for the three months
ended September 30, 2001, primarily due to a corresponding reduction in
contracts. Gross profit was 44% of revenues for the three months ended September
30, 2000 compared to 32% for the three months ended September 30, 2001. The
decrease in gross profit is due primarily to the termination and cancellation of
higher margin contracts and continued pressure associated with competitive
pricing demands resulting from capital spending challenges within the wireless
telecommunications industry.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 3% from $15.4 million for the three months
ended September 30, 2000 to $15.9 million for the three months ended
September 30, 2001. As a percentage of revenues, selling, general and
administrative expenses increased from 21% for the three months ended
September 30, 2000 to 29% for the three months ended September 30, 2001. The
increase was primarily due to higher fixed costs associated with our domestic
and international expansion compared to a lower revenue base, partially offset
by improved domestic utilization rates.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased 100% from $2.8 million for the three months ended
September 30, 2000 to $5.6 million for the three months ended September 30,
2001. The increase is primarily due to amortization of goodwill and other
identifiable intangibles resulting from our acquisitions completed subsequent to
September 30, 2000.
11
Net Other Income (Expense). For the three months ended September 30, 2000,
net other income was $0.1 million as compared to net other expense of $0.2
million for the three months ended September 30, 2001. The change is primarily
attributable to higher interest expense resulting from increased debt
outstanding during the periods under comparison, lower other income and interest
income, offset by higher foreign currency gain resulting from increased
international activity and associated fluctuations in foreign exchange rates.
Provision (Benefit) for Income Taxes. Our effective income tax rate
decreased from 37% for the three months ended September 30, 2000 to 26% for the
three months ended September 30, 2001. The decrease was primarily attributable
to a change in projected earnings combined with an increase in the valuation
allowance on the losses from certain foreign operations.
Comparison of Results for the Nine Months Ended September 30, 2000 to the Nine
Months Ended September 30, 2001
Revenues. Revenues decreased 8% from $175.9 million for the nine months
ended September 30, 2000 to $162.2 million for the nine months ended
September 30, 2001. The $13.7 million decrease was primarily attributable to the
recent decline in the economy and specifically, in wireless telecommunications
infrastructure spending, which resulted in the suspension and termination of
certain contracts, including our contracts with Metricom, Inc. and Advanced
Radio Telecom, partially offset by our expansion into international markets.
Revenues from international markets comprised 27% of our total revenues during
the nine months ended September 30, 2000 compared to 34% of our total revenues
during the nine month period ended September 30, 2001.
Cost of Revenues. Cost of revenues increased 9% from $99.2 million for the
nine months ended September 30, 2000 to $108.6 million for the nine months ended
September 30, 2001 and gross profit was 44% of revenues for the nine months
ended September 30, 2000 compared to 33% for the nine months ended September 30,
2001. The increase in cost of revenues and decline in gross profit is primarily
attributable to the recent decline in the economy and specifically, in wireless
telecommunications infrastructure spending, which resulted in the suspension and
termination of certain contracts, including our contracts with Metricom, Inc.
and Advanced Radio Telecom. The sudden and unexpected loss of these customers
caused the expected overall margin on the related contracts to decrease and
therefore a cumulative entry was recorded in the first half of fiscal 2001 to
adjust the margin recorded to date to the expected final margin on the
contracts. Gross profit also decreased due to costs incurred to demobilize staff
as well as work performed on milestones that could not be completed and billed.
Additionally, we have begun to experience pressure associated with competitive
pricing demands within the wireless telecommunications industry.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 149% from $34.7 million for the nine months
ended September 30, 2000 to $86.5 million for the nine months ended September
30, 2001. As a percentage of revenues, selling, general and administrative
expenses increased from 20% for the nine months ended September 30, 2000 to 53%
for the nine months ended September 30, 2001. The increase is due primarily to
higher administrative costs to accommodate our domestic and international
growth, combined with lower utilization rates caused by the recent downturn in
the wireless telecommunications industry. Additionally, bad debt expense of
$21.2 million, which included allowances for receivables due from Metricom, Inc.
of $13.9 million, Advanced Radio Telecom of $3.1 million, US Wireless of $1.3
million and certain unusual charges of $3.6 million were recorded during the
second quarter of fiscal 2001. These unusual charges included accruals for
estimated contractor liability in our Mexico subsidiary of $2.2 million and the
estimated loss on unused office space of $1.4 million.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased 184% from $5.8 million for the nine months ended September 30,
2000 to $16.5 million for the nine months ended September 30, 2001. The increase
is primarily due to the amortization of goodwill and other identifiable
intangibles resulting from our acquisitions completed subsequent to
September 30, 2000.
Asset Impairment Charges. For the nine months ended September 30, 2001,
asset impairment charges totaled $12.9 million, compared to no charge for the
nine months ended September 30, 2000. The recent slowdown in the economy,
current economic conditions and visible trends in the telecommunications
industry, triggered an impairment evaluation by the Company of its goodwill and
other intangible assets in the second quarter of fiscal 2001. Based on the
Company's analyses of the results of operations and projected future cash flows
associated with certain goodwill and other intangible assets, the Company
determined that impairment existed. Accordingly, the Company recorded a $12.9
million impairment charge in the second quarter of fiscal 2001 determined as the
amount by which the carrying amount of the assets exceeded the present value of
the estimated future cash flows. Assets determined to be impaired included
goodwill and contract and workforce intangibles approximating $8.2 million in
the Company's design and deployment segment and $4.7 million in its network
management segment. There were no impairment charges recorded during the third
quarter of fiscal 2001. The Company does not believe these write-downs will
impair or affect the Company's ongoing operations.
12
Net Other Income (Expense). For the nine months ended September 30, 2000,
net other income was $1.1 million compared to net other expense of $4.8 million
for the nine months ended September 30, 2001. This increase in expense of $5.9
million was primarily attributable to higher interest expense resulting from
increased debt outstanding during the periods under comparison, higher foreign
currency transaction losses due to increased international activity combined
with foreign currency exchange rate fluctuations during the nine months ended
September 30, 2001, and $1.1 million realized loss on available-for-sale
investment securities related to the bankruptcy filing of Advanced Radio Telecom
which was recorded in the first quarter of fiscal 2001.
Provision (Benefit) for Income Taxes. Our effective income tax rate
decreased from 39% for the nine months ended September 30, 2000 to 26% for the
nine months ended September 30, 2001. The decrease was primarily attributable to
a change in projected earnings which included the effect of certain asset
impairment and bad debt charges recorded in the second quarter of fiscal 2001,
combined with an increase in the valuation allowance on the losses from certain
foreign operations.
Earn-out Provision for Davis Bay, LLC Acquisition
In June 2000, the Company acquired the assets of Davis Bay, LLC, a
Washington State limited liability company, for $3.0 million in cash and stock.
Of the total purchase price, $2.4 million was paid through the issuance of
approximately 49,000 shares of the Company's common stock. Included in the asset
purchase agreement was an earn-out provision whereby the Company agreed to pay
Davis Bay additional consideration contingent on certain quarterly earnings
results from existing and potential future contracts secured by Davis Bay for
the Company. These earn-out payments were capped at $20.0 million. During the
six months ended June 30, 2001, $10.5 million in additional goodwill was
recorded under the earn-out provision, bringing the total earn-out up to the
$20.0 million allowed under the contract. Effective September 27, 2001, Davis
Bay and the Company executed a second amendment to the original asset purchase
agreement that replaced the remaining, unpaid earn-out with a final earn-out
equal to 1,638,838 shares of the Company's common stock issued at the then
current market value. Accordingly, the estimated liability of common stock to be
issued related to the earn-out agreement decreased from $10.5 million as of
June 30, 2001 to $7.3 million as of September 30, 2001, and goodwill was reduced
by $3.2 million. On October 17, 2001, 1,638,838 shares of the Company's common
stock were issued to Davis Bay.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 (SFAS No. 141), "Business
Combinations", and Statement No. 142 (SFAS No. 142), "Goodwill and Other
Intangible Assets". SFAS No. 141 supersedes APB Opinion No. 16, "Business
Combinations" and SFAS No. 38, "Accounting for Preacquisition Contingencies of
Purchases Enterprises" and eliminates pooling-of-interests accounting
prospectively. SFAS No. 141 was adopted on July 1, 2001. SFAS No. 142 supersedes
APB Opinion No. 17, "Intangible Assets" and changes the accounting for goodwill
from an amortization method to an impairment-only approach. Under SFAS No. 142,
goodwill will be tested annually and whenever events or circumstances occur
indicating that goodwill might be impaired. The provisions of SFAS No. 142 are
required to be applied starting with fiscal years beginning after December 15,
2001. Upon adoption of SFAS No. 142, amortization of goodwill recorded for
business combinations consummated prior to July 1, 2001 will cease, and
intangible assets acquired prior to July 1, 2001 that do not meet the criteria
for recognition under SFAS No. 141 will be reclassified to goodwill. The
adoption of SFAS No. 141 did not have an impact on the Company's financial
position or results of operations. The Company will adopt SFAS No. 142 on
January 1, 2002, upon which time the Company will cease amortizing goodwill and
separately identifiable intangibles in accordance with the guidelines set forth
in the standard. As of the date of adoption, the Company expects remaining
unamortized goodwill and unamortized other intangible assets to be approximately
$54.6 million and $8.6 million, respectively, all of which will be subject to
the transition guidelines of SFAS No. 142. The Company is currently evaluating
the impact that the adoption of SFAS No. 142 will have on its results of
operations and financial position.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 143 (SFAS No. 143), "Accounting for Asset Retirement Obligations," which
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and for the associated asset retirement
costs. The standard applies to tangible long-lived assets that have a legal
obligation associated with their retirement that results from the acquisition,
construction or development or normal use of the asset. SFAS No. 143 requires
that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The fair value of the liability is added to the carrying
amount of the associated asset and this additional carrying amount is
depreciated over the remaining life of the asset. The liability is accreted at
the end of each period through charges to operating expense. The provisions of
SFAS No. 143 are required to be applied during the quarter ending March 31,
2003. To accomplish this, the Company must identify all legal obligations for
asset retirement obligations, if any, and determine the fair value of these
obligations on the date of adoption. The determination of fair value is complex
and will require the Company to gather market information and develop cash flow
models. Additionally, the Company will be required to develop processes to track
and monitor these obligations. It is not anticipated that the financial impact
of this statement will have a material effect on our consolidated financial
statements.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 (SFAS No. 144), "Accounting for the Impairment or Disposal of
Long-Lived Assets", which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", it retains many of the fundamental provisions of SFAS
No. 121, including the recognition and measurement of the impairment of
long-lived assets to be held and used, and the measurement of long-lived assets
to be disposed of by sale. SFAS No. 144 also supersedes the accounting and
reporting provisions of Accounting Principles Board Opinion No. 30 (APB 30),
"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions", for the disposal of a segment of a business. However,
it retains the requirement in APB 30 to report separately discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to owners) or
is classified as held for sale. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001. At this time, the Company does not anticipate
that the adoption of SFAS No. 144 will have a material effect on the Company's
consolidated financial statements.
13
Liquidity and Capital Resources
Our sources of cash liquidity included cash, cash from operations, amounts
available under credit facilities, and other external sources of funds. As of
September 30, 2001, we had cash of $12.0 million and had $23.0 million
outstanding on our line of credit with a group of financial institutions. On
October 30, 2001, the Company received $35.0 million from the investment funds
managed by Oak Investment Partners for the sale of its Series A Convertible
Preferred Stock in a private placement pursuant to an agreement executed on
October 10, 2001.
Cash used in or provided by operations is primarily derived from our
contracts in process and changes in working capital. Cash used in operations
totaled $37.7 million for the nine months ended September 30, 2000 while cash
provided by operations totaled $0.4 million for the nine months ended
September 30, 2001.
Cash used in investing activities totaled $5.4 million and $4.3 million for
the nine months ended September 30, 2000 and 2001, respectively. Investing
activities for the nine months ended September 30, 2000 consisted primarily of
proceeds totaling $34.7 million received from the sale of investments, offset by
cash paid of approximately $37.1 million for acquisitions and investments. Cash
used in investing activities for the nine months ended September 30, 2001
consisted of capital expenditures.
Cash provided by financing activities for the nine months ended
September 30, 2000 was $33.0 million, which was primarily derived from net
borrowings under the line of credit of $23.9 million and sales of common stock
issued through our stock option and employee stock purchase plans of
$9.5 million. Cash used in financing activities totaled $2.1 million for the
nine months ended September 30, 2001 and consisted primarily of repayment of
borrowings under our line of credit, notes payable and capital lease
obligations, partially offset by proceeds from the issuance of common stock.
As of September 30, 2001, $23.0 million was outstanding under our senior
secured credit facility ("line of credit") with a group of financial
institutions. The line of credit expires in February 2004. Loans under this line
of credit bear interest, at our discretion, at either (i) the greater of the
bank prime rate and the Federal Funds Rate plus 0.5%, plus a margin ranging from
0.75% to 1.50%, the ("base rate margin"), or (ii) at the London Interbank
Offering Rate ("LIBOR") plus a margin ranging from 1.75% to 2.50%, the ("LIBOR
rate margin"). The line of credit is secured by substantially all of our assets.
The line of credit agreement contains restrictive covenants, which, among other
things, require maintenance of certain financial ratios. On July 19, 2001, we
executed an amendment to our line of credit agreement, which among other items,
changed the minimum EBITDA covenant to exclude unusual charges up to a specified
amount with respect to the first and second quarters of our fiscal 2001
financial results.
We have no material cash commitments other than obligations under our
credit facilities, promissory notes, and 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.
14
Risk Factors That May Affect Results of Operations and Financial Condition
You should carefully consider the following risk factors and all other
information contained herein as well as the information included in our Annual
Report on Form 10-K for the year ended December 31, 2000, and other reports and
filings made with the Securities and Exchange Commission before investing in our
common stock. 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 2. Management's Discussion and
-----------------------------------
Analysis of Financial Condition and Results of Operations.
- ----------------------------------------------------------
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:
o telecommunications market conditions and economic conditions generally;
o the timing and size of network deployments by our carrier customers and
the timing and size of orders for network equipment built by our vendor
customers;
o fluctuations in demand for our services;
o the length of sales cycles;
o reductions in the prices of services offered by our competitors; and
o costs of integrating technologies or businesses that we add.
The factors substantially within our control include:
o changes in the actual and estimated costs and time to complete
fixed-price, time-certain projects;
o the timing of expansion into new markets, both domestically and
internationally; and
o the timing and payments associated with possible acquisitions.
Due to these factors, our quarterly revenues, expenses and results of
operations have recently varied significantly and could continue to 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. Estimates are inherently uncertain and actual results
are likely to deviate, perhaps substantially, from our estimates as a result of
the many risks and uncertainties in our business, including, but not limited to,
those set forth in these risk factors. We undertake no duty to update estimates
if given. In addition, the long-term viability of our business could be
negatively impacted if there were a sustained 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.
In recent months, we have experienced a negative impact to our earnings and
stock price as a result of the foregoing factors that may cause our quarterly
results to fluctuate. We may continue to incur losses for the foreseeable
future. Due to the recent downturn in the financial markets generally, and
specifically the slowdown in wireless telecommunications infrastructure
spending, some of our customers have cancelled or suspended their contracts with
us and many of our customers and potential customers have postponed entering
into new contracts for our services. The reduction in the availability of
capital due to the downturn has also delayed the completion of mergers
contemplated by some of our customers, which has resulted in project delays. 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 receivables 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 and three of our customers have filed
for bankruptcy protection in recent months. If we are not able to collect
amounts due to us, we may be required to write-off significant amounts of our
accounts receivable. For example, we recognized bad debt expense of $3.5
15
million during the first quarter of fiscal 2001 due to Advanced Radio Telecom's
filing for bankruptcy protection and we recognized bad debt expense of $13.9
million for the entire Metricom, Inc. receivable due to Metricom's filing for
bankruptcy protection and $1.3 million for US Wireless during the second quarter
of 2001. 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 revisions 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 telecommunications industry has historically experienced a
dramatic rate of growth both in the United States and internationally. Recently,
however, many telecommunications carriers have been re-evaluating their network
deployment plans in response to downturns in the capital markets, changing
perceptions regarding industry growth, 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 telecommunications industry. If the rate of growth continues to slow and
carriers continue to 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 continue to negatively 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 in
acceptance of rapidly changing enhanced telecommunications capabilities. If
telecommunications service providers continue to perceive that the rate of
acceptance of next generation telecommunications products will grow more slowly
than previously expected, they may, as a result, continue to slow their
development of next generation technologies. Any significant sustained slowdown
will further 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 revenues 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. In addition, uncertainties regarding the availability and
allocation of spectrum have caused delays in network deployment. There has also
been substantial regulatory uncertainty regarding payments owed to the United
States government by past successful wireless bidders, and such uncertainty has
also delayed network deployments. In addition, factors adversely affecting the
demand for wireless services, such as allegations of health risks associated
with the use of mobile phones, could slow or delay the deployment of wireless
networks. These factors, as well as delays in granting the use of spectrum,
legal decisions and future legislation regulations 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 have 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 these 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. In addition, to the extent our
customers continue to experience capital constraints, they could place pressure
on us to lower the prices we charge for our services. If competitive pressures
force us to make price concessions or otherwise reduce prices for our services,
then our revenues and margins will decline and our results of operations would
be harmed.
Our success is dependent on the continued trend toward outsourcing wireless
telecommunications services.
Our success is dependent on the continued trend by wireless carriers and
network equipment vendors to outsource their network design, deployment and
management needs. If wireless carriers and network equipment vendors elect to
perform more network deployment services themselves, our revenues would likely
decline and our business would be harmed.
16
A loss of one or more of our key customers or delays in project timing for key
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 could 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 from us and most of our
contracts with customers can be terminated without cause or penalty by the
customer on notice to us. 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.
The consolidation of equipment vendors or carriers could adversely impact
our business.
Recently, the wireless telecommunications 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 may simplify integration and installation, which could 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 bargaining power for our remaining
customers. 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.
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 September 30, 2001, 22% 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 WFI, and may
restrict our ability to hire workers under the H-1B visa category in the future.
In addition, these regulations expose us to significant penalties, including a
prohibition on the hiring of H-1B workers, if the Department of Labor deems us
noncompliant.
In addition, immigration policies are subject to rapid change, and these
policies have generally become more stringent since the events of September 11,
2001. For example, the Mexican government will not issue visas to enter Mexico
for people of certain nationalities without a prior background check conducted
by the Gubernacion office in Mexico City. These policies may restrict our
ability to send certain of our employees to Mexico that we deem necessary to
sustain the growth of our subsidiary, WFI de Mexico. Any additional 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 otherwise restrict
our ability to utilize our existing employees as we see fit, and, therefore,
could harm our business.
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
51% of our revenues for the nine months ended September 30, 2001. 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 date 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
17
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 by 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 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. In
the first quarter of fiscal 2001, we experienced such gross margin adjustments
related to the suspension and termination of the Metricom and Advanced Radio
Telecom contracts. Under certain circumstances, a cancellation or modification
of a fixed price contract could also result in our having to reverse revenue
that we recognized in a prior period, which could significantly reduce the
amount of revenues we recognize 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 additional
adjustments such as those described above, our revenues and gross margins will
be adversely affected.
Our financial results 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 those
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 results of operations.
Additionally, due to current 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
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, our recent growth in expanding services, and the
recent and sudden slowdown due to the current economic conditions in our
industry limit our ability to forecast operating results.
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
"Management's Discussion and Analysis of Financial Condition and Operating
Results."
Our operating results may suffer because of competition in our industry.
The wireless 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 more
complete description of our competition, see "Business--Competition" in our
Annual Report on Form 10-K for the year ended December 31, 2000.
18
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:
o the prices at which others offer competitive services;
o the ability and willingness of our competitors to finance customers'
projects on favorable terms;
o the ability of our customers to perform the services themselves; and
o the responsiveness of our competitors to customer needs.
We may not be able to compete effectively on these or other bases, and, as
a result, our revenues and income may decline. In addition, we have recently
begun to face competition from a new class of entrants into the wireless network
services market comprised of recently unemployed telecommunications workers who
have started their own businesses and are willing to operate at lower profit
margins than ours. To the extent that these competitors are able to increase
their market share, our business may suffer.
We must keep pace with rapid technological changes, market conditions and
industry developments to maintain and 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 successfully
develop or market service offerings that respond in a timely manner to the
technological advances of our customers and competitors. In addition, the
services that we do develop may not adequately or competitively address the
needs of the changing telecommunications marketplace. If we are not successful
in responding to technological changes, market conditions or industry
developments, our revenues may decline and our business may be harmed.
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
"Directors and Executive Officers of the Registrant," incorporated by reference
into our Annual Report on Form 10-K for the year ended December 31, 2000, for a
listing of our 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. One important component of our business strategy is to expand our
presence in new and 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:
o diversion of significant time and attention of our management;
o difficulty in integrating and absorbing the acquired business, its
employees, corporate culture, managerial systems and processes and
services;
o failure to retain key personnel and employee turnover;
o customer dissatisfaction or performance problems with an acquired
company;
o assumption of unknown liabilities; and
o other unanticipated events or circumstances.
19
Our failure to adequately address any of these factors may negatively
affect our expected profitability from acquisitions or harm our ability to
successfully negotiate or complete future acquisitions.
We may not be successful in our efforts to integrate international acquisitions.
A key component of our business model is to expand our operations in
international markets. International acquisitions pose a challenge, as we must
integrate operations despite differences in culture, language and legal
environments. To date, we have limited experience with international
acquisitions and face risks related to those transactions, including:
o difficulties in staffing, managing and integrating international
operations due to language, cultural or other differences;
o different or conflicting regulatory or legal requirements;
o foreign currency fluctuations; and
o diversion of significant time and attention of our management.
Our failure to address these risks could inhibit or preclude our efforts to
pursue or complete international acquisitions.
We have recently expanded our operations internationally. Our failure to
effectively manage our international operations could harm our business.
We currently have international operations, including offices in Brazil,
India, Mexico, United Kingdom and Sweden. For the nine months ended September
30, 2001, international operations accounted for approximately 34% of our total
revenues. We believe that the percentage of our 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 time 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 will be limited, and our business could be harmed.
Our international business operations are subject to a number of material
risks, including, but not limited to:
o difficulties in building and managing foreign operations;
o difficulties in enforcing agreements and collecting receivables through
foreign legal systems and addressing other legal issues;
o longer payment cycles;
o foreign and U.S. taxation issues;
o potential weaknesses in foreign economies, particularly in Europe, South
America and Mexico;
o fluctuations in the value of foreign currencies; and
o 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. Fluctuations in the value of foreign currencies, compared to the U.S.
dollar, may make our services more expensive than local service offerings in
international locations. This would make our service offerings less price
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
20
peso. In addition, we conduct business in Swedish krona, British pound sterling,
and Euro. We do not currently engage in currency hedging activities to limit the
risks of currency fluctuations. Therefore, fluctuations in foreign
currencies could have a negative impact on the profitability of our global
operations, which would harm our 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 the
relationship with our customers, and to effectively manage the project and
deploy appropriate resources, including third-party contractors, personnel and
our own, 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 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 would harm our business.
As of September 30, 2001, executive officers and directors and their affiliates
controlled 51% of our outstanding common stock and as a result are able to
exercise control over matters requiring stockholder approval.
As of September 30, 2001, executive officers and directors and their
affiliates beneficially owned, in the aggregate, approximately 51% of our
outstanding common stock. In particular, our Chairman, Massih Tayebi, and our
Chief Executive Officer, Masood K. Tayebi, beneficially owned, in the aggregate,
approximately 45% of our outstanding common stock. In addition, other members of
the Tayebi family owned, in the aggregate, approximately 7% 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 include preventing a
third-party from acquiring control over us. These transactions may also 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. For
further information regarding our stock ownership, see "Security Ownership of
Certain Beneficial Owners and Management" incorporated by reference into our
Annual Report on Form 10-K for the year ended December 31, 2000.
Our stock price may be particularly volatile because of our industry.
The stock market in general has recently experienced extreme price and
volume fluctuations. In addition, the market prices of securities of technology
and telecommunications companies have been extremely volatile, and have
experienced fluctuations that have often been unrelated to or disproportionate
to the operating performance of those 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" in our Annual Report on Form 10-K for the year
ended December 31, 2000.
Provisions in our charter documents and Delaware law may make it difficult for a
third-party to acquire us and could depress the price of 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
management or us. These provisions may also discourage proxy contests and make
it more difficult for our stockholders to elect directors and take other
corporate action. As a result, these provisions could limit the price that
investors are willing to pay for shares of our common stock. These provisions
include:
o authorizing the board of directors to issue preferred stock;
o prohibiting cumulative voting in the election of directors;
o limiting the persons who may call special meetings of stockholders;
o prohibiting stockholder action by written consent; and
21
o establishing advance notice requirements for nominations for election to
our board of directors or for proposing matters that can be acted on by
stockholders at meetings of our stockholders.
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 us from engaging in
a business combination with an interested stockholder unless specific conditions
are met.
Item 3. 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 because 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. The following table sets forth total amounts owed to our U.S.
operations from our Mexican, Brazilian, and United Kingdom subsidiaries at
September 30, 2000 and 2001 (denominated in U.S. dollars, in millions):
2000 2001
----- -----
Mexico ................................ $10.0 $ 9.2
Brazil ................................ $ 1.3 $ 2.4
United Kingdom ........................ $ 2.4 $ 9.0
The potential foreign currency translation losses from a hypothetical 10%
adverse change in the exchange rates from the intercompany balances at September
30, 2000 and 2001 are as follows (denominated in U.S. dollars, in millions):
2000 2001
----- -----
Mexico ................................ $ 1.0 $ 0.9
Brazil ................................ $ 0.1 $ 0.2
United Kingdom ........................ $ 0.2 $ 0.9
In addition, we estimate that a 10% change in foreign exchange rates would
impact reported operating profit by approximately $1.0 million and $0.7 million
for the nine months ended September 30, 2000 and 2001, respectively. 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.
We do not use derivative financial instruments, derivative commodity
instruments or other market risk sensitive instruments, positions or
transactions. Accordingly, management believes 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 September 30, 2001, $23.0 million was outstanding under our senior
secured credit facility ("line of credit") with a group of financial
institutions. The line of credit expires in February 2004. Loans under this line
of credit bear interest, at our discretion, at either (i) the greater of the
bank prime rate and the Federal Funds Rate plus 0.5%, plus a margin ranging from
0.75% to 1.50%, the ("base rate margin"), or (ii) at the London Interbank
Offering Rate ("LIBOR") plus a margin ranging from 1.75% to 2.50%, the ("LIBOR
rate margin"). The line of credit is secured by substantially all of our assets.
The line of credit agreement contains restrictive covenants, which, among other
things, require maintenance of certain financial ratios. On July 19, 2001, we
executed an amendment to our line of credit agreement, which among other items,
changed the minimum EBITDA covenant to exclude unusual charges up to a specified
amount with respect to the first and second quarters of our fiscal 2001
financial results.
We do not utilize any derivative financial instruments to hedge the
interest rate fluctuation as our balances under the credit 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 the nine months ended September 30, 2001
would have increased net loss for the period by approximately $0.1 million.
22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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. Limited discovery commenced in
August 2001. During discovery, Mr. Korey made claims against us for in excess of
$6.0 million. We believe the arbitration claims of Mr. Korey are without merit
and intend to vigorously defend against them.
In June and July 2001, the Company and certain of its directors and
officers were named as defendants in five purported class action complaints
filed in the United States District Court for the Southern District of New York
on behalf of persons and entities who acquired the Company's common stock at
various times on or after November 4, 1999. The complaints allege that the
registration statement and prospectus dated November 4, 1999, issued by the
Company in connection with the public offering of the Company's common stock
contained untrue statements of material fact or omissions of material fact in
violation of securities laws because the registration statement and prospectus
allegedly failed to disclose that the offering's underwriters had (a) solicited
and received additional and excessive compensation and benefits from their
customers beyond what was listed in the registration statement and prospectus
and (b) entered into tie-in or other arrangements with certain of their
customers which were allegedly designed to maintain, distort and/or inflate the
market price of the Company's common stock in the aftermarket. The actions seek
unspecified monetary damages and other relief. On August 8, 2001, the
above-referenced lawsuits were consolidated for pretrial purposes with hundreds
of similar lawsuits filed against other initial public offering issuers and
their underwriters in the Southern District of New York. An initial case
management conference was held on September 7, 2001 for all the lawsuits, at
which time the court ordered that the time for all defendants to respond to any
complaint be postponed until further notice of the Court. The Company believes
these lawsuits are without merit and intends to vigorously defend against them.
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 these or other matters may arise from time to time that
may harm our business.
Item 2. Changes in Securities and Use of Proceeds
On October 17, 2001, we issued an aggregate of 1,638,838 shares of our
common stock, valued at $7.3 million, to Davis Bay, LLC. The shares were issued
pursuant to a second amendment to the asset purchase agreement executed on
September 27, 2001 by the Company and Davis Bay. The shares were issued pursuant
to the exemption from registration provided for under Rule 506 of Regulation D
of the Securities Act of 1933, based on the representation by Davis Bay that it
is an accredited investor.
On October 30, 2001, we issued an aggregate of 63,637 shares of Series A
Convertible Preferred Stock, valued at $35.0 million, in a private placement to
investment funds managed by Oak Investment Partners. The shares were issued for
a common stock equivalent price of $5.50 per share. Each share of Series A
Convertible Preferred Stock is initially convertible into 100 shares of common
stock at the option of the holder at any time subject to certain provisions in
the agreement. After July 2004, the Series A Convertible Preferred Stock will
automatically convert into shares of the Company's common stock if and when our
common stock trades at or above $11.00 per share for 30 consecutive days after
that date. The shares were issued pursuant to the exemption from registration
provided for under Rule 506 of Regulation D of the Securities Act of 1933, based
on the representation by the purchasers that they are accredited investors.
Item 6. Exhibits and Reports on Form 8-K:
(a). Exhibits:
Exhibit
Number Description of Document
------- -----------------------
4.1 Restated Certificate of Incorporation filed and effective
on November 5, 1999.
4.2 Certificate of Designations, Preferences and Rights of
Series A Preferred Stock.
(b). Reports on Form 8-K:
None.
23
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WIRELESS FACILITIES, INC.
By: /s/ MASOOD K. TAYEBI, PH.D
-----------------------------------------
Masood K. Tayebi, Ph.D.
Chief Executive Officer
By: /s/ DAN STOKELY
-----------------------------------------
Dan Stokely
Vice President Corporate Controller and
Principle Accounting Officer
Date: November 13, 2001
24