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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
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Common Stock, par value $0.001 NASDAQ
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
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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[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock (Common Stock) held by
non-affiliates as of March 11, 2002 was approximately $100 million, based on the
closing sale price on the NASDAQ market exchange on that date. *
The number of shares outstanding of the Registrant's Common Stock was
47,621,270 as of March 11, 2002.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of registrant's proxy statement for the annual meeting to
be held on June 21, 2002 (the "Proxy Statement"), to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A not later than 120
days after the close of the Registrant's fiscal year, are incorporated by
reference under Part III of this Form 10-K.
* Excludes the common stock held by executive officers, directors and
stockholders whose ownership exceeds 5% of the Common Stock outstanding at
March 11, 2002.
WIRELESS FACILITIES, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
TABLE OF CONTENTS
Page No.
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PART I
Item 1. Business 3
Item 2. Properties 17
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 18
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 19
Item 6. Selected Financial Data 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 28
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 29
PART III
Item 10. Directors and Executive Officers of the Registrant 30
Item 11. Executive Compensation 30
Item 12. Security Ownership of Certain Beneficial Owners and Management 30
Item 13. Certain Relationships and Related Transactions 30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 31
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PART I
Item 1. Business
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This report contains forward-looking statements. These statements relate to
future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"potential" or "continue," the negative of such terms or other comparable
terminology. These statements are only predictions. Actual events or results may
differ materially. Important factors which may cause actual results to differ
materially from the forward-looking statements are described in the Section
entitled "Risk Factors" in Item 1 of this Annual Report on Form 10-K and in
other sections of this Annual Report on Form 10-K, and other risks identified
from time to time in our filings with the Securities and Exchange Commission,
press releases and other communications.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of the forward-looking
statements. We are under no obligation to update any of the forward-looking
statements after the filing of the Form 10-K to conform such statements to
actual results or to changes in our expectations.
Description of the business
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General
Wireless Facilities, Inc. is an independent provider of outsourced services
for the wireless communications industry. We were incorporated in the state of
New York on December 19, 1994, began operations in March 1995, and were
reincorporated in the state of Delaware in 1998. We completed our initial public
offering on November 5, 1999.
We plan, design, deploy and manage wireless telecommunications networks.
This work involves radio frequency engineering, site development, project
management and the installation of radio equipment networks. We also provide
network management services, which involve day-to-day optimization and
maintenance of wireless networks. As part of our strategy, we are technology and
vendor independent. We believe that this aligns our goals with those of our
customers and enables us to objectively evaluate and recommend specific products
or technologies. We provide network design and deployment services to wireless
carriers such as (in alphabetical order) AT&T Wireless, Cingular, Telcel and
Verizon and equipment vendors such as Ericsson, Nortel and Siemens. During 2001,
we also provided services to Bechtel Corporation, a global engineering and
project management company. In turn, Bechtel Corporation provides services to
both wireless carriers and equipment manufacturers.
The wireless telecom industry has experienced rapid growth over the past
few years and carriers have made large capital investments to expand their
networks. During 2001, however, a weakened economy and tightened capital markets
constrained the growth of these capital investments, thus reducing demand for
infrastructure equipment and related services. As carriers deploy their
networks, they have been faced with a proliferation in both the number and type
of competitors. Due to this increasingly competitive and capital constrained
environment, carriers are experiencing challenges associated with managing
complex networks and technologies and must focus now on satisfying customer
demand for enhanced services, seamless and comprehensive coverage, better call
quality, faster data transmission and lower prices. These changes have put
pressure on carriers and equipment vendors to allocate their resources
effectively, which we believe could increasingly lead them to outsource network
planning, design, deployment and management.
Our services are designed to improve our customers' competitive position
through the planning, design and deployment and management of their networks. We
developed a methodology of planning and deploying wireless networks that allows
us to deliver reliable, scalable network solutions. We offer our services
primarily on a fixed-price basis with scheduled deadlines for completion times,
that is, on a time-certain basis. We believe this enables our customers to more
reliably forecast the costs and timing of network deployment and management.
This allows our customers to focus on their core competencies and rely on us for
planning, designing, deploying and managing their networks.
In addition to our United States operations, as of December 31, 2001, we
had ongoing projects in countries within Europe, Middle East, Africa
(collectively, "EMEA") and Latin America. In 2001, 32% of our revenues were
derived from international operations.
Industry Background
Wireless networks are telecom systems built using radio equipment. The
implementation of a wireless network involves several project phases, including
planning, design and deployment. During the planning phase, decisions are made
about the type
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of equipment to be used, where it will be located and how it will be configured.
These decisions are based on a number of analytical considerations, including
phone subscriber profiles and target markets, forecasts of call usage, financial
modeling and forecasting and radio engineering analysis. The design phase
follows, and involves the coordinated efforts of radio engineers, site
development professionals and other technical disciplines. Potential equipment
sites are identified, based on a range of variables including radio propagation
characteristics, economics, site access, and construction feasibility.
Once a network design has been accepted, land or building rooftops must be
bought or leased for towers or telecom equipment, including radio base stations,
antennas and supporting electronics. This site development phase requires input
from a number of specialists, including real estate, land use and legal
professionals who work with local jurisdictions to secure any necessary land
use, zoning and construction permits. Next, construction and equipment
installation must be performed. Finally, radio frequency engineers commission
the new radio equipment, test it, integrate it with existing networks and tune
the components to optimize performance.
Once placed in service, wireless networks must be continually updated,
recalibrated, tuned and monitored for performance and faults. Traffic patterns
change, trees or buildings may block radio signals and interference may be
encountered from neighboring or competing networks or other radio sources. Usage
patterns may change because of new rate plans, new features or increasing sales.
Optimization is the process of tuning the network to take into account such
changes, and often gives rise to maintenance tasks such as antenna changes, new
equipment installations or the replacement of substandard or failed components.
Changes in the Wireless Telecom Industry
Wireless carriers are under pressure to continuously upgrade their networks
with new technologies and expand into new geographic regions in order to remain
competitive and satisfy the demand for pervasive wireless service. The demand
for wireless Internet access and other data services, also known as mobile
wireless broadband services, has created the need to adopt new technologies such
as those embodied in the nearer-term 2.5G and emerging third-generation (3G)
standard. High-speed fiber networks are being coupled with mobile broadband
wireless technologies to deliver enhanced telecom capabilities and features to
new customers and markets. During 2001, a weakened world economy and tightened
capital markets constrained the growth of the wireless telecommunications
industry, resulting in a delay in buildouts of wireless communications networks.
As carriers deploy their wireless networks, they face significant
competition. Through privatization in the 1980s, domestic and international
deregulation in the 1990s, and more recently, tightened capital markets and the
lifting of spectrum caps in the United States, the competitive landscape has
changed for wireless carriers. For carriers to differentiate themselves and
remain competitive in this new environment, they have been required to deploy
networks to:
. provide seamless nationwide coverage and avoid expensive roaming costs
on competitors' networks in markets where carriers do not currently
own infrastructure;
. offer PCS service in new geographic markets;
. offer enhanced services, such as one rate plans, caller ID, text
messaging and emergency 911 locator services;
. implement third-generation (3G) network standards to deliver wireless
broadband data services, including Internet access and two-way e-mail;
and
. offer wireless local loop systems domestically to bypass incumbent
wireline competitors and in developing countries lacking modern
wireline telephone infrastructure.
A number of emerging telecommunication carriers, whose business models were
originally funded when the capital markets were more robust, have found it
increasingly difficult to secure additional funds to complete the build-out of
their technologies and networks and as a consequence, certain carriers filed for
bankruptcy during 2001. In addition, many established carriers have stopped or
deferred the build-out of their networks in the current uncertain markets for
capital and telecommunication services. As a result, notwithstanding long-term
growth projections for the wireless telecommunications industry, the near-term
outlook for the deployment of wireless networks remains uncertain. See the
section "Risk Factors" in Item 1 of this Annual Report on Form 10-K.
Challenges for Wireless Carriers and Equipment Vendors
Due to this increasingly competitive environment, carriers are focused on
satisfying customer demand for enhanced services, seamless and comprehensive
coverage, better quality, faster data transmission and lower prices. It has also
created an environment where speed to market is an important component of a
wireless carrier's success. Carriers are also faced with the
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challenge of managing increasingly complex networks and technologies. For
example, the introduction of wireless Internet technologies and the growth in
mobile broadband wireless services requiring the transmission of large amounts
of data creates additional new technological hurdles for carriers establishing
or upgrading their networks. In this dynamic environment, customer acquisition
and retention are key determinants of success. In our experience, this has led
carriers to increasingly prioritize their resources and focus on revenue
generating activities by outsourcing functions outside their core competencies.
The changing environment is also placing significant operational challenges
on carriers. Carriers must make decisions about which geographic markets to
serve and which services and technologies to offer. Staffing challenges and
process implementations can present cost uncertainties and operational
challenges for carriers to deploy and manage their networks. The technical
complexity of wireless networks is increasing for carriers as the concurrent
management of analog, legacy digital and next generation technologies evolves.
Additionally, networks are being deployed with equipment from unrelated vendors,
posing system integration challenges. This situation is exacerbated by
consolidation within the industry as many emerging operators are acquired or
cease their operations. While consolidation creates opportunities for new
technology platforms and allows business models and data solutions to form new
nationwide networks, this often entails operational challenges for carriers to
effectively integrate their distinct networks.
Equipment vendors are also facing numerous challenges as they develop new
generations of equipment with increased features and functionality. Vendors
traditionally provide equipment and related services that can be deployed within
a carrier's existing network and integrate with equipment offered by other
vendors. As a result of the rapid pace of technological change, we believe that
equipment vendors have increasingly focused on offering competitive product
solutions and outsourced services such as network design, deployment and
management. During 2001, equipment manufacturers underwent substantial
downsizing as a result of tight capital markets and reduced carrier
infrastructure investments. In an effort to continue to provide the full range
of services required to implement their equipment, we believe manufacturers will
increasingly turn to outsourcing for these technical services.
The Need for Outsourcing
We believe that carriers, equipment vendors and related engineering and
project management companies are outsourcing network planning, design and
deployment and management to focus on their core competencies and refine their
competitive advantage. We believe wireless carriers and equipment vendors who
are seeking outsourcing are looking for service providers who:
. accommodate larger-scale, domestic and international design and
deployment projects through sufficient numbers of highly skilled and
experienced employees;
. offer turnkey solutions;
. are technology and vendor independent;
. offer fixed-price, time-certain services; and
. update, manage, optimize, monitor and maintain complex wireless
networks.
The WFI Solution
We provide outsourced services to telecom carriers, equipment vendors and
related engineering and project management companies for the planning, design,
deployment and ongoing optimization and management of wireless networks. We
offer turnkey solutions on a fixed-price, time-certain basis as well as on a
time and expense method. We have expertise with all major wireless technologies,
and have deployed equipment supplied by a majority of the world's leading
equipment vendors. We believe that we are better able to manage large-scale
deployments for our customers, both domestically and internationally than
telecommunications carriers using their own internal resources or coordinating
multiple sub-contractors. Our project management process enables us to meet our
customers' needs for high quality networks delivered on time and within budget.
Turnkey Solutions. Traditionally, carriers engaged a number of firms or
used internal personnel to build and operate their wireless networks. In this
case, the carrier was responsible for the coordination and integration of the
various groups and defined and implemented the process to be used. The turnkey
approach that we offer allows the carrier to engage a single responsible party
who is accountable for delivering and managing the network under a single master
service agreement. In contrast to traditional methods, we provide management
services during each phase of the engagement, enabling us to efficiently
schedule processes and resources, reducing the time and cost of network
deployment and management. We provide our customers with a primary point of
accountability and reduce the inefficiencies associated with coordinating
multiple subcontractors. In addition, we eliminate the need for a carrier or
equipment vendor to assemble, train and retain network deployment and management
staff,
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resulting in potential cost and time efficiencies. This allows carriers and
vendors to focus their resources on revenue generating activities.
Technology and Vendor Independence for Both Mobile and Fixed Wireless
Operations. We have experience in all major wireless technologies, including:
conversion of analog, cellular systems to digital capability (CDMA, TDMA, GSM,
and iDEN); deployment of digital PCS systems; migration to 3G network platforms
to provide high speed wireless data Internet capability, such as UMTS spectrum
in Europe; and development of emerging broadband technologies in the MMDS and
LMDS spectrums. Two critical components of our ability to meet and exceed
customer expectations are our broad scope of services and our technology
expertise and independence. We are continually keeping abreast of next
generation technologies to maintain technology expertise. Consistent with our
vendor independent policy, we have not aligned ourselves with the products of
any particular vendor. We provide services to many of the largest wireless
carriers along with engineering staff that are qualified and approved by nearly
every major wireless equipment vendor. Our technology and vendor independence
results in objective recommendations to the customer based on the full profile
of the customer's needs.
Fixed-Price and Time-Certain Delivery. A majority of our services are sold
primarily on a fixed-price, time-certain basis, where our customers pay by the
cell site or project, rather than by the hour. By selling our services primarily
on a fixed-price, time-certain basis, we enable our customers to better forecast
their capital expenditures and more accurately forecast the timing and costs of
network deployment and management. This allows them to focus on their core
competencies and rely on us for the cost-effective planning, deployment and
management of their networks.
Time and Expense Services. We also provide services to customers on a time
and expense method whereby customers are billed for our services by the hour and
for related expenses incurred for materials required to complete a project. This
service type provides our customers with the flexibility to outsource certain
projects which allows them to leverage their own resources.
Proven Methodology. Our project management process enables us to meet our
customers' needs without compromising quality. We leverage our experience, which
we obtained from implementing hundreds of projects, to reduce time to market for
new projects. For example, project managers utilize our project management
process to chart project progress and coordinate the integration of numerous
specialized activities during the design and deployment of a network. We have
dedicated staff employed to facilitate efficient feedback of information among
the various specialized activities so that our project teams work quickly and
effectively. Through this coordinated effort and the use of Dynamic Tracker(TM),
our proprietary project tracking software tool, we are able to optimize resource
deployment and deliver solutions on time and within budget.
Depth and Scale. Our principal asset is our staff, 84% of whom work
directly on customer projects. As of December 31, 2001, we had approximately 625
engineers, 25% of whom have advanced degrees. Our technological expertise and
industry knowledge has enabled us to form strong customer relationships with
early stage telecom ventures, as well as established carriers and equipment
vendors. In addition, we have established corporate resource centers in Mexico,
Brazil, the United Kingdom and Sweden. We believe our presence in these
countries facilitates our ability to customize services to meet the needs of our
international customer base.
Strategy
Our objective is to be the global leader in telecom outsourcing. This means
being the leading independent provider of complete outsourced wireless telecom
network services, including network planning, design, deployment, and
management. The key elements of our strategy include:
Reinforce our focus on larger, top tier clients and customer satisfaction.
Our long-term success depends upon our ability to consistently deliver value to
our customers in the form of completed projects, rendered to the highest
professional standards, delivered on time and within budget. By offering turnkey
solutions on a fixed-price, time-certain basis, we hold ourselves to the
expectations set with our customers. We strive to exceed customer expectations
on every project. We believe we have been successful in developing customer
loyalty and trust because of our high standards and vendor and technology
independence. Customer satisfaction is demonstrated by the fact that a high
level of our customers has used WFI services for repeat projects.
Expand the suite of services we offer and pursue cross-selling
opportunities. Since our inception, we have continually looked for new ways to
serve our customers. Expanding our services provides new channels for revenues
and the ability to cross-sell our suite of services to existing customers. For
instance, we often utilize our pre-deployment consulting services to establish
relationships with customers as soon as a project is conceived. Based on this
relationship, we pursue opportunities for network design and deployment. Once a
network is deployed, we offer ongoing network operations, maintenance and
optimization services. Through our network operations center in Richardson,
Texas, we also centrally manage, monitor and optimize the networks of several of
our customers. Our experience with emerging technologies also offers
cross-selling opportunities for network upgrades and deployment of a carrier's
next generation network. As technologies continue to evolve and networks
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become more complex, we will continue to expand our services to meet the
changing needs of our customers.
Remain at the forefront of new technologies. Emerging technologies present
numerous opportunities and challenges for existing carriers and vendors as well
as for new carriers. Our customers depend on us to draw upon our extensive
design and deployment experience to recommend optimal solutions to them. To
achieve this, we have in-house training programs for all technical personnel. We
will continue to actively market our technology expertise to wireless carriers
and equipment vendors that are deploying leading edge technologies. This permits
us to gain valuable experience deploying new technologies, while also adding
value to these customers' products and services offerings. Additionally,
employees in our Advanced Technology Group are members of and participate with
industry standards setting bodies to develop domestic and international
standards for next generation telecom products by attending standard setting
forums and making contributions to new standards.
Pursue opportunities for international growth. International markets
represent a significant opportunity for future growth. We established corporate
resource centers in Mexico and Brazil in 1998, the United Kingdom in 1999, and
Sweden in 2000. By the end of 2001, we had begun planning the emergence of
corporate resources in China. We intend to increasingly execute international
projects with both local professional resources and by the use of allocated
resources from other market segments. Initially, our international revenues
resulted from deployment contracts with multinational equipment vendors.
However, as we continue to penetrate foreign markets, we expect to continue to
capitalize on opportunities created by privatization, new licensees and the
expansion of wireless local loop networks.
Continue to attract and retain qualified personnel. Technology drives our
industry. As a result, our engineers and site development teams are critical to
our success. We have implemented an institutional process for career development
and training. We intend to continue to attract and retain qualified staff by
offering our employees challenging projects and opportunities to work with
emerging technologies within a corporate culture that fosters innovation and
encourages learning and professional development. We intend to continue to
invest in training and professional development.
Capitalize on prior project experience. We have participated in the
deployment of thousands of cell sites. The experience we have gained through
these projects is reflected in our project management process and proprietary
project management tools. This experience allows us to optimize the allocation
of our resources and consistently meet our customers' needs without compromising
quality. We will also seek to leverage our knowledge gained in international
markets, such as the deployment of 3G technology in domestic markets. We will
continue to refine our processes, methodologies and project management tools,
matching them to new customer and technology requirements.
Network Services
We provide a comprehensive suite of network solutions to wireless carriers
and equipment vendors, from feasibility planning, to design, deployment and
ongoing network management.
Business Consulting
We provide business consulting services for all pre-deployment planning
steps involved in technology assessment, market analysis, and business plan
development.
Market Analysis. The market team studies and analyzes the traffic patterns,
population density, topography and propagation environment in each market under
consideration. We have a well-developed capability in geographic information
systems (GIS) services, which is used for network design as well as deployment.
We have developed a proprietary methodology to assist customers in analysis of
the competitive landscape for broadband services.
Technology Evaluation and Vendor Selection. The Advanced Technology Group,
a group of experts in wireless telecommunications technologies and applications,
assists customers in determining the best equipment for a particular project,
analyzing the feasibility of a particular technology for a network plan and
managing the bidding process from multiple equipment vendors. Consistent with
our independence from vendors and technology, evaluation and selections are made
to suit the customers profile of needs.
Strategic and Business Consulting. Our business consulting group utilizes
its expertise and experience to analyze the financial, engineering, competitive
market and technology issues applicable to a proposed technology or network
deployment project. Drawing on the demographic analysis and preliminary network
dimensioning performed by the market analysis team and benchmarks for
deployment-related expenditures from our various functional groups, consultants
create new business strategies or evaluate existing deployment strategies.
Services include:
. defining subscriber profiles and target markets, including competitive
and regulatory analysis;
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. developing service offerings and marketing plans that drive usage
forecasting;
. network design and backbone configuration; and
. business plan development and financial modeling.
We have worked on a number of high profile business and technology planning
projects in the wireless industry, covering a range of mobile broadband and
satellite technologies. Although the size of these projects is typically smaller
in scope than design and deployment projects, they are strategically important
to us because they represent opportunities to build relationships and
credibility with customers during the planning phase, and they enhance our
experiences with leading edge technologies. These services are offered on both a
time and materials and fixed price basis.
Design and Deployment Services
We provide a range of services for the full design and deployment of
wireless networks. Such services include:
Radio Frequency Engineering. Radio frequency engineers design each
integrated wireless system to meet the customer's transmission requirements.
These requirements are based upon a projected level of subscriber density and
traffic demand and the coverage area specified by the operator's license or
cost-benefit decisions. Our engineers perform the calculations, measurements and
tests necessary to determine the optimal placement of the wireless equipment. In
addition to meeting basic transmission requirements, the radio frequency network
design must make optimal use of radio frequency and result in the highest
possible signal quality for the greatest portion of subscriber usage within
existing constraints. The constraints may be imposed by cost parameters,
terrain, license limitations, interference with other operators, site
availability, applicable zoning requirements and other factors.
Microwave Relocation. To enable customers to use the radio frequency
spectrum they have licensed, it is often necessary for customers to analyze the
licensed spectrum for microwave interference and move incumbent users of this
portion of the spectrum to new frequencies. We assist our customers in
accomplishing this microwave relocation by providing complete point-to-point and
point-to-multipoint line-of-sight microwave engineering and support services.
Engineering and support services include identifying existing microwave paths,
negotiating relocation with incumbent users, managing and tracking relocation
progress and documenting the final decommissioning of incumbent users.
Fixed Network Engineering. Most wireless calls are ultimately routed
through a wireline network. As a result, the traffic from wireless networks must
be connected with switching centers within wireline networks. We establish the
most efficient method to connect cell sites to the wireline backbone, whether by
microwave radio or by landline connections. Our engineers are involved in
specifying, provisioning and implementing fixed network facilities.
Additionally, the convergence of voice and data networks, specifically through
broadband technologies, such as LMDS, MMDS and Fast Ethernet, has created a new
subset of specialized fixed network engineering skills. These skills include
planning, design, capacity and traffic analysis for packet-switched and Internet
protocol router-based network elements. Engineering teams are trained in
specialized data networking and Internet protocol engineering issues.
Site Development. Site development experts study the feasibility of placing
base stations in the area under consideration from a zoning perspective,
negotiate leases and secure building permits, supervise and coordinate the civil
engineering required to prepare the rooftop or tower site, manage multiple
construction subcontractors and secure the proper electrical and
telecommunications connections.
Installation and Optimization Services. We install radio frequency
equipment, including base station electronics and antennas, and recommend and
implement location, software and capacity changes required to meet the
customer's performance specifications. We provide installation and optimization
services for all major PCS, cellular and mobile broadband wireless air interface
standards and equipment manufacturers. We also perform initial optimization
testing of installed networks to maximize the efficiency of these networks.
Network Management Services
Network management services are comprised of post-deployment radio
frequency optimization services and network operations and maintenance services.
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Post-Deployment Radio Frequency Optimization. Upon initial deployment, a
network is optimized to provide wireless service based upon a set of parameters
existing at that time, such as cell density, spectrum usage, base station site
locations and estimated calling volumes and traffic patterns. Over time, call
volumes or other parameters may change, requiring, for example, the relocation
of base stations, addition of new equipment or the implementation of system
enhancements. We offer ongoing radio frequency optimization services to
periodically test network elements, tune the network for optimal performance and
identify elements that need to be upgraded or replaced.
Network Operations and Maintenance. For customers with ongoing outsourcing
needs, we can assume responsibility for day-to-day operation and maintenance of
their wireless networks. The relationship we develop with our customers for this
type of outsourcing contract begins with a team of engineers and other
professional and support staff matched to the customer's specific needs. We take
into account such variables as grade of service and reliability requirements,
equipment manufacturer certification and geographic layout of the system in
question for determining the allocation of site maintenance and other
responsibilities between our service team and the customer's own personnel. We
provide staffing to perform the necessary services for centralized network
monitoring and optimization services and ongoing optimization, operations,
maintenance and repair of critical network elements, including base station
equipment, mobile switching centers and network operating centers to the extent
required by its customers. We also provide training services for the internal
network staff of our customers.
The WFI Methodology
We believe that our project management process is critical for the
successful execution of our business model. Project managers use our methodology
and proprietary tools to coordinate the various specialized activities involved
in bidding, planning, designing, deploying and optimizing networks on an ongoing
basis. Through the coordination of project managers and functional experts, we
are able to integrate and account for the various pieces of a turnkey
engagement.
We have built upon past experiences in developing an analytical framework
to provide scalable solutions to clients. While there are features unique to
each project, there are often similarities among projects. The project
management process is designed to bring the expertise developed during prior
engagements to bear on each new project.
We continue to dedicate resources to maintaining and improving the project
management process. At the conclusion of each engagement, incremental knowledge
gained during the course of the project is incorporated into a knowledge
database. We believe that the implementation and improvement of the project
management process ultimately benefits clients. The methodology enables us to
leverage technological and industry expertise to deliver reliable networks in a
rapid fashion without sacrificing quality. We are committed to continually
refining the project management process, customizing it for each new customer
and for each new technology opportunity.
Sales and Marketing
We market and sell services through a direct sales force to wireless
carriers and equipment vendors. As of December 31, 2001, we employed 34
full-time sales and marketing staff. Sales personnel work collaboratively with
senior management, consulting and deployment personnel to develop new sales
leads and secure new contracts. Each salesperson is expected to generate new
sales leads and take responsibility as an account manager for specified accounts
with existing customers. As account manager, the salesperson works with planning
and deployment personnel assigned to that customer to identify opportunities for
performing additional services for that customer.
Customers
We provide network design, deployment and management services to wireless
carriers, equipment vendors and related engineering and project management
companies. We have provided services to satellite service providers and wireless
tower companies. A representative list of our customers (in alphabetical order)
during 2001 includes AT&T Wireless, Bechtel, Cingular, Ericsson, Nextel,
Siemens, Triton PCS, Telecorp PCS, Telcel and Verizon.
Employees
As of December 31, 2001, we employed 1,486 full time employees worldwide,
including 1,249 in network, design and deployment services, 34 in sales and
marketing, and 203 in general and administrative positions. None of our
employees, with the exception of our Scandinavian employees, are represented by
a labor union, and we have not experienced any work stoppages. We consider our
employee relations to be satisfactory.
9
Competition
Our market is highly competitive and fragmented and is represented by numerous
service providers. However, primary competitors have been the internal
engineering departments of carrier and equipment vendor customers. With respect
to radio frequency engineering services, we compete with service providers that
include American Tower, CelPlan Technologies, Comsearch (a subsidiary of Allen
Telecom Inc.), Flextronics, LCC International, and Marconi Communications. We
compete with site acquisition service providers that include General Dynamics
and Whalen & Company, Inc. (a subsidiary of Tetra Tech, Inc.). These companies
have also engaged in some site management activities. Competitors that perform
civil engineering work during a build-out are normally regional construction
companies. We compete with engineering and project management companies like
Bechtel, Bovis Lend Lease and Fluor Daniel Inc. for the deployment of wireless
networks. These companies are significant competitors given their project
finance capabilities, reputations and international experience. Many of these
competitors have significantly greater financial, technical and marketing
resources, generate greater revenues and have greater name recognition than we
do. We have worked as a subcontractor for Bechtel, and have developed a
relationship whereby on occasions we have jointly pursued business
opportunities, and will continue to do so in the future.
We believe that the principal competitive factors in our market include the
ability to deliver results within budget and on time, reputation,
accountability, staffing flexibility, project management expertise, industry
experience and competitive pricing. In addition, expertise in new and evolving
technologies, such as mobile broadband wireless, has become increasingly
important. We believe that the ability to integrate these technologies, as well
as equipment from multiple vendors, gives us a competitive advantage as we can
offer the best technology and equipment to meet a customer's needs. We believe
our ability to compete also depends on a number of additional factors which are
outside of our control, including:
. the prices at which others offer competitive services;
. the ability and willingness of our competitors to finance customers'
projects on favorable terms;
. the ability of our customers to perform the services themselves; and
. the responsiveness of our competitors to customer needs.
Industry Segment Information
Our operations are organized along service lines and include three
reportable industry segments: Design and Deployment, Network Management, and
Business Consulting. The following table sets forth the contribution of our
industry segments to revenues and operating income (loss) for the fiscal years
ended December 31, 1999, 2000 and 2001 (in millions):
1999 2000 2001
------- -------- --------
Revenues:
Design and deployment $ 86.9 $ 205.6 $ 159.5
Network management 4.5 42.7 40.4
Business consulting 1.3 7.6 7.3
------- -------- --------
Total revenues $ 92.7 $ 255.9 $ 207.2
======= ======== ========
Operating income (loss):
Design and deployment $ 16.2 $ 38.9 $ (59.1)
Network management 1.1 10.7 (11.2)
Business consulting 0.3 2.4 (1.2)
------- -------- --------
Total operating income (loss) $ 17.6 $ 52.0 $ (71.5)
======= ======== ========
Geographic Segment Information
In 2001, we realized approximately 32% of our revenues from projects
outside of the United States. Revenues for the years ended December 31, 1999,
2000 and 2001 and long-lived assets at December 31, 1999, 2000 and 2001 derived
by geographic segment are as follows (in millions):
1999 2000 2001
----- ------ ------
United States $61.1 $183.7 $141.6
EMEA -- 18.0 22.5
Latin America 31.6 54.2 43.1
----- ------ ------
Total revenues $92.7 $255.9 $207.2
===== ====== ======
10
1999 2000 2001
----- ------ -----
United States $12.3 $ 71.5 $58.2
EMEA -- 29.2 21.9
Latin America 0.3 1.1 1.9
----- ------ -----
Total long-lived assets $12.6 $101.8 $82.0
===== ====== =====
Risk Factors
You should carefully consider the following risk factors and all other
information contained in this Annual Report on Form 10-K. Investing in our
common stock involves a high degree of risk. Risks and uncertainties, in
addition to those we describe below, that are not presently known to us or that
we currently believe are immaterial may also impair our business operations. If
any of the following risks occur, our business could be harmed, the price of our
common stock could decline and you may lose all or part of your investment. See
the note regarding forward-looking statements included at the beginning of Item
1. Business.
We expect our quarterly results to fluctuate. If we fail to meet earnings
estimates, our stock price could decline.
Our quarterly and annual operating results have fluctuated in the past and
will vary in the future due to a variety of factors, many of which are outside
of our control.
The factors outside of our control include:
. telecommunications market conditions and economic conditions
generally;
. 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;
. fluctuations in demand for our services;
. the length of sales cycles;
. the ability of certain customers to sustain capital resources to
pay their trade accounts receivable balances;
. reductions in the prices of services offered by our competitors;
and
. costs of integrating technologies or businesses that we add.
The factors substantially within our control include:
. changes in the actual and estimated costs and time to complete
fixed-price, time-certain projects;
. the timing of expansion into new markets, both domestically and
internationally; and
. the timing and payments associated with possible acquisitions.
Due to these factors, 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 the recent downward trend in our revenues and results of
operations is sustained. 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.
During 2001, we 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 and or have asked for price concessions. 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
11
and three of our customers filed for bankruptcy protection in 2001. 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 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 due
to US Wireless' filing for bankruptcy protection 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.
If the downturn in the telecommunications industry continues or if we are
unable to sufficiently increase our revenues or reduce our expenses, we may
experience a negative impact to our financial results which may cause us to
breach certain financial covenants. If we are unable to obtain waivers of
compliance for breach of certain financial covenants, additional adverse
consequences affecting availability of future funding could occur and repayment
of our debt obligations could be accelerated, thus limiting our available
liquidity and capital resources.
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 and
internationally. 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 geographic areas, 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 both in the
Unites States and internationally. 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 rely upon outside financing
to pay the considerable costs of deploying their networks. 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. Even customers and potential customers that have adequate
financing may delay deploying or upgrading their networks as they prioritize or
ration their capital resources. 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, and they may be inclined to choose
the services of our competitors to the extent our competitors are willing and
able to provide project financing. 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.
12
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 future consolidation within the
wireless telecommunication industry 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 increase the bargaining power of 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.
Our future success will depend on our ability to hire and retain additional
highly skilled engineering, managerial, marketing and sales personnel.
Competition for such personnel is intense, especially for engineers and project
managers, and we may be unable to attract sufficiently qualified personnel in
adequate numbers to meet the demand for our services in the future. In addition,
as of December 31, 2001, 24% (approximately 250) 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
52% of our revenues for the twelve months ended December 30, 2001. With the
percentage-of-completion method for revenue recognition, 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 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.
13
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. This challenge has
resulted in our underutilization of employees due to the unforseen reduction in
the demand for our services during fiscal 2001. 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 seven 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 the "Business--Competition" section
of this Annual Report on Form 10-K.
We believe that the principal competitive factors in our market include the
ability to deliver results within budget and on time, reputation,
accountability, staffing flexibility, project management expertise, industry
experience and pricing. In addition, expertise in new and evolving technologies,
such as wireless internet services, has become increasingly important. We also
believe our ability to compete depends on a number of factors outside of our
control, including:
. the prices at which others offer competitive services;
. the ability and willingness of our competitors to finance
customers' projects on favorable terms;
. the ability of our customers to perform the services themselves;
and
. the responsiveness of our competitors to customer needs.
14
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
in this Annual Report on Form 10-K, 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 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:
. difficulties in staffing, managing and integrating international
operations due to language, cultural or other differences;
. different or conflicting regulatory or legal requirements;
. foreign currency fluctuations; and
. 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 continue to enter new international markets. Our failure to effectively
manage our international operations or respond to changing regulatory conditions
in foreign markets could harm our business.
We currently have international operations, including offices in Brazil,
Mexico, United Kingdom and Sweden. For the twelve months ended December 31,
2001, international operations accounted for approximately 32% 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 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 enter these new international markets, 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:
. difficulties in building and managing foreign operations;
. regulatory uncertainties in foreign countries, including changing
regulations and delays in licensing carriers to build out their
networks in various locations;
. difficulties in enforcing agreements and collecting receivables
through foreign legal systems and addressing other legal issues;
. longer payment cycles;
. foreign and U.S. taxation issues;
15
. potential weaknesses in foreign economies, particularly in
Europe, South America and Mexico;
. fluctuations in the value of foreign currencies; and
. unexpected domestic and international regulatory, economic or
political changes.
To date, we have encountered each of the risks set forth above in our
international operations. If we are unable to expand and manage our
international operations effectively, our business may be harmed.
Fluctuations in the value of foreign currencies could harm our profitability.
The majority of our international sales are currently denominated in U.S.
dollars. 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 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, and our own
personnel, 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 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 December 31, 2001, executive officers and directors and their affiliates
controlled 53% of our outstanding common stock (including the shares of common
stock into which the shares of Series A Convertible Preferred Stock may be
converted), and as a result are able to exercise control over matters requiring
stockholder approval.
As of December 31, 2001, executive officers and directors and their
affiliates beneficially owned, in the aggregate, approximately 53% of our
outstanding common stock, after giving effect to the conversion of Series A
Convertible Preferred Stock. In particular, our Chairman, Massih Tayebi, and our
Chief Executive Officer, Masood K. Tayebi, beneficially owned, in the aggregate,
approximately 38% of our outstanding common stock. In addition, other members of
the Tayebi family owned, in the aggregate, approximately 6% 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 this
Annual Report on Form 10-K.
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 this Annual Report on Form 10-K.
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:
16
. authorizing the board of directors to issue preferred stock;
. prohibiting cumulative voting in the election of directors;
. limiting the persons who may call special meetings of
stockholders;
. prohibiting stockholder action by written consent; and
. establishing advance notice requirements for nominations for
election to 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 2. Properties
- ------------------
Our principal executive offices are located in approximately 93,000 square
feet of office space in San Diego, California. The lease for such space expires
in April 2010. Other executive offices are located in the following locations:
Sao Paulo, Brazil; Mexico City, Mexico; Stockholm, Sweden; and in London, U.K.
The Company also leases office space to support engineering and deployment
services in Reston, Virginia; Los Angeles, California; Oakland, California;
Honolulu, Hawaii; Hingham, Massachusetts; Grand Rapids, Michigan; Montvale, New
Jersey; Columbia, Maryland; Baltimore, Maryland; Bensalem, Pennsylvania and
Beijing, China. The leases on these spaces expire at various times through March
2009.
In conjunction with asset acquisitions that occurred in 2000, we assumed
the operating leases of additional office space in the following locations:
Seattle, Washington; Chicago, Illinois; Houston, Texas; Denver, Colorado;
Milwaukee, Wisconsin; and Portland, Oregon.
Item 3. Legal Proceedings
- -------------------------
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. On August 8,
2001, the above-referenced lawsuits were consolidated for pretrial purposes with
similar lawsuits filed against hundreds of other initial public offering issuers
and their underwriters in the Southern District Court 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 October 2000, we were notified that Norm Korey, a former employee who
was terminated by us, asserted that he was 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. In August 2001, the arbitration
concluded with an award of $316,700 in favor of Norm Korey, representing
severance pay, commissions and expense reimbursement. The outcome of this
proceeding did not have a materially adverse effect on the Company.
On July 25, 2000, we filed a complaint for Declaratory Relief in the
Superior Court of the State of California for the County of San Diego, against
Dr. Rahim Tafazolli, a former employee/consultant who received an unregistered
certificate purportedly representing 45,000 shares of our common stock. The
complaint sought a declaration that the subject certificate is invalid due to
the forfeiture provisions of the employee benefit plan and due to Dr.
Tafazolli's failure to perform the agreed services. On November 21, 2000, Dr.
Tafazolli filed a cross-complaint seeking money damages and a declaration that
he is entitled to receive an unrestricted WFI stock certificate for 45,000
shares. On July 2001, we entered into a settlement agreement with Dr. Tafazolli
agreeing to issue Dr. Tafazolli 15,000 unrestricted shares. Massih Tayebi, our
Chairman, and Masood K. Tayebi, our Chief Executive Officer, each agreed to
transfer to us one-half of the shares due to Dr. Tafazolli under the settlement
agreement. We have had no net increase in the number of outstanding shares of
our common stock and no impact on our financial statements for the year ended
December 31, 2001, as a result of this agreement.
17
Advanced Radio Telecom Corp. ("ART"), which initiated Chapter 11 bankruptcy
proceedings in 2001, has filed an action with the bankruptcy court against the
Company to recover alleged preference payments in the amount of $737,529. The
Company filed an answer contesting the allegations in this matter and intends to
vigorously defend against this matter. In a related matter, ART has filed a
partial objection to the Company's proof of claim. The Company has retained
counsel and is currently prosecuting the full value of its claim.
Metricom, Inc., which initiated Chapter 11 bankruptcy proceedings in 2001,
has filed an action with the bankruptcy court against the Company to recover
alleged preference payments in the amount of $1,416,240. The Company intends to
vigorously defend against this matter.
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 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
None.
18
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------------------
Our common stock is listed on the NASDAQ National Market System, under the
symbol "WFII" and has traded since November 5, 1999.
Our common stock began trading on the NASDAQ National Market System
effective November 5, 1999. Prior to that date, there was no public market for
our common stock. The following table sets forth for the periods indicated the
high and low closing prices for our common stock, as reported by NASDAQ. Such
quotation represents inter-dealer prices without retail markups, markdowns or
commissions and may not necessarily represent actual transactions.
High Low
------- ------
Fiscal Year Ended December 31, 2001
First Quarter $ 44.19 $ 4.13
Second Quarter $ 7.61 $ 3.69
Third Quarter $ 9.69 $ 4.29
Fourth Quarter $ 7.15 $ 4.27
Fiscal Year Ended December 31, 2000
First Quarter $157.88 $39.63
Second Quarter $ 93.63 $32.75
Third Quarter $ 80.50 $48.13
Fourth Quarter $ 62.66 $31.94
On March 11, 2002, the closing price of our Common Stock as reported by
Nasdaq was $5.10 per share. On March 11, 2002, there were approximately
47,621,270 shares of Common Stock outstanding, which were held by approximately
269 shareholders of record of our common stock.
We have not declared any dividends since becoming a public company.
Covenants in our financing arrangements prohibit or limit our ability to declare
or pay cash dividends. We currently intend to retain any future earnings to
finance the growth and development of the business and therefore do not
anticipate paying any cash dividends in the foreseeable future. Any future
determination to pay cash dividends will be at the discretion of the board of
directors and will be dependent upon the future financial condition, results of
operations, capital requirements, general business conditions and other factors
that the board of directors may deem relevant.
On October 30, 2001, we issued an aggregate of 63,637 shares of Series A
Convertible Preferred Stock, and raised $34.9 million, net of issuance costs, 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. Before any proceeds are distributed to the
holders of Common Stock, each share of Series A Convertible Preferred Stock is
entitled to receive $550.00 per share as a liquidation preference upon any
liquidation, dissolution, winding up, consolidation, merger, reorganization,
sale of all or substantially all of the Company's assets or certain change of
control transactions (each a "Liquidation Event"). 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. We intend to use the net the
proceeds from the offering to support future liquidity and expansion needs of
the Company.
19
Item 6. Selected Financial Data
- -------------------------------
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and related notes thereto
and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" which are included elsewhere in this Annual Report on
Form 10-K.
Year Ended December 31,
(All amounts except per share data in millions)
---------------------------------------------
Consolidated Statement of Operations Data: 1997 1998 1999 2000 2001
----- ----- ----- ------ ------
Revenues $22.7 $51.9 $92.7 $255.9 $207.2
Gross profit $10.9 $23.8 $38.4 $115.8 $ 66.2
Operating income (loss) $ 7.0 $10.7 $17.6 $ 52.0 $(71.5)
Net income (loss) $ 6.8 $ 4.7 $ 9.6 $ 31.8 $(60.1)
Net income (loss) per share:
Basic $0.24 $0.17 $0.33 $ 0.76 $(1.31)
Diluted $0.23 $0.15 $0.27 $ 0.63 $(1.31)
Weighted average shares:
Basic 28.7 28.4 29.1 41.8 45.9
Diluted 29.3 30.7 35.2 50.5 45.9
As of December 31,
(All amounts in millions)
-----------------------------------------------
Consolidated Balance Sheet Data: 1997 1998 1999 2000 2001
----- ----- ------ ------ ------
Cash and cash Equivalents $ .8 $ 2.9 $ 34.3 $ 18.5 $ 61.1
Working capital $ 9.2 $ 7.7 $ 91.4 $103.2 $104.3
Total assets $11.1 $60.3 $134.4 $297.1 $275.9
Total debt $ -- $16.0 $ 2.7 $ 37.7 $ 42.1
Total stockholders' equity $ 9.8 $14.3 $101.4 $198.6 $197.8
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations ("MD&A")
----------------------
This report contains forward-looking statements. These statements relate to
future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"potential" or "continue," the negative such terms or other comparable
terminology. These statements are only predictions. Actual events or results may
differ materially. Important factors which may cause actual results to differ
materially from the forward-looking statements are described in the Section
entitled "Risk Factors" in Item 1 in this Annual Report on Form 10-K and in
other sections of this Annual Report on Form 10-K, and other risks identified
from time to time in our filings with the Securities and Exchange Commission,
press releases and other communications.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we, nor any other
person, assume responsibility for the accuracy and completeness of the forward-
looking statements. We are under no obligation to update any of the
forward-looking statements after the filing of the Annual Report on Form 10-K to
conform this statement to actual results or to changes in its expectations.
Overview
Wireless Facilities, Inc. offers network business consulting, network
planning, design and deployment, and network operations and maintenance services
to the wireless telecommunications industry. During the years ended December 31,
2000 and December 31, 2001, we increased the number of our contracts, the scope
of our services and our geographic presence. In the final months of 1999, we
entered into our first contracts for network planning which contributed to
increased revenues and net income during the year ended December 31, 2000.
During 2000, we formed a subsidiary in the United Kingdom, Wireless Facilities
International Limited. ("WFIL"). WFIL began servicing existing contracts and
entering into new contracts in Europe, the Middle East and Africa ("EMEA") in
April 2000. This work included services performed for many of the latest
wireless technologies, including UMTS, broadband wireless applications, and
voice and video applications. For the year ended December 31, 2001, our design
and deployment, network management and business consulting segments contributed
to 77%, 19% and 4% of our revenues, respectively. Revenues from our
international operations contributed to 32% of our total revenues for the year
ended December 31, 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, cost of revenues on each project
20
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 as total project cost estimates are revised on a periodic
basis as deemed necessary. 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
corporate overhead, costs of expendable computer software and equipment, and
other direct project-related expenses. Direct compensation and benefits is
computed based on standard costs and actual hours billed. We review these
standard costs periodically to ensure they are comparable to actual costs.
Selling, general and administrative expenses include compensation and
benefits, costs associated with underutilization, computer software and
equipment, facilities expenses and other expenses not directly related to
projects. Our sales personnel have, as part of their compensation package,
incentives based on their productivity. During the year ended December 31, 2000,
we completed the first phase of implementing a new financial management and
accounting software program in our domestic operations. We completed the same
software program implementation in Mexico by the second quarter of fiscal 2001
and as of December 31, 2001, we were in the final phases of implementation in
the United Kingdom. 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 phasing in its
implementation in our international operations. We may also incur expenses
related to a given project in advance of the commencement of the project as we
increase our personnel to work on the project. New hires typically undergo
training on our systems and project management process prior to being deployed
on a project.
Due to the recent downturn in the financial markets in general, and
specifically within the telecommunications industry, many of our customers are
having trouble obtaining necessary capital resources which are required to fund
the expansion of their businesses (e.g., telecom network deployments and
upgrades). The current volatility of the financial markets and economic slowdown
in the U.S. and internationally 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 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, $13.9 million for Metricom,
Inc. and $1.3 million for US Wireless in the second quarter of fiscal 2002,
which thereby negatively affected our profitability.
Some of our contracts with our customers include billing milestones,
whereby the client is not invoiced until certain milestones are reached.
However, we recognize revenue under the percentage-of-completion method of
accounting. 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 unforeseen 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 28% 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.
As a result of these and other factors, it has become extremely difficult
to accurately forecast our future revenues and
21
earnings, and we therefore cannot re-affirm estimates of our revenues or
projections of our earnings that we have made in public statements prior to the
date of this Annual Report on Form 10-K.
Results of Operations
Comparison of Results for the Year Ended December 31, 2000 to the Year
Ended December 31, 2001
Revenues. Revenues decreased 19% from $255.9 million for the twelve
months ended December 31, 2000 to $207.2 million for the twelve months ended
December 31, 2001. The $48.7 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. Revenues from international markets comprised 28% of our
total revenues during the twelve months ended December 31, 2000 compared to 32%
of our total revenues during the twelve month period ended December 31, 2001.
Cost of Revenues. Cost of revenues increased slightly from $140.1
million for the twelve months ended December 31, 2000 to $141.0 million for the
twelve months ended December 31, 2001 and gross profit was 45% of revenues for
the twelve months ended December 31, 2000 compared to 32% for the twelve months
ended December 31, 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 adjusting entry in the
amount of $8.6 million 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. Finally, we have
begun to experience continued pressure associated with competitive pricing
demands within the wireless telecommunications industry.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 93% from $53.5 million for the twelve months
ended December 31, 2000 to $103.2 million for the twelve months ended December
31, 2001. As a percentage of revenues, selling, general and administrative
expenses increased from 21% for the twelve months ended December 31, 2000 to 50%
for the twelve months ended December 31, 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 downturn experienced
during 2001 in the wireless telecommunications industry. During the fiscal 2001,
the Company recorded approximately $2.4 million of severance costs associated
with the reduction of employee headcount. Also, bad debt expense totaling $21.3
million, which included allowances for receivables due from Metricom, Inc. of
$13.9 million, Advanced Radio Telecom of $3.1 million, and US Wireless of $1.3
million were recorded during the first half of fiscal 2001. The Company also
recorded accruals during fiscal 2001 for an estimated contractor liability in
our Mexico subsidiary of $2.2 million and for the estimated loss on unused
office space of $1.4 million.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased 110% from $10.3 million for the twelve months ended December
31, 2000, to $21.6 million for the twelve months ended December 31, 2001. The
increase is primarily due to the incremental amortization of goodwill and other
identifiable intangibles resulting from our acquisitions completed during the
latter part of fiscal 2000.
Asset Impairment Charges. For the twelve months ended December 31,
2001, asset impairment charges totaled $12.9 million, compared to no charge for
the twelve months ended December 31, 2000. The recent slowdown in the economy,
current economic conditions and visible trends in the telecommunications
industry triggered an impairment evaluation of our goodwill and other intangible
assets in the second quarter of fiscal 2001 in accordance with SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of". Based on our analyses of the results of operations and
projected future cash flows associated with certain goodwill and other
intangible assets, we determined that an impairment existed. Accordingly, we
recorded a $12.9 million impairment charge in the second quarter of fiscal 2001.
Assets determined to be impaired included goodwill and contract and workforce
intangibles approximating $8.2 million in our design and deployment segment and
$4.7 million in our network management segment.
Net Other Income (Expense). For the twelve months ended December 31,
2000, net other income was $0.2 million compared to net other expense of $3.5
million for the twelve months ended December 31, 2001. This increase in expense
of $3.7 million was primarily attributable to higher interest expense resulting
from increased debt outstanding during the periods under comparison, and a $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.
22
Provision (Benefit) for Income Taxes. Our effective income tax rate
changed from a provision of 39% for the twelve months ended December 31, 2000 to
a benefit of 20% for the twelve months ended December 31, 2001. The change was
primarily attributable to the change from reported pre-tax earnings in 2000 to
reported pre-tax losses in 2001, as well as an increase in the valuation
allowances on certain U.S. and foreign deferred tax assets in 2001.
Comparison of Results for the Year Ended December 31, 1999 to the Year
Ended December 31, 2000
Revenues. Revenues increased 176% from $92.7 million for the year
ended December 31, 1999, to $255.9 million for the year ended December 31, 2000.
The $163.2 million increase was primarily attributable to the addition of new
contracts from our acquisitions completed during 2000, expanded scope on several
large, existing contracts, and new contracts in our consulting and network
management segments, which generated no revenues in the year ended December 31,
1999. Significant new contracts included contracts acquired through our fiscal
year 2000 acquisitions of The Walter Group, the Dallas network operations
center, and Davis Bay. Revenues also increased from two significant deployment
contracts in the Mexican market serviced in the year ended December 31, 2000.
Revenues from our international markets comprised 34% of our total revenues
during the year ended December 31, 1999, compared to 28% of our total revenues
during the year ended December 31, 2000.
Cost of Revenues. Cost of revenues increased 158% from $54.3 million
for the year ended December 31, 1999, to $140.1 million for the year ended
December 31, 2000, primarily due to increased staffing in support of new
contracts. Gross profit was 41% of revenues for the year ended December 31,
1999, compared to 45% for the year ended December 31, 2000. The increase is
primarily due to a more favorable mix of project revenues resulting from the
types of services provided.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 186% from $18.7 million for the year ended
December 31, 1999, to $53.5 million for the year ended December 31, 2000. As a
percentage of revenues, selling, general and administrative expenses increased
from 20% for the year ended December 31, 1999, to 21% for the year ended
December 31, 2000. The increase is due to staffing increases in general and
administrative departments to support our growth in operations, the increased
corporate support required for a public company, as well as time charged for new
employees during our orientation, training and assignment processes.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased 390% from $2.1 million for the year ended December 31, 1999,
to $10.3 million for the year ended December 31, 2000. The increase is primarily
due to goodwill and other identifiable intangibles resulting from our recent
acquisitions, which also contributed to our increase in revenues and overall
operating expenses.
Net Other Income (Expense). For the year ended December 31, 1999, net
other expense was $0.5 million compared to net other income of $0.2 million for
the year ended December 31, 2000. This increase totaling $0.7 million was
primarily attributable to interest earned on our investments in marketable
securities from the proceeds of our November 1999 initial public offering and
the reduction of net foreign currency losses, partially offset by an increase in
interest expense on increasing balances on our line of credit and the initiation
of certain capital leases.
Provision for Income Taxes. Our provisional income tax rate as a
percentage of income before taxes decreased from 42% for the year ended December
31, 1999, to 39% for the year ended December 31, 2000. The decrease is primarily
attributable to increases in our foreign revenues from operations.
Trends
During 2001, tightened capital markets constrained the growth of the
wireless telecommunications industry, resulting in a delay in buildouts of
wireless communications networks. If buildouts and deployments of wireless
communications networks continue to be delayed for a sustained period of time,
our customers may place pressure on us to lower the prices that we charge for
our services, which would harm our results of operations.
Indications regarding overall telecom market conditions available as
of the date of this Annual Report on Form 10-K show continuing weakness in
wireless telecommunications infrastructure spending. Due to this environment,
management presently expects that the Company will record a net loss for the
quarter ending March 31, 2002, resulting from the continued underutilization of
its billable employees. In response, management is taking steps intended to
restore the Company to profitability as soon as possible and is considering a
number of alternative cost cutting measures and significant expense reductions,
including further lowering work force levels, many of which may require the
Company to take an accounting charge in connection with their implementation.
Liquidity and Capital Resources
Our sources of liquidity included cash and cash equivalents, cash from
operations, amounts available under credit facilities, and other external
sources of funds. On October 30, 2001, the Company received $34.9 million, net
of issuance costs, from the investment funds
23
managed by Oak Investment Partners for the sale of its Series A Convertible
Preferred Stock. As of December 31, 2001, we had cash and cash equivalents of
$61.1 million and had $33.0 million outstanding on our senior secured credit
facility ("line of credit").
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 $38.3 million for the twelve months ended December 31, 2000 while cash
provided by operations totaled $5.2 million for the twelve months ended December
31, 2001.
Cash used in investing activities was $14.7 million and $5.0 million
for the years ended December 31, 2000 and 2001, respectively. Investing
activities for the year ended December 31, 2000 consisted primarily of cash paid
for acquisitions and investments of $47.1 million and capital expenditures of
$5.7 million which are partially offset by proceeds totaling $38.0 million
received from sales of marketable securities. Acquisitions during the year ended
December 31, 2000 included the purchase of assets or securities from The Walter
Group, Comcor, Davis Bay, Questus, Telia Contracting, and Telia Academy, as well
as the purchase of a network operations center, an investment in CommVerge
Solutions Inc., and an equity interest in Diverse Networks, Inc. Cash used in
investing activities for the twelve months ended December 31, 2001 consisted of
capital expenditures.
Cash provided by financing activities for the year ended December 31,
2000 was $37.5 million which was primarily derived from $24.9 million in net
borrowings under our line of credit and $12.9 million from sale of common stock
issued through our stock option and employee stock purchase plans. Cash provided
by financing activities totaled $42.3 million for the twelve months ended
December 31, 2001. Financing activities primarily consisted of proceeds from
issuance of Series A Convertible Preferred Stock, sales of common stock issued
through our stock option and employee stock purchase plans, and net borrowings
under our line of credit, partially offset by repayment of notes payable and
capital lease obligations.
As of December 31, 2001, $33.0 million was outstanding under our line
of credit with a weighted average interest rate of 6.40%. 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 2.50%, the ("base rate
margin"), or (ii) at the London Interbank Offering Rate ("LIBOR") plus a margin
ranging from 1.75% to 3.50%, 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. On December 31,
2001, we executed a second amendment to our line of credit agreement, which
amended certain financial covenants for 2002, reduced the aggregate commitment
from $100 million to $80 million and waived the requirement for compliance for
two financial covenants as of December 31, 2001. As such, we were in compliance
with all required covenants as of December 31, 2001.
As discussed in the "Risk Factors" section of Part 1 of our Annual
Report on Form 10-K, 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. If the downturn in the telecommunications
industry continues or if we are unable to sufficiently increase our revenues or
reduce our expenses, we may experience a negative impact to our financial
results which may cause us to breach certain financial covenants. If we are
unable to obtain waivers of compliance for breach of certain financial
covenants, additional adverse consequences affecting availability of future
funding could occur and repayment of our debt obligations could be accelerated,
thus limiting our available liquidity and capital resources.
We have no material cash commitments other than obligations under our
credit facilities, 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.
The following summarizes the Company's contractual obligations and
other commitments at December 31, 2001, and the effect such obligations could
have on its liquidity and cash flow in future periods (in millions):
Amount of Commitment Expiring by Period
-----------------------------------------------
2002 2003 2004 2005 2006 Thereafter
----- ---- ---- ---- ----
Capital leases .......... $ 5.1 $ 3.5 $0.5 $0.2 $ -- $ --
Operating leases ........ 4.9 4.3 3.7 3.5 2.4 8.2
Long-term debt .......... 0.2 0.2 0.2 -- -- --
----- ----- ---- ---- ---- ----
$10.2 $ 8.0 $4.4 $3.7 $2.4 $8.2
===== ===== ==== ==== ==== ====
We believe that our cash and cash equivalent balances and funds
available under the existing line of credit will be sufficient to satisfy cash
requirements for the next twelve months. Although we cannot accurately
anticipate the effect of inflation
24
on our operations, we do not believe that inflation has had, or is likely in the
foreseeable future to have, a material impact on our net revenues or results of
operations. In addition to our credit facility, we derive a portion of our
liquidity from our cash flows from operations. During 2001, tightened capital
markets constrained the growth of the wireless telecommunications industry,
resulting in a delay in buildouts of wireless communications networks. If
buildouts and deployments of wireless communications networks continue to be
delayed for a sustained period of time, the demand for our services and the
prices that we are able to charge for our services may decline, which would
result in a decline in our cash flows from operations. To address this, we are
focused on preserving cash by continuously monitoring expenses and identifying
cost savings. We will also continue to explore opportunities for direct equity
investments to help meet our short-term liquidity requirements.
Critical Accounting Principles and Estimates
In response to the SEC's Release Numbers 33-8040 "Cautionary Advice
Regarding Disclosure About Critical Accounting Policies" and 33-8056,
"Commission Statement about Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Company has identified the following
critical accounting policies that affect its more significant judgments and
estimates used in the preparation of its consolidated financial statements. The
preparation of the Company's financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management of the Company to make estimates and judgments that affect the
reported amounts of assets and liabilities, revenues and expenses, and related
disclosures of contingent assets and liabilities. On a periodic basis, the
Company evaluates its estimates, including those related to revenue recognition,
allowance for doubtful accounts, valuation of long-lived assets including
goodwill and identifiable intangibles, accounting for income taxes including the
related valuation allowance, accruals for self-insurance and compensation and
related benefits, and contingencies and litigation. We explain these accounting
policies in the notes to the consolidated financial statements and at relevant
sections in this discussion and analysis. These estimates are based on the
information that is currently available and on various other assumptions that
are believed to be reasonable under the circumstances. Actual results could vary
from those estimates under different assumptions or conditions.
We believe the following critical accounting policies affect the Company's
more significant judgments and estimates used in the preparation of its
consolidated financial statements.
Revenue recognition. We derive our revenue primarily from long-term
contracts and account for these contracts under the provisions of Statement of
Position 81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts". Revenue on time and materials contracts is
recognized as services are rendered at contract labor rates plus material and
other direct costs incurred. Revenue on fixed price contracts is recognized on
the percentage-of-completion method based on the ratio of total costs incurred
to date compared to estimated total costs to complete the contract. Estimates of
costs to complete include material, direct labor, overhead, and allowable
general and administrative expenses. These estimates are reviewed on a
contract-by-contract basis, and are revised periodically throughout the life of
the contract such that adjustments to profit resulting from revisions are made
cumulative to the date of the revision. 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. Significant management judgments
and estimates, including the estimated costs to complete projects, which drives
the project's percent complete, must be made and used in connection with the
revenue recognized in any accounting period. Material differences may result in
the amount and timing of our revenue for any period if our management made
different judgments or utilized different estimates. In addition, many of our
contracts include milestone billings. If a contract is terminated or reduced in
scope prior to a milestone billing, we may not be able to recover the full
amount of revenue recognized, which would result in a reduction of revenue and
gross margin in the respective period.
Allowance for doubtful accounts. We maintain an allowance for doubtful
accounts for estimated losses resulting from the inability of certain customers
to make required payments on amounts due to the Company. Management determines
the adequacy of this allowance by periodically evaluating individual customer
accounts receivables considering the customer's financial condition and current
economic conditions. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additions to the allowance for doubtful accounts may be required.
Valuation of long-lived and intangible assets and goodwill. We have
recorded significant amounts of goodwill and intangibles resulting from the
acquisitions we have completed in the past three years. We assess the impairment
of identifiable intangibles, long-lived assets and related goodwill whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable. Factors we consider important which could trigger an impairment
review include the following:
. significant underperformance relative to expected historical or
projected future operating results;
. significant changes in the manner of our use of the acquired assets or
the strategy for our overall business;
25
. significant negative industry or economic trends;
. significant decline in our stock price for a sustained period; and
. our market capitalization relative to net book value.
When we determine that the carrying value of intangibles, long-lived assets
and related goodwill may not be recoverable based upon the existence of one or
more of the above indicators of impairment, we measure any impairment based on a
projected discounted cash flow method using a discount rate determined by our
management to be commensurate with the risk inherent in our current business
model. Net intangible assets, long-lived assets, and goodwill amounted to $90.4
million as of December 31, 2001.
In 2002, SFAS No. 142 became effective and as a result, we will cease to
amortize approximately $54.4 million of goodwill and $2.1 million of
intangibles. We recorded approximately $14.0 million of amortization on these
amounts during 2001. Through December 31, 2001, goodwill has been amortized on a
straight-line basis over lives ranging from 5 to 20 years, and intangibles have
been amortized on a straight-line basis over lives ranging from 2 to 5 years. In
lieu of amortization, we are required to perform an initial impairment review of
our goodwill and intangible assets with indefinite lives in 2002 and an annual
impairment review thereafter. If we are required to record an impairment charge
in the future, it would have an adverse impact on our results of operations.
Accounting for income taxes. As part of the process of preparing our
consolidated financial statements we are required to estimate our income taxes
in each of the jurisdictions in which we operate. This process involves us
estimating our actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items, such as deferred
revenue, for tax and accounting purposes. These differences result in deferred
tax assets and liabilities, which are included within our consolidated balance
sheet. We must then assess the likelihood that our deferred tax assets will be
recovered from future taxable income and to the extent we believe that recovery
is not likely, we must establish a valuation allowance. To the extent we
establish a valuation allowance or increase this allowance in a period, we must
include an expense within the tax provision in the statement of operations.
Significant management judgment is required in determining our provision
for income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. We have recorded a
valuation allowance of $12.2 million as of December 31, 2001, due to
uncertainties related to our ability to utilize some of our deferred tax assets,
primarily consisting of certain net operating losses carried forward and foreign
tax credits, before they expire. The valuation allowance is based on our
estimates of taxable income by jurisdiction in which we operate and the period
over which our deferred tax assets will be recoverable. In the event that actual
results differ from these estimates or we adjust these estimates in future
periods we may need to establish an additional valuation allowance which could
materially impact our financial position and results of operations. The net
deferred tax asset as of December 31, 2001 was $10.0 million, net of a valuation
allowance of $12.2 million.
Accrual for self insurance. The Company maintains an accrual for its health
and workers compensation self-insurance, which is a component of accrued
expenses in the consolidated balance sheets. Management determines the adequacy
of these accruals by periodically evaluating our historical experience and
trends related to both health and workers compensation claims and payments,
information provided to us by our insurance broker, industry experience and
trends and average lag period in which claims are paid. If such information
indicates that our accruals are overstated or understated, we will adjust the
assumptions utilized in our methodologies and reduce or provide for additional
accruals as appropriate.
Contingencies and litigation. The Company is subject to various claims and
legal actions in the ordinary course of our business. Some of these matters
include professional liability and employee-related matters. Although we are
currently not aware of any such pending or threatened litigation that we believe
is reasonably likely to have a material adverse effect on us, if we become aware
of such assessments against the Company, we will evaluate the probability of an
adverse outcome and provide accruals for such contingencies as necessary.
Factors That May Affect Financial Condition And Future Results
The Company participates in an industry that is highly competitive and is
experiencing severe economic pressures. Industry participants confront
aggressive pricing practices by competitors, continually changing customer
demand patterns, and rapid technological developments. The following are
important factors that could cause actual results to differ materially from the
projected results contained in the forward-looking statements in this report.
. Continued weak global economic conditions could adversely impact the
Company's revenues and growth rate.
26
. The competitive environment in the wireless telecommunications industry
places pressure on revenue, gross margins and market share.
. Depressed capital markets are likely to hinder future capital expansion for
wireless carriers and equipment vendors.
. Erosion of the financial condition of customers could adversely affect the
Company's business.
. Delays in implementing the Company's business and information management
and system improvements could adversely affect its business.
. The Company's stock price can be volatile.
Additional factors that could cause actual results to differ materially
from the projected results contained in the forward-looking statements in this
report are described in the "Risk Factors" section in Item I of this Annual
Report on Form 10-K.
At December 31, 2000 and 2001, the Company did not have any relationships
with unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes. In addition, the Company does
not engage in trading activities involving non-exchange traded contracts. As
such, the Company is not materially exposed to any financing, liquidity, market
or credit risk that could arise if the Company had engaged in such
relationships.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 141 (SFAS No. 141),
"Business Combinations," and SFAS 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
Purchased 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 and intangible assets with indefinite lives will be tested at least
annually or 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 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 intangible assets with indefinite lives in accordance
with the guidelines set forth in the standard. As of the date of adoption,
remaining unamortized goodwill and unamortized other intangible assets is
approximately $54.4 million and $2.1 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 June 2001, the FASB issued SFAS 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. At this time, the Company does not anticipate that the adoption of
SFAS No. 143 will have a material effect on the Company's consolidated financial
statements.
In October 2001, the FASB issued SFAS 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),
27
"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.
Certain Related Party Transactions
In addition to the foregoing transactions, other related party transactions
are referenced in Part III, Item 13 "Certain Relationships and Related
Transactions" of this Annual Report on Form 10-K.
In October 2001, the Company issued an aggregate of 63,637 shares of Series
A Convertible Preferred Stock, valued at $35.0 million, in a private placement
to entities affiliated with a director of the Company.
During 2000 and 2001, two subsidiaries of the Company, WFI de Mexico and
Wireless Facilities Latin America Ltda., entered into certain transactions with
JFR Business Corporation International S. de R.L. de C.V. and JFR de Brasil
Ltda. (collectively, JFR). The General Manager of WFI de Mexico and Wireless
Facilities Latin America Ltda., who is also the brother of both the Chairman and
the Chief Executive Officer of the Company, holds a majority ownership interest
in JFR. The primary business purpose for WFI de Mexico and Wireless Facilities
Latin America Ltda. transacting business with JFR relates to obtaining more
reliable and more available service and response compared to independent
businesses providing such services, at market or less than market rates after
considering all relevant factors. Commencing in March 2002, all transactions
between JFR and WFI de Mexico and JFR and Wireless Facilities Latin America
Ltda. must be approved by the Company's Chief Financial Officer and General
Counsel, after a competitive bidding process.
During 2000 and 2001, WFI de Mexico contracted with JFR for automobile
leasing, computer leasing, and as a sub-contractor for certain of its customer
contracts. During the years ended December 31, 2000 and 2001, WFI de Mexico paid
JFR approximately $3.6 million and $2.7 million, respectively, for all services
rendered under these contracts. As of December 31, 2000 and 2001, WFI de Mexico
owed JFR $0 and approximately $2.2 million, respectively. Also during 2001, JFR
contracted with WFI de Mexico for subcontractor services for certain of its
customer contracts. The Company believes that the terms and the amounts paid or
payable under these contracts are comparable to terms and amounts that the
Company could have negotiated under contracts with unaffiliated third parties
for such services.
During 2001, Wireless Facilities Latin America Ltda. has transacted
business with JFR as a subcontractor providing services in connection with
certain customer contracts. During the year ended December 31, 2001, Wireless
Facilities Latin America Ltda. paid JFR approximately $0.1 million for all
services rendered under these contracts. Also during 2001, JFR contracted with
Wireless Facilities Latin America Ltda. for subcontractor engineering services
for certain of its customer contracts. As of December 31, 2001, Wireless
Facilities Latin America Ltda. has a trade receivable balance from JFR for
approximately $0.3 million related to such services. The Company believes that
the terms and the amounts payable and receivable under these contracts are
comparable to terms and amounts that the Company could have negotiated under
contracts with unaffiliated third parties for such services.
At December 31, 2001, except as noted above, there are no other commitments
or guarantees between JFR and the Company.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
We are exposed to foreign currency risks due to both transactions and
translations between functional and reporting currencies in our Mexican,
Brazilian and United Kingdom subsidiaries. We are exposed to the impact of
foreign currency fluctuations due to the operations of and net monetary asset
and liability positions in our Mexico, Brazil and United Kingdom foreign
subsidiaries. Significant monetary assets and liabilities include trade
receivables, trade payables and intercompany payables that are not denominated
in their local functional currencies. As of December 31, 2001, our Mexican
subsidiary was in a net asset position of approximately $27.3 million while our
Brazilian and United Kingdom subsidiaries were
28
in net monetary liability positions of approximately $1.4 million and $5.6
million, respectively. The potential foreign currency translation losses from a
hypothetical 10% adverse change in the exchange rates from the net asset or
liability positions at December 31, 2001 are approximately $2.7 million, $0.1
million and $0.6 million for Mexico, Brazil and the United Kingdom,
respectively.
In addition, we estimate that a 10% change in foreign exchange rates would
impact reported net income (loss) by approximately $0.4 million for the twelve
months ended December 31, 2001. 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.
Due to the difficulty in determining and obtaining predictable cashflow
forecasts in our Latin America operations, the use of hedging activities is not
deemed appropriate at this time.
As of December 31, 2001, $33.0 million was outstanding under our line of
credit with a weighted average interest rate of 6.40%. 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 2.50%, the ("base rate
margin"), or (ii) at the London Interbank Offering Rate ("LIBOR") plus a margin
ranging from 1.75% to 3.50%, 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. On December 31,
2001, we executed a second amendment to our line of credit agreement, which
amended certain financial covenants for 2002, reduced the aggregate commitment
from $100 million to $80 million and waived the requirement for compliance for
two financial covenants as of December 31, 2001. As such, we were in compliance
with all required covenants as of December 31, 2001.
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 twelve months ended December 31, 2001,
would have increased net loss for the period by approximately $0.2 million.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The information required by this Item is included in Part IV Items 14(a)(1)
and (2) of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
---------------------
None
29
PART III
Item 10. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
The information required by this item is incorporated by reference to the
information under the captions "Election of Directors" and "Compliance with
Section 16(a) of the Exchange Act" of the Registrant's definitive Proxy
Statement and notice of our 2002 Annual Meeting of Stockholders which we will
file with the Securities and Exchange Commission within 120 days after the end
of fiscal 2001 (April 30, 2002).
Item 11. Executive Compensation
- --------------------------------
The information required by this item is incorporated by reference to the
information under the caption "Executive Compensation" of the Registrant's
definitive Proxy Statement and notice of our 2002 Annual Meeting of Stockholders
which we will file with the Securities and Exchange Commission within 120 days
after the end of fiscal 2001 (April 30, 2002).
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information required by this item is incorporated by reference to the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" of the Registrant's definitive Proxy Statement and notice of our
2002 Annual Meeting of Stockholders which we will file with the Securities and
Exchange Commission within 120 days after the end of fiscal 2001 (April 30,
2002).
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
The information required by this item is incorporated by reference to the
information under the caption "Certain Relationships and Related Transactions"
of the Registrant's definitive Proxy Statement and notice of our 2002 Annual
Meeting of Stockholders which we will file with the Securities and Exchange
Commission within 120 days after the end of fiscal 2001 (April 30, 2002).
30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) 1. Financial Statements and Financial Statement Schedules
- --------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Page
- ---------------------------------------------------------------------------------------------------------------
Independent Auditors' Report F-1
- ---------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheets as of December 31, 2000 and 2001 F-2
- ---------------------------------------------------------------------------------------------------------------
Consolidated Statements of Operations for the Years Ended December 31, 1999, 2000 and 2001 F-3
- ---------------------------------------------------------------------------------------------------------------
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1999, 2000 and 2001 F-4
- ---------------------------------------------------------------------------------------------------------------
Consolidated Statement of Cash Flows for the Years Ended December 31, 1999, 2000 and 2001 F-6
- ---------------------------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements F-8
- ---------------------------------------------------------------------------------------------------------------
Schedule II: Valuation and Qualifying Accounts S-1
- ---------------------------------------------------------------------------------------------------------------
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted.
2. Exhibits and Reports on Form 8-K
- --------------------------------------
Exhibit
Number Description of Document
3.1 Amended and Restated Certificate of Incorporation.(3)
3.2 Bylaws in effect since November 5, 1999.(1)
3.3 Certificate of Designations, Preferences and Rights of Series A Preferred Stock.(3)
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Speciman Stock Certificate.(1)
10.1 1997 Stock Option Plan.(1)
10.2 Form of Stock Option Agreement pursuant to the 1997 Stock Option Plan and related terms and conditions.(1)
10.3 1999 Equity Incentive Plan.(1)
10.4 Form of Stock Option Agreement pursuant to the 1999 Equity Incentive Plan.(1)
10.5 1999 Employee Stock Purchase Plan and related offering documents.(1)
10.6 R&D Building Lease by and between the Company and Sorrento Tech Associates as amended.(1)
10.7 Amended and Restated Credit Agreement by and among the Company, various banks and Credit Suisse First Boston
dated as of February 9, 2001.(5)
10.8 Second Amended and Restated Investor Rights Agreement by and among the Company and certain stockholders of the
Company dated as of September 17, 1999.(1)
10.9 Employment Offer Letter by and between the Company and Scott Fox dated as of April 9, 1999.(1)
31
10.10 Form of Indemnity Agreement by and between the Company and certain officers and directors of the Company.(1)
10.11 Amended Promissory Note from the Company to Masood K. Tayebi dated as of August 2, 1999.(1)
10.12 Amended Promissory Note from the Company to Massih Tayebi dated as of August 2, 1999.(1)
10.13 Amended Promissory Note from the Company to Sean Tayebi dated as of August 2, 1999.(1)
10.14 Form of Warrant Agreement by and between the Company and each of Scott Anderson and Scot Jarvis dated as of
February 28, 1997.(1)
10.15 Form of Subscription and Representation Agreement by and between the Company and each of Scott Anderson and
Scot Jarvis dated as of February 28, 1997.(1)
10.16 Form of Warrant Agreement by and between the Company and each of Scott Anderson and Scot Jarvis dated as of
February 1, 1998.(1)
10.17 Form of Bill of Sale and Assignment Agreement by and between the Company and each of Massih Tayebi and Masood
K. Tayebi dated as of June 30, 1999.(1)
10.18 Assignment of Note by and among the Company, Masood K. Tayebi and Massih Tayebi dated as of June 30, 1999.(1)
10.19 Form of Promissory Note from each of Masood K. Tayebi and Massih Tayebi to the Company dated as of June 30,
1999.(1)
10.20 Form of Promissory Note from each of Masood K. Tayebi and Massih Tayebi to the Company dated as of June 30,
1999.(1)
10.21 Services Agreement by and between WFI de Mexico S. de R.L. de C.V. and Ericsson Telecom, S.A. de C.V. dated as
of August 4,
1999.(1) +
10.22 Amended and Restated Master Services Agreement by and between the Company and TeleCorp Holding Communications,
Inc., dated as of October 12, 1999.(1) +
10.23 Master Services Agreement by and between the Company and Nextel Partners Operating Corp. dated as of January
18, 1999.(1) +
10.24 Agreement by and between the Company and Siemens Aktiengesellschaft, Berlin and Mu"nchen, Federal Republic of
Germany, represented by the Business Unit Mobile Networks.(1) +
10.25 Master Services Agreement by and between the Company and Triton PCS, Operating Company, L.L.C. dated as of
January 19, 1998, as amended.(1) +
10.26 Microwave Relocation Services Agreement by and between Entel Technologies, Inc. and Triton PCS Operating
Company, L.L.C. dated as of February 11, 1998.(1) +
10.27 Site Development Services Agreement by and between Entel Technologies, Inc. and Triton PCS, Inc. dated as of
December 10, 1997.(1) +
10.28 Sales Agreement for Products and Services by and between the Company and Integrated Ventures, LLC dated as of
April 19, 1999.(1) +
10.29 Settlement Agreement and Mutual General Release by and between the Company and Total Outsourcing, Inc dated as
of June 30, 1999.(1)
10.30 Straight Note from Scott Fox and Kathleen W. Fox to the Company dated as of July 8, 1999.(1)
32
10.31 Master Services Agreement by and between the Company and Metricom, Inc. dated as of September 21, 1999.(1) +
10.32 Sublease Agreement by and between the Company and Franklin Templeton Corporate Services, Inc. dated as of April
14, 2000.(2)
10.33 2000 Nonstatutory Stock Option Plan.(2)
10.34 Form of Stock Option Agreement and Grant Notice used in connection with the 2000 Nonstatutory Stock Option
Plan.(2)
10.35 Preferred Stock Purchase Agreement dated as of October 10, 2001 among the Company, Oak Investment Partners X,
Limited Partnership, and Oak X Affiliates Fund, Limited Partnership, including Press release of Wireless
Facilities, Inc. dated October 11, 2001.(3)
10.36 First Amendment to Amended and Restated Credit Agreement effective July 19, 2001.(4)
10.37 Employment Offer Letter by and between the Company and Brad Weller effective August 16, 1999.(4)
10.38 Executive Change of Control Agreement dated as of May 11, 2001 between the Company and Brad Weller.(4)
10.39 Second Amendment to Amended and Restated Credit Agreement and Limited Waiver dated as of December 31, 2001.*
21.1 List of subsidiaries.*
23.1 Independent Auditors' Report on Schedule and Consent.*
24.1 Power of Attorney. Reference is made to the signature page to this Report on Form 10-K.
- ------------------------
(1) Filed as an exhibit to the Company's Registration Statement on Form S-1
(No. 333-85515), and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000, filed on November 14, 2000 and
incorporated herein by reference.
(3) Filed as an exhibit to the Company's Report on Form 8-K filed on October
11, 2001 and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001, filed on August 10, 2001 and incorporated
herein by reference.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 2000, filed on March 29, 2001 and incorporated
herein by reference.
* Filed herewith.
+ Certain confidential matters deleted pursuant to Order Granting Application
for Confidential Treatment, issued in connection with the Registration
Statement on Form S-1 (No. 333-85515) dated November 10, 1999.
(b) Reports on Form 8-K
- -------------------------
The following report on Form 8-K was filed after September 30, 2001:
On October 11, 2001, we filed a Current Report on Form 8-K dated October
10, 2001, announcing that we entered into an agreement to sell $35 million of
Series A Convertible Preferred Stock in a private placement to investment funds
managed by Oak Investment Partners. Upon completion of the sale of the Series A
Convertible Preferred Stock, Bandel Carano, a managing partner of Oak Investment
Partners, will rejoin the Company's Board of Directors. Mr. Carano previously
served as a member of the Company's Board from August 1998 to June 2001.
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 19, 2002
Wireless Facilities, Inc.
By: /s/ Masood K. Tayebi, Ph.D.
---------------------------------------
Masood Tayebi
Chief Executive Officer
Power of Attorney
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Massih Tayebi and Masood K. Tayebi, and
each of them, as his attorneys-in-fact, each with the power of substitutes, for
him in any and all capacities, to sign any amendments to this Annual Report on
Form 10-K, and to file the same, with exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated:
Signature Title Date
/s/ Massih Tayebi, Ph.D. Chairman and Director March 19, 2002
- ------------------------------------------
Massih Tayebi
/s/ Masood K. Tayebi, Ph.D. Chief Executive Officer and Director March 19, 2002
- ------------------------------------------ (Principal Executive Officer)
Masood K. Tayebi
/s/ Brad Weller General Counsel, Vice President of March 19, 2002
- ------------------------------------------ Legal Affairs and Secretary
Brad Weller
/s/ Terry Ashwill Chief Financial Officer (Principal March 19, 2002
- ------------------------------------------ Financial and Accounting Officer)
Terry Ashwill
/s/ Dan Stokely Corporate Controller (Chief Accounting March 19, 2002
- ------------------------------------------ Officer)
Dan Stokely
/s/ Scott Anderson Director March 19, 2002
- ------------------------------------------
Scott Anderson
/s/ Bandel Carano Director March 19, 2002
- ------------------------------------------
Bandel Carano
/s/ Scot Jarvis Director March 19, 2002
- ------------------------------------------
Scot Jarvis
/s/ William Hoglund Director March 19, 2002
- ------------------------------------------
William Hoglund
/s/ David Lee Director March 19, 2002
- ------------------------------------------
David Lee
34
Independent Auditors' Report
The Board of Directors
Wireless Facilities, Inc.:
We have audited the accompanying consolidated balance sheets of Wireless
Facilities, Inc. and subsidiaries as of December 31, 2000 and 2001, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 2001.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Wireless Facilities,
Inc. and subsidiaries as of December 31, 2000 and 2001, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.
KPMG LLP
San Diego, California
February 11, 2002
F-1
WIRELESS FACILITIES, INC.
Consolidated Balance Sheets
December 31, 2000 and 2001
(in millions, except par value)
Assets 2000 2001
-------- --------
Current assets:
Cash and cash equivalents $ 18.5 $ 61.1
Accounts receivable, net 119.1 88.5
Accounts receivable - related party -- 0.3
Contract management receivables, net 20.8 5.9
Income taxes receivable 12.7 3.2
Prepaid expenses 3.7 4.5
Employee loans and advances - current portion 2.2 1.5
Other current assets 8.4 9.3
-------- --------
Total current assets 185.4 174.3
Property and equipment, net 20.0 19.0
Goodwill, net 64.7 54.4
Other intangibles, net 17.1 8.6
Deferred tax assets, net -- 10.0
Investments in unconsolidated affiliates 9.2 8.4
Employee loans and advances 0.2 0.7
Other assets 0.5 0.5
-------- --------
Total assets $ 297.1 $ 275.9
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 15.1 $ 9.0
Accounts payable - related party -- 2.2
Accrued expenses 18.1 15.3
Contract management payables 9.2 4.2
Billings in excess of costs 0.9 1.6
Line of credit payable 24.9 33.0
Note payable - current portion 1.7 0.2
Capital lease obligations - current portion 3.5 4.5
Deferred tax liabilities, net 8.8 --
-------- --------
Total current liabilities 82.2 70.0
Note payable, net of current portion 0.6 0.4
Capital lease obligations, net of current portion 7.0 4.0
Common stock to be issued 8.6 --
Other liabilities -- 3.5
-------- --------
Total liabilities 98.4 77.9
-------- --------
Minority interest in subsidiary 0.1 0.2
Commitments and contingencies
Stockholders' equity:
Series A Convertible Preferred Stock, $.001 par value; 5.0 shares
authorized; 0.1 shares issued and outstanding at December 31, 2001;
liquidation preference $35.0 -- --
Common stock, $.001 par value, 195.0 shares authorized; 43.3 and 47.2 shares
issued and outstanding at December 31, 2000 and 2001, respectively -- --
Additional paid-in capital 156.9 215.1
Retained earnings (accumulated deficit) 43.0 (17.1)
Accumulated other comprehensive loss (1.3) (0.2)
-------- --------
Total stockholders' equity 198.6 197.8
-------- --------
Total liabilities and stockholders' equity $ 297.1 $ 275.9
======== ========
See accompanying notes to consolidated financial statements.
F-2
WIRELESS FACILITIES, INC.
Consolidated Statements of Operations
Years ended December 31, 1999, 2000 and 2001
(in millions except per share amounts)
1999 2000 2001
-------- --------- ---------
Revenues $ 92.7 $ 255.9 $ 207.2
Cost of revenues 54.3 140.1 141.0
-------- --------- ---------
Gross profit 38.4 115.8 66.2
Selling, general and administrative expenses 18.7 53.5 103.2
Depreciation and amortization 2.1 10.3 21.6
Asset impairment charges -- -- 12.9
-------- --------- ---------
Operating income (loss) 17.6 52.0 (71.5)
-------- --------- ---------
Other income (expense):
Interest income (expense), net (0.2) 0.1 (3.1)
Foreign currency gain (loss) (0.3) -- 0.2
Other, net -- 0.1 (0.6)
-------- --------- ---------
Total other income (expense) (0.5) 0.2 (3.5)
-------- --------- ---------
Income (loss) before minority interest in income of subsidiary and
income taxes 17.1 52.2 (75.0)
Minority interest in income of subsidiary 0.3 0.1 0.1
Provision (benefit) for income taxes 7.2 20.3 (15.0)
-------- --------- ---------
Net income (loss) $ 9.6 $ 31.8 $ (60.1)
======== ========= =========
Net income (loss) per common share:
Basic $ 0.33 $ 0.76 $ (1.31)
Diluted $ 0.27 $ 0.63 $ (1.31)
Weighted average common shares outstanding:
Basic 29.1 41.8 45.9
Diluted 35.2 50.5 45.9
See accompanying notes to consolidated financial statements.
F-3
WIRELESS FACILITIES, INC.
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1999, 2000 and 2001
(in millions)
Convertible Convertible
Preferred stock - Series A Preferred stock - Series B Common stock
-------------------------- -------------------------- ---------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
Balance, December 31, 1998 1.7 $-- -- $-- 27.0 $--
Issuance of common stock -- -- -- -- 0.3 --
Issuance of Series B preferred stock -- -- 2.7 -- -- --
Stock-based compensation -- -- -- -- -- --
Issuance of warrants in connection with
acquisitions -- -- -- -- -- --
Purchase of treasury stock -- -- -- -- -- --
Conversion of Series A and B preferred stock
to common stock (1.7) -- (2.7) -- 7.8 --
Initial public offering of common stock, net -- -- -- -- 4.6 --
Retirement of treasury stock -- -- -- -- -- --
Net income -- -- -- -- -- --
Total comprehensive income -- -- -- -- -- --
---- --- ---- --- ---- ---
Balance, December 31, 1999 -- -- -- -- 39.7 --
Issuance of common stock for exercise of stock
options -- -- -- -- 2.4 --
Issuance of common stock under employee stock
purchase plan -- -- -- -- 0.2 --
Issuance of common stock in connection with
acquisitions -- -- -- -- 0.8 --
Issuance of common stock for exercise
of warrants -- -- -- -- 0.2 --
Tax benefit from exercise of stock options -- -- -- -- -- --
Net income -- -- -- -- -- --
Foreign currency translation loss -- -- -- -- -- --
Net unrealized investment loss -- -- -- -- -- --
Total comprehensive income -- -- -- -- -- --
---- --- ---- --- ---- ---
Balance, December 31, 2000 -- -- -- -- 43.3 --
Issuance of Series A preferred stock 0.1 -- -- -- -- --
Issuance of common stock for exercise of stock
options -- -- -- -- 0.7 --
Issuance of common stock under employee stock
purchase plan -- -- -- -- 0.3 --
Issuance of common stock in connection with
acquisition -- -- -- -- 2.0 --
Issuance of common stock for exercise of warrants -- -- -- -- 0.9 --
Tax benefit from exercise of stock options -- -- -- -- -- --
Net loss -- -- -- -- -- --
Foreign currency translation gain -- -- -- -- -- --
Net realized investment loss -- -- -- -- -- --
Total comprehensive loss -- -- -- -- -- --
---- --- ---- --- ---- ---
Balance, December 31, 2001 0.1 $-- -- $-- 47.2 $--
==== === ==== === ==== ===
(Continued)
See accompanying notes to consolidated financial statements.
F-4
WIRELESS FACILITIES, INC.
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1999, 2000, and 2001
(in millions)
Retained Accumulated Compre-
Additional Earnings Treasury stock Other hensive
Paid-in (Accumulated --------------- Comprehensive Income
Capital Deficit) Shares Amount Loss (Loss) Total
---------- ------------ ------ ------ ------------- ------- -------
Balance, December 31, 1998 $ 26.2 $ 1.6 3.3 $(13.5) $ -- $ 14.3
Issuance of common stock 0.6 -- -- -- -- -- 0.6
Issuance of Series B preferred stock 15.0 -- -- -- -- -- 15.0
Stock-based compensation 0.1 -- -- -- -- -- 0.1
Issuance of warrants in connection with
acquisitions 0.1 -- -- -- -- -- 0.1
Purchase of treasury stock -- -- -- (0.2) -- -- (0.2)
Conversion of Series A and B preferred
stock to common stock -- -- -- -- -- -- --
Initial public offering of common stock,
net 61.9 -- -- -- -- -- 61.9
Retirement of treasury stock (13.7) -- (3.3) 13.7 -- -- --
Net income -- 9.6 -- -- -- 9.6 9.6
------
Total comprehensive income -- -- -- -- -- $ 9.6 --
------ ------- ---- ------ ------ ====== -------
Balance, December 31, 1999 90.2 11.2 -- -- -- 101.4
Issuance of common stock for exercise
of stock options 9.5 -- -- -- -- -- 9.5
Issuance of common stock under employee
stock purchase plan 3.4 -- -- -- -- -- 3.4
Issuance of common stock in connection 37.7 -- -- -- -- -- 37.7
with acquisitions
Issuance of common stock for exercise of
warrants 0.5 -- -- -- -- -- 0.5
Tax benefit from exercise of stock 15.6 -- -- -- -- -- 15.6
options
Net income -- 31.8 -- -- -- 31.8 31.8
Foreign currency translation loss -- -- -- -- (0.3) (0.3) (0.3)
Net unrealized investment loss -- -- -- -- (1.0) (1.0) (1.0)
------
Total comprehensive income -- -- -- -- -- $ 30.5 --
------ ------- ---- ------ ------ ====== -------
Balance, December 31, 2000 156.9 43.0 -- -- (1.3) 198.6
Issuance of Series A convertible
preferred stock 34.9 -- -- -- -- -- 34.9
Issuance of common stock for exercise
of stock options 2.7 -- -- -- -- -- 2.7
Issuance of common stock under employee
stock purchase plan 1.7 -- -- -- -- -- 1.7
Issuance of common stock in connection
with acquisitions 16.0 -- -- -- -- -- 16.0
Issuance of common stock for exercise of
warrants 1.4 -- -- -- -- -- 1.4
Tax benefit from exercise of stock
options 1.5 -- -- -- -- -- 1.5
Net loss -- (60.1) -- -- -- (60.1) (60.1)
Foreign currency translation gain -- -- -- -- 0.1 0.1 0.1
Net realized investment loss -- -- -- -- 1.0 1.0 1.0
------
Total comprehensive loss -- -- -- -- -- $(59.0) --
------ ------- ---- ------ ------ ====== -------
Balance, December 31, 2001 $215.1 $ (17.1) -- $ -- $ (0.2) $ 197.8
====== ======= ==== ====== ====== =======
See accompanying notes to consolidated financial statements.
F-5
WIRELESS FACILITIES, INC.
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 2000, and 2001
(in millions)
1999 2000 2001
------- ------- -------
Operating activities:
Net income (loss) $ 9.6 $ 31.8 $ (60.1)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 2.5 10.7 22.5
Provision for doubtful accounts 0.4 0.1 21.3
Asset impairment charges -- -- 12.9
Gain on sale of property and equipment, net -- -- (0.2)
Provision for (benefit from) deferred income taxes (1.7) 9.1 (18.8)
Tax benefit from exercise of stock options -- 15.6 1.5
Realized loss on investment -- -- 1.0
Other 0.3 -- --
Changes in assets and liabilities, net of the effect of acquisitions:
Accounts receivable (7.6) (84.4) 7.6
Contract management receivables 10.2 (6.8) 14.9
Income taxes receivable 1.6 (17.7) 9.5
Other assets (2.3) (12.6) (8.1)
Accounts payable (4.9) 8.2 6.2
Accrued expenses 1.2 11.2 (3.7)
Contract management payables (1.1) 0.9 (5.0)
Billings in excess of costs 5.1 (4.4) 0.7
Other liabilities 0.1 -- 3.0
------- ------- -------
Net cash provided by (used in) operating activities 13.4 (38.3) 5.2
------- ------- -------
Investing activities:
Capital expenditures (3.2) (5.6) (5.0)
Investment in marketable securities (38.0) -- --
Cash paid for acquisitions, net of cash acquired (1.7) (38.1) --
Cash paid for investments (0.1) (9.0) --
0.1 38.0 --
------- ------- -------
Net cash used in investing activities (42.9) (14.7) (5.0)
------- ------- -------
Financing activities:
Proceeds from issuance of preferred stock, net of issuance costs 15.0 -- 34.9
Proceeds from issuance of common stock 62.5 12.9 5.8
Purchase of treasury stock (0.2) -- --
Net borrowings (repayment) under line of credit (3.0) 24.9 8.1
Repayment of capital lease obligations -- (1.3) (4.8)
Proceeds from collection of officer notes receivable -- 0.6 --
Repayment of officer notes payable (3.8) -- --
Repayment of subordinated stockholder notes payable (5.5) -- --
Borrowings (repayment) of notes payable (4.0) 0.4 (1.7)
------- ------- -------
Net cash provided by financing activities 61.0 37.5 42.3
------- ------- -------
Effect of exchange rate on cash (0.1) (0.3) 0.1
------- ------- -------
Net increase (decrease) in cash and cash equivalents 31.4 (15.8) 42.6
Cash and cash equivalents at beginning of year 2.9 34.3 18.5
------- ------- -------
Cash and cash equivalents at end of year $ 34.3 $ 18.5 $ 61.1
======= ======= =======
(continued)
See accompanying notes to consolidated financial statements.
F-6
WIRELESS FACILITIES, INC.
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 2000 and 2001
(in millions)
1999 2000 2001
----- ------ -----
Supplemental disclosures of noncash transactions:
Fair value of assets acquired in acquisitions $ 3.4 $ 88.6 $ --
Cash paid for acquisitions (2.1) (38.7) --
Issuance of common stock for acquisitions -- (37.7) --
Issuance of notes payable for acquisition (0.8) (1.5) --
Common stock to be issued -- (8.6) --
Issuance of warrants in acquisitions (0.1) -- --
----- ------ -----
Liabilities assumed in acquisitions 0.4 2.1 --
Common stock issued for earn-out provision in acquisition -- -- 16.0
Property and equipment acquired under capital leases 1.8 10.0 2.8
Reduction of accounts receivable in exchange for notes receivable -- -- 1.4
Note receivable issued for sale of equipment -- -- 1.0
Reduction of accounts receivable in exchange for investment securities -- 1.1 --
Decrease in fair value of investment securities available for sale -- (1.0) (0.1)
Reduction of note payable in lieu of consideration for exercise of warrants -- 0.5 --
Receipt of note for sale of investment 0.2 -- --
Tax benefit from exercise of stock options -- 15.6 1.5
Supplemental disclosure of cash flow information:
Cash paid during the year for interest 1.3 1.8 3.9
Cash paid during the year for income taxes, net 5.6 9.6 10.3
See accompanying notes to consolidated financial statements.
F-7
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 2000 and 2001
(1) Organization and Summary of Significant Accounting Policies
(a) Description of Business
Wireless Facilities, Inc. ("WFI") was formed in the state of New York
on December 19, 1994, began operations in March 1995 and was
reincorporated in 1998, in Delaware. WFI provides a full suite of
outsourcing services to wireless carriers and equipment vendors,
including business consulting, design and deployment and management of
client networks. WFI's customers include both early-stage and mature
providers of cellular, PCS, and broadband data services and equipment.
WFI's engagements range from small contracts for the deployment of a
single cell site, to large multi-year turnkey contracts. These
services are billed either on a time and materials basis or a
fixed-price, time-certain basis (i.e. turnkey contracts).
In November 1999, WFI completed an initial public offering of 4.6
million shares of common stock. Prior to the initial public offering,
there was no public market for WFI's common stock. The net proceeds of
the offering, after deducting applicable underwriting discounts and
offering expenses, were approximately $61.9 million.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of WFI and
its wholly-owned and majority-owned subsidiaries. WFI and its
subsidiaries are collectively referred to herein as the "Company." As
of December 31, 1999, the wholly-owned subsidiaries included Entel
Technologies, Inc., WFI de Mexico, Wireless Facilities Latin America
Ltda., and WFI International, Ltd., based in London, England, which
began operations in April of 2000. In March 2000, the Company acquired
the assets of a network operations center and business segment located
in Dallas, Texas. In conjunction with this purchase, the Company
formed WFI Network Management Services Corporation, a wholly-owned
subsidiary incorporated in the state of Delaware, to operate the
center. In May 2000, the Company acquired a 16.67% interest in the
operations of Diverse Networks, Inc., which is accounted for using the
equity method of accounting. In August 2000, the Company acquired
Questus, Ltd., ("Questus") a privately held company incorporated in
the United Kingdom in a stock purchase acquisition. Questus is a
provider of management consulting and network development services in
the European wireless services market. The acquisition included
Questus' wholly-owned subsidiaries, Questus Scandinavia, A.B.,
incorporated in Stockholm, Sweden, and Questus GmbH, incorporated in
Vienna, Austria. In September 2000, the Company formed a wholly-owned
subsidiary WFI-UK, Ltd., based in London, England, to act as a holding
company. The Company acquired Telia Contracting AB and Telia Academy
AB in October 2000 and December 2000, respectively. Telia Contracting
AB, a Swedish corporation located in Gothenburg, Sweden, is a global
provider of network management consulting services with geographic
emphasis in Asia, Scandinavia, South America, and Europe. Telia
Academy AB, a Swedish limited liability corporation located in Kalmar,
Sweden, is a provider of management training and consultancy services
to the global telecommunications industry.
All intercompany transactions have been eliminated in consolidation.
Investments accounted for using the cost method include companies in
which the Company owns less than 20% and for which the Company has no
significant influence. Investments accounted for using the equity
method include companies in which the Company owns more than 20% but
less than 50%, or for which the Company is considered to have
significant influence.
(c) Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash
equivalents consisting of money market investments were $0 and $55.6
million as of December 31, 2000 and 2001, respectively.
F-8
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 2000 and 2001
(d) Investment Securities
Investment securities consisted of an investment in a public company
made in fiscal 2000, which was classified as available for sale and
carried at fair value with unrealized gains or losses reported in a
separate component of accumulated other comprehensive income. The
carrying value of the investment at December 31, 2000 was $0.1
million, net of an unrealized loss of $1.0 million and was classified
in other current assets. The investment was liquidated in fiscal 2001
as the investee company declared bankruptcy. Accordingly, the
unrealized loss of $1.0 million recorded at December 31, 2000 was
realized and reclassified to earnings in 2001. There were no
investment securities outstanding as of December 31, 2001.
(e) Property and Equipment, Net
Property and equipment consists primarily of computer and office
equipment and is recorded at cost. Equipment acquired under capital
leases is recorded at the present value of the future minimum lease
payments. Depreciation is calculated using the straight-line method
over the estimated useful life of each asset, which is one to three
years for computer equipment and five years for furniture and office
equipment. Equipment acquired under capital leases is amortized over
the shorter of the lease term or the estimated useful life of the
asset. Improvements, which add to the useful life of an asset, are
capitalized. Expenditures for maintenance and repairs are charged to
operations as incurred.
(f) Goodwill, Net
Goodwill represents the excess of the purchase price over the fair
value of assets purchased from acquired companies. Goodwill is
amortized on a straight-line basis over its estimated period of
benefit from five to twenty years. In determining the useful life of
goodwill the Company considers several factors including industry
technology, competition, demand and other economic factors. The
Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its
remaining life can be recovered through future operating cash flows of
the acquired operation. The amount of goodwill impairment, if any, is
measured based on the projected discounted future operating cash flows
using a discount rate reflecting the Company's average cost of funds.
The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved.
(g) Other Intangibles, Net
Other intangibles consist primarily of acquired customer
relationships, workforce, purchased technology, trade names,
non-compete covenants and patents. Other intangibles are recorded at
cost and are amortized using the straight-line method over their
expected useful lives from two to five years. The Company reviews the
carrying value and remaining useful life of intangibles for impairment
whenever events or circumstances indicate that the carrying amount may
not be recoverable. The amount of impairment, if any, is measured
based on the projected discounted future operating cash flows using a
discount rate reflecting the Company's average cost of funds. The
assessment of the recoverability of other intangibles will be impacted
if estimated future operating cash flows are not achieved.
(h) Revenue Recognition
Revenue is recognized in accordance with Statement of Position 81-1,
"Accounting for Performance of Construction-Type and Certain
Production-Type Contracts." Revenue on time and materials contracts is
recognized as services are rendered at contract labor rates plus
material and other direct costs incurred. Revenue on fixed price
contracts is recognized using the percentage-of-completion method
based on the ratio of total actual costs to complete the contract.
Estimates of costs to complete include material, direct labor,
overhead, and allowable general and administrative expenses. These
estimates are reviewed on a contract-by-contract basis, and are
revised periodically throughout the life of the contract such that
adjustments to profit resulting from revisions are made cumulative to
the date of the revision. 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. Billings in excess of
costs incurred on uncompleted projects are recorded as billings in
excess of costs in the accompanying balance sheets.
F-9
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 2000 and 2001
(i) Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for estimated
losses resulting from the inability of its customers to make required
payments, which results in bad debt expense. Management periodically
determines the adequacy of this allowance by evaluating individual
customer receivables considering the customer's financial condition
and current economic conditions.
(j) Contract Management Receivables and Payables
During 2000 and 2001, the Company managed contracts whereby the
Company paid for services rendered by third parties on behalf of
customers. The Company passed these expenses through to the customers,
who reimbursed the Company for the expenses plus a management fee.
Commencing on October 1, 2001, the Company increased its level of
service to customers under these types of contracts whereby the
Company is functioning as the principle rather than the agent with
respect to the customer and the vendor, resulting in higher management
fees to the Company. As such, and in accordance with the provisions of
EITF 99-19 "Reporting Revenue Gross as a Principal versus Net as an
Agent," the Company has recorded the gross charges (inclusive of
mark-up) in service revenues and the corresponding costs payable to
the respective vendors in cost of service revenue. Amounts receivable
from the customer or owed to third parties for the contract management
activities are shown separately on the balance sheets to distinguish
them from receivables and liabilities generated by the Company's own
operations.
(k) Income Taxes
The Company records deferred tax assets and liabilities for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
The Company maintains a valuation allowance for deferred tax assets
for which it is not more likely than not that the Company will realize
the benefits of these tax assets. The valuation allowance is based on
estimates of future taxable income by jurisdiction in which the
Company operates, the number of years over which the deferred tax
assets will be recoverable, and scheduled reversals of deferred tax
liabilities.
(l) Common Stock Split
On February 22, 1999, the Company effected a 3-for-1 stock split of
the Company's common stock. All per share and share data in the
consolidated financial statements and notes to the consolidated
financial statements have been retroactively restated to reflect this
stock split.
F-10
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 2000 and 2001
(m) Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with
Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting
for Stock-Based Compensation." SFAS No. 123 permits entities to
recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant or allows entities to apply
the provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees and its related
interpretations including FASB Interpretation Number 44, "Accounting
for Certain Transactions involving Stock Compensation." Under APB
Opinion No. 25 and its related interpretations, compensation expense
is recognized as the difference, if any, between the current market
price of the underlying stock and the exercise price on the date of
grant. In accordance with SFAS No. 123, the Company has elected to
apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
(n) Net Income per Common Share
The Company calculates net income per share in accordance with SFAS
No. 128, "Earnings Per Share." Under SFAS No. 128, basic net income
(loss) per common share is calculated by dividing net income (loss)
by the weighted average number of common shares outstanding during the
reporting periods. Diluted net income per common share reflects the
effects of potentially dilutive securities. Weighted average shares
used to compute net income (loss) per share are presented below (in
millions):
1999 2000 2001
---- ---- ----
Weighted average shares, basic 29.1 41.8 45.9
Dilutive effect of stock options 5.2 7.7 --
Dilutive effect of warrants 0.9 1.0 --
---- ---- ----
Weighted average shares, diluted 35.2 50.5 45.9
==== ==== ====
For the years ended December 31, 1999, 2000, and 2001, options to
purchase 0.2 million, 4.5 million and 5.3 million shares of common
stock, respectively, were not included in the calculation of diluted
net income (loss) per share because the effect of these instruments
was anti-dilutive. For the year ended December 31, 2001, Series A
Preferred Stock convertible into 1.6 million common shares were not
included in the calculation of diluted net loss per share because the
effect of these instruments was anti-dilutive.
(o) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
Of
The Company reviews long-lived assets and intangibles for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of
an asset to future net undiscounted cash flows without interest
expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair
value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
(p) Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires that fair values be disclosed for the Company's financial
instruments. The carrying amounts of cash and cash equivalents,
accounts receivable, contract management receivables, income tax
receivable, accounts payable, accrued expenses and contract management
payables approximate fair value due to the short-term nature of these
instruments. The carrying amounts reported for the Company's line of
credit payable and notes payable approximate their fair value because
the underlying instruments bear interest at rates comparable to
current rates offered to the Company for instruments of similar terms
and risk.
F-11
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 2000 and 2001
(q) Comprehensive Income (Loss)
SFAS No. 130, "Reporting Comprehensive Income," establishes rules for
the reporting of comprehensive income (loss) and its components.
Comprehensive income (loss) for the years ended December 31, 2000 and
2001 consisted of net income (loss), unrealized gain (loss) on
available-for-sale securities and foreign currency translation
adjustments.
(r) Foreign Currency Translation
In accordance with SFAS No. 52 "Foreign Currency Translation," the
financial statements of the Company's foreign subsidiaries where the
functional currency has been determined to be the local currency are
translated into United States dollars using current rates of exchange
for assets and liabilities and rates of exchange that approximate the
rates in effect at the transaction date for revenues, expenses, gains
and losses.
(s) Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash, accounts
receivable and contract management receivables. At times, cash
balances held in financial institutions are in excess of federally
insured limits. The Company performs periodic evaluations of the
relative credit standing of financial institutions and limits the
amount of risk by selecting financial institutions with a strong
relative credit standing.
(t) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements, and the reported amount of revenue
and expenses during the reporting period to prepare these consolidated
financial statements in conformity with accounting principles
generally accepted in the United States of America. Actual results
could differ from those estimates.
(u) Reclassifications
Certain amounts in prior year financial statements have been
reclassified to conform to the 2001 presentation.
(v) Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 141 (SFAS No.
141), "Business Combinations," and SFAS 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 at least annually or whenever events or
circumstances occur indicating that goodwill might be impaired. Upon
adoption of SFAS No. 142, amortization of goodwill and intangible
assets with indefinite lives 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
Company will adopt SFAS No. 142 on January 1, 2002, upon which time
the Company will cease amortizing goodwill and intangible assets with
indefinite lives in accordance with the guidelines set forth in the
standard. The Company is currently evaluating the impact that the
adoption of SFAS No. 142 will have on its results of operations and
financial position.
F-12
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 2000 and 2001
In June 2001, the FASB issued SFAS 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. At this
time, the Company does not anticipate that the adoption of SFAS No.
143 will have a material effect on the Company's consolidated
financial statements.
In October 2001, the FASB issued SFAS 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) Impairment Charge
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.
(3) Acquisitions
The Company accounts for acquisitions in accordance with APB 16, "Business
Combinations," and related interpretations.
(a) Entel Technologies, Inc. ("Entel")
On February 27, 1998, the Company acquired all of the outstanding
shares of stock of Entel, a Maryland wireless outsourcing company.
Entel rendered site development and project management services to
telecommunications providers in connection with site acquisition,
construction management and microwave relocation projects throughout
F-13
WIRE FACILITIES, INC.
Notes to Condolidated Financial Statements
Years ended December 31, 1999, 2000 and 2001
the United States. Consideration for the acquisition consisted of
$3.5 million in cash and $5.2 million in notes payable to Entel
shareholders. The excess purchase price paid over the fair value of
tangible and identifiable intangible assets acquired was recorded as
goodwill. Goodwill of $7.8 million was recognized in the transaction
and was being amortized over seven years. The remaining net book
value of goodwill was approximately $3.5 million as of December 31,
2001, which will be subject to the transition guidelines of SFAS 142
effective January 1, 2002. The Company accounted for this
acquisition using the purchase method of accounting. Thus, results
of operations from this acquired entity are included in the
Company's consolidated financial statements from the acquisition
date.
(b) B. Communication International, Inc. ("BCI")
On January 4, 1999, the Company acquired BCI for $2.9 million in
cash, warrants and notes. BCI provided radio frequency engineering
and cell site and switch technician services in the U.S. and Latin
America. The excess purchase price paid over the fair value of
tangible and identifiable intangible assets acquired was recorded as
goodwill. Goodwill of $1.2 million was recognized in the transaction
and was being amortized over seven years. The remaining net book
value of goodwill was approximately $0.7 million as of December 31,
2001, which will be subject to the transition guidelines of SFAS 142
effective January 1, 2002. Acquired identifiable intangible assets
of $0.5 million consist primarily of non-compete agreements and were
being amortized over two years. Acquired identifiable intangible
assets were fully amortized as of December 31, 2001. The Company
accounted for this acquisition using the purchase method of
accounting. Thus, results of operations from this acquired entity
are included in the Company's consolidated financial statements from
the acquisition date.
(c) C.R.D., Inc. ("CRD")
On June 25, 1999, the Company acquired CRD for $0.5 million in
cash, warrants, and assumption of debt. CRD installed and
maintained cell site and microwave electronics. The excess purchase
price paid over the fair value of tangible and identifiable
intangible assets acquired was recorded as goodwill. Goodwill of
$0.3 million was recognized in the transaction and was being
amortized over seven years. During the second quarter of fiscal
2001, an impairment analysis was performed which resulted in the
write-off of the remaining net book value of goodwill of $0.2
million, in accordance with SFAS 121. The Company accounted for
this acquisition using the purchase method of accounting. Thus,
results of operations from this acquired entity are included in the
Company's consolidated financial statements from the acquisition
date.
(d) WFI de Mexico ("WFIM")
On September 18, 1998, the Company formed and acquired an 88%
ownership interest in a Mexican subsidiary (WFIM). WFIM acquired
all the assets of Cable and Wireless Services, S.C., a Mexican
wireless communications company. Consideration for the acquisition
consisted of $0.1 million in cash. The remaining 12% of WFI de
Mexico's stock was held by directors and the General Manager of
WFIM pursuant to Restricted Stock Agreements which permit WFIM to
repurchase and transfer such shares upon the occurrence of certain
events.
On January 21, 2000, the Company acquired all but 2.5% of the
minority ownership interest in WFIM from the General Manager of
that subsidiary. The acquisition was made under the terms of a
Restricted Stock Agreement, pursuant to which the Company issued
0.4 million shares of common stock valued at $18.2 million in
exchange for shares in WFIM. The acquisition price was allocated
first to reduce the General Manager's minority interest, with the
excess of $17.9 million recorded as goodwill, which was being
amortized over 20 years. The remaining net book value of goodwill
was approximately $16.1 million as of December 31, 2001, which
will be subject to the transition guidelines of SFAS 142 effective
January 1, 2002. The General Manager is the brother of both the
Chairman and the Chief Executive Officer of the Company. The
Company accounted for this acquisition using the purchase method
of accounting. Thus, results of operations and earnings previously
allocated to minority owners are included in the Company's
consolidated financial statements from the acquisition date.
F-14
WIRE FACILITIES, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 2000 and 2001
(e) The Walter Group, Inc. ("TWG")
On January 11, 2000, the Company acquired TWG, a Washington
corporation and a privately-held provider of management
consulting and network development services to the wireless
communications market. Consideration consisted of $5.6 million in
cash and approximately 95,000 shares of the Company's common
stock valued at $4.1 million. The Company accounted for this
acquisition using the purchase method of accounting. Thus,
results of operations from this acquired entity are included in
the Company's consolidated financial statements from the
acquisition date. The excess purchase price paid over the fair
value of tangible and identifiable intangible assets acquired was
recorded as goodwill. Goodwill of $7.7 million was recognized in
the transaction and was being amortized over ten years. During
the second quarter of fiscal 2001, an impairment analysis was
performed which resulted in the write-off of $6.5 million of
goodwill in accordance with SFAS 121. As of December 31, 2001,
the remaining net book value of goodwill was approximately $0.1
million, which will be subject to the transition guidelines of
SFAS 142 effective January 1, 2002. Acquired identifiable
intangible assets of $1.6 million consisted of non-compete
covenants and an assembled workforce and were being amortized
over two to five years. During the second quarter of fiscal 2001,
in connection with the impairment analysis performed, the lives
of the remaining intangibles were evaluated, which resulted in a
reduction of the useful life for assembled workforce from five to
three years As of December 31, 2001, the remaining net book value
for assembled workforce was $0.8 million, which will be subject
to the transition guidelines of SFAS 142 effective January 1,
2002. The indentifiable assets related to non-compete covenants
were fully amortized as of December 31, 2001.
(f) Network Operations Center
On March 13, 2000, the Company acquired the assets of a network
operations center and business segment from Ericsson Inc. for
$6.3 million in cash. The center is located in Dallas, Texas. The
Company accounted for this acquisition using the purchase method
of accounting. The results of operations from the acquired assets
are included in the Company's consolidated financial statements
from the acquisition date. The excess purchase price paid over
the fair value of the tangible and identifiable intangible assets
acquired was recorded as goodwill. Goodwill of $1.0 million was
recognized in the transaction and was being amortized over seven
years. During the second quarter of fiscal 2001, an impairment
analysis was performed which resulted in the write-off of the
remaining net book value of goodwill of $0.8 million, in
accordance with SFAS 121. Acquired identifiable intangible assets
of $3.4 million consisted primarily of customer relationships and
an assembled workforce and were being amortized over two to five
years. As a result of the impairment analysis, the remaining net
book value of customer relationships and assembled workforce was
determined to be impaired and fully written off in accordance
with SFAS 121.
(g) Comcor Advisory Services ("Comcor")
On April 25, 2000, the Company acquired the assets of Comcor, a
privately-held provider of site development services to the
wireless mobility and broadband wireless communications market.
The Company paid $5.4 million in cash as well as issued
approximately 21,000 shares of the Company's common stock valued
at $1.8 million to Comcor shareholders for the acquisition. The
excess purchase price paid over the fair value of the tangible
and identifiable intangible assets acquired was recorded as
goodwill. Goodwill of $6.6 million was recognized in the
transaction and was being amortized over ten years. During the
second quarter of fiscal 2001, an impairment analysis was
performed which resulted in the write-off of $1.5 million of
goodwill, in accordance with SFAS 121. As of December 31, 2001,
the remaining net book value of goodwill was approximately $4.0
million, which will be subject to the transition guidelines of
SFAS 142 effective January 1, 2002. Acquired identifiable
intangible assets of $0.6 million consisted primarily of an
assembled workforce and was being amortized over five years. As
of December 31, 2001, the remaining net book value of assembled
workforce was approximately $0.4 million, which will be subject
to the transition guidelines of SFAS 142 effective January 1,
2002. The Company accounted for this acquisition using the
purchase method of accounting. Thus, the results of operations
from the acquired assets are included in the Company's
consolidated financial statements from the acquisition date.
F-15
WIRE FACILITIES, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 2000 and 2001
(h) Diverse Networks, Inc. ("DNI")
On May 24, 2000, the Company paid $4.0 million in cash to acquire
a 16.67% percent interest in DNI, a private company that provides
network management and data center services. In conjunction with
the acquisition, the Company received a warrant for the rights to
purchase up to a 50% interest in DNI over five years. The warrant
is exercisable after May 24, 2001, or upon the occurrence of a
material event as defined in the warrant agreement. The number of
shares and exercise price for the warrant is dependent upon
revenues earned by contracts and agreements provided to DNI by
the Company. Exercise of the warrant may be effected by cash or
by using a net issue exercise feature. The warrant may be
exercised in total or in part, and is assignable and transferable
prior to any first exercise. This investment has been accounted
for under the equity method of accounting due to the presence of
significant influence that is deemed to exist based on the
material level of existing contracts that WFI holds with DNI.
(i) Davis Bay, LLC
On June 26, 2000, the Company acquired the assets of Davis Bay,
LLC, a Washington State limited liability company, for $3.0
million in cash and approximately 49,000 shares of the Company's
common stock valued at $2.4 million. The acquisition was
accounted for as a purchase. Thus, the results of operations from
the acquired assets are included in the Company's consolidated
financial statements from the acquisition date.
Included in the asset purchase agreement was an earn-out
provision whereby the Company agreed to pay Davis Bay's selling
shareholders' additional consideration contingent on certain
quarterly earnings results from existing and potential future
contracts secured by Davis Bay for the Company and executed
within 18 months of the acquisition date. Earn-out payments, were
paid quarterly over the life of the eligible contracts, in stock.
These payments were capped at $20.0 million. As of December 31,
2000, the Company recorded $9.5 million in additional goodwill as
a result of the earn-out provision consisting of approximately
0.2 million shares of the Company's common stock. The majority of
these shares were issuable in the first quarter of 2001 and were
recorded as a liability as of December 31, 2000. The excess
purchase price paid over the fair value of the tangible and
identifiable intangible assets acquired was recorded as goodwill.
Goodwill of $11.6 million was recognized as of December 31, 2000
related to the transaction, and was being amortized over ten
years.
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. During the second quarter of fiscal 2001, in
connection with the impairment analysis performed, the lives of
the remaining intangibles were evaluated, which resulted in a
reduction of the useful life for goodwill from 10 to 5 years,
pursuant to guidelines of SFAS 121. 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, resulting in a corresponding reduction in goodwill of $3.2
million. On October 17, 2001, 1,638,838 shares of the Company's
common stock were issued to Davis Bay. Acquired identifiable
intangible assets of $1.0 million consisted of an assembled
workforce and purchased technology and were being amortized over
three to five years. As of December 31, 2001, the net book value
of goodwill and acquired identifiable assets related to assembled
workforce were approximately $15.6 million and $0.4 million,
respectively, which will be subject to the transition guidelines
of SFAS 142 effective January 1, 2002.
(j) CommVerge Solutions, Inc.
On July 21, 2000, the Company acquired convertible preferred
stock of CommVerge Solutions, Inc., a privately-held wireless
network planning and deployment company. The investment totaled
$5.0 million in cash and is accounted for using the cost method
of accounting.
F-16
WIRE FACILITIES, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 2000 and 2001
(k) Questus, Ltd.
On August 29, 2000, the Company acquired all of the outstanding
capital stock of Questus, Ltd., a private limited company
incorporated in the United Kingdom. Consideration consisted of
$10.6 million in cash, approximately 0.2 million shares of the
Company's common stock valued at $10.3 million, and promissory
notes to one selling shareholder totaling $1.5 million. Included
in the purchase were Questus' wholly owned subsidiaries, Questus
Scandinavia, A.B., incorporated in Stockholm Sweden, and Questus
GmbH, incorporated in Vienna, Austria. The acquisition was
accounted for as a purchase. Thus, the results of operations from
the acquired assets are included in the Company's consolidated
financial statements from the acquisition date. The excess
purchase price paid over the fair value of tangible and
identifiable intangible assets acquired was recorded as goodwill.
Goodwill of $14.0 million was recognized in the transaction and
was being amortized over ten years. As of December 31, 2001, the
net book value of goodwill was approximately $12.7 million and
will be subject to the transition guidelines of SFAS 142
effective January 1, 2002. Acquired identifiable intangible
assets of $6.8 million consisted primarily of customer
relationships, purchased technology, and trade names and are
being amortized over two to five years.
Under the agreement for the sale and purchase of the entire
issued share capital of Questus Limited, 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 issued an
aggregate of 146,806 shares of its common stock based on this
lower collar adjustment in December 2001.
(l) Telia Contracting AB
On October 12, 2000, the Company acquired all of the outstanding
capital stock of Telia Contracting, AB of Gothenburg, Sweden, a
subsidiary of Telia AB in Sweden. Consideration consisted of $7.8
million in cash. The acquisition was accounted for as a purchase.
Thus, the results of operations from the acquired assets are
included in the Company's consolidated financial statements from
the acquisition date. The excess purchase price paid over the
fair value of tangible and identifiable intangible assets
acquired was recorded as goodwill. Goodwill of $1.8 million was
recognized in the transaction and was being amortized over ten
years. Acquired identifiable intangible assets of $5.5 million
consisted primarily of customer relationships, an assembled
workforce and purchased technology and are being amortized over
two to five years. As of December 31, 2001, the remaining net
book value for goodwill and assembled workforce was $1.6 million
and $0.5 million, respectively, which will be subject to the
transition guidelines of SFAS 142 effective January 1, 2002.
(m) Telia Academy AB
On December 4, 2000, the Company acquired the assets of Telia
Academy AB, a limited liability company organized under the laws
of Sweden. Consideration consisted of $2.2 million in cash. The
acquisition was accounted for as a purchase. Thus, the results of
operations from the acquired assets are included in the Company's
consolidated financial statements from the acquisition date. The
excess purchase price paid over the fair value of tangible and
identifiable intangible assets acquired was recorded as goodwill.
Goodwill of $1.2 million was recognized in the transaction and
was being amortized over seven years. Acquired identifiable
intangible assets of $0.7 million consisted primarily of customer
relationships and an assembled workforce and were being amortized
over one to ten years. During the second quarter of fiscal 2001,
an impairment analysis was performed which resulted in the
write-off of the remaining net book value of goodwill and
acquired identifiable intangible assets of $1.1 million and $0.6
million, respectively, in accordance with SFAS 121.
F-17
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 2000 and 2001
The following summary presents pro forma consolidated results of operations for
the years ended December 31, 1999 and 2000 as if the acquisitions described
above had occurred at the beginning of the year ended December 31, 1999, and
includes adjustments that are directly attributable to the transaction or are
expected to have a continuing impact on the Company. Adjustments to revenues and
cost of revenues are derived from the available financial information by
estimating the monthly operating revenue or expense and pro-rating for the
period of time such operations were excluded from the Company's financial
results for the periods presented.
The pro forma results are for illustrative purposes only, and do not purport to
be indicative of the actual results which would have occurred had the
transactions been completed as of the beginning of the periods, nor are they
indicative of results of operations which may occur in the future (all amounts
except per share amounts are in millions).
1999 2000
------ ------
Pro forma revenue $126.1 $268.9
Pro forma operating income $ 16.4 $ 48.2
Pro forma net income $ 8.7 $ 28.7
Pro forma net income per common share:
Basic $ 0.29 $ 0.68
Diluted $ 0.24 $ 0.57
F-18
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 2000 and 2001
(4) Balance Sheet Details
The consolidated balance sheets consist of the following at December 31,
2000 and 2001 (in millions):
2000 2001
-------- --------
Accounts receivable, net:
Billed $ 75.1 $ 58.4
Unbilled 44.9 46.1
-------- --------
120.0 104.5
Allowance for doubtful accounts (0.9) (16.0)
-------- --------
Total accounts receivable, net $ 119.1 $ 88.5
======== ========
Contract management receivables, net:
Billed $ 6.0 $ 5.8
Unbilled 14.8 2.4
-------- --------
20.8 8.2
Allowance for doubtful accounts -- (2.3)
-------- --------
Total contract management receivables, net $ 20.8 $ 5.9
======== ========
Property and equipment, net:
Computer equipment $ 24.2 $ 29.7
Furniture and office equipment 1.4 3.1
-------- --------
25.6 32.8
Accumulated depreciation and amortization (5.6) (13.8)
-------- --------
Total property and equipment, net $ 20.0 $ 19.0
======== ========
Goodwill, net:
Goodwill $ 71.1 $ 69.0
Accumulated amortization (6.4) (14.6)
-------- --------
Total goodwill, net $ 64.7 $ 54.4
======== ========
Other intangibles, net:
Customer relationships $ 10.2 $ 8.4
Assembled workforce 3.9 3.4
Purchased technology 3.6 3.6
Trade names 1.1 0.5
Noncompete covenants 0.5 0.5
Other 0.8 0.3
-------- --------
20.1 16.7
Accumulated amortization (3.0) (8.1)
-------- --------
Total other intangibles, net $ 17.1 $ 8.6
======== ========
F-19
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 2000 and 2001
(5) Notes payable and other financing arrangements
(a) Credit Agreement
As of December 31, 2001, $33.0 million was outstanding under the
Company's line of credit with a weighted average interest rate of
6.40%. The line of credit expires in February 2004. Loans under this
line of credit bear interest, at the Company's 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 2.50%, the ("base rate
margin"), or (ii) at the London Interbank Offering Rate ("LIBOR") plus
a margin ranging from 1.75% to 3.50%, the ("LIBOR rate margin"). The
line of credit is secured by substantially all of the Company's
assets. The line of credit agreement contains restrictive covenants,
which, among other things, require maintenance of certain financial
ratios. On July 19, 2001, the Company executed an amendment to its
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 fiscal 2001. On
December 31, 2001, the Company executed a second amendment to our line
of credit agreement, which amended certain financial covenants for
2002, reduced the aggregate commitment from $100 million to $80
million and waived the requirement for compliance for two financial
covenants as of December 31, 2001. As such, the Company was in
compliance with all required covenants as of December 31, 2001.
(b) Note Payable to Financial Institutions
In December 1999, the financial institutions who were parties to the
line of credit agreement entered into an intercreditor agreement with
the Company, which provided for the issuance of notes payable not to
exceed $1.0 million, secured by substantially all of the Company's
assets. On February 24, 2000, the Company executed a $1.0 million note
payable under this agreement, payable ratably through February 2005 at
a 9% interest rate. At December 31, 2000 and 2001, the Company had
outstanding borrowings of $0.8 million and $0.6 million, respectively,
under this note payable.
(c) BCI Notes Payable
In January 1999, the Company issued notes payable in consideration for
the BCI acquisition (see Note 3). These notes had a carrying value of
$0.9 million at December 31, 1999. The notes were due in January 2001
and bore interest at 9.62%. These notes were repaid in full during
2000.
(d) Questus Notes Payable
In consideration for the acquisition of Questus (see Note 3), the
Company issued promissory notes to a selling shareholder totaling $1.5
million, secured by a standing letter of credit. These notes bore
interest at LIBOR plus 1% and were due on April 30, 2002. The notes
were repaid in full in 2001.
Maturities of notes payable at December 31, 2001 are as follows (in
millions):
2002 $ 0.2
2003 0.2
2004 0.2
-----
Total $ 0.6
=====
F-20
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 2000 and 2001
(6) Lease Commitments
The Company leases certain equipment under capital leases with interest
rates ranging from 2.5% to 13.9% that expire at various dates through 2005.
The Company also leases certain facilities and equipment under operating
leases having terms expiring at various dates through 2010. Future minimum
lease payments under capital and operating leases as of December 31, 2001
are as follows (in millions):
Capital Operating
leases leases
------- ---------
Year ending December 31,
2002 $ 5.1 $ 4.9
2003 3.5 4.3
2004 0.5 3.7
2005 0.2 3.5
2006 -- 2.4
Thereafter -- 8.2
----- -----
Total minimum lease payments 9.3 $27.0
=====
Less amount representing interest (0.8)
-----
Present value of capital lease obligations 8.5
Less current portion (4.5)
-----
Long-term capital lease obligations $ 4.0
=====
Equipment recorded under capital leases approximated $11.8 million and
$13.9 million, with accumulated amortization of $1.4 and $5.7 million as of
December 31, 2000 and 2001, respectively.
There were no sublease agreements as of December 31, 2001 to offset future
minimum lease payments. Rent expense under operating leases for the years
ended December 31, 1999, 2000, and 2001 was $0.9 million, $3.8 million and
$6.4 million, respectively.
The lease on certain office facilities includes scheduled base rent
increases over the term of the lease. The total amount of the base rent
payments is being charged to expense on the straight-line method over the
term of the lease. In addition to the base rent payment, the Company pays a
monthly allocation of the building's operating expenses. The Company has
recorded deferred rent, included in accrued expenses, of $0.3 million and
$0.5 million at December 31, 2000 and 2001, respectively, to reflect the
excess of rent expense over cash payments since inception of the lease.
During 2001, the Company recorded an accrual for $1.4 million related to an
estimated loss on unused office space which is included in rent expense.
The Company periodically evaluates the adequacy of this accrual and the
related variables and assumptions used to calculate the estimated loss on
unused office space.
F-21
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 2000 and 2001
(7) Income Taxes
Income (loss) before provision (benefit) for income taxes for the years
ended December 31, 1999, 2000, and 2001 is comprised of the following (in
millions):
1999 2000 2001
----- ----- ------
Domestic $10.5 $30.7 $(57.3)
Foreign 6.3 21.4 (17.8)
----- ----- ------
$16.8 $52.1 $(75.1)
===== ===== ======
The provision (benefit) for income taxes for the years ended December 31,
1999, 2000 and 2001 is comprised of the following (in millions):
1999 2000 2001
----- ----- ------
Current:
Federal $ 5.7 $ 1.7 $ 0.6
State 0.8 0.4 0.3
Foreign 2.4 4.1 0.4
----- ----- ------
$ 8.9 $ 6.2 $ 1.3
===== ===== ======
Deferred:
Federal $(1.6) $ 8.5 $(14.9)
State (0.3) 1.5 (1.8)
Foreign 0.2 4.1 0.4
----- ----- ------
(1.7) 14.1 (16.3)
----- ----- ------
$ 7.2 $20.3 $(15.0)
===== ===== ======
A reconciliation of total income tax provision (benefit) to the amount
computed by applying the statutory federal income tax rate of 35% to income
(loss) before income tax provision (benefit) for the years ended December
31, 1999, 2000 and 2001 is as follows (in millions):
1999 2000 2001
---- ------ ------
Income taxes at federal statutory rate $5.9 $18.3 $(26.2)
State taxes, net of federal tax benefit 0.3 1.2 (1.0)
Foreign taxes 0.7 0.5 7.0
Amortization of goodwill and other intangibles 0.3 0.7 1.0
Increase in federal valuation allowance -- -- 3.3
Other, net -- (0.4) 0.9
---- ------ ------
$7.2 $20.3 $(15.0)
==== ===== ======
F-22
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 2000 and 2001
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities as of December 31, 2000
and 2001 are as follows (in millions):
2000 2001
------- ------
Deferred tax assets:
Allowance for doubtful accounts $ 0.3 $ 6.9
Bonus accrual 0.1 --
Vacation accrual 0.8 0.9
Goodwill and other intangibles, principally due to differences in amortization 1.2 6.6
Net operating loss carryforwards 4.4 10.0
Income tax credit carryforwards 4.6 4.6
Other 0.2 0.7
------- ------
11.6 29.7
Valuation allowance (4.1) (12.2)
------- ------
Total deferred tax assets, net 7.5 17.5
------- ------
Deferred tax liabilities:
Adjustment from cash to accrual method of accounting for income taxes (0.8) --
Property and equipment, principally due to differences in depreciation (2.1) (1.6)
Unearned revenue (9.2) (5.1)
Foreign deferred tax liability (4.2) (0.8)
------- ------
Total deferred tax liability (16.3) (7.5)
------- ------
Net deferred tax asset (liability) $ (8.8) $ 10.0
====== ======
At December 31, 2001, the Company had federal tax loss carryforwards of $24.6
million and foreign tax credit carryforwards of $4.1 million, which expire in
2020 and 2004, respectively. The Company has minimum tax credit carryforwards of
$0.5 million, which may be carried forward indefinitely. In addition, the
Company has foreign tax loss carryforwards of $6.4 million and $4.5 million in
the United Kingdom and Sweden, respectively.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. Based upon the level of historical taxable income
and projections for future taxable income, management believes it is more likely
than not the Company will realize the deferred tax assets, net of the
valuation allowance, as of December 31, 2001. The Company has recorded a
valuation allowance of $12.2 million as of December 31, 2001 to reflect the
estimated amount of deferred tax assets that may not be realized. A valuation
allowance of $4.2 million was recorded due to the expiration of foreign tax
credit carryforwards after consideration of stock option deductions available
for tax return purposes. A valuation allowance of $4.2 million was recorded for
certain federal and state deferred tax assets related to intangibles and tax
loss carryforwards not expected to be realized, and a valuation allowance of
$3.8 million was recorded for foreign tax loss carryforwards not expected to be
realized.
It is the Company's intention to reinvest undistributed earnings of its foreign
subsidiaries and thereby indefinitely postpone their remittance. Accordingly, no
provision has been made for foreign withholding taxes or United States income
taxes which may become payable if undistributed earnings of foreign subsidiaries
were paid as dividends to the Company.
F-23
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 2000 and 2001
(8) Stockholders' Equity
(a) Common Stock
In November 1999, the Company completed an initial public offering of
4.6 million shares of common stock. Prior to the initial public
offering, there was no public market for the Company's Common Stock.
The net proceeds of the offering, after deducting applicable
underwriting discounts and offering expenses, were approximately $61.9
million.
(b) Preferred Stock
On August 8, 1998, the Company issued 1.7 million shares of Series A
Convertible Preferred Stock in a private placement for $21.0 million.
Upon closing of the Company's initial public offering, all outstanding
shares of Series A Preferred Stock were converted into 5.1 million
shares of Common Stock.
In February 1999, the Board of Directors authorized the issuance of up
to 2.8 million shares of par value $0.01 Series B Preferred Stock.
Shortly thereafter, the Company sold 2.7 million Series B Convertible
Preferred Stock for $15.0 million, or $5.50 per share. Upon closing of
the Company's initial public offering, all outstanding shares of
Series B Preferred Stock were converted into 2.7 million shares of
Common Stock.
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. Upon any Liquidation Event (such as a sale
of the Company), each outstanding share of Series A Convertible
Preferred Stock is entitled to receive $550.00 per share as a
liquidation preference, ahead of any amounts paid to holders of Common
Stock. 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, and the net proceeds after the deduction of related
issuance costs was $34.9 million.
(c) Treasury Stock
On August 5, 1998, the Company purchased 3.3 million shares of Common
Stock for $13.5 million. During 1999, the Company purchased an
additional approximate 21,000 shares of Common Stock for $0.2 million.
The treasury stock was retired during 1999.
(d) Common Stock Warrants
In February 1997, the Company issued warrants to purchase 0.3 million
shares of Common Stock at an exercise price of $0.93 per share to two
Company directors. One-third of these warrants vested at the date of
issuance and then annually for the following two years. In February
1998, the Company issued warrants to purchase 1.2 million shares of
Common Stock at an exercise price of $1.58 per share to two Company
directors. One-third of these warrants vested at the date of issuance,
and then annually for the following two years. At December 31, 2000, a
total of 0.9 million warrants were outstanding . At December 31, 2001,
no warrants remained outstanding as all 0.9 million warrants were
exercised during 2001.
F-24
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 2000 and 2001
In connection with the acquisition of BCI in January 1999, the Company
issued 0.2 million common stock warrants exercisable at $4.16 per
share. These warrants vested 25% on June 1, 1999, December 1, 1999,
June 1, 2000, and December 1, 2000 and expire one year after their
respective vesting date. In June 2000, these warrants were exchanged
for new warrants with the same economic terms other than the addition
of a net exercise provision. During 2000, the outstanding warrants
related to the BCI acquisition were partially exercised using the net
exercise provision contained in the warrants, and the remaining 0.1
million warrants were exercised by reducing the outstanding balance of
the note payable related to the acquisition. No warrants were
outstanding as of December 31, 2001.
(e) Stock Option Plans and Employee Stock Purchase Plan
Stock Option Plans
During the years ended 1997, 1999 and 2000, the Board of Directors
approved the 1997 Stock Option Plan (the "1997 Plan"), the 1999 Equity
Incentive Plan (the "1999 Plan") and the 2000 Non-statutory Stock
Option Plan (the "2000 Plan"), respectively. Stock options granted
under the 1997 Plan and 1999 Plan may be incentive stock options or
non-statutory stock options and are exercisable for up to ten years
following the date of grant. The Company ceased making grants under
the 1997 Plan upon completion of its initial public offering. The 2000
Plan permits the grant of non-statutory stock options, which are
exercisable for a period following the date of grant as determined by
the Board of Directors, generally ten years. Stock option exercise
prices for the 1997 Plan, 1999 Plan and 2000 Plan must be equal to or
greater than the fair market value of the common stock on the grant
date. A total of 7.5 million, 12.1 million, and 3.0 million shares of
common stock have been authorized for issuance under the 1997 Plan,
1999 Plan and 2000 Plan, respectively.
In accordance with the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company applies APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related
interpretations in accounting for its 1997 Plan, 1999 Plan and 2000
Plan. Accordingly, the Company recorded compensation expense totaling
$0.1 million, for the year ended December 31, 1999, reflecting the
intrinsic value of options granted in 1999. All options granted in
2000 and 2001 were at or above fair market value on the date of grant.
During 2001, the Company's Board of Directors approved a voluntary
stock option cancel and regrant program for employees. The program
provided employees with the opportunity to cancel all of their
existing and outstanding stock options granted to them on or after
September 30, 2000 and before March 30, 2001, and some or all of their
existing and outstanding stock options granted to them prior to
September 30, 2000, in exchange for a new option grant for an equal
number of shares to be granted at a future date. The new options were
to be issued no earlier than six months and one day after the
cancellation date of March 30, 2001, and the exercise price of the new
options was to be based on the trading price of the Company's Common
Stock on the date of the new option grants. Under the program,
participating employees could select their regrant date to be October
1, 2001, October 22, 2001 or November 12, 2001. A total of 5,221,577,
10,852 and 16,415, options were regranted with exercise prices of
$4.47, $6.12 and $5.35 on October 1, 2001, October 22, 2001 and
November 12, 2001, respectively. The exchange program was designed to
comply with FASB Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation."
F-25
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 2000 and 2001
Stock option transactions are summarized below:
Weighted Weighted Weighted
average average average
exercise exercise exercise
1997 Plan price 1999 Plan price 2000 Plan price
---------- --------- ---------- --------- --------- --------
Outstanding at December
31, 1998 3,573,648 $ 2.26 192,487 $ 47.44 -- $ --
Granted 4,288,890 9.74 -- -- -- --
Exercised (305,312) 1.88 -- -- -- --
Cancelled (781,879) 5.03 -- -- -- --
---------- ---------- ---------
Outstanding at December
31, 1999 6,775,347 6.74 192,487 47.44 -- --
Granted -- -- 5,977,752 52.81 1,725,419 45.00
Exercised (2,357,930) 4.03 (274) 32.75 -- --
Cancelled (663,765) 11.51 (551,954) 54.70 (21,589) 48.90
---------- ---------- ---------
Outstanding at December
31, 2000 3,753,652 7.64 5,618,011 52.44 1,703,830 44.95
Granted -- -- 6,668,374 4.66 2,117,353 8.00
Exercised (567,309) 3.91 (103,337) 4.66 (28,328) 4.40
Canceled (632,474) 11.37 (5,312,862) 45.75 (1,985,459) 38.91
---------- ---------- ---------
Outstanding at
December 31, 2001 2,553,869 $ 7.55 6,870,186 $ 11.90 1,807,396 $10.49
========== ========== =========
Balance exercisable at
December 31, 2001 1,579,094 $ 6.76 2,094,513 $ 13.13 431,112 $12.11
========== ========== =========
F-26
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 2000, and 2001
The following table summarizes information as of December 31, 2001 concerning
options outstanding and exercisable:
Options outstanding Options exercisable
------------------------------------------------ -----------------------------
Weighted Weighted Weighted Weighted
Range of Number average average number average
exercise prices outstanding remaining life exercise price exercisable exercise price
- -------------------- ----------- -------------- -------------- ----------- --------------
$ 1.33 - 3.69 1,885,227 8.34 $ 3.24 729,477 $ 2.52
4.00 - 4.16 652,038 7.22 4.14 268,830 4.16
4.29 - 4.47 4,818,166 9.60 4.47 1,641,738 4.47
5.06 - 8.50 1,709,448 8.53 6.80 626,124 7.63
10.00 - 56.25 1,610,618 8.15 27.11 656,093 25.50
57.00 - 109.38 540,950 8.69 59.99 175,165 60.66
132.06 - 132.06 15,004 8.21 132.06 7,292 132.06
----------- ---------
11,231,451 8.83 $ 10.69 4,104,719 $ 10.57
========== =========
Employee Stock Purchase Plan
In August 1999, the Board of Directors approved the 1999 Employee Stock Purchase
Plan (the "Purchase Plan"). A total of 1.5 million shares of common stock have
been authorized for issuance under the Purchase Plan. The Purchase Plan is
intended to qualify as an employee stock purchase plan within the meaning of
Section 423 of the Internal Revenue Service Code. The Purchase Plan commenced in
November 1999 upon completion of the Company's initial public offering.
Unless otherwise determined by the board, all employees are eligible to
participate in the Purchase Plan so long as they are employed by the Company (or
a subsidiary designated by the board) for at least 20 hours per week and are
customarily employed by the Company (or a subsidiary designated by the board)
for at least 5 months per calendar year.
Employees who participate in an offering may have up to 15% of their earnings
for the period of that offering withheld pursuant to the Purchase Plan. The
amount withheld is used at various purchase dates within the offering period to
purchase shares of Common Stock. The price paid for Common Stock at each such
purchase date will equal the lower of 85% of the fair market value of the Common
Stock at the commencement date of that offering period or 85% of the fair market
value of the Common Stock on the relevant purchase date. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment. From the Purchase
Plan's inception through December 31, 2001, the cumulative number of shares of
Common Stock that have been issued under the Purchase Plan is 0.5 million.
Accounting for Stock-Based Compensation
Under SFAS No. 123, the weighted average fair value of stock options granted
during 1999, 2000, and 2001 was $7.83, $42.21, and $4.59 respectively, on the
date of grant. The weighted average estimated fair values of shares granted
under the Purchase Plan during 2000 and 2001 was $10.80 and $5.91, respectively.
There were no grants under the Purchase Plan in fiscal 1999. Fair value under
SFAS No. 123 is determined using the Black-Scholes option-pricing model with the
following assumptions:
1999 2000 2001
------- --------- --------
Expected term:
Stock options 5 years 5 years 3 years
Purchase plan -- 11 months 6 months
Interest rate 5.75% 6.16% 4.55%
Volatility 81% 123% 150%
Dividends -- -- --
F-27
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 2000, and 2001
Had compensation expense been recognized for stock-based compensation plans in
accordance with SFAS No. 123, the Company would have recorded the following net
income (loss) and net income (loss) per share amounts (in millions, except per
share amounts):
1999 2000 2001
----- ----- ------
Net income (loss) $9.6 $31.8 $(60.1)
SFAS No. 123 stock-based compensation expense 4.6 29.2 14.9
----- ----- ------
Pro forma net income (loss) $5.0 $ 2.6 $(75.0)
==== ===== ======
Pro forma income (loss) per common share:
Basic $0.17 $ 0.06 $(1.63)
Diluted $0.14 $ 0.05 $(1.63)
(9) Employee Benefit Plan
In 1996, the Company implemented a savings plan pursuant to Section 401(k)
of the Internal Revenue Code (the "Code"), covering substantially all
employees. Participants in the plan may contribute a percentage of
compensation, but not in excess of the maximum allowed under the Code. The
Company may make contributions at the discretion of its Board of Directors.
The Company made no contributions in 1999, 2000 or 2001.
(10) Significant Customers
The Company had sales to three separate customers which comprised 14%, 11%
and 10% of the Company's total revenues for the year ended December 31,
1999. At December 31, 1999, accounts receivable from these customers
totaled $1.6 million, $3.3 million, and $2.8 million, respectively.
The Company had sales to one customer who comprised 22% of the Company's
total revenues for the year ended December 31, 2000. At December 31, 2000,
accounts receivable from this customer totaled $8.9 million.
The Company had sales to three separate customers which comprised 11%, 11%
and 10% of the Company's total revenues for the year ended December 31,
2001. At December 31, 2001, accounts receivable from these customers
totaled $3.1 million, $7.3 million and $26.9 million, respectively.
(11) Segment Information
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes annual and interim reporting standards for an
enterprise's operating segments and related disclosures about its products,
services, geographic areas and major customers. An operating segment is
defined as a component of an enterprise that engages in business activities
from which it may earn revenues and incur expenses, and about which
separate financial information is regularly evaluated by the chief
operating decision maker in deciding how to allocate resources.
Prior to the year ended 1999, the Company provided only design and
deployment service. In 1999, the Company added network maintenance and
business consulting services. Due to the nature of these services, the
amount of capital assets
F-28
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 2000, and 2001
used in providing services to customers is minor. Revenue and operating
income (loss) provided by the Company's segments for the years ended
December 31, 1999, 2000, and 2001 are as follows (in millions):
1999 2000 2001
------- -------- ---------
Revenues:
Design and deployment $ 86.9 $ 205.6 $ 159.5
Network management 4.5 42.7 40.4
Business consulting 1.3 7.6 7.3
------- -------- ---------
Total revenues $ 92.7 $ 255.9 $ 207.2
======= ======== ========
Operating income (loss):
Design and deployment $ 16.2 $ 38.9 $ (59.1)
Network management 1.1 10.7 (11.2)
Business consulting 0.3 2.4 (1.2)
------- -------- ---------
Total operating income (loss) $ 17.6 $ 52.0 $ (71.5)
======= ======== ========
Revenues generated by geographic segment for the years ended December 31,
1999, 2000, and 2001 are as follows (in millions):
1999 2000 2001
------- -------- --------
United States $ 61.1 $ 183.7 $ 141.6
EMEA -- 18.0 22.5
Latin America 31.6 54.2 43.1
------- -------- --------
Total revenues $ 92.7 $ 255.9 $ 207.2
======= ======== ========
Long-lived assets by geographic region for the years ended December 31,
1999, 2000 and 2001, which include property and equipment, goodwill, and
other intangibles, are as follows (in millions):
1999 2000 2001
------- -------- -------
United States $ 12.3 $ 71.5 $ 58.2
EMEA -- 29.2 21.9
Latin America 0.3 1.1 1.9
------- -------- -------
Total long-lived assets $ 12.6 $ 101.8 $ 82.0
======= ======== =======
(12) Related Party Transactions
In August 1998, the Company paid a dividend to its stockholders. In
connection with the dividend payment, the Company issued promissory notes
for a total of $5.5 million to two executives and one related stockholder.
The notes carried interest at 5% per annum and were repaid in November
1999.
In August 1998, the Company sold 1.7 million shares of Series A convertible
preferred stock to various investors at a purchase price of $12.48 per
share, of which 1.4 million were sold to entities affiliated with a
director of the Company. These shares were converted into common stock upon
closing of the Company's initial public offering.
In February 1999, the Company sold 2.7 million shares of Series B
convertible preferred stock to various investors at a purchase price of
$5.50 per share, of which 2.3 million were sold to entities affiliated with
a director of the Company. In addition, 0.4 million shares were sold to
entities which combined, held greater than 5% of the Company's capital
stock. These shares were converted into common stock upon closing of the
Company's initial public offering.
In June 1999, the Company sold its 25% ownership interest in Sierra Towers
Investment Group, LLC ("Sierra") and a note receivable from Sierra to two
officers of the Company in exchange for cash and a note payable to the
Company. The note was paid in full in September 2000.
F-29
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 2000, and 2001
During 1999, the Company advanced $0.5 million to the General Manager of
WFI de Mexico. The general manager is the brother of both the Chairman and
the Chief Executive Officer of the Company. The advance was repaid in March
2002.
In January 2000, the Company acquired a portion of the minority ownership
interest in WFI de Mexico from the General Manager of WFI de Mexico. The
acquisition was made under the terms of a Restricted Stock Agreement,
pursuant to which the Company issued shares of common stock valued at $18.2
million in exchange for the shares held by the General Manager.
In October 2001, the Company issued an aggregate of 63,637 shares of Series
A Convertible Preferred Stock, valued at $35.0 million, in a private
placement to entities affiliated with a director of the Company. 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. Upon any
Liquidation Event (such as a sale of the Company), each outstanding share
of Series A Convertible Preferred Stock is entitled to receive $550.00 per
share as a liquidation preference, ahead of any amounts paid to holders of
Common Stock.
During 2000 and 2001, two subsidiaries of the Company, WFI de Mexico and
Wireless Facilities Latin America Ltda., entered into certain transactions
with JFR Business Corporation International S. de R.L. de C.V. and JFR de
Brasil Ltda. (collectively, JFR). The General Manager of WFI de Mexico and
Wireless Facilities Latin America Ltda. is the brother of both the Chairman
and the Chief Executive Officer of the Company and holds a majority
ownership interest in JFR. The primary business purpose for WFI de Mexico
and Wireless Facilities Latin America Ltda. transacting business with JFR
relates to obtaining superior service and response compared to independent
businesses providing such services, at market or less than market rates.
Commencing in March 2002, all transactions between JFR and WFI de Mexico
and JFR and Wireless Facilities Latin America Ltda. must be approved by the
Company's Chief Financial Officer and General Counsel, after a competitive
bidding process.
During 2000 and 2001, WFI de Mexico contracted with JFR for automobile
leasing, computer leasing, and as a sub-contractor for certain of its
customer contracts. During the years ended December 31, 2000 and 2001, WFI
de Mexico paid JFR approximately $3.6 million and $2.7 million,
respectively, for all services rendered under these contracts. As of
December 31, 2000 and 2001, WFI de Mexico owed JFR $0 and approximately
$2.2 million, respectively. Also during 2001, JFR contracted with WFI de
Mexico for subcontractor services for certain of its customer contracts.
The Company believes that the amounts paid or payable under these contracts
are comparable to amounts that the Company could have negotiated under
contracts with unaffiliated third parties for such services.
During 2001, Wireless Facilities Latin America Ltda. has transacted
business with JFR as a subcontractor providing services in connection with
certain customer contracts. During the year ended December 31, 2001,
Wireless Facilities Latin America Ltda. paid JFR approximately $0.1 million
for all services rendered under these contracts. Also during 2001, JFR
contracted with Wireless Facilities Latin America Ltda. for subcontractor
engineering services for certain of its customer contracts. As of December
31, 2001, Wireless Facilities Latin America Ltda. has a trade receivable
balance from JFR for approximately $0.3 million related to such services.
The Company believes that the amounts payable and receivable under these
contracts are comparable to amounts that the Company could have negotiated
under contracts with unaffiliated third parties for such services.
At December 31, 2001, except as noted above, there are no other commitments
or guarantees between JFR and the Company.
F-30
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 2000, and 2001
(13) Legal Matters
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 similar lawsuits
filed against hundreds of other initial public offering issuers and their
underwriters in the Southern District Court 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 October 2000, the Company was notified that Norm Korey, a former
employee who was terminated, asserted that he is owed certain commissions
and stock options and severance pay from the Company. The Company was
served with a formal arbitration demand relating to the matter in January
2001. In August 2001, the arbitration concluded with an award of $316,700
in favor of Norm Korey, representing severance pay, commissions and expense
reimbursement. The outcome of this proceeding did not have a materially
adverse effect on the Company.
On July 25, 2000, the Company filed a complaint for Declaratory Relief in
the Superior Court of the State of California for the County of San Diego,
against Dr. Rahim Tafazolli, a former employee/consultant who received an
unregistered certificate purportedly representing 45,000 shares of the
Company's common stock. The complaint sought a declaration that the subject
certificate is invalid due to the forfeiture provisions of the employee
benefit plan and due to Dr. Tafazolli's failure to perform the agreed
services. On November 21, 2000, Dr. Tafazolli filed a cross-complaint
seeking money damages and a declaration that he is entitled to receive an
unrestricted WFI stock certificate for 45,000 shares. On July 2001, the
Company entered into a settlement agreement with Dr. Tafazolli agreeing to
issue Dr. Tafazolli 15,000 unrestricted shares. Massih Tayebi, the
Company's Chairman, and Masood K. Tayebi, the Company's Chief Executive
Officer, each agreed to transfer to us one-half of the shares due to Dr.
Tafazolli under the settlement agreement. As a result, the Company has had
no net increase in the number of outstanding shares of its common stock and
no impact on its financial statements for the year ended December 31, 2001.
Advanced Radio Telecom Corp. ("ART"), which initiated Chapter 11 bankruptcy
proceedings in 2001, has filed an action with the bankruptcy court against
the Company to recover alleged preference payments in the amount of
$737,529. The Company filed an answer contesting the allegations in this
matter and intends to vigorously defend against this matter. In a related
matter, ART has filed a partial objection to the Company's proof of claim.
The Company has retained counsel and is currently prosecuting the full
value of its claim.
Metricom, Inc., which initiated Chapter 11 bankruptcy proceedings in 2001,
has filed an action with the bankruptcy court against the Company to
recover alleged preference payments in the amount of $1,416,240. The
Company intends to vigorously defend against this matter.
In addition to the foregoing matters, from time to time, the Company 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 the Company's business.
F-31
WIRELESS FACILITIES, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 2000 and 2001
(14) Quarterly Financial Data (Unaudited)
The following financial information reflects all normal and recurring
adjustments that are, in the opinion of management, necessary for a fair
statement of the results of the interim periods. Summarized quarterly data
for the years ended December 31, 1999, 2000 and 2001, is as follows (in
millions, except per share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Fiscal year 1999:
- ----------------
Revenues $ 15.0 $ 18.1 $ 23.8 $ 35.8
Gross profit 5.8 6.3 10.7 15.6
Operating income 2.6 2.8 $ 5.6 $ 6.6
Net income $ 1.6 $ 1.0 $ 2.8 $ 4.2
======= ======= -====== =======
Net income per common share:
Basic $ 0.06 $ 0.04 $ 0.10 $ 0.12
Diluted $ 0.05 $ 0.03 $ 0.08 $ 0.10
Fiscal year 2000:
- ----------------
Revenues $ 43.3 $ 59.4 $ 73.1 $ 80.1
Gross profit 18.0 26.4 32.3 39.1
Operating income 9.3 12.8 14.0 15.9
Net income $ 5.8 $ 7.9 $ 9.0 $ 9.1
======= ======= ======= =======
Net income per common share:
Basic $ 0.14 $ 0.19 $ 0.21 $ 0.21
Diluted $ 0.12 $ 0.16 $ 0.17 $ 0.18
Fiscal year 2001:
- ----------------
Revenues $ 52.7 $ 54.7 $ 54.8 $ 45.0
Gross profit 13.6 22.2 17.8 12.6
Operating loss (22.1) (36.5) (3.7) (9.2)
Net loss $ (8.5) $ (38.3) $ (2.9) $ (10.4)
======= ======= ======= =======
Net loss per common share - basic and diluted $ (0.19) $ (0.83) $ (0.06) $ (0.22)
F-32
WIRELESS FACILITIES, INC.
Schedule II: Valuation and Qualifying Accounts
(in millions)
Years Ended December 31, 1999, 2000 and 2001
- ---------------------------------------------------------------------------------------------------------------------
Balance at Balance at End
Allowance for Doubtful Accounts Beginning of Year Provisions Write-offs of Year
-------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1999 $0.6 $ 0.4 $0.1 $ 0.9
- ---------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2000 $0.9 $ 0.1 $0.1 $ 0.9
- ---------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2001 $0.9 $21.3 $3.9 $18.3
- ---------------------------------------------------------------------------------------------------------------------
See accompanying independent auditor's report.
S-1