<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
-
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30,
-------------
1999
----
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
Commission file number 0-27231
---------------
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.)
9805 Scranton Road, Suite 100
San Diego, CA 92121
(858) 824-2929
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
______________________________________________
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 ______
No X . (The Registrant has been subject to the filing requirements of
---
Section 13(a) and 15(d) less than 90 days since the Registrant's
Registration Statement on Form 8-A was declared effective by the Commission
on November 4, 1999.)
As of November 30, 1999, there were 39,642,510 shares of the Registrant's
$0.001 par value Common Stock outstanding.
<PAGE>
WIRELESS FACILITIES, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
<S> <C>
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 1998, September 30, 1999 (unaudited) and September 30, 1999
Pro forma (unaudited).................................................................................. 1
Consolidated Statements of Operations for the Three Months and the Nine Months
Ended September 30, 1998 and 1999 (unaudited).......................................................... 2
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1999
(unaudited).......................................................................................... 3
Notes to Consolidated Financial Statements.............................................................. 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................................... 10
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.......................................................... 11
Item 6. Exhibits and Reports on Form 8-K................................................................... 11
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WIRELESS FACILITIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30,
December 31, September 30, 1999
1998 1999 Pro Forma
-------------- ------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Assets
Cash................................................................ $ 2,866 $ 4,447 $ 65,082
Billed accounts receivable, net..................................... 5,518 28,100 28,100
Unbilled accounts receivable........................................ 18,651 12,209 12,209
Contract management receivables..................................... 24,156 6,745 6,745
Other current assets................................................ 365 2,548 2,248
-------- -------- --------
Total current assets............................................. 51,556 54,049 114,384
Property and equipment, net......................................... 981 2,582 2,582
Goodwill, net....................................................... 6,899 7,477 7,477
Other assets, net................................................... 816 744 744
-------- -------- --------
Total assets..................................................... $ 60,252 $ 64,852 $125,187
======== ======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.................................................. $ 10,263 $ 584 $ 584
Accrued expenses.................................................. 4,884 3,642 3,342
Contract management payables...................................... 9,339 4,174 4,174
Billings in excess of costs and profits........................... 82 1,968 1,968
Line of credit.................................................... 3,000 7,000 7,000
Officers Notes Payable............................................ 3,825 0 0
Subordinated stockholder notes payable............................ 5,500 5,500 5,500
Notes payable, current portion.................................... 1,574 2,535 0
Income taxes payable.............................................. 4,017 2,283 2,283
Deferred income tax liability..................................... 1,333 694 694
-------- -------- --------
Total current liabilities....................................... 43,817 28,380 25,545
Long-term liabilities-notes payable, net of current portion......... 2,119 868 868
-------- -------- --------
Total liabilities............................................... 45,936 29,248 26,413
-------- -------- --------
Minority interest................................................... 0 370 370
Stockholders' equity:
Convertible preferred stock-Series A, $0.01 par value, 1,682,692
Shares authorized; 1,682,692 shares issued and outstanding at
December 31, 1998 and September 30, 1999 (unaudited) and none
pro forma (unaudited)............................................. 17 17 0
Convertible preferred stock-Series B, $0.01 par value, 2,800,000
Shares authorized; no shares and 2,727,273 shares issued and
Outstanding at December 31, 1998 and September 30, 1999
(unaudited) and none pro forma (unaudited)........................ 0 27 0
Common stock, $0.01 par value, 50,000,000 shares authorized;
27,045,810 and 27,252,820 shares issued and outstanding at
December 31, 1998 and September 30, 1999 (unaudited) and $0.001
par value, 150,000,000 shares authorized and 39,628,169
outstanding pro forma (unaudited)................................. 303 305 40
Additional paid-in capital.......................................... 25,959 41,530 91,317
Retained earnings................................................... 1,565 7,000 7,000
Treasury stock at cost; 3,252,390 and 3,273,172 shares at December
31, 1998 and September 30, 1999 (unaudited) and none pro forma
(unaudited)....................................................... (13,530) (13,692) 0
Accumulated other comprehensive income.............................. 2 47 47
-------- -------- --------
Total stockholders' equity.................................... 14,316 35,234 98,404
-------- -------- --------
Total liabilities and stockholders' equity.................... $ 60,252 $ 64,852 $125,187
======== ======== ========
</TABLE>
1
<PAGE>
WIRELESS FACILITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
1998 1999 1998 1999
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues..................................................... $14,008 $23,833 $35,619 $56,938
Cost of revenues............................................. 8,021 13,102 18,600 34,126
--------- --------- --------- ---------
Gross profit............................................... 5,987 10,731 17,019 22,812
Selling, general and administrative expenses................. 3,510 4,835 7,974 10,827
Amortization of goodwill..................................... 389 326 648 972
--------- --------- --------- ---------
Operating income........................................... 2,088 5,570 8,397 11,013
Net other expense............................................ (153) (261) (299) (888)
--------- --------- --------- ---------
Income before taxes and minority interest.............. 1,935 5,309 8,098 10,125
Minority interest............................................ 0 (370) 0 (370)
--------- --------- --------- ---------
Income before taxes.................................... 1,935 4,939 8,098 9,755
Provision for income taxes................................... (3,383) (2,141) (3,443) (4,321)
--------- --------- --------- ---------
Net (loss) income...................................... $(1,448) $ 2,798 $ 4,655 $ 5,434
========= ========= ========= =========
Earnings per share data:
Net income per common share:
Basic...................................................... $ (0.05) $ 0.10 $ 0.16 $ 0.20
Diluted.................................................... $ (0.05) $ 0.08 $ 0.15 $ 0.17
Weighted-average common shares outstanding:
Basic...................................................... 27,918 27,248 28,904 27,167
Diluted.................................................... 31,314 33,478 31,661 32,464
Pro forma "income tax" information (unaudited):
Income before taxes........................................ $ 1,935 $ 4,939 $ 8,098 $ 9,755
Pro forma provision for income taxes....................... (848) (2,141) (3,550) (4,321)
--------- --------- --------- ---------
Pro forma net income....................................... $ 1,087 $ 2,798 $ 4,548 $ 5,434
========= ========= ========= =========
Pro forma "Preferred Conversion" net income per common share:
Basic...................................................... $ 0.03 $ 0.08 $ 0.15 $ 0.16
Diluted.................................................... $ 0.03 $ 0.07 $ 0.14 $ 0.14
Pro forma weighted-average common shares outstanding:
Basic...................................................... 31,111 35,308 30,172 34,651
Diluted.................................................... 34,507 41,538 32,929 39,948
Pro forma "Initial Public Offering" net income per common
share:
Basic...................................................... $ 0.03 $ 0.07 $ 0.15 $ 0.14
Diluted.................................................... $ 0.03 $ 0.06 $ 0.14 $ 0.12
Pro forma weighted-average common shares outstanding:
Basic...................................................... 31,111 39,908 30,172 39,251
Diluted.................................................... 34,507 46,138 32,929 44,548
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
WIRELESS FACILITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Nine months Nine months
ended ended
September 30, September 30,
1998 1999
------------- -------------
<S> <C> <C>
Net cash used in operating activities.................................... $ (6,533) $(8,184)
Investing activities:
Capital expenditures.................................................. (766) (2,442)
Cash paid for acquisitions, net of cash acquired...................... (3,218) (1,742)
Cash paid for investments............................................. (543) (63)
Distributions from investments........................................ 0 56
---------- ------------
Net cash used in investing activities................................. (4,527) (4,191)
---------- ------------
Financing activities:
Proceeds from issuance of preferred stock............................. 21,000 15,000
Proceeds from issuance of common stock................................ 820 396
Stockholder distributions............................................. (3,098) 0
Purchase of treasury stock............................................ (13,568) (161)
Net borrowings (repayment) under line of credit....................... 2,000 4,000
Net borrowings (repayment) to/from officers........................... 400 (3,825)
Repayment of acquisition notes payable................................ (1,009) (1,499)
---------- ------------
Net cash provided by financing activities............................. 6,545 13,911
---------- ----------
Effect of exchange rates on cash......................................... 0 45
---------- ----------
Net (decrease) increase in cash.......................................... (4,515) 1,581
Cash at beginning of period.............................................. 836 2,866
---------- ----------
Cash at end of period.................................................... $ (3,679) $ 4,447
========== ==========
Noncash transactions:
Issuance of notes payable for stockholder distributions................ $ 5,500 --
Issuance of notes for acquisition...................................... $ 5,206 $ 827
Receipt of note for sale of investment................................. -- $ 199
Supplemental disclosure of cash flow information:
Cash paid during the period for interest............................... $ 180 $ 696
Cash paid during the period for income taxes........................... $ 246 $ 7,244
See accompanying notes to consolidated financial statements.
</TABLE>
3
<PAGE>
WIRELESS FACILITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) Organization and Summary of Significant Accounting Policies
(a) Description of Business
Wireless Facilities, Inc. (WFI) was formed in the state of New York on
December 19, 1994, began operations in March 1995 and was reincorporated on
August 30, 1998, in Delaware. WFI provides a full suite of outsourcing services
to wireless carriers and equipment vendors, including the design, deployment and
management of client networks.
(b) Basis of Presentation
The information as of September 30, 1999, and for the three and nine month
periods ended September 30, 1998 and 1999 is unaudited. In the opinion of
management, these consolidated financial statements include all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
the results of operations for the interim periods presented. Interim operating
results are not necessarily indicative of operating results expected in
subsequent periods or for the year as a whole. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements and the related notes included in the Company's Registration
Statement filed on Form S-1 with the Securities and Exchange Commission on
November 4, 1999.
The consolidated financial statements include the accounts of WFI and its
majority-owned subsidiaries. During 1998, WFI acquired a wholly owned subsidiary
(Entel Technologies, Inc.), formed a subsidiary under WFI's control in Mexico
(WFI de Mexico), and formed a wholly owned subsidiary in Brazil (Wireless
Facilities Latin America Ltda). In January 1999, WFI acquired wholly-owned
subsidiary, B. Communication International, Inc. In June 1999, WFI acquired
wholly-owned subsidiary C.R.D. Inc. WFI and its subsidiaries are collectively
referred to herein as the ``Company.'' All intercompany transactions have been
eliminated in consolidation. Affiliated companies (20% to 50% owned with no
controlling interest) are accounted for on the equity method. Investments
accounted for on the cost basis include companies in which the Company owns less
than 20% and for which the Company has no significant influence.
(c) Pro forma Consolidated Statement of Operations Information and 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.
Through August 6, 1998, Wireless Facilities, Inc. was an S corporation
whereby income taxes were the individual responsibility of the stockholders. On
August 7, 1998, in conjunction with the private placement and sale of Series A
preferred stock, the Company elected to be taxed as a C corporation under the
internal revenue tax code. As a result, the Company recorded a net deferred tax
liability of $2,082,000 on August 7, 1998.
The pro forma "income tax" information (unaudited) for the three and nine
months ended September 30, 1998 presented in the consolidated statements of
operations have been provided to give pro forma effect to net income assuming
the Company was taxed as a C corporation as of the beginning of the periods
presented. No pro forma effect is reported for the three and nine months ended
September 30, 1999 as the Company accounted for income taxes as a C corporation
for the entire periods presented.
(d) Preferred Conversion, Initial Public Offering and Earnings per Share Pro
Forma Information
On November 9, 1999, subsequent to the interim financial information
presented herein, the Company completed an initial public offering of common
stock. In conjunction with the closing of that offering, the Company issued and
sold all 4,600,000 shares of common stock (including an underwriter's over-
allotment) covered by the Company's Registration Statement on Form S-1. Such
shares were sold by the Company at $15.00 per share less an underwriting
discount of $1.05 per share. The offering proceeds (net of underwriters'
discounts) of $64,170,000 were partially used to pay off approximately $2.5
million of short term debt. Upon the closing of the offering on November 9,
1999, all convertible preferred stock then outstanding automatically converted
into shares of common stock. Each share of Series A preferred stock converted
into 3 shares of common stock and each share of Series B preferred stock
converted into one share of common stock. Approximately $1.0 million in expenses
relating to the offering are estimated which will be recorded against the
proceeds in equity in conjunction with this transaction.
These transactions, which occurred after September 30, 1999, are presented
in the September 30, 1999 pro forma consolidated balance sheet (unaudited).
4
<PAGE>
Details of the earnings per share reported are as follows:
The calculation of the pro forma "Preferred Conversion" weighted average
shares reflects the conversion of preferred stock and the assumed issuance of
284,456 shares of common stock to replace capital withdrawn in excess of
earnings. (All information is presented in thousands.)
<TABLE>
<CAPTION>
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
1998 1999 1998 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Pro forma preferred conversion basic income
per share:
Pro forma net income $ 1,087 $ 2,798 $ 4,548 $ 5,434
=========== =========== ========== ==========
Weighted average shares 27,918 27,248 28,904 27,167
Pro forma preferred conversion adjustments:
Assumed conversion of preferred stock 2,909 7,776 984 7,200
Assumed issuance of shares to replace
capital withdrawn in excess of earnings 284 284 284 284
---------- ---------- ---------- ----------
31,111 35,308 30,172 34,651
=========== ========== ========== ===========
Pro forma preferred conversion basic net
income per share $ 0.03 $ 0.08 $ 0.15 $ 0.16
=========== ========== ========== ===========
Pro forma preferred conversion diluted
income per share:
Adjustments to pro forma preferred
conversion basic weighted average shares 31,111 35,308 30,172 34,651
Effect of outstanding options 2,839 5,242 2,352 4,371
Effect of outstanding warrants 557 988 405 926
---------- ---------- ---------- ----------
Total diluted weighted average shares 34,507 41,538 32,929 39,948
=========== ========== ========== ===========
Pro forma preferred conversion diluted net
income per share $ 0.03 $ 0.07 $ 0.14 $ 0.14
=========== ========== ========== ===========
</TABLE>
The calculation of the pro forma "Initial Public Offering" weighted average
shares reflects the preferred stock conversion as well as the issuance of
4,600,000 shares of common stock as of September 30, 1999. (All information is
presented in thousands.)
<TABLE>
<CAPTION>
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
1998 1999 1998 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Pro forma initial public offering basic
income per share:
Pro forma net income $ 1,087 $ 2,798 $ 4,548 $ 5,434
=========== ========== ========== ==========
Pro forma preferred conversion basic 31,111 35,308 30,172 34,651
weighted average shares
Pro forma adjustments:
Assumed issuance of shares during the IPO as 0 4,600 0 4,600
of 9/30/99.
----------- ---------- ---------- ----------
31,111 39,908 30,172 39,251
=========== ========== ========== ==========
Pro forma initial public offering basic net $ 0.03 $ 0.07 $ 0.15 $ 0.14
income per share
=========== ========== ========== ==========
Pro forma initial public offering diluted
income per share:
Adjustments to pro forma initial public 31,111 39,908 30,172 39,251
offering basic weighted average shares:
Effect of outstanding options................ 2,839 5,242 2,352 4,371
Effect of outstanding warrants............... 557 988 405 926
---------- ---------- ---------- ----------
Total diluted weighted average shares........ 34,507 46,138 32,929 44,548
=========== ========== ========== ==========
Pro forma diluted net income per share....... $ 0.03 $ 0.06 $ 0.14 $ 0.12
=========== ========== ========== ==========
</TABLE>
5
<PAGE>
WIRELESS FACILITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(e) Common Stock Split and Authorized Capital
On February 22, 1999, the Company effected a 3-for-1 stock split of the
Company's common stock. All per share and shares outstanding data in the
Consolidated Financial Statements and Notes to the Consolidated Financial
Statements have been retroactively restated to reflect this stock split.
On February 25, 1999, the Company filed a Restated Certificate of
Incorporation. Among other things, the restated certificate increased the shares
of authorized common stock from 45,000,000 to 50,000,000 shares (post-split),
and decreased authorized preferred stock from 5,000,000 to 4,482,692 shares.
On November 10, 1999 in connection with the Company's initial public
offering, the Company filed a Restated Certificate of Incorporation. Among other
things, the restated certificate increased the shares of authorized common stock
from 50,000,000 shares to 195,000,000 and authorized preferred stock (post
preferred conversion) to 5,000,000. In addition, the restated certificate
changed the par value of all stock from $0.01 to $0.001 per share. The effect of
this change in par value is reflected in the Company's Consolidated Balance
Sheet at September 30, 1999 pro forma (unaudited).
(f) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(g) Reclassifications
Certain prior period amounts have been reclassified to conform with the
current period presentation.
(2) Segment Information
Through September 30, 1999, all of the Company's business activities are
aggregated into one reportable segment given the similarities of economic
characteristics between the activities and the common nature of the Company's
services and customers. Revenues derived by geographic segment are as follows
(in thousands):
<TABLE>
<CAPTION>
Three months Three months Nine months Nine months
ended ended ended ended
September 30, 1998 September 30, 1999 September 30, 1998 September 30, 1999
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S........................ $14,008 $17,709 $35,619 $39,787
Foreign.................... $ 0 $ 6,124 $ 0 $17,151
</TABLE>
6
<PAGE>
Item 2. 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 of such terms or other comparable
terminology. These statements are only predictions. Actual events or results may
differ materially.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person 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 this Form 10-Q to conform such statements
to actual results or to changes in our expectations.
The following discussion should be read in conjunction with our financial
statements and the related notes and other financial information appearing
elsewhere in this Form 10-Q. Readers are also urged to carefully review and
consider the various disclosures made by us which attempt to advise interested
parties of the factors which affect our business, including without limitation
the disclosures made under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations", under the caption "Risk
Factors", and the audited financial statements and related footnotes included in
the Company's final prospectus filed with the Securities and Exchange Commission
on November 5, 1999 (No. 333-85515).
Overview
Wireless Facilities, Inc. (the "Company") offers network business
consulting, network planning, design and deployment services for the wireless
telecommunications industry. For the nine months ended September 30, 1998 and
September 30, 1999, we increased both the number of our contracts as well as the
scope of our services. In the nine-months ended September 30, 1999, we entered
into our first contracts for network planning. We expect to generate increased
revenue from our network management services as we cross-sell to our existing
customers and make this service available to new customers.
Revenues on network planning, design and deployment contracts are
recognized using the percentage-of-completion method. Under the percentage-of-
completion method, expenses on each project are recognized as incurred, and
revenues are recognized based on a comparison of the current costs incurred for
the project to date, compared to the then estimated total costs of the project
from start to completion. Accordingly, revenue recognized in a given period
depends on the costs incurred on each individual project and the current
estimate of the total costs to complete a project, determined at that time. As a
result, gross margins for any single project may fluctuate from period to
period. For network planning, design and deployment contracts offered on a time
and expense basis, we recognize revenues as services are performed. We typically
charge a fixed monthly fee for ongoing radio frequency optimization and network
operations and maintenance services. With respect to these services, we
recognize revenue as services are performed.
Cost of revenues includes direct compensation and benefits, living and
travel expenses, payments to third-party sub-contractors, allocation of
overhead, costs of expendable computer software and equipment, and other direct
project-related expenses.
Selling, general and administrative expenses include compensation and
benefits, computer software and equipment, facilities expenses and other
expenses not related directly to projects. Our sales personnel have, as part of
their compensation package, incentives based on their productivity. We are
currently installing a new financial management and accounting software program
to better accommodate our growth. We expect to incur expenses related to the
licensing of the software package and related personnel costs associated with
its installations testing and implementation. We may incur expenses related to
a given project in advance of the project beginning 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.
In August 1998, we converted from an S corporation to a C corporation.
Prior to becoming a C corporation, our stockholders were taxed individually for
their share of our profits or losses. In 1998, we incurred a one-time charge of
$2.1 million to establish a deferred income tax liability upon our change from
an S corporation to a C corporation. The remaining tax provision for the period
ended September 30, 1999 is attributable to federal and state income taxes at
the standard statutory C corporation rates for operations from August 7, 1998 to
September 30, 1999.
On November 9, 1999, subsequent to the interim financial information
presented herein, we completed an initial public offering of common stock. In
conjunction with the closing of that offering, the Company issued 4,600,000
shares of common stock (including an underwriter's over-allotment) for proceeds
(after underwriter discounts) of $64,170,000 in cash, which was partially used
to payoff approximately $2.5 million of short term debt. In connection with the
offering, all convertible preferred stock then outstanding automatically
converted into shares of common stock. Each share of Series A preferred stock
converted into 3 shares of common stock and each share of Series B preferred
stock converted into one share of common stock. The historical financial
information discussed below does not take into consideration these transactions
which occurred after September 30, 1999.
Results of Operations
Revenues. Revenues increased 70% from $14.0 million for the three months
ended September 30, 1998 to $23.8 million for the three months ended September
30, 1999. The $9.8 million increase was primarily attributable to the addition
of new contracts.
Revenues for the nine months ended September 30, 1999 increased 60% from
the nine months ended September 30, 1998. The $21.3 million increase was
primarily attributable to the addition of new contracts, offset by a reduction
in revenue of $5.0 million from the effects of revised cost estimates related to
two fixed-price contracts. The addition of new service offerings, including site
7
<PAGE>
development and fixed network engineering, contributed $10.1 million to the new
contract revenues.
Cost of Revenues. Cost of revenues increased 64% from $8.0 million for the
three months ended September 30, 1998 to $13.1 million for the three months
ended September 30, 1999, primarily due to increased staffing in support of new
contracts. Gross margin was 45% of revenues for the three months ended September
30, 1999 compared to 43% for the three months ended September 30, 1998. Gross
margin for the three months ended September 30, 1999 increased due to the
addition of new higher margin contracts.
Cost of revenues increased 83% from $18.6 million for the nine months ended
September 30, 1998 to $34.1 million for the nine months ended September 30,
1999, primarily due to increased staffing in support of new contracts. Gross
margin was 40% of revenues for the nine months ended September 30, 1999 compared
to 48% for the nine months ended September 30, 1998. Gross margin for the nine
months ended September 30, 1999 was reduced primarily due to a reduction in
revenue of $5.0 million from the effects of revised cost estimates related to
two fixed-price contracts.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, including amortization of goodwill, increased 32% from
$3.9 million for the three months ended September 30, 1998 to $5.2 million for
the three months ended September 30, 1999. The increase was attributable to an
increase in executive, administrative, sales and marketing personnel costs, as
well as increases in purchases of expendable tools and systems in support of our
growth. As a percentage of revenues, selling, general and administrative
expenses decreased from 28% for the three months ended September 30, 1998 to 22%
for the three months ended September 30, 1999 reflecting consolidation
efficiencies following the Entel acquisition in February, 1998.
Selling, general and administrative expenses, including amortization of
goodwill, increased 37% from $8.6 million for the nine months ended September
30, 1998 to $11.8 million for the nine months ended September 30, 1999. The
increase was primarily attributable to increases in executive, administrative,
sales and marketing personnel costs, as well as increases in purchases of
expendable tools and systems in support of our growth. As a percentage of
revenues, selling, general and administrative expenses decreased from 24% for
the nine months ended September 30, 1998 to 21% for the nine months ended
September 30, 1999, reflecting consolidation efficiencies following the Entel
acquisition.
Net Other Income (Expense). For the three months ended September 30, 1999,
other expenses were $0.3 million as compared to $0.2 million for the three
months ended September 30, 1998. This increase was attributable to increased
interest expense and to foreign currency translation losses related to our
Brazilian subsidiary.
For the nine months ended September 30, 1999, other expenses were $0.9
million as compared to $0.3 million for the nine months ended September 30,
1998. This increase was attributable to increased interest expense, foreign
currency translation losses related to our Brazilian subsidiary, and the
minority interest in our Mexican subsidiary.
Net Income. Net income for the three months ended September 30, 1999 was
$2.8 million, as compared to a net loss of $1.4 million for the three months
ended September 30, 1998. The $4.2 million increase was primarily due to revenue
and margin increases on new contracts offset in part by an increase in selling,
general and administrative expenses. In addition, in 1998, we incurred a one-
time charge of $2.1 million to establish a deferred income tax liability upon
our change from an S corporation to a C corporation.
Net income for the nine months ended September 30, 1999 was $5.4 million,
as compared to $4.7 million for the nine months ended September 30, 1998. The
15% increase in net income was primarily due to revenue increases on new
contracts and the recording of the tax liability associated with our change from
an S corporation to a C corporation in 1998.
Liquidity and Capital Resources
As of December 2, 1999, the latest date which information was available, we
had cash and cash equivalents totaling approximately $68.7 million. Of this,
proceeds from the Company's initial public offering totaling approximately $64.0
million were invested in short-term investment grade securities.
As of December 2, 1999, the Company had approximately $6 million
outstanding on a $20 million line of credit.
Future capital requirements will depend upon many factors, including the
timing of payments under contracts and our increase in personnel in advance of
new contracts.
Cash provided by and used in operations is primarily derived from our
contracts in process and changes in working capital. Cash used in operations was
$8.2 million for the nine months ended September 30, 1999 and $6.5 million for
the nine months ended September 30, 1998. While cash from contracts increased
due to increased collection efforts, cash paid out for income taxes increased as
we converted from an S corporation to a C corporation in August of 1998.
Cash used in investing activities was $4.2 million for the nine months
ended September 30, 1999, and $4.5 million for the nine months ended September
30, 1998. Investing activities for the nine months ended September 30, 1998
consist primarily of acquisitions, including the acquisition of Entel in
February, 1998 for $3.5 million in cash and $5.2 million paid pursuant to
promissory notes, as well as capital expenditures to support the Company's
growth. Investing activities for the nine months ended September 30, 1999
consist primarily of $1.7 million paid for the acquisitions of BCI and CRD in
February and June 1999, respectively, and $2.4 million in fixed assets and
equipment used in operations.
Cash provided by financing activities for the nine months ended September
30, 1999 was $13.9 million which was primarily derived from the proceeds from
sales of preferred stock totaling $15.0 million, partially offset by net
repayments on borrowings totaling $1.3 million. Cash provided by financing
activities for the nine months ended September 30, 1998 was $6.5 million which
primarily consisted of proceeds from sales of preferred stock totaling $21.0
million. Proceeds from the sale of preferred stock were used to repurchase stock
from major stockholders for approximately $13.5 million. Net borrowings totaled
$2.0 million, and S corporation stockholder distributions totaled $3 million for
the period.
8
<PAGE>
We have no material commitments other than obligations under our credit
facilities, operating and capital leases. Our future capital requirements will
depend upon many factors, including the timing of payments under contracts and
our increase in personnel in advance of new contracts.
On November 9, 1999, subsequent to the interim financial information
presented herein, we completed an initial public offering of common stock. In
conjunction with the closing of that offering, we issued 4,600,000 shares of
common stock for approximately $64.0 million in cash (net of commissions), which
was partially used to payoff approximately $2.5 million of short term debt. The
remaining amounts are invested in short-term investment grade securities.
Year 2000 Readiness Disclosure
Many computers, software, and other equipment include computer code in
which calendar year data is abbreviated to only two digits. As a result of these
design decisions, some of these systems could fail to operate or fail to produce
correct results if ''00'' is interpreted to mean 1900, rather than 2000. These
problems are widely expected to increase in frequency and severity as the year
2000 approaches, and are commonly referred to as the ''Year 2000 Problem.''
Assessment of Internal Infrastructure. The Year 2000 Problem affects the
computers, software and other related equipment that we use, operate or maintain
for our operations. We have established a team, led by Integrated Ventures, LLC,
our information services provider, responsible for monitoring the assessment and
remediation status of our Year 2000 projects and reporting the status of these
projects to the Audit Committee of our Board of Directors. We have contacted the
vendors of the products that we use for our internal systems in order to gauge
their year 2000 compliance. All of our vendors have provided us written
assurances that they believe that the third-party hardware and software we use
are year 2000 compliant. We have not independently verified these
representations. We have, however, been testing our systems to independently
verify year 2000 compliance and we expect to complete such testing in the fourth
quarter of this year. We cannot be sure that such tests will fully ensure year
2000 compliance of our internal systems. For this and other reasons, we may
experience unanticipated negative consequences, including material costs, caused
by undetected errors or defects in the technology used in our internal
information technology systems.
As of December 2, 1999, we had completed testing over 85% of our hardware
and computer network infrastructure for year 2000 compliance. The actual costs
associated with our year 2000 compliance testing is estimated to be less than
$25,000 to set up a network test environment and pay the fees charged by our
information services provider related to conducting the tests.
In addition to computers and related systems, the operation of office and
facilities equipment, such as fax machines, telephone switches, security systems
and other common devices may be affected by the year 2000 problem. We are
currently assessing the potential effect and costs of remediating the year 2000
problem on our office equipment and our facilities.
We believe that the risk to our business of not being year 2000 compliant
resides principally in the areas of billing and communications. Failure to be
fully year 2000 compliant could affect our information and accounting systems,
resulting in delayed or inaccurate customer billing, and associated payment
delays. In addition, failure to be fully year 2000 compliant could disrupt or
disable our internal and external communications systems. We do not believe,
however, that these problems would materially affect our ability to continue to
provide services to our customers.
Costs of Remediation. We do not know if the total cost of completing any
required modifications, upgrades or replacements of our internal systems would
be material. Based on the activities described above, we do not believe that the
Year 2000 Problem will materially interfere with our ability to continue to
provide services to our customers or result in material additional costs related
to our own year 2000 compliance. However, we cannot be certain that the Year
2000 Problem will not harm our business or operating results. In addition,
because we have warranted in some of our contracts that our deliverables will be
year 2000 compliant, failure to meet this compliance could result in termination
of the relevant contracts or even liability for our customers' related damages.
We have not deferred any material information technology projects, nor equipment
purchases, as a result of our Year 2000 Problem activities.
Customers. We have not inquired into the year 2000 compliance efforts or
status of our customers. Our customers' deployment plans could be affected by
year 2000 issues if they need to expend significant resources to fix their
existing systems. This situation could divert funds and resources otherwise
available for outsourced network services and could harm our business. In
addition, some customers may wait to deploy networks until after the year 2000,
which may reduce our revenues in the near future. Any termination, change,
reduction or delay in our projects for key customers could seriously harm our
business. Additionally, if our customers are not year 2000 compliant by December
31, 1999, they may face difficulties with their account payment systems, which
could result in delayed payments to us.
Contingency Plan. We have no specific contingency plan to address the
effect of year 2000 noncompliance. If, in the future, it comes to our attention
that certain of our third-party hardware and software are not year 2000
compliant, then we will seek to make modifications. We cannot be sure that we
will be able to modify our systems to comply with year 2000 requirements, and
failure to make such modifications in a timely and successful manner could harm
our business.
Disclaimer. The discussion of our efforts and expectations relating to Year
2000 compliance are forward-looking statements. Our ability to achieve Year 2000
compliance, and the level of incremental costs associated therewith, could be
adversely affected by, among other things, the availability and cost of contract
personnel and external resources, third-party vendors' ability to modify
proprietary software, and unanticipated problems not identified in the ongoing
compliance review.
9
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to foreign currency risks due to both transaction
and translation between a functional and reporting currency. The Company
currently does not hedge any of these risks because (1) cash flows from foreign
operations in Mexico are generally reinvested locally, (2) foreign operations in
Brazil are minimal and (3) we do not believe that to do so is justified by the
current exposure or the cost at this time. The Company is exposed to the impact
of foreign currency fluctuations due to the operations of and intercompany
transactions with its consolidated subsidiaries in Mexico and Brazil. While
these intercompany balances are eliminated in consolidation, exchange rate
changes do affect consolidated earnings. At September 30, 1999 there were $1.6
million and $0.9 million owing to the Company from its Mexican and Brazilian
subsidiaries, respectively. These intercompany receivables are denominated in US
dollars. The potential foreign currency translation losses from a hypothetical
10 percent adverse change in the exchange rates from these intercompany balances
are $160,000 and $90,000 from Mexico and Brazil, respectively. In addition, we
estimate that a 10% change in foreign exchange rates would impact reported
operating profit for the three and nine months ended September 30, 1999 by
$485,000 and $425,000. This was estimated using a 10% deterioration factor to
the average monthly exchange rates applied to net income or loss for each of the
subsidiaries in the respective period. Operations with and by foreign
subsidiaries was insignificant at September 30, 1998.
As of December 2, 1999, the latest date for which detailed information was
available, we had cash or cash equivalents of approximately $68.7 million. Of
this cash, $64 million is invested in interest-bearing investment grade
securities, primarily short-term, highly liquid investments with maturities at
the date of purchase of less than 90 days. We have the ability to hold these
investments until maturity, and therefore we do not expect the value of these
investments to be affected to any significant degree by the effect of a sudden
change in market interest rates. The Company does not utilize derivative
financial instruments, derivative commodity instruments or other market risk
sensitive instruments, positions or transactions in any material fashion.
Accordingly, management believes that, while the investment-grade securities the
Company holds are subject to changes in the financial standing of the issuer of
such securities, it is not subject to any material risks arising from changes in
interest rates, foreign currency exchange rates, commodity prices, equity prices
or other market changes that affect market risk sensitive instruments.
10
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(a). Changes in Certificate of Incorporation
---------------------------------------
Prior to the effectiveness of the Company's initial public offering on November
4, 1999, the Company filed a Restated Certificate of Incorporation to increase
the total number of authorized shares of the Company's stock, and to adopt
certain stockholder protection measures. Upon the consummation of the Company's
initial public offering on November 9, 1999, all the then outstanding Series A
preferred stock and Series B preferred stock automatically converted into Common
Stock. Following such conversion, the Company filed a further Restated
Certificate of Incorporation that reflects the deletion of provisions relating
to those series of preferred stock.
(b). Use of Proceeds from Sales of Registered Securities
---------------------------------------------------
On November 9, 1999, the Company completed an initial public offering of its
Common Stock, $0.001 par value per share. The managing underwriters in the
offering were Credit Suisse First Boston, Hambrecht & Quist and Thomas Weisel
Partners LLC. The shares of Common Stock sold offering were registered under
the Securities Act of 1933, as amended, on a Registration Statement on Form S-1
(Reg. No. 333-85515) ("the "Registration Statement") that was declared effective
by the Commission on November 4, 1999. All 4,600,000 shares of Common Stock
registered under the Registration Statement, including shares covered by an
overallotment option, were sold at a price to the public of $15.00 per share.
The offering resulted in gross proceeds of $69,000,000, of which $4,830,000 was
applied toward commissions to the underwriters. Expenses related to the
offering are estimated to be $1,000,000. After deducting underwriting
commissions, the Company received net proceeds of approximately $64,170,000. As
of November 30, 1999, the Company has used the net proceeds from the offering to
(i) repay $2,535,210 of short-term debt and (ii) invest in interest-bearing,
investment grade securities. The offering proceeds will be used for working
capital and general corporate purposes. In addition, the Company may use a
portion of the net proceeds to acquire businesses; however, the Company
currently has no commitments or agreements and is not involved in any material
negotiations to do so. None of the net proceeds of the offering were paid
directly or indirectly to any director or officer of the Company or their
associates, persons owning ten percent (10%) or more of any class of equity
securities of the Company, or an affiliate of the Company.
Item 6. Exhibits and Reports on Form 8-K:
(a). Exhibits:
--------
27 Financial Data Schedule
(b). Reports on Form 8-K:
--------------------
None.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WIRELESS FACILITIES, INC.
<TABLE>
<CAPTION>
<S> <C> <C>
Date: December 15, 1999 By: /s/ MASSIH TAYEBI
Massih Tayebi
Chief Executive Officer
By: /s/ THOMAS A. MUNRO
Thomas A. Munro
Chief Financial Officer
</TABLE>
12
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Document
27 Financial Data Schedule
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S QUARTERLY REPORT ON
FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,447
<SECURITIES> 0
<RECEIVABLES> 47,759
<ALLOWANCES> 705
<INVENTORY> 0
<CURRENT-ASSETS> 54,049
<PP&E> 4,512
<DEPRECIATION> 1,930
<TOTAL-ASSETS> 64,852
<CURRENT-LIABILITIES> 28,380
<BONDS> 0
0
44
<COMMON> 305
<OTHER-SE> 34,885
<TOTAL-LIABILITY-AND-EQUITY> 64,852
<SALES> 56,938
<TOTAL-REVENUES> 56,938
<CGS> 34,126
<TOTAL-COSTS> 34,126
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 323
<INTEREST-EXPENSE> 720
<INCOME-PRETAX> 9,755
<INCOME-TAX> 4,321
<INCOME-CONTINUING> 5,434
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,434
<EPS-BASIC> 0.20
<EPS-DILUTED> 0.17
</TABLE>
