<PAGE>
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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 JUNE 30, 2000
[_] 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)
<TABLE>
<S> <C>
Delaware 13-3818604
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
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 [X] No [_]
As of July 31, 2000 there were 42,225,935 shares of the Registrant's $0.001
par value Common Stock outstanding.
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<PAGE>
WIRELESS FACILITIES, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
Page
No.
----
<C> <S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements............................................. 3
Consolidated Balance Sheets - December 31, 1999 and June 30, 2000 3
(unaudited).....................................................
Consolidated Statements of Operations for the Three Months Ended 4
June 30, 1999 and 2000 and for the Six Months Ended June 30,
1999 and 2000 (unaudited).......................................
Consolidated Statements of Cash Flows for the Six Months Ended 5
June 30, 1999 and 2000 (unaudited)..............................
Notes to Consolidated Financial Statements (unaudited)........... 6
Item 2. Management's Discussion and Analysis of Financial Condition and 11
Results of Operations...........................................
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 16
Item 2. Changes in Securities and Use of Proceeds........................ 17
Item 4. Submission of Matters to a Vote of Security Holders.............. 18
Item 6. Exhibits and Reports on Form 8-K................................. 18
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
WIRELESS FACILITIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ -----------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................... $ 34,322 $ 37,129
Investments in marketable securities................ 37,965 11,980
Billed accounts receivable, net..................... 23,033 36,434
Unbilled accounts receivable........................ 9,600 32,365
Contract management receivables..................... 13,993 11,937
Inventory........................................... -- 2,468
Other current assets................................ 3,200 8,319
-------- --------
Total current assets............................... 122,113 140,632
Property and equipment, net........................... 5,069 10,896
Goodwill, net......................................... 7,098 40,584
Other intangibles, net................................ 374 6,769
Investments........................................... 100 4,198
Other assets.......................................... 238 3,548
-------- --------
Total assets.......................................... $134,992 $206,627
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.................................... $ 5,428 $ 6,213
Accrued expenses.................................... 5,961 9,849
Contract management payables........................ 8,258 5,747
Billings in excess of costs......................... 5,170 9,514
Current portion of note payable..................... -- 159
Line of credit...................................... -- 13,641
Current portion of capital lease obligations........ 137 1,089
Income taxes payable................................ 5,641 955
Deferred income tax liability....................... -- 8,365
-------- --------
Total current liabilities.......................... 30,595 55,532
Notes payable, net of current portion................. 909 --
Capital lease obligations, net of current portion..... 1,652 4,091
Other long-term liabilities........................... 59 59
-------- --------
Total liabilities..................................... 33,215 59,682
-------- --------
Minority interest..................................... 338 138
-------- --------
Stockholders' equity:
Common stock, $0.001 par value, 195,000,000 shares
authorized; 39,705,590 and 41,796,389 shares issued
and outstanding at December 31, 1999 and June 30,
2000 (unaudited), respectively..................... 40 42
Additional paid-in capital.......................... 90,245 122,354
Note receivable from stockholder.................... -- (95)
Retained earnings................................... 11,171 24,878
Accumulated other comprehensive loss................ (17) (372)
-------- --------
Total stockholders' equity......................... 101,439 146,807
-------- --------
Total liabilities and stockholders' equity............ $134,992 $206,627
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
WIRELESS FACILITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
1999 2000 1999 2000
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Revenues....................... $18,078 $59,435 $33,106 $102,768
Cost of revenues............... 11,649 33,056 21,024 58,386
------- ------- ------- --------
Gross profit................. 6,429 26,379 12,082 44,382
Selling, general and
administrative expenses....... 3,242 11,690 5,561 19,323
Depreciation and amortization.. 300 1,893 1,077 3,006
------- ------- ------- --------
Operating income............. 2,887 12,796 5,444 22,053
Net other (expense) income..... (228) 459 (627) 1,010
------- ------- ------- --------
Income before taxes and
minority interest......... 2,659 13,255 4,817 23,063
Minority interest.............. -- 67 -- 131
------- ------- ------- --------
Income before taxes........ 2,659 13,188 4,817 22,932
Provision for income taxes..... 1,610 5,302 2,181 9,225
------- ------- ------- --------
Net income................. $ 1,049 $ 7,886 $ 2,636 $ 13,707
======= ======= ======= ========
Earnings per share data:
Net income per common share:
Basic...................... $ 0.04 $ 0.19 $ 0.10 $ 0.34
Diluted.................... $ 0.03 $ 0.16 $ 0.08 $ 0.28
Weighted-average common
shares outstanding:
Basic...................... 27,175 41,348 27,126 40,913
Diluted.................... 32,935 50,073 32,365 49,479
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
WIRELESS FACILITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six months Six months
ended ended
June 30, June 30,
1999 2000
---------- ----------
<S> <C> <C>
Net cash used in operating activities.................... $ (3,241) $(17,797)
Investing activities:
Capital expenditures................................... (1,266) (986)
Cash paid for acquisitions, net........................ (1,742) (18,089)
Cash paid for investments.............................. (63) (4,000)
Proceeds from sales of investments .................... 55 25,985
-------- --------
Net cash used in/(provided by) investing activities.. (3,016) 2,910
-------- --------
Financing activities:
Proceeds from issuance of preferred stock.............. 15,000 --
Proceeds from issuance of common stock................. 353 4,967
Purchase of treasury stock............................. (127) --
Net borrowings (repayment) under line of credit ....... (3,000) 13,641
Net borrowings (repayment) to/from officers............ (3,825) --
Repayment of capital lease obligations................. -- (311)
Repayment of acquisition notes payable................. (994) (250)
-------- --------
Net cash provided by financing activities............ 7,407 18,047
-------- --------
Effect of exchange rates on cash......................... 11 (353)
-------- --------
Net increase in cash and cash equivalents................ 1,161 2,807
Cash and cash equivalents at beginning of period......... 2,866 34,322
-------- --------
Cash and cash equivalents at end of period............... $ 4,027 $ 37,129
======== ========
Noncash transactions:
Issuance of stock for acquisitions..................... -- $ 26,549
Property and equipment acquired under capital lease.... -- $ 3,702
Reduction of note payable in lieu of consideration for
exercise of warrants.................................. -- $ 500
Issuance of stock under a cashless exercise of
warrants.............................................. -- $ 231
Note receivable issued for stock option exercise....... -- $ 95
Issuance of notes payable for acquisition.............. $ 827 --
Receipt of note for sale of investment................. $ 200 --
Supplemental disclosure of cash flow information:
Cash paid during the period for interest............... $ 692 $ 380
Cash paid during the period for income taxes........... $ 6,631 $ 6,706
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<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 in
Delaware in August of 1998. 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 June 30, 2000, and for the three months ended June
30, 1999 and 2000 is unaudited, as is information for the six months ended
June 30, 2000. 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 annual consolidated financial statements for
the fiscal year ended December 31, 1999, filed on Form 10-K with the
Securities and Exchange Commission.
The consolidated financial statements include the accounts of WFI and its
wholly-owned and majority-owned subsidiaries. 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 November 1999, WFI
formed a wholly-owned subsidiary WFI International, Ltd. based in London,
England, which began operations in April of this year. 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
June 2000, the Company formed a wholly-owned subsidiary WFI-UK, Ltd., based in
London, England, to act as a holding company. In May 2000, the Company
acquired a 16.67% interest in the operations of Diverse Networks, Inc.
("DNI"), which will be accounted for using the equity method of accounting.
WFI and its subsidiaries are collectively referred to herein as the "Company."
All intercompany transactions have been eliminated in consolidation.
Investments accounted for using the cost method include companies in which the
Company owns less than 20% and for which the Company has no significant
influence. Investments accounted for using the equity method include companies
in which the Company owns more than 20% but less than 50%, or for which the
Company is considered to have significant influence.
(c) Use of Estimates
The preparation of financial statements in conformity with 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.
(d) Reclassifications
Certain prior period amounts have been reclassified to conform with the
current period presentation.
(2) Recent Events
On January 11, 2000, the Company acquired The Walter Group ("TWG"), a
Washington corporation and a privately-held provider of management consulting
and network development services to the wireless
6
<PAGE>
WIRELESS FACILITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
communications market. Consideration consisted of $5.5 million in cash and
stock valued at $4.1 million. The excess purchase price paid over the fair
value of tangible and identifiable intangible assets acquired was recorded as
goodwill. Goodwill of approximately $7.7 million was recognized in the
transaction and is being amortized over 10 years. Results from operations for
the six months ended June 30, 2000 include amortization expense of
approximately $385,000 related to the goodwill recorded from this acquisition.
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.
On January 21, 2000, the Company acquired 6% of the existing 8% minority
ownership interest in its majority-owned subsidiary, WFI de Mexico, from the
General Manager of that subsidiary. The purchase was made under terms of a
Restricted Stock Agreement, by which the Company issued shares of stock valued
at $18.2 million. The acquisition price was recorded first to reduce the
General Manager's minority interest, with the excess of approximately $17.9
million recorded as goodwill, which is being amortized over 20 years. The
General Manager is the brother of both the President and the Chief Executive
Officer of the Company. Results from operations for the six months ended June
30, 2000 include amortization expense of approximately $448,000 related to
this acquisition. The Company accounted for this acquisition using the
purchase method of accounting. Thus, results of operations from this
acquisition are included in the Company's consolidated financial statements
from the acquisition date.
On March 13, 2000, the Company acquired the assets of a network operations
center and business segment from Ericsson Inc., for $6.35 million in cash. The
center is located in Dallas, Texas. The excess purchase price paid over the
fair value of the tangible and identifiable intangible assets acquired was
recorded as goodwill. Goodwill of $1.0 million was recognized in the
transaction and is being amortized over seven years. 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. Results from
operations for the six months ended June 30, 2000 include amortization expense
of approximately $35,000 related to goodwill for this acquisition.
On April 25, 2000, the Company acquired the assets of Comcor Advisory
Services ("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 stock valued at $1.8 million to
Comcor shareholders for the acquisition, which the Company accounted for using
the purchase method of accounting. Thus, the 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 the tangible and identifiable intangible assets acquired was
recorded as goodwill. Goodwill of $6.5 million was recognized in the
transaction, and is being amortized over ten years. Results from operations
for the six months ended June 30, 2000 include amortization expense of
approximately $109,000 related to goodwill for this acquisition.
On May 24, 2000, the Company paid $4 million to acquire a 16.67% percent
interest in Diverse Networks, Inc. ("DNI"), a private company that provides
network management and data center services. In conjunction with the
acquisition, the Company paid $100 for 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 may be effected by cash or by using a net issue exercise
feature. The warrant may be exercised in total or in part, is assignable and
transferable prior to any first exercise. The Company holds a position on
DNI's Board of Directors and has entered into other contracts with DNI, and is
therefore considered to have significant influence. This investment will be
accounted for under the equity method of accounting. The Company's share of
DNI's net income for the period ending June 30, 2000 was not material.
7
<PAGE>
WIRELESS FACILITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
On June 26, 2000, the Company acquired the assets of Davis Bay, Inc., a
Washington State limited liability company, for approximately $3 million in
cash and stock. Of the total purchase price, approximately $2.4 million was
paid in stock and issued to the selling shareholders, and is currently held in
escrow. Of the escrowed consideration, 6,164 shares are for general indemnity
provisions in the asset agreement and will be released two years after the
acquisition date. The remaining 43,149 shares are escrowed for specific
indemnity provisions and will be released over the next year as the specific
provisions are fulfilled. Included in the asset purchase agreement is an earn-
out provision whereby the Company agrees to pay Davis Bay's selling
shareholders' additional consideration based on quarterly earnings from
potential future contracts secured by Davis Bay for the Company and executed
within 18 months of the acquisition date. Earn-out payments will be paid
quarterly over the life of the eligible contracts, will be paid in stock, and
are capped at $20 million. The acquisition was accounted for as a purchase.
Thus, the 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 the tangible and
identifiable intangible assets acquired was recorded as goodwill. Goodwill of
$1.0 million was recognized in the transaction, and will be amortized over 10
years from the acquisition date. No amortization expense was included in
results from operations for the six months ended June 30, 2000 due to the
timing of the acquisition.
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 million and will be accounted
for using the cost method of accounting.
The following summary presents pro forma consolidated results of operations
as if the asset acquisitions described above had occurred at the beginning of
the six months ended June 30, 1999 and June 30, 2000. Adjustments to revenues
and cost of revenues are taken from the available financial information by
prorating the estimated monthly operating revenue or expense for the period of
time such operations were excluded from the Company's financial results for
the periods presented. The pro forma combined results include the effects of
the purchase price allocation on depreciation of property, plant and equipment
and amortization of intangible assets and adjustments to reflect the reversal
of interest income resulting from the use of cash related to the acquisitions.
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 transaction been completed as of the beginning of the periods, nor are
they indicative of results of operations which may occur in the future.
<TABLE>
<CAPTION>
Six months Six months
ended ended
June 30, June 30,
1999 2000
---------- ----------
<S> <C> <C>
Pro forma revenue......................................... $43,022 $105,834
Pro forma operating income................................ $ 5,064 $ 22,248
Pro forma net income...................................... $ 2,427 $ 13,669
Pro forma net income per common share:
Basic................................................... $ 0.09 $ 0.33
Diluted................................................. $ 0.07 $ 0.28
</TABLE>
8
<PAGE>
WIRELESS FACILITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(3) Net Income Per Common Share
The Company calculates net income per share in accordance with SFAS No.
128, Earnings Per Share. Under SFAS No. 128, basic net income per common share
is calculated by dividing net income by the weighted-average number of common
shares outstanding during the reporting period. Diluted net income per common
share reflects the effects of potentially dilutive securities. Weighted
average shares used to compute net income per share are presented below (in
thousands):
<TABLE>
<CAPTION>
Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
1999 2000 1999 2000
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Weighted-average shares,
basic........................ 27,175 41,348 27,126 40,913
Dilutive effect of stock
options...................... 4,893 7,741 4,369 7,571
Dilutive effect of warrants... 867 984 870 995
------ ------ ------ ------
Weighted-average shares, fully
diluted...................... 32,935 50,073 32,365 49,479
====== ====== ====== ======
</TABLE>
Options to purchase 33,965 and 590,043 shares of common stock for the three
months ended June 30, 1999 and 2000, respectively, were not included in the
calculation of diluted net income per share because the effect of these
instruments was anti-dilutive. Options to purchase 283,849 and 246,671 shares
of common stock for the six months ended June 30, 1999 and 2000, respectively,
were not included in the calculation of diluted net income per share because
the effect of these instruments was anti-dilutive.
(4) Inventory
As of June 30, 2000, the Company recorded $2.5 million in inventory
consisting of uninstalled telecommunication equipment purchased under a
service contract for one customer. Under the contract, the Company has the
right to bill the customer for the equipment, but agrees to hold the equipment
in its warehouses until the equipment is installed. Therefore, the Company
recognized $3.0 million in deferred revenue related to this equipment as of
June 30, 2000. The equipment is expected to be installed prior to the end of
the fiscal year.
9
<PAGE>
WIRELESS FACILITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
(5) Segment Information
Prior to January 1, 1999, the Company provided only design and deployment
services. In the last fiscal quarter of 1999, the Company added network
maintenance and business consulting services to its operations. Due to the
nature of these services, the amount of capital assets used in providing
services to customers is not significant. Revenue and operating income
provided by the Company's industry segments for the three and six months ended
June 30, 1999 and 2000 are as follows (in thousands):
<TABLE>
<CAPTION>
Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
1999 2000 1999 2000
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Design and deployment.......... $18,078 $51,675 $33,106 $ 91,792
Network management............. -- 5,501 -- 7,930
Business consulting............ -- 2,259 -- 3,046
------- ------- ------- --------
Total revenues.............. $18,078 $59,435 $33,106 $102,768
======= ======= ======= ========
Operating income:
Design and deployment.......... $ 2,887 $10,213 $ 5,444 $ 18,206
Network management............. -- 1,576 -- 2,444
Business consulting............ -- 1,007 -- 1,403
------- ------- ------- --------
Total operating income...... $ 2,887 $12,796 $ 5,444 $ 22,053
======= ======= ======= ========
</TABLE>
Revenues derived by geographic region are as follows (in thousands):
<TABLE>
<CAPTION>
Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
1999 2000 1999 2000
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
U.S.......................... $16,160 $44,626 $30,352 $ 76,054
Central and South America.... 1,918 11,526 2,754 19,679
Europe, Middle East and
Africa...................... -- 3,283 -- 7,035
------- ------- ------- --------
Total Revenues............. $18,078 $59,435 $33,106 $102,768
======= ======= ======= ========
</TABLE>
10
<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," "except," "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 the 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
consolidated financial statements and the related notes and other financial
information appearing elsewhere in this Form 10-Q. Readers are also urged to
carefully review and consider the various disclosures made by us which attempt
to advise interested parties of the factors which affect our business,
including without limitation the disclosures made under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", under the caption "Risk Factors", and the audited consolidated
financial statements and related footnotes included in the Company's Annual
Report filed on Form 10-K for the year ended December 31, 1999 and other
reports and filings made with the Securities and Exchange Commission.
Overview
Wireless Facilities, Inc. offers network business consulting, network
planning, design and deployment, and network operations and maintenance
services for the wireless telecommunications industry. During the six months
ended June 30, 1999 and June 30, 2000, we increased both 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 six months ended
June 30, 2000. For the six months ended June 30, 2000, our consulting, design
and deployment, and network management segments contributed to 3%, 89% and 8%
of our revenues, respectively. We expect to generate increased revenue from
our network management and consulting services as we cross-sell to our
existing customers and make our full range of services available to new
customers. We also formed a subsidiary in the United Kingdom, Wireless
Facilities International, Ltd. ("WFIL"). WFIL began servicing existing
contracts and entering into new contracts in Europe, the Middle East and
Africa ("EMEA") in April 2000. During the six months ended June 30, 2000, we
performed work in 29 countries. These contracts include services performed for
many of the latest wireless technologies, including UMTS, broadband wireless
applications, and voice and video applications. Revenues from our
international operations contributed 26% of our total revenues for the six
months ended June 30, 2000.
Revenues on network planning, design and deployment contracts are primarily
fixed price contracts which are recognized using the percentage-of-completion
method. Under the percentage-of-completion method of accounting, expenses on
each project are recognized as incurred, and revenues are recognized based on
a comparison of the current costs incurred for the project to date compared to
the then estimated total costs of the project from start to completion.
Accordingly, revenue recognized in a given period depends on the costs
incurred on each individual project and the current estimate of the total
costs to complete a project, determined at that time. As a result, gross
margins for any single project may fluctuate from period to period. The full
amount of an estimated loss is charged to operations in the period it is
determined that a loss will be realized from the performance of a contract.
For network planning and 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.
11
<PAGE>
Cost of revenues includes direct compensation and benefits, living and
travel expenses, payments to third-party sub-contractors, allocation of
overhead, costs of expendable computer software and equipment, and other
direct project-related expenses.
Selling, general and administrative expenses include compensation and
benefits, computer software and equipment, facilities expenses and other
expenses not related directly to projects. Our sales personnel have, as part
of their compensation package, incentives based on their productivity. During
the six months ended June 30, 2000, we completed the first phase of
implementing a new financial management and accounting software program in our
domestic operations. Such software was implemented to better accommodate our
growth. We expect to incur expenses in subsequent periods related to licensing
the software package and related personnel costs associated with phasing in
its implementation in our domestic and international operations. We may 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.
Results of Operations:
Three months ended June 30, 1999 and June 30, 2000
Revenues. Revenues increased 228% from $18.1 million for the three months
ended June 30, 1999 to $59.4 million for the three months ended June 30, 2000.
The $41.3 million increase was primarily attributable to the addition of new
contracts, including contracts in our business development and network
management segments which were not included in the three months ended June 30,
1999. During the three months ended June 30, 2000, revenues increased due to
expanded scope on several large, existing contracts. Contract work for two
significant customers represented 29% and 10% of total revenues during the
period. Also contributing to the increase over the same period in the prior
year was approximately $4.3 million in revenue from contracts acquired through
our acquisition of The Walter Group during the first three months of the
fiscal year 2000, as well as revenues from two deployment contracts in the
Mexican market. Another significant factor for the increase is our expansion
into the international market. Revenues from our international subsidiaries
comprised 11% of our total revenues during the three months ended June 30,
1999, compared to 25% of our total revenues during the same three month period
ended June 30, 2000.
Cost of Revenues. Cost of revenues increased 185% from $11.6 million for
the three months ended June 30, 1999 to $33.1 million for the three months
ended June 30, 2000, primarily due to increased staffing in support of new
contracts. Gross profit was 36% for the three months ended June 30, 1999
compared to 44% of revenues for the three months ended June 30, 2000. The
improvement in gross profit is primarily attributable to improvements in our
budgeting of turnkey projects and the fact that the three months ended June
30, 1999 included the impact of a revision to expense forecasts for the
completion of two fixed-price contracts.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 266% from $3.2 million for the three months
ended June 30, 1999 to $11.7 million for the three months ended June 30, 2000.
As a percentage of revenues, selling, general and administrative expenses
increased from 18%
12
<PAGE>
for the three months ended June 30, 1999 to 20% for the three months ended
June 30, 2000. The increase is due to staffing increases in overhead
departments to support our growth in operations, the increased support
required for a public company, as well as time charged for new employees as
they go through our orientation, training and assignment processes.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased 533% from $0.3 million for the three months ended June 30,
1999 to $1.9 million for the three months ended June 30, 2000. The increase is
primarily due to goodwill and other indentifiable intangibles resulting from
our recent acquisitions, which also contributed to our increase in contracts,
revenues and overall operations.
Net Other Income (Expense). For the three months ended June 30, 1999 net
other expense was $0.2 million, as compared to net other income of $0.5 for
the three months ended June 30, 2000. This $0.7 million increase was primarily
attributable to interest earned on our investments in marketable securities
from the proceeds of our November 1999 initial public offering, and a foreign
currency gain on foreign currency receivables denominated in U.S. dollars, due
to a devaluation of the Mexican peso compared to the U.S. dollar. The net
increase was slightly offset by increased interest expense due to increased
borrowings against our line of credit during the three months ending June 30,
2000.
Six months ended June 30, 1999 and June 30, 2000
Revenues. Revenues increased 211% from $33.1 million for the six months
ended June 30, 1999 to $102.8 million for the six months ended June 30, 2000.
The $69.7 million increase was primarily attributable to the addition of new
contracts from our acquisitions made during the first quarter of 2000,
expanded scope on several large, existing contracts, and new contracts in our
business development and network management segments, which were not included
in the six months ended June 30, 1999. Significant new contracts included
contracts acquired through our acquisitions of The Walter Group and the Dallas
network operations center during the first three months of the fiscal year
2000. Revenues also increased from two significant deployment contracts in the
Mexican market serviced in the six months ended June 30, 2000. The six months
ended June 30, 2000 included an expansion into the international market.
Revenues from our international subsidiaries comprised 8% of our total
revenues during the six months ended June 30, 1999, compared to 26% of our
total revenues during the same six month period ended June 30, 2000.
Cost of Revenues. Cost of revenues increased 178% from $21.0 million for
the six months ended June 30, 1999 to $58.4 million for the six months ended
June 30, 2000, primarily due to increased staffing in support of new
contracts. Gross profit was 36% of revenues for the six months ended June 30,
1999 compared to 43% for the six months ended June 30, 2000. The improvement
in gross profit is primarily attributable to improvements in our budgeting of
turnkey projects and the fact that the three months ended June 30, 1999
included the impact of a revision to expense forecasts for the completion of
two fixed-price contracts.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 245% from $5.6 million for the six months
ended June 30, 1999 to $19.3 million for the six months ended June 30, 2000.
As a percentage of revenues, selling, general and administrative expenses
increased from 17%
13
<PAGE>
for the six months ended June 30, 1999 to 19% for the six months ended June
30, 2000. The increase in dollars is due to staffing increases in overhead
departments to support our growth in operations, the increased support
required for a public company, as well as time charged for new employees as
they go through our orientation, training and assignment processes.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased 173% from $1.1 million for the six months ended June 30,
1999 to $3.0 million for the six months ended June 30, 2000. The increase is
primarily due to goodwill and other indentifiable intangibles resulting from
our recent acquisitions, which also contributed to our increase in contracts,
revenues and overall operations.
Net Other Income (Expense). For the six months ended June 30, 1999, net
other expense was $0.6 million compared to net other income of $1.0 million
for the six months ended June 30, 2000. This increase totaling $1.6 million
was primarily attributable to interest earned on our investments in marketable
securities from the proceeds of our November 1999 initial public offering.
Liquidity and Capital Resources
As of June 30, 2000, the latest date which information was available, we
had cash and cash equivalents totaling approximately $37.1 million. Of this,
approximately $23.6 million was invested in short-term, investment grade
securities, with maturities at the date of purchase of less than 90 days.
Future capital requirements will depend upon many factors, including our
plans for future acquisitions, the timing of payments under contracts and
increases in personnel in advance of new contracts.
Cash used in operations is primarily derived from our contracts in process
and changes in working capital. Cash used in operations was $3.2 million and
$17.8 million for the six months ended June 30, 1999 and 2000, respectively.
Cash used in investing activities was $3.0 million for the six months ended
June 30, 1999. Cash provided by investing activities was $2.9 million for the
six months ended June 30, 2000. Investing activities for the six months ended
June 30, 1999 consisted primarily of cash paid for the acquisitions of B.
Communications International and CRD. Investing activities for the six months
ended June 30, 2000 consist primarily of proceeds totaling $26 million
received from sales of investments, partially offset by cash paid for
acquisitions and investments approximating $22 million. Acquisitions during
the six months ended June 30, 2000 include the purchase of assets from The
Walter Group, Comcor, Davis Bay, as well as a network operations center, and
an equity interest in Diverse Networks, Inc.
Cash provided by financing activities for the six months ended June 30,
1999 was $7.4 million, which was primarily derived from the sale of preferred
stock, less repayment of credit borrowings from a financial institution and
officers. In February 1999, we issued and sold 2,727,273 shares of Series B
preferred stock for $15.0 million. These shares were converted to common stock
at the conversion rate of 1-to-1 upon the closing of our initial public
offering in November of 1999, in accordance with the terms of the preferred
stock agreement. Cash provided by financing activities was $18 million for the
six months ended June 30, 2000. Financing activities for this period primarily
consisted of $13.6 million borrowed under our line of credit and $5.0 million
from sales of common stock issued through our stock option and employee stock
purchase plans. At June 30, 2000, $13.6 million was outstanding under our line
of credit. The credit facility is due on August 17, 2002 and bears interest at
either the bank prime rate minus 0.25% (8.5% at December 31, 1999) or at the
London Interbank Offering Rate (LIBOR) plus 2.25% (10.4% at December 31, 1999)
at our discretion. The line of credit is secured by substantially all of our
assets. The agreement contains restrictive covenants, which, among other
things, require maintenance of certain financial ratios.
The Company has no material cash commitments other than obligations under
its 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.
14
<PAGE>
On November 10, 1999, we completed an initial public offering of our common
stock. In conjunction with the closing of that offering, we issued 4,600,000
shares of common stock for approximately $64.2 million in cash (net of
underwriting discounts). As of June 30, 2000, the proceeds were used as
follows: (i) $8.6 million was used to repay short-term debt and notes payable;
(ii) $21.8 million was used to acquire assets or equity interests in other
businesses; (iii) $0.1 million was used in operations. The remaining amounts,
approximating $33.9 million at June 30, 2000, are invested in short-term,
investment grade securities.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company is exposed to foreign currency risks due to both transactions
and translations between a functional and reporting currency. We currently do
not hedge any of these risks in our foreign subsidiaries because (1) cash
flows from foreign operations in Mexico are generally reinvested locally in
Mexico, (2) foreign operations in Brazil are minimal, (3) the British Pound
Sterling is relatively stable against the U.S. dollar, and (4) 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, Brazil and the United Kingdom. While these
intercompany balances are eliminated in consolidation, exchange rate changes
do affect consolidated earnings. At June 30, 2000, there was $8.6 million,
$1.3 million and $0.1 million owed to our U.S. operations from our Mexican,
Brazilian and United Kingdom subsidiaries, respectively. These intercompany
receivables were denominated in U.S. dollars. The potential foreign currency
translation losses from a hypothetical 10% adverse change in the exchange
rates from these intercompany balances are approximately $857,000, $128,000
and $70,000 from Mexico, Brazil and the United Kingdom, respectively. In
addition, we estimate that a 10% change in foreign exchange rates would impact
reported operating profit for the three and six months ended June 30, 2000 by
approximately $108,000 and $617,000, respectively. This was estimated using a
10% deterioration factor to the average monthly exchange rates applied to net
income or loss for each of the subsidiaries in the respective period.
Operations with and net income of foreign subsidiaries were not significant at
June 30, 1999.
As of June 30, 2000, the latest date for which detailed information was
available, we had cash and cash equivalents of approximately $37.1 million. Of
this, $23.6 million was invested in short-term, interest-bearing investment
grade securities, 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. We do not use derivative financial instruments, derivative commodity
instruments or other market risk sensitive instruments, positions or
transactions in any material fashion. Accordingly, management believes 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.
As of August 8, 2000, we held a $30 million line of credit facility with a
financial institution. At June 30, 2000, $13.6 million was outstanding under
our line of credit. The credit facility is due on August 17, 2002 and bears
interest at either the bank prime rate minus 0.25% (8.5% at December 31, 1999)
or at the London Interbank Offering Rate (LIBOR) plus 2.25% (10.4% at December
31, 1999) at our discretion. The line of credit is secured by substantially
all of our assets. The agreement contains restrictive covenants, which, among
other things, require maintenance of certain financial ratios. We do not
utilize any derivative financial instruments to hedge the interest rate
fluctuation as our balances under the facility are borrowed over the short
term and we currently retain the ability to pay down amounts borrowed through
our operational funds.
15
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
As reported in the Company's Form 10-Q for the quarter ended March 31,
2000, subsequent to the Company's initial public offering in November 1999,
the Company received correspondence from certain former employees (or their
stockbrokers) who presented stock certificates of a predecessor of the Company
delivered in 1996 as part of an employee benefit plan. The Company did not
register these shares in its books and records because it believed them to
have been forfeited in accordance with the terms of the plan. However, these
former employees claimed that such certificates represented outstanding shares
of the Company's common stock issued to them for services rendered in 1996.
On March 6, 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 six former employees who had sold or who had attempted to sell
unregistered certificates purportedly representing 97,500 shares of the
Company. The Complaint sought a declaration that the subject certificates were
invalid due to forfeiture provisions of the applicable employee benefit plan.
In June 2000, the Company settled its actions against five of these
defendants. Subsequent to June 30, 2000, the Company settled its action with
the remaining defendant and dismissed the Complaint. The terms of the
settlements called for the Company to recognize a certain number of the shares
represented by these certificates as having been properly issued in 1996 for
services rendered prior to issuance.
The total number of shares represented by such unregistered certificates
(including shares subject to the settlement agreements described above and
those not yet been presented to the Company) is estimated to be approximately
532,500 shares of common stock. Recognition of any of these shares will depend
on the facts and circumstances relating to the issuance and delivery of each
such certificate. The Company is therefore not certain at this time how many
of the subject shares will be recognized.
As a result of the foregoing circumstances, the Company underreported the
number of shares of common stock outstanding during each of the years ended
December 31, 1996 through December 31, 1999. The impact of the additional
shares was not material to the financial statements for the years ended
December 31, 1996 through December 31, 1999.
Massih Tayebi, the Company's Chief Executive Officer, and Masood Tayebi,
the Company's President, were the executive officers and directors of the
Company's predecessor entity during 1996, and collectively owned the
substantial majority of outstanding shares of that entity during that time.
They have agreed to transfer shares of common stock owned by them to the
Company, share for share, for any shares represented by unregistered
certificates which are recognized by the Company as issued and outstanding.
Each will transfer to the Company one-half of the number of shares recognized.
Consequently, the Company expects no increase in the number of currently
outstanding shares of the Company's common stock and no impact on the
financial statements in future periods as a result of the Company recognizing
any of the unregistered certificates. Such surrender of outstanding shares
held by the Tayebis is not expected to materially diminish the ownership
interests of either of them in the Company.
The Company does not believe existing demands or future litigation
associated with the unregistered certificates will have a material effect on
the Company's financial position or results of operations. However, there can
be no guarantee that any litigation that might arise out of these
circumstances can be settled or disposed of in the manner anticipated, and
therefore no guarantee that other outcomes would not have a material adverse
effect on the Company's financial position or results of operations.
Other than as described above, the Company is not subject to any legal
proceedings other than ordinary routine matters incidental to the business,
none of which are expected to have a material adverse effect on the Company's
financial position or results of operations. However, litigation is subject to
inherent uncertainties, and an adverse result in existing or other matters may
arise from time to time that may harm the Company's business.
16
<PAGE>
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c). Recent Sales of Unregistered Securities
During the six months ended June 30, 2000, the Company issued unregistered
securities in the following transactions:
1. On January 11, 2000, the Company issued an aggregate of 95,062 shares of
common stock, valued at $4.1 million, to two shareholders of The Walter Group
("TWG") as partial consideration for substantially all of the assets of TWG.
2. On January 21, 2000, the Company issued 430,000 shares of common stock,
valued at $18.2 million, to Jalil Tayebi, the General Manager of the Company's
majority-owned subsidiary WFI de Mexico. The shares were issued in exchange
for a 6% interest in WFI de Mexico, pursuant to the terms of a Restricted
Stock Agreement entered into between the Company and Mr. Tayebi. Mr. Tayebi is
the brother of both the President and the Chief Executive Officer of the
Company.
3. On March 21, 2000, the Company issued an aggregate of 1,000 shares of
common stock to two former shareholders of C.R.D., Inc. ("CRD"). The shares
were issued pursuant to the partial exercise of two Warrant Agreements (the
"CRD Warrants") dated June 1, 1999 between the Company and the former CRD
shareholders. The CRD Warrants were entered into by the Company as partial
consideration for the acquisition of certain assets from CRD. The exercise
price of $5.50 per share was paid in cash.
4. On April 25, 2000, the Company issued an aggregate of 21,425 shares of
common stock, valued at $1.8 million, to two shareholders of Comcor Advisory
Services ("Comcor"), as partial consideration for the acquisition of certain
assets from Comcor.
5. On June 1, 2000, the Company issued an aggregate of 1,000 shares of
common stock to two former shareholders of C.R.D. The shares were issued
pursuant to the partial exercise of the CRD Warrants. The exercise price of
$5.50 per share was paid in cash.
6. On June 21, 2000, the Company issued an aggregate of 55,612 shares of
common stock to two former shareholders of B. Communications International,
Inc. ("BCI"). The shares were issued pursuant to two Warrant Agreements, dated
January 4, 1999, between the Company and the former BCI shareholders as
partial consideration for the acquisition of certain assets from BCI. The
exercise price of $4.16 per share was paid pursuant to a net exercise
provision whereby 4,484 shares of common stock underlying the warrants, valued
at $55.75 per share, were used as payment of the exercise price.
7. On June 26, 2000, the Company issued an aggregate of 49,313 shares of
common stock, valued at $2.4 million, to two shareholders of Davis Bay, Inc.
("Davis Bay"), as partial consideration for the acquisition of certain assets
from Davis Bay.
The issuances of the securities in the transactions described in paragraphs
(1) through (7) above were deemed to be exempt from registration under the
Securities Act of 1933, as amended by virtue of Section 4(2) and/or Regulation
D promulgated thereunder. The recipients represented their intentions to
acquire the securities for investment purposes only and not with a view to the
distribution thereof. Each of the recipients received adequate information
about the Company and the Company reasonably believed that each of the
recipients was an "Accredited Investor", as such term is defined in the
Securities Act of 1933, as amended.
(d). Use of Proceeds from Sales of Registered Securities
On November 10, 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 in the 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
17
<PAGE>
proceeds of $69 million of which $4.8 million was applied toward commissions
to the underwriters. Expenses related to the offering were approximately
$2,250,000. After deducting the underwriter's commissions, the Company
received net proceeds of approximately $64.2 million. As of June 30, 2000, the
Company has used the net proceeds from the offering as follows: (i) $8.6
million was used to repay short-term debt and notes payable, (ii) $21.8
million was used to acquire assets or equity interests in other businesses,
(iii) $0.1 million was used in operations, and (iv) the remaining proceeds
have been invested in interest-bearing, investment grade securities. The
offering proceeds are available to be used for working capital and general
corporate purposes. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The Annual Meeting of Stockholders of Wireless Facilities, Inc. was held on
June 22, 2000. At this meeting, the Company solicited the vote of the
Stockholders on the proposals set forth below and received for each proposal
the votes indicated below:
(i) To elect five directors to serve for the ensuing year and until their
successors are elected. Elected to serve as directors were Massih
Tayebi, Ph.D., Masood Tayebi, Ph.D., Scott Anderson, Bandel Carano and
Scot Jarvis. For each elected director the results of voting were:
Massih Tayebi, Ph.D., 38,514,158 for and 168,321 withheld; Masood
Tayebi, Ph.D., 37,851,458 for and 831,021 withheld; Scott Anderson
38,676,019 for and 6,460 withheld; Bandel Carano 38,676,064 for and
6,415 withheld; and Scot Jarvis 38,676,314 for and 6,165 withheld.
(ii) To ratify the selection of KPMG LLP as independent auditors of the
Company for its fiscal year ending December 31, 2000. The selection of
KPMG as independent auditors of the Company for its fiscal year ending
December 31, 2000 was ratified with the following votes: 38,669,126
for, 10,743 against, and 2,610 abstained.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a). Exhibits:
27 Financial Data Schedule
(b). Reports on Form 8-K:
None.
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<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.
Date: August 10, 2000 By: /s/ Massih Tayebi
-------------------------------------
Massih Tayebi
Chief Executive Officer and Director
By:/s/ Thomas A. Munro
-------------------------------------
Thomas A. Munro
Chief Financial Officer
19
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
27 Financial Data Schedule
</TABLE>
20
