<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 SEPTEMBER 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>
4810 Eastgate Mall
San Diego, CA 92121
(858) 228-2000
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
----------------
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 October 31, 2000 there were 43,002,170 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 SEPTEMBER 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 September
30, 2000 (unaudited).......................................... 3
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 1999 and 2000 (unaudited).......... 4
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 2000 (unaudited)....................... 5
Notes to Consolidated Financial Statements (unaudited)......... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 16
Item 2. Changes in Securities and Use of Proceeds...................... 17
Item 6. Exhibits and Reports on Form 8-K............................... 17
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WIRELESS FACILITIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------ -------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents......................... $ 34,322 $ 24,315
Investments in marketable securities.............. 37,965 3,190
Billed accounts receivable, net................... 23,033 46,213
Unbilled accounts receivable...................... 9,600 53,463
Contract management receivables................... 13,993 16,417
Taxes receivable.................................. 561 8,668
Other current assets.............................. 2,639 5,589
-------- --------
Total current assets............................. 122,113 157,855
Property and equipment, net......................... 5,069 18,225
Goodwill, net....................................... 7,098 53,651
Other intangibles, net.............................. 374 12,465
Investments......................................... 100 9,991
Other assets........................................ 238 1,291
-------- --------
Total assets........................................ $134,992 $253,478
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.................................. $ 5,428 $ 8,944
Accrued expenses.................................. 5,961 11,823
Contract management payables...................... 8,258 4,653
Billings in excess of costs....................... 5,170 3,392
Current portion of note payable................... -- 1,659
Line of credit.................................... -- 23,915
Current portion of capital lease obligations...... 137 3,070
Income taxes payable.............................. 5,641 --
Deferred income tax liability..................... -- 1,134
-------- --------
Total current liabilities........................ 30,595 58,590
Notes payable, net of current portion............... 909 107
Capital lease obligations, net of current portion... 1,652 7,338
Other long-term liabilities......................... 59 59
-------- --------
Total liabilities................................... 33,215 66,094
-------- --------
Minority interest................................... 338 7
-------- --------
Stockholders' equity:
Common stock, $0.001 par value, 195,000,000 shares
authorized; 39,705,590 and 42,919,315 shares
issued and outstanding at December 31, 1999 and
September 30, 2000 (unaudited), respectively..... 40 43
Additional paid-in capital........................ 90,245 154,330
Note receivable from stockholder.................. -- (641)
Retained earnings................................. 11,171 33,921
Accumulated other comprehensive loss.............. (17) (276)
-------- --------
Total stockholders' equity....................... 101,439 187,377
-------- --------
Total liabilities and stockholders' equity.......... $134,992 $253,478
======== ========
</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 Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
1999 2000 1999 2000
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues................ $23,833 $73,073 $56,938 $175,841
Cost of revenues........ 13,102 40,800 34,126 99,186
------- ------- ------- --------
Gross profit.......... 10,731 32,273 22,812 76,655
Selling, general and
administrative
expenses............... 4,645 15,425 10,208 34,748
Depreciation and
amortization........... 516 2,829 1,591 5,834
------- ------- ------- --------
Operating income...... 5,570 14,019 11,013 36,073
Net other
(expense)income........ (261) 223 (888) 1,233
------- ------- ------- --------
Income before taxes
and minority
interest............. 5,309 14,242 10,125 37,306
Minority interest....... (370) 125 (370) (7)
------- ------- ------- --------
Income before taxes... 4,939 14,367 9,755 37,299
Provision for income
taxes.................. 2,141 5,324 4,321 14,549
------- ------- ------- --------
Net income............ $ 2,798 $ 9,043 $ 5,434 $ 22,750
======= ======= ======= ========
Earnings per share data:
Net income per common
share:
Basic............... $ 0.10 $ 0.21 $ 0.20 $ 0.55
Diluted............. $ 0.08 $ 0.17 $ 0.17 $ 0.45
Weighted-average
common shares
outstanding:
Basic............... 27,248 42,363 27,167 41,396
Diluted............. 33,478 51,921 32,464 50,293
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
WIRELESS FACILITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine months Nine months
ended Ended
September 30, September 30,
1999 2000
------------- -------------
<S> <C> <C>
Net cash used in operating activities.............. $(8,184) $(37,690)
------- --------
Investing activities:
Capital expenditures............................. (2,422) (3,008)
Cash paid for acquisitions, net of cash
acquired........................................ (1,742) (28,200)
Cash paid for investments........................ (63) (8,929)
Proceeds from sales of investments............... 56 34,775
------- --------
Net cash used in/(provided by) investing
activities.................................... (4,191) (5,362)
------- --------
Financing activities:
Proceeds from issuance of preferred stock........ 15,000 --
Proceeds from issuance of common stock........... 396 9,450
Purchase of treasury stock....................... (161) --
Net borrowings (repayment) under line of credit.. 4,000 23,915
Net borrowings (repayment) to/from officers...... (3,825) 617
Repayment of capital lease obligations........... -- (704)
Repayment of acquisition notes payable........... (1,499) (250)
------- --------
Net cash provided by financing activities...... 13,911 33,028
------- --------
Effect of exchange rates on cash and cash
equivalents....................................... 45 17
------- --------
Net increase/(decrease) in cash and cash
equivalents....................................... 1,581 (10,007)
Cash and cash equivalents at beginning of period... 2,866 34,322
------- --------
Cash and cash equivalents at end of period......... $ 4,447 $ 24,315
======= ========
Noncash transactions:
Issuance of stock for acquisition................ -- $ 36,855
Property and equipment acquired under capital
lease........................................... -- $ 9,323
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 receivable for sale of
investment...................................... $ 199 --
Supplemental disclosure of cash flow information:
Cash paid during the period for interest......... $ 696 $ 1,028
Cash paid during the period for income taxes..... $ 7,244 $ 10,637
</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 1998. WFI provides a full suite of outsourcing services to
wireless carriers and equipment vendors, including the design, deployment and
management of client networks. WFI's customers include both early-stage and
mature providers of cellular, PCS and broadband data services and equipment.
WFI's engagements range from small contracts for the deployment of a single
cell, to large multi-year turnkey contracts. These services are billed either
on a time and materials basis or on a fixed price, time certain basis.
(b) Basis of Presentation
The information as of September 30, 2000, and for the three months and nine
months ended September 30, 1999 and 2000 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 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
May 2000, the Company acquired a 16.67% interest in the operations of Diverse
Networks, Inc. ("DNI"), which is accounted for using the equity method of
accounting. In August 2000, the Company acquired Questus, Ltd., ("Questus") a
privately held company incorporated in the United Kingdom in a stock purchase
acquisition. Questus is a provider of management consulting and network
development services in the European wireless services market. The acquisition
included Questus' wholly-owned subsidiaries, Questus Scandinavia, A.B.,
incorporated in Stockholm, Sweden, and Questus GmbH, incorporated in Vienna,
Austria. In September 2000, the Company formed a wholly-owned subsidiary WFI-
UK, Ltd., based in London, England, to act as a holding company.
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 require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
6
<PAGE>
WIRELESS FACILITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
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, Inc. ("TWG"), a
Washington corporation and a privately-held provider of management consulting
and network development services to the wireless communications market.
Consideration consisted of $5.5 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 nine months ended
September 30, 2000 include amortization expense of approximately $578,000
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 acquisition was made under the terms
of a Restricted Stock Agreement, pursuant to which the Company issued shares
of common stock valued at $18.2 million in exchange for shares representing
the 6% interest in WFI de Mexico. 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 Chairman and the
Chief Executive Officer of the Company. Results from operations for the nine
months ended September 30, 2000 include amortization expense of approximately
$672,000 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 the acquired assets are included in the Company's consolidated
financial statements from the acquisition date. Results of operations for the
nine months ended September 30, 2000 include amortization expense of
approximately $ 70,000 related to goodwill recorded from 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 the
acquired assets are included in the Company's consolidated financial
statements from the acquisition date. The excess purchase price paid over the
fair value of the tangible and identifiable intangible assets acquired was
recorded as goodwill. Goodwill of $6.5 million was recognized in the
transaction, and is being amortized over ten years. Results from operations
for the nine months ended September 30, 2000 include amortization expense of
approximately $274,000 related to goodwill recorded from this acquisition.
7
<PAGE>
WIRELESS FACILITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
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 of the warrant may be effected by cash or by using a net
issue exercise feature. The warrant may be exercised in total or in part, and
is assignable and transferable prior to any first exercise. A representative
of the Company holds a position on DNI's Board of Directors and the Company
has entered into other contracts with DNI, and is therefore considered to have
significant influence. This investment has been accounted for under the equity
method of accounting.
On June 26, 2000, the Company acquired the assets of Davis Bay, LLC., 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 issued to the selling shareholders, and is currently held in
escrow. Of the escrowed consideration, 6,164 shares are being held subject to
general indemnity provisions in the asset agreement and are to be released
approximately two years after the acquisition date. Absent any claims against
the escrow the remaining 43,149 shares are escrowed for specific indemnity
provisions and are to be released approximately one year after the acquisition
date, provided 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 contingent on
certain quarterly earnings results from potential future contracts secured by
Davis Bay for the Company and executed within 18 months of the acquisition
date. Earn-out payments, if earned, are to be paid quarterly over the life of
the eligible contracts, are to be paid in stock, and are capped at $20
million. The acquisition was accounted for as a purchase. Thus, the results of
operations from the acquired assets are included in the Company's consolidated
financial statements from the acquisition date. 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. Results of operations for the nine months ended September 30, 2000
include amortization expense of approximately $27,000 related to goodwill
recorded from this 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.
On August 29, 2000, the Company acquired all of the outstanding capital
stock of Questus, Ltd., a private limited company incorporated in the United
Kingdom. Consideration consisted of approximately $10.5 million in cash, stock
valued at approximately $10.3 million, and promissory notes to one selling
shareholder totaling $1.5 million. Included in the purchase were Questus
wholly owned subsidiaries, Questus Scandinavia, A.B., incorporated in
Stockholm Sweden, and Questus GmbH, incorporated in Vienna, Austria. The
excess purchase price paid over the fair value of tangible and identifiable
assets acquired was recorded as goodwill. Goodwill of approximately $14.0
million was recognized in the transaction and is being amortized over 10
years. Results from operations for the nine months ended September 30, 2000
include amortization expense of approximately $119,000 related to goodwill for
this acquisition.
On October 12, 2000, the Company acquired all of the outstanding capital
stock of Telia Contracting, AB of Gothenburg, Sweden, a subsidiary of Telia AB
in Sweden. Consideration consisted of approximately $7.8 million in cash.
8
<PAGE>
WIRELESS FACILITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
The following summary presents pro forma consolidated results of operations
as if the asset acquisitions described above (with the exception of Telia
Contracting, AB, which occurred after September 30, 2000) had occurred at the
beginning of the three and nine months ended September 30, 1999, and the three
and nine months ended September 30, 2000, and includes adjustments that are
directly attributable to the transaction or are expected to have a continuing
impact on the Company. Adjustments to revenues and cost of revenues are taken
from the available financial information by estimating the monthly operating
revenue or expense and pro-rating for the period of time such operations were
excluded from the Company's financial results for the periods presented.
The pro forma results are for illustrative purposes only, and do not
purport to be indicative of the actual results which would have occurred had
the transactions been completed as of the beginning of the periods, nor are
they indicative of results of operations which may occur in the future (all
amounts except per share data are in thousands).
<TABLE>
<CAPTION>
Three months Three months Nine Months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
1999 2000 1999 2000
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Pro forma revenue....... $30,228 $73,566 $69,073 $180,879
Pro forma operating
income................. $ 4,222 $13,643 $ 8,211 $ 35,839
Pro forma net income.... $ 1,658 $ 9,039 $ 3,744 $ 22,414
Pro forma net income per
common share:
Basic................. $ 0.06 $ 0.21 $ 0.13 $ 0.54
Diluted............... $ 0.05 $ 0.17 $ 0.11 $ 0.44
</TABLE>
(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 Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
1999 2000 1999 2000
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Weighted-average shares,
basic.................. 27,248 42,363 27,167 41,396
Dilutive effect of stock
options................ 5,286 8,621 4,480 7,921
Dilutive effect of
warrants............... 944 937 817 976
------ ------ ------ ------
Weighted-average shares,
fully diluted.......... 33,478 51,921 32,464 50,293
====== ====== ====== ======
</TABLE>
Options to purchase 191,167 and 550,222 shares of common stock for the
three months ended September 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 321,633 and
1,242,195 shares of common stock for the nine months ended September 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.
9
<PAGE>
WIRELESS FACILITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(4) 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 nine months
ended September 30, 1999 and 2000 are as follows (in thousands):
<TABLE>
<CAPTION>
Three months Three months Nine months Nine Months
ended ended ended Ended
September 30, September 30, September 30, September 30,
1999 2000 1999 2000
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Design and
deployment........... $23,833 $57,980 $56,938 $142,285
Network management.... -- 12,770 -- 28,346
Business consulting... -- 2,323 -- 5,210
------- ------- ------- --------
Total revenues...... $23,833 $73,073 $56,938 $175,841
======= ======= ======= ========
Operating income:
Design and
deployment........... $ 5,570 $11,156 $11,013 $ 26,419
Network management.... -- 2,279 -- 7,765
Business consulting... -- 584 -- 1,888
------- ------- ------- --------
Total operating
income............. $ 5,570 $14,019 $11,013 $ 36,073
======= ======= ======= ========
</TABLE>
Revenues derived by geographic region are as follows (in thousands):
<TABLE>
<CAPTION>
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
1999 2000 1999 2000
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
U.S. ................. $17,709 $51,067 $39,787 $128,345
Central and South
America.............. 6,124 17,843 17,151 38,291
Europe, Middle East
and Africa........... -- 4,163 -- 9,205
------- ------- ------- --------
Total Revenues...... $23,833 $73,073 $56,938 $175,841
======= ======= ======= ========
</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 this Quarterly Report on 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 notes 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 nine months
ended September 30, 1999 and September 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
nine months ended September 30, 2000. For the nine months ended September 30,
2000, our consulting, design and deployment, and network management segments
contributed to 3%, 81% and 16% 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. During this period, we also formed a subsidiary in
the United Kingdom, Wireless Facilities International, Ltd. ("WFIL"). WFIL
began servicing existing contracts and entering into new contracts in Europe,
the Middle East and Africa ("EMEA") in April 2000. During the nine months
ended September 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 27% of
our total revenues for the nine months ended September 30, 2000.
Revenues from network planning, design and deployment contracts are
primarily fixed price contracts which are recognized using the percentage-of-
completion method. Under the percentage-of-completion method of accounting,
expenses on each project are recognized as incurred, and revenues are
recognized based on a comparison of the current costs incurred for the project
to date compared to the then estimated total costs of the project from start
to completion. Accordingly, revenue recognized in a given period depends on
the costs incurred on each individual project and the current estimate of the
total costs to complete a project, determined at that time. As a result, gross
margins for any single project may fluctuate from period to period. The full
amount of an estimated loss is charged to operations in the period it is
determined that a loss will be realized from the performance of a contract.
For business consulting, network planning, design and deployment contracts
offered on a time and expense basis, we recognize revenues as services are
performed. We typically charge a fixed monthly fee for ongoing radio frequency
optimization and network operations and maintenance services. With respect to
these services, we recognize revenue as services are performed.
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 nine months ended September 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 commencement of the
project as we increase our personnel to work on the project. New hires
typically undergo training on our systems and project management process prior
to being deployed on a project.
Results of Operations:
Three months ended September 30, 1999 and September 30, 2000
Revenues. Revenues increased 207% from $23.8 million for the three months
ended September 30, 1999 to $73.1 million for the three months ended September
30, 2000. The $49.3 million increase was primarily attributable to the
addition of new contracts, including contracts in our consulting and network
management segments which were not included in the three months ended
September 30, 1999. Another significant factor for the increase is our
expansion into the international market. Revenues from international markets
comprised 26% of our total revenues during the three months ended September
30, 1999, compared to 30% of our total revenues during the same three month
period ended September 30, 2000.
Cost of Revenues. Cost of revenues increased 211% from $13.1 million for
the three months ended September 30, 1999 to $40.8 million for three months
ended September 30, 2000, primarily due to increased staffing in support of
new contracts. Gross profit was 44% of revenues for the three months ended
September 30, 2000 compared to 45% of revenues for the three months ended
September 30, 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 235% from $4.6 million for the three months
ended September 30, 1999 to $15.4 million for the three months ended September
30, 2000. As a percentage of revenues, selling, general and administrative
expenses increased from 19% for the three months ended September 30, 1999 to
21% for the three months ended September 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, costs of
staffing and running international offices, as well as time charged for new
employees during their orientation, training and assignment processes.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased 460% from $0.5 million for the three months ended September
30, 1999 to $2.8 million for the three months ended September 30, 2000.
Net Other Income (Expense). For the three months ended September 30, 1999
net other expense was $0.3 million, as compared to net other income of $0.2
for the three months ended September 30, 2000. This $0.5 million income
increase was primarily attributable to interest revenue from the investment of
proceeds from our initial public offering which occurred in November 1999,
partially offset by foreign exchange losses for the period and increased
interest expense on increasing balances on our line of credit.
Provision for Income Taxes. Our provisional income tax rate as a percentage
of income before taxes decreased from 43% for the three months ended September
30, 1999, to 37% for the three months ended September 30, 2000. The decrease
is primarily attributable to increases in our foreign sales.
12
<PAGE>
Nine Months Ended September 30, 1999 and September 30, 2000
Revenues. Revenues increased 209% from $56.9 million for the nine months
ended September 30, 1999 to $175.8 million for the nine months ended September
30, 2000. The $118.9 million increase was primarily attributable to the
addition of new contracts from our acquisitions completed during the first
quarter of 2000, expanded scope on several large, existing contracts, and new
contracts in our consulting and network management segments, which were not
included in the nine months ended September 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 nine months ended
September 30, 2000. Revenues from our international markets comprised 30% of
our total revenues during the nine months ended September 30, 1999, compared
to 27% of our total revenues during the same nine month period ended
September 30, 2000.
Cost of Revenues. Cost of revenues increased 191% from $34.1 million for
the nine months ended September 30, 1999 to $99.2 million for the nine months
ended September 30, 2000, primarily due to increased staffing in support of
new contracts. Gross profit was 40% of revenues for the nine months ended
September 30, 1999 compared to 44% for the nine months ended September 30,
2000. The nine months ended September 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 240% from $10.2 million for the nine months
ended September 30, 1999 to $34.7 million for the nine months ended September
30, 2000. As a percentage of revenues, selling, general and administrative
expenses increased from 18% for the nine months ended September 30, 1999 to
20% for the nine months ended September 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 during their our orientation, training and
assignment processes.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased 267% from $1.6 million for the nine months ended September
30, 1999 to $5.8 million for the nine months ended September 30, 2000. The
increase is primarily due to goodwill and other identifiable intangibles
resulting from our recent acquisitions, which also contributed to our increase
in contracts, revenues and overall operations.
Net Other Income (Expense). For the nine months ended September 30, 1999,
net other expense was $0.9 million compared to net other income of $1.2
million for the nine months ended September 30, 2000. This increase totaling
$2.1 million was primarily attributable to interest earned on our investments
in marketable securities from the proceeds of our November 1999 initial public
offering, partially offset by an increase in interest expense on increasing
balances on our line of credit.
Provision for Income Taxes. Our provisional income tax rate as a percentage
of income before taxes decreased from 44% for the nine months ended September
30, 1999, to 39% for the nine months ended September 30, 2000. The decrease is
primarily attributable to increases in our foreign sales.
Liquidity and Capital Resources
As of September 30, 2000, we had cash and cash equivalents totaling
approximately $24.3 million. Of this, approximately $13.6 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 $8.2 million and
$37.7 million for the nine months ended September 30, 1999 and 2000,
respectively.
Cash used in investing activities was $4.2 million and $5.4 million for the
nine months ended September 30, 1999 and 2000 respectively. Investing
activities for the nine months ended September 30, 1999 consisted
13
<PAGE>
primarily of cash paid for the acquisitions of B. Communications International
and CRD. Investing activities for the nine months ended September 30, 2000
consisted primarily of proceeds totaling $34.8 million received from sales of
investments, partially offset by cash paid for acquisitions and investments
approximating $37.1 million. Acquisitions during the nine months ended
September 30, 2000 include the purchase of assets from The Walter Group,
Comcor, Davis Bay and Questus, as well as a network operations center, an
investment in CommVerge, and an equity interest in Diverse Networks, Inc.
Cash provided by financing activities for the nine months ended September
30, 1999 was $13.9 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
$33.0 million for the nine months ended September 30, 2000. Financing
activities for this period primarily consisted of $23.9 million borrowed under
our line of credit, and $9.4 million from sales of common stock issued through
our stock option and employee stock purchase plans. At September 30, 2000,
$23.9 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% (9.5% at September 30, 2000) or at the London Interbank Offering Rate
(LIBOR) plus 2.25% (6.73% at September 30, 2000) 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.
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 September 30, 2000, the proceeds were used as
follows: (i) $8.6 million was used to repay short-term debt and notes payable;
(ii) $32.3 million was used to acquire assets or equity interests in other
businesses; and (iii) $1.3 net of reinvested interest and asset management
fees was used in our operations. The remaining proceeds, approximating $22.0
million at September 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 in our Mexican,
Brazilian and United Kingdom subsidiaries. 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 and the cost at this time. The Company is
exposed to the impact of foreign currency fluctuations due to intercompany
transactions with its consolidated foreign subsidiaries. While these
intercompany balances are eliminated in consolidation, exchange rate changes
do affect consolidated earnings. At September 30, 2000, there was $10.0
million, $1.3 million and $2.4 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 $1.0
million from Mexico, $0.1 million from Brazil and $0.2 million from the United
Kingdom. 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, 2000 by approximately $0.4 million and $1.0 million,
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 September 30, 1999.
14
<PAGE>
As of September 30, 2000, we had cash and cash equivalents of approximately
$24.3 million. Of this, $13.6 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 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 September 30, 2000, we held a $30 million line of credit facility
with a financial institution. At September 30, 2000, $23.9 million was
outstanding under this line of credit. This line of credit was increased to
$50 million on October 31, 2000. The credit facility is due on August 17, 2002
and bears interest at either the bank prime rate minus 0.25% (9.5% at
September 30, 2000) or at the London Interbank Offering Rate (LIBOR) plus
2.25% (6.7% at September 30, 2000) 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 Quarterly Reports on Form 10-Q for the
quarters ended March 31, 2000 and June 30, 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 corporation of the Company delivered in 1996 as
part of an employee benefit plan.
The Company has settled the demands of each of the six former employees who
had sold or who had attempted to sell unregistered certificates purportedly
representing 97,500 shares of the Company, against whom the Company had filed
a compliant for Declaratory Relief in the Superior Court of the State of
California for the County of San Diego on March 6, 2000, and the Company
dismissed the complaint on July 28. The Company has also settled a similar
demand for recognition by another former employee and has reached a tentative
settlement agreement with an additional former employee, based on similar
circumstances. In each of these settlements the Company has agreed to
recognize a certain number of the shares as having been properly issued in
1996 for services rendered prior to issuance.
On July 25, 2000, the Company filed a Complaint for Declaratory Relief in
the Superior Court of the State of California for the County of San Diego,
against Dr. Rahim Tafazolli, a former employee/consultant who received an
unregistered certificate purportedly representing 45,000 shares of the
Company. The complaint seeks a declaration that the subject certificate is
invalid due to forfeiture provisions of the employee benefit plan and due to
Dr. Tafazolli's failure to perform the agreed services. On August 10, 2000,
Dr. Tafazolli filed a related complaint in the Court of Chancery of the State
of Delaware in and for New Castle County. The related complaint seeks money
damages and a declaration that Dr. Tafazolli is entitled to receive an
unrestricted WFI stock certificate for 45,000 shares. The Company intends to
vigorously pursue its action in California and to vigorously defend against
the related action in Delaware.
The Company has settled or agreed to settle demands relating to a total of
127,500 shares. The Company has received no other additional formal demands
for recognition of shares represented by unregistered certificates other than
the demand by Dr. Tafazolli.
The Company refers to its Quarterly Reports on Form 10-Q for the quarters
ended March 31, 2000 and June 30, 2000 for further detail on the anticipated
impact arising from recognition of the share certificates. The Company does
not believe existing demands or future litigation associated with the
unregistered certificates will have a material effect on its financial
position or results of operations. However, there can be no guarantee that
existing or future litigation that might arise out of these circumstances can
be settled or disposed of in the manner anticipated. Other outcomes could have
a material adverse effect on the Company's financial position or results of
operations.
Other than as described above, and as described in the Company's Quarterly
Reports on Form 10-Q for the quarters ended March 31, 2000 and June 30, 2000,
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 which
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 three months ended September 30, 2000, the Company issued
unregistered securities in the following transactions:
1. On August 29, 2000, the Company issued an aggregate of 160,313 shares of
common stock, valued at $10.3 million, to shareholders of Questus Ltd.
("Questus"), as partial consideration for the acquisition of capital stock of
Questus.
The issuance of the securities in the transaction described in the
paragraph above was deemed not to be subject to the registration requirements
of the Securities Act of 1933, as amended, by virtue of Regulation S
promulgated thereunder.
The issuance of the securities was made in an offshore transaction, and in
connection with the offer and issuance no directed selling efforts were made
in the United States by the Company, a distributor, any of their respective
affiliates, or any person acting on behalf of any of the foregoing. Each of
the recipients certified that it was not a U.S. person, as such term is
defined in Rule 902 of the Securities Act, and that it was not acquiring the
securities for the account or benefit of any U.S. person, and made further
certifications regarding resale of the securities and hedging transactions.
(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 of $15.00 per share.
The offering resulted in gross 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 underwriters'
commissions, the Company received net proceeds of approximately $64.2 million.
As of September 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) $32.3 million was used to acquire assets or equity
interests in other businesses; and (iii) $1.3 net of reinvested interest and
asset management fees was used in our operations. The remaining proceeds,
approximating $22.0 million at September 30, 2000, are invested in short-term,
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 6. Exhibits and Reports on Form 8-K:
(a). Exhibits:
<TABLE>
<C> <S>
10.1 Sublease Agreement by and between the Company and Franklin
Templeton Corporate Services, Inc. dated as of April 14,
2000.
10.2 2000 Nonstatutory Stock Option Plan
10.3 Form of Stock Option Agreement and Grant Notice for the 2000
Nonstatutory Stock Option Plan
27 Financial Data Schedule
</TABLE>
(b). Reports on Form 8-K:
None.
17
<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.
/s/ Massih Tayebi
Date: November 13, 2000 By: _________________________________
Massih Tayebi
Chairman
/s/ Thomas A. Munro
By: _________________________________
Thomas A. Munro
President
18
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.1 Sublease Agreement by and between the Company and Franklin Templeton
Corporate Services, Inc. dated as of April 14, 2000.
10.2 2000 Nonstatutory Stock Option Plan
10.3 Form of Stock Option Agreement and Grant Notice for the 2000
Nonstatutory Stock Option Plan
27 Financial Data Schedule
</TABLE>
19
