Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 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)
Delaware 13-3818604
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4810 Eastgate Mall
San Diego, CA 92121
(858) 228-2000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $0.001 NASDAQ
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ______.
-------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [_]
The aggregate market value of the voting stock (Common Stock) held by
non-affiliates as of March 22, 2001 was approximately $130 million, based on
the closing sale price on the NASDAQ market exchange on that date. *
The number of shares outstanding of the Registrant's Common Stock was
43,844,089 as of March 22, 2001.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of registrant's proxy statement for the annual meeting to be
held on June 22, 2001 (the "Proxy Statement"), to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after
the close of the Registrant's fiscal year, are incorporated by reference under
Part III of this Form 10-K.
Certain exhibits filed with the registrant's (i) Registration Statement
on Form S-1 (No. 333-85515) and (ii) Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000 are incorporated by reference into Part IV of
this Form 10-K.
* Excludes the common stock held by executive officers, directors and
stockholders whose ownership exceeds 5% of the Common Stock outstanding at
March 22, 2001.
WIRELESS FACILITIES, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
Page No.
--------
PART I
Item 1. Business 3
Item 2. Properties 21
Item 3. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 22
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 23
Item 6. Selected Financial Data 24
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 25
Item 7a. Quantitative and Qualitative Disclosure about Market Risk 29
Item 8. Financial Statements and Supplementary Data 30
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 30
PART III
Item 10. Directors and Executive Officers of the Registrant 31
Item 11. Executive Compensation 31
Item 12. Security Ownership of Certain Beneficial Owners and Management 31
Item 13. Certain Relationships and Related Transactions 31
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 32
2
PART I
Item 1. Business
- --------------------
This report contains forward-looking statements. These statements relate to
future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"potential" or "continue," the negative of such terms or other comparable
terminology. These statements are only predictions. Actual events or results
may differ materially. Important factors which may cause actual results to
differ materially from the forward-looking statements are described in the
Section entitled "Risk Factors" in Item 1 in this Form 10-K, and other risks
identified from time to time in our filings with the Securities and Exchange
Commission, press releases and other communications.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of the forward-
looking statements. We are under no obligation to update any of the forward-
looking statements after the filing of the Form 10-K to conform such statements
to actual results or to changes in our expectations.
Description of the business
- ----------------------------
Introduction
Wireless Facilities, Inc. is an independent provider of outsourced services
for the wireless communications industry. We were incorporated in the state of
New York on December 19, 1994, began operations in March 1995 and reincorporated
in the state of Delaware in 1998. We completed our initial public offering on
November 5, 1999.
We plan, design, deploy and manage wireless telecommunications networks. This
work involves radio frequency engineering, site development, project management
and the installation of radio equipment networks. We have also expanded our
network management services, which involve day-to-day optimization and
maintenance of wireless networks. As part of our strategy, we are technology and
vendor independent. We believe that this aligns our goals with those of our
customers and enables us to objectively evaluate and recommend specific products
or technologies. We provide network design and deployment services to wireless
carriers such as Verizon and AT&T affiliates Telecorp PCS and Triton PCS;
equipment vendors such as Ericsson and Siemens and wireless data carriers, such
as Sprint and XO Communications.
The wireless telecom industry has experienced rapid growth over the past few
years and carriers have made large capital investments to expand their networks.
As carriers deploy these networks, they have been faced with a proliferation in
both the number and type of competitors. Due to this increasingly competitive
environment, carriers must focus on satisfying customer demand for enhanced
services, seamless and comprehensive coverage, better call quality, faster data
transmission and lower prices. The proliferation in services has also caused
carriers to experience challenges associated with managing complex networks and
new technologies. These changes have put pressure on carriers and equipment
vendors to allocate their resources effectively, which we believe has
increasingly led them to outsource network planning, deployment and management.
Our services are designed to improve our customers' competitive position
through the planning, deployment and management of their networks. We developed
a methodology of planning and deploying wireless networks that allows us to
deliver reliable, scalable network solutions. We offer our services primarily on
a fixed-price basis with scheduled deadlines for completion times, that is, on a
time-certain basis. We believe this enables our customers to more reliably
forecast the costs and timing of network deployment and management. This allows
our customers to focus on their core competencies and rely on us for planning,
deploying and managing their networks.
Since 1995, we have completed projects for more than 130 customers, ranging in
scope from the installation of a single cell site to multi-year, large-scale
deployment contracts. We have expanded our operations internationally and during
2000, were engaged on projects in 54 countries. In addition to our U.S.
operations, as of December 31, 2000, we had ongoing projects in countries
including Argentina, Brazil, Canada, Chile, Czech Republic, France, Germany,
3
India, Japan, Kuwait, Mauritius, Mexico, Morocco, Poland, Russia, South Africa,
Spain, Syria, Turkey, United Arab Emirates, the United Kingdom and Venezuela. In
2000, 28% of our revenues was derived from international operations.
Industry Background
Wireless networks are telecom systems built using radio equipment. The
implementation of a wireless network involves several project phases, including
planning, design and deployment. During the planning phase, decisions are made
about the type of equipment to be used, where it will be located and how it will
be configured. These decisions are based on a number of analytical
considerations, including phone subscriber profiles and target markets,
forecasts of call usage, radio engineering analysis and financial modeling and
forecasting. The design phase follows, and involves the coordinated efforts of
radio engineers, site development professionals and other technical disciplines.
Potential equipment sites are identified, based on a range of variables
including radio propagation characteristics, economics, site access, and
construction feasibility.
Once a network design has been accepted, land or building rooftops must be
bought or leased for towers or telecom equipment, including radio base stations,
antennas and supporting electronics. This site development phase requires input
from a number of specialists, including real estate, land use and legal
professionals who work with local jurisdictions to get any necessary land use,
zoning and construction permits. Next, construction and equipment installation
must be performed. Finally, radio frequency engineers commission the new radio
equipment, test it, integrate it with existing networks and tune the components
to optimize performance.
Once placed in service, wireless networks must be continually updated,
recalibrated, tuned and monitored for performance and faults. Traffic patterns
change, trees or buildings may block radio signals and interference may be
encountered from neighboring or competing networks or other radio sources. Usage
patterns may change because of new rate plans, new features or increasing sales.
Optimization is the process of tuning the network to take into account such
changes, and often gives rise to maintenance tasks such as antenna changes, new
equipment installations or the replacement of substandard or failed components.
Growth of the Wireless Telecom Industry
Wireless telecom has been one of the most rapidly growing technologies in the
world, driven by the dramatic increase in wireless telephone usage, as well as
demand for wireless Internet and other data services, also known as wireless
broadband services. In March 2001, Dataquest/Gartner estimated that by 2005, the
worldwide wireless subscriber base will grow to over 1.2 billion from 703
million in 2000. The demand for wireless Internet access and other data services
has accelerated the adoption of new technologies such as those embodied in the
emerging third-generation (3G) standard. High-speed fiber networks are being
coupled with broadband wireless technologies to deliver enhanced telecom
capabilities and features to new customers and markets.
Wireless carriers are under pressure to continuously upgrade their networks
with new technologies and expand into new geographic regions in order to remain
competitive and satisfy the demand for pervasive wireless service. Additionally,
new carriers have entered the market as a result of deregulation, the issuance
of new licenses and the demand for new services, fueling the development of new
networks. As a result, carriers have been deploying new network equipment both
in the U.S. and internationally. New technologies, such as broadband wireless,
are helping to fuel demand for more advanced wireless equipment. In September
2000, Dataquest/Gartner estimated that the market for broadband wireless
equipment in North America would grow from $146.3 million in 1999 to $1.45
billion in 2003, a compound annual growth rate of 77.6%.
Changes in the Wireless Telecom Industry
As carriers deploy their wireless networks, they face significant competition.
Through privatization in the 1980s and deregulation in the 1990s, both
domestically and internationally, the competitive landscape has changed for
4
wireless carriers. For carriers to differentiate themselves and remain
competitive in this new environment, they have been required to deploy networks
to:
. provide seamless nationwide coverage and avoid expensive roaming costs on
competitors' networks in markets where carriers do not currently own
infrastructure;
. offer PCS service in new geographic markets;
. offer enhanced services, such as one rate plans, calling party pays, caller
ID, text messaging and emergency 911 locator services;
. implement the new third-generation (3G) network standard to deliver
wireless broadband data services, including Internet access and two-way e-
mail;
. introduce other emerging data networking and broadband technologies, such
as LMDS, MMDS and other point-to-multipoint architectures, for the
provision of high speed data wireless Internet access and other broadband
services; and
. offer wireless local loop systems domestically to bypass incumbent wireline
competitors and in developing countries lacking modern wireline telephone
infrastructure.
The convergence of traditional wireless, wireline and cable services has also
added complexity to the telecom environment as carriers have deployed networks
spanning traditional wireless/wireline boundaries to offer these enhanced
services and new technologies.
New Challenges for Wireless Carriers and Equipment Vendors
Due to this increasingly competitive environment, carriers are focused on
satisfying customer demand for enhanced services, seamless and comprehensive
coverage, better quality, faster data transmission and lower prices. The
proliferation of carriers and new technologies has created an environment where
speed to market is an important component of a wireless carrier's success.
Carriers are also faced with the challenge of managing increasingly complex
networks and technologies. For example, the introduction of wireless Internet
technologies and the growth in broadband wireless services requiring the
transmission of large amounts of data creates additional new technological
hurdles for carriers establishing or upgrading their networks. In this dynamic
environment, customer acquisition and retention are key determinants of success.
In our experience this has led carriers to increasingly prioritize their
resources, focusing on revenue generating activities and outsourcing when they
can do so effectively.
In our experience, the changing environment is also placing significant
operational challenges on carriers. Carriers must make decisions about which
geographic markets to serve and which services and technologies to offer.
Staffing challenges and process implementations can present cost uncertainties
and operational challenges for carriers to deploy and manage their networks.
Additionally, networks are being deployed with equipment from unrelated vendors,
posing system integration challenges. This situation is exacerbated by
consolidation in the industry, which often entails the integration of distinct
networks.
Equipment vendors are also facing numerous challenges as they develop new
generations of equipment with increased features and functionality. Vendors must
provide equipment that can be deployed within a carrier's existing network and
integrate with equipment offered by other vendors. As a result of the rapid pace
of technological change, we believe that equipment vendors have increasingly
focused on offering competitive product solutions and outsourced services such
as network design, deployment and management.
5
The Need for Outsourcing
We believe that carriers and equipment vendors are outsourcing network
planning, deployment and management to focus on their core competencies and
refine their competitive advantage. In our experience, wireless carriers and
equipment vendors who are seeking outsourcing are looking for service providers
who:
. offer turnkey solutions;
. are technology and vendor independent;
. offer fixed-price, time-certain services;
. have sufficient numbers of highly skilled, experienced employees capable of
designing and deploying large-scale domestic and international projects;
and
. update, manage, optimize, monitor and maintain networks.
The WFI Solution
We provide outsourced services to telecom carriers and equipment vendors for
the planning, design, deployment and ongoing optimization and management of
wireless networks. We offer turnkey solutions on a fixed-price, time-certain
basis. We have expertise with all major wireless technologies, and have deployed
equipment supplied by a majority of the world's leading equipment vendors. We
are better able to manage large-scale deployments for our customers, both
domestically and internationally. Our project management process enables us to
meet our customers' needs on time and within budget without compromising
quality.
Turnkey Solutions. Traditionally, carriers engaged a number of firms or used
internal personnel to build and operate their wireless networks. In this case,
the carrier was responsible for the coordination and integration of the various
groups and defined and implemented the process to be used. The end-to-end, or
turnkey, approach that we offer allows the carrier to engage a single
responsible party who is accountable for delivering and managing the network
under a single contract. In contrast to traditional methods, we provide
management services during each phase of the engagement, enabling us to
efficiently schedule processes and resources, reducing the time and cost of
network deployment and management. We provide our customers with a primary point
of accountability and reduce the inefficiencies associated with coordinating
multiple subcontractors. In addition, we eliminate the need for a carrier or
equipment vendor to assemble, train and retain network deployment and management
staff, resulting in cost savings. This allows carriers and vendors to focus
their resources on revenue generating activities.
Technology and Vendor Independence for Both Mobile and Fixed Wireless
Operations. We have experience in all major wireless technologies, including:
conversion of analog, cellular systems to digital capability (CDMA, TDMA, GSM,
and iDEN); deployment of digital PCS systems; migration to 3G network platforms
to provide high speed wireless data internet capability, such as UMTS spectrum
in Europe; and development of emerging broadband technologies in the MMDS and
LMDS spectrums. Two critical components of our ability to meet and exceed
customer expectations are our broad scope of services and our technology
expertise and independence. We are continually keeping abreast of next
generation technologies to maintain technology expertise. Consistent with our
vendor independent policy, we have not aligned ourselves with the products of
any particular vendor. We provide services to many of the largest wireless
carriers and with engineering staff qualified and approved by nearly every major
wireless equipment vendor. Our technology and vendor independence results in
objective recommendations to the customer based on the full profile of the
customer's needs.
Fixed-Price and Time-Certain Delivery. Our services are sold primarily on a
fixed-price, time-certain basis, where our customers pay by the cell site or
project, rather than by the hour. By selling our services primarily on a fixed-
price, time-certain basis, we enable our customers to better forecast their
capital expenditures and more accurately forecast the timing and costs of
network deployment and management.
6
This allows them to focus on their core competencies and rely on us for the
cost-effective planning, deployment and management of their networks.
Proven Methodology. Our project management process enables us to meet our
customers' needs on a fixed-price, time-certain basis without compromising
quality. We leverage our experience, obtained from implementing hundreds of
projects, to reduce time to market for new projects. For example, project
managers utilize our project management process to chart project progress and
coordinate the integration of numerous specialized activities during the design
and deployment of a network. We have dedicated staff employed to facilitate
efficient feedback of information among the various specialized activities so
that our project teams work quickly and effectively. Through this coordinated
effort and the use of Dynamic Tracker, our project tracking software tool, we
are able to optimize resource deployment and deliver solutions on time and
within budget.
Depth and Scale. Our principal asset is our staff, 88% of whom work directly
on customer projects. As of December 31, 2000, we had more than 680 engineers,
30% of whom have advanced degrees. Our technological expertise and industry
knowledge has enabled us to form strong customer relationships with early stage
telecom ventures, as well as established carriers and equipment vendors. During
2000, we were engaged on projects in 54 countries. In addition, we have
established corporate resource centers in Mexico, Brazil, India, the United
Kingdom and Sweden. We believe our presence in these countries facilitates our
ability to customize our services to meet international customers' specific
needs.
Strategy
Our objective is to be the global leader in telecom outsourcing. This means
being the leading independent provider of complete outsourced telecom network
services, including network planning; design; deployment; and management. The
key elements of our strategy include:
Focus on customer satisfaction. Our long-term success depends upon our ability
to consistently deliver value to our customers in the form of completed
projects, rendered to the highest professional standards, delivered on time and
within budget. By offering turnkey solutions on a fixed-price, time-certain
basis, we hold ourselves to the expectations set with our customers. We strive
to exceed customer expectations on every project. We believe we have been
successful in developing customer loyalty and trust because of our high
standards and vendor and technology independence. Customer satisfaction is
demonstrated by the fact that a majority of our customers have used WFI services
for repeat projects.
Expand the suite of services we offer and pursue cross-selling opportunities.
Since our inception, we have continually looked for new ways to serve our
customers. Expanding our services provides new channels for revenues and the
ability to cross-sell our suite of services to existing customers. For instance,
we often utilize our pre-deployment consulting services to establish
relationships with customers as soon as a project is conceived. Based on this
relationship, we pursue opportunities for network design and deployment. Once a
network is deployed, we offer ongoing network operations, maintenance and
optimization services. Through our network operations center in Richardson,
Texas, we also centrally manage, monitor and optimize the networks of several of
our customers. Our experience with emerging technologies also offers cross-
selling opportunities for network upgrades and deployment of a carrier's next
generation network. As technologies continue to evolve and networks become more
complex, we will continue to expand our services to meet the changing needs of
our customers.
Remain at the forefront of new technologies. Emerging technologies present
numerous opportunities and challenges for existing carriers and vendors as well
as for new carriers. Our customers depend on us to draw upon our extensive
design and deployment experience to recommend optimal solutions to them. To
achieve this, we have in-house training programs for all technical personnel. We
will continue to actively market our technology expertise to wireless carriers
and equipment vendors that are deploying leading edge technologies. This permits
us to gain valuable experience deploying new technologies, while also adding
value to these customers' products and services offerings. Additionally,
employees in our Advanced Technology Group are members of and participate with
industry standards setting bodies to develop domestic and international
7
standards for next generation telecom products by attending standard setting
forums and making contributions to new standards.
Pursue opportunities for international growth. International markets represent
a significant opportunity for future growth. We established corporate resource
centers in Mexico and Brazil in 1998 and India and the United Kingdom in 1999
and have continued this expansion in 2000 by adding a corporate resource center
in Sweden. We intend to increasingly execute international projects with local
professional resources. Initially, our international revenues resulted from
deployment contracts with multinational equipment vendors. However, as we
continue to penetrate foreign markets, we expect to continue to capitalize on
opportunities created by privatization, new licensees and the expansion of
wireless local loop networks.
Continue to attract and retain qualified personnel. Technology drives our
industry. As a result, our engineers and site development teams are critical to
our success. We have implemented an institutional process for career
development, training and advancement. We intend to continue to attract and
retain qualified staff by offering our employees challenging projects and
opportunities to work with emerging technologies within a corporate culture that
fosters innovation and encourages learning and professional development. We
intend to continue to invest in training and professional development.
Capitalize on prior project experience. We have participated in the deployment
of thousands of cell sites. The experience we have gained through these projects
is reflected in our project management process and proprietary project
management tools. This experience allows us to optimize the allocation of our
resources and consistently meet our customers' needs on a fixed-price, time-
certain basis without compromising quality. We will also seek to transfer our
knowledge gained in international markets, such as the deployment of 3G
technology in domestic markets. We will continue to refine our processes,
methodologies and project management tools, matching them to new customer and
technology requirements.
Continue to pursue strategic acquisitions. We intend to continue to pursue
acquisitions that will supplement our technical expertise, allow us to acquire
additional human resources or strategic customer relationships or expand our
presence in key geographic markets where we could more effectively complete a
project or gain access to new contracts. During 2000, we acquired seven
businesses to strengthen our ability to provide ongoing network optimization and
management services, extend our geographic reach, broaden our technical
expertise and add professional resources.
Network Services
We provide a comprehensive suite of network solutions to wireless carriers and
equipment vendors, from feasibility planning, to design, deployment and ongoing
network management.
Pre-Deployment Planning Services: Telecom Strategy Group
We provide pre-deployment planning services for all steps involved in
technology assessment, market analysis, and business plan development.
Market Analysis. The market team studies and analyzes the traffic patterns,
population density, topography and propagation environment in each market under
consideration. We have a well-developed capability in geographic information
systems (GIS) services, which is used for network design as well as deployment.
We have developed a proprietary methodology to assist customers in analysis of
the competitive landscape for broadband services.
Technology Evaluation and Vendor Selection. The Advanced Technology Group, a
group of experts in wireless telecom technologies and applications, assists
customers in determining the best equipment for a particular project, analyzing
the feasibility of a particular technology for a network plan and managing the
bidding process from multiple equipment vendors. Consistent with our
independence from vendors and technology, evaluation and selections are made to
suit the customers profile of needs.
8
Strategic and Business Consulting. Our business consulting group utilizes its
expertise and experience to analyze the financial, engineering, competitive
market and technology issues applicable to a proposed technology or network
deployment project. Drawing on the demographic analysis and preliminary network
dimensioning performed by the market analysis team and benchmarks for
deployment-related expenditures from our various functional groups, consultants
create new business strategies or evaluate existing deployment strategies.
Services include:
. defining subscriber profiles and target markets, including competitive and
regulatory analysis;
. developing service offerings and marketing plans that drive usage
forecasting;
. network design and backbone configuration; and
. business plan development and financial modeling.
These services are particularly important to start-up carriers that have
limited resources and access to information for emerging technologies such as 3G
and broadband wireless.
We have worked on a number of high profile business and technology planning
projects in the wireless industry, covering a range of mobile broadband, and
satellite technologies. Although the size of these projects is typically smaller
in scope than design and deployment projects, they are strategically important
to us because they represent opportunities to build relationships and
credibility with customers during the planning phase as well as enhance our
experiences with leading edge technologies. These services are offered on both a
time and materials and fixed price basis.
Design and Deployment Services
We provide a range of services for the full design and deployment of wireless
networks. Such services include:
Radio Frequency Engineering. Radio frequency engineers design each integrated
wireless system to meet the customer's transmission requirements. These
requirements are based upon a projected level of subscriber density and traffic
demand and the coverage area specified by the operator's license or cost-benefit
decisions. Our engineers perform the calculations, measurements and tests
necessary to determine the optimal placement of the wireless equipment. In
addition to meeting basic transmission requirements, the radio frequency network
design must make optimal use of radio frequency and result in the highest
possible signal quality for the greatest portion of subscriber usage within
existing constraints. The constraints may be imposed by cost parameters,
terrain, license limitations, interference with other operators, site
availability, applicable zoning requirements and other factors.
Microwave Relocation. To enable customers to use the radio frequency spectrum
they have licensed, it is often necessary for them to analyze the licensed
spectrum for microwave interference and move incumbent users of this portion of
the spectrum to new frequencies. We assist our customers in accomplishing this
microwave relocation by providing complete point-to-point and point-to-
multipoint line-of-sight microwave engineering and support services. Engineering
and support services include identifying existing microwave paths, negotiating
relocation with incumbent users, managing and tracking relocation progress and
documenting the final decommissioning of incumbent users.
Fixed Network Engineering. Most wireless calls are ultimately routed through a
wireline network. As a result, the traffic from wireless networks must be
connected with switching centers within wireline networks. We establish the
most efficient method to connect cell sites to the wireline backbone, whether by
microwave radio or by landline connections. Our engineers are involved in
specifying, provisioning and implementing fixed network facilities.
Additionally, the convergence of voice and data networks, specifically through
broadband technologies, such as LMDS, MMDS and Fast Ethernet, has created a new
9
demand for specialized fixed network engineering skills. These skills include
planning, design, capacity and traffic analysis for packet-switched and Internet
protocol router-based network elements. Engineering teams are trained in
specialized data networking and Internet protocol engineering issues.
Site Development. Site development experts study the feasibility of placing
base stations in the area under consideration from a zoning perspective,
negotiate leases and secure building permits, supervise and coordinate the civil
engineering required to prepare the rooftop or tower site, manage multiple
construction subcontractors and secure the proper electrical and telecom
connections.
Installation and Optimization Services. We install radio frequency equipment,
including base station electronics and antennas, and recommend and implement
location, software and capacity changes required to meet the customer's
performance specifications. We provide installation and optimization services
for all major PCS, cellular and broadband wireless air interface standards and
equipment manufacturers. We also perform initial optimization testing of
installed networks to maximize the efficiency of these networks.
Network Management Services
Network management services are comprised of post-deployment radio frequency
optimization services and network operations and maintenance services. In March
2000, we expanded our network management services by acquiring from Ericsson a
network operations center located in Richardson, Texas, and we are currently
providing centralized network monitoring and optimization services for several
of our customers from this site.
Post-Deployment Radio Frequency Optimization. Upon initial deployment, a
network is optimized to provide wireless service based upon a set of parameters
existing at that time, such as cell density, spectrum usage, base station site
locations and estimated calling volumes and traffic patterns. Over time, call
volumes or other parameters may change, requiring, for example, the relocation
of base stations, addition of new equipment or the implementation of system
enhancements. We offer ongoing radio frequency optimization services to
periodically test network elements, tune the network for optimal performance and
identify elements that need to be upgraded or replaced.
Network Operations and Maintenance. For customers with ongoing outsourcing
needs, we can assume responsibility for day-to-day operation and maintenance of
their wireless networks. The relationship we develop with our customers for this
type of outsourcing contract begins with a team of engineers and other
professional and support staff matched to the customer's specific needs. We take
into account such variables as grade of service and reliability requirements,
equipment manufacturer certification and geographic layout of the system in
question for determining the allocation of site maintenance and other
responsibilities between our service team and the customer's own personnel. We
provide staffing to perform the necessary services for ongoing optimization,
operations, maintenance and repair of critical network elements, including base
station equipment, mobile switching centers and network operating centers to the
extent required by its customers. We also provide training services for the
internal network staff of our customers.
The WFI Methodology
We believe that our project management process is critical for the successful
execution of our business model. Project managers use our methodology and
proprietary tools to coordinate the various specialized activities involved in
bidding, planning, designing, deploying and optimizing networks on an ongoing
basis. Through the coordination of project managers and functional experts, we
are able to integrate and account for the various pieces of a turnkey
engagement.
We have built upon past experiences in developing an analytical framework to
provide scalable solutions to clients. While there are features unique to each
project, there are often similarities among projects. The project management
process is designed to bring the expertise developed during prior engagements to
bear on each new project.
10
We continue to dedicate resources to maintaining and improving the project
management process. At the conclusion of each engagement, incremental knowledge
gained during the course of the project is incorporated into a knowledge
database. We believe that the implementation and improvement of the project
management process ultimately benefits clients. The methodology enables us to
leverage technological and industry expertise to deliver reliable networks in a
rapid fashion without sacrificing quality. We are committed to continually
refine the project management process, customizing it for each new customer and
for each new technology opportunity.
Sales and Marketing
We market and sell services through a direct sales force to wireless carriers
and equipment vendors. As of December 31, 2000, we employed 25 full-time sales
and marketing staff. Sales personnel work collaboratively with senior
management, consulting and deployment personnel to develop new sales leads and
secure new contracts. Each salesperson is expected to generate new sales leads
and take responsibility as an account manager for specified accounts with
existing customers. As account manager, the salesperson works with planning and
deployment personnel assigned to that customer to identify opportunities for
performing additional services for that customer.
Customers
We provide network design, deployment and management services to wireless
carriers and equipment vendors. We are also actively targeting carriers
deploying new wireless broadband networks. Additionally, we have provided
services to satellite service providers and wireless tower companies. Since
1995, we have completed projects for more than 130 customers. As of December 31,
2000, we had ongoing projects in 54 countries. A representative list of our
customers during 2000 includes Cingular, AT&T Wireless, Verizon, Ericsson,
Sprint PCS, Triton PCS, Telecorp PCS, Siemens, Telcel, Metricom and XO
Communications.
Employees
As of December 31, 2000, we employed 2,072 full time employees worldwide,
including 1,822 in network and deployment services, 25 in sales and marketing,
and 225 in general and administrative roles. None of our employees, with the
exception of our Scandinavian employees, are represented by a labor union, and
we have not experienced any work stoppages. We consider our employee relations
to be satisfactory.
Competition
Our market is highly competitive and fragmented and is served by numerous
service providers. However, primary competitors are often the internal
engineering departments of carrier and equipment vendor customers. With respect
to radio frequency engineering services, we compete with service providers that
include American Tower CelPlan Technologies, Comsearch (a subsidiary of Allen
Telecom Inc.), LCC International, and Marconi Communications. We compete with
site acquisition service providers that include General Dynamics and Whalen &
Company, Inc. (a subsidiary of Tetra Tech, Inc.). These companies have also
engaged in some site management activities. Competitors that perform civil
engineering work during a build-out are normally regional construction
companies. We compete with engineering and project management companies like
Bechtel Group, Inc., Black & Veatch and Fluor Daniel Inc. for the deployment of
wireless networks. These companies are significant competitors given their
project finance capabilities, reputations and international experience. Many of
these competitors have significantly greater financial, technical and marketing
resources, generate greater revenues and have greater name recognition than we
do.
We believe that the principal competitive factors in our market include the
ability to deliver results within budget and on time, reputation,
accountability, project management expertise, industry experience and
competitive pricing. In addition, expertise in new and evolving technologies,
such as broadband wireless, has become increasingly important. We believe that
the ability to integrate these technologies, as well as equipment from multiple
vendors, gives us a competitive advantage as we can offer the best
11
technology and equipment to meet a customer's needs. We believe our ability to
compete also depends on a number of additional factors which are outside of our
control, including:
. the prices at which others offer competitive services;
. the willingness of our competitors to finance customers' projects on
favorable terms;
. the ability of our customers to perform the services themselves; and
. the extent of our competitors' responsiveness to customer needs.
Industry Segment Information
Our operations are organized along service lines and include three reportable
industry segments: Design and Deployment, Network Management, and Business
Consulting. The following table sets forth the contribution of our industry
segments to revenues and operating income for the fiscal year ended December
31, 2000 (in millions):
Operating
Revenues Income
--------- ------
Design and deployment $205.6 $38.9
Network management $ 42.7 $10.7
Business consulting $ 7.6 $ 2.4
------ -----
Total $255.9 $52.0
====== =====
Geographic Segment Information
In 2000 we realized approximately 28% of our revenues from projects
outside of the U.S. Revenues for the year ended December 31, 2000 and long-term
assets at December 31, 2000 derived by geographic segment are as follows (in
millions):
Revenues Assets
-------- ------
United States $ 183.7 $ 71.5
Foreign $ 72.2 $ 30.3
------- -------
Total $ 255.9 $ 101.8
======= =======
Recent Events
On February 9, 2001, we executed an amended and restated credit
agreement, which increased the aggregate commitment provided by our credit
facility from $50 million to $100 million. The borrowings under this credit
agreement are due in February 2004 and bear interest at either (i) the greater
of the bank prime rate or the Federal Funds Rate plus .5%, plus a margin of
1.25%, the base rate margin, or (ii) at the London Interbank Offering Rate
("LIBOR") plus 2.25%, the LIBOR rate margin, at our discretion. Beginning with
the third quarter of 2001, the base rate margin and the LIBOR rate margin will
be determined based on certain financial ratios as of the end of the most
recently ended fiscal quarter which will result in margins ranging from .75% to
1.50% and 1.75% to 2.50%, respectively. The credit facility is secured by
substantially all of our assets. The agreement contains restrictive covenants,
which, among other things, requires maintenance of certain financial ratios.
On February 23, 2001, we announced that we received notice of contract
suspension and termination from Metricom, Inc., with regard to remaining RF
engineering and deployment services for Metricom's data network buildout, which
would have been provided during the first and second quarter of our fiscal 2001.
Beyond the second quarter, we do not anticipate any material impact related to
Metricom's notice of contract suspension and termination.
On March 2, 2001, the Company's Board of Directors approved a
voluntary stock option cancel and regrant program for employees. The program
provides employees with the opportunity to cancel all of their existing and
outstanding stock options granted to them on or after September 30, 2000 and
before March 30, 2001, and some or all of their existing and outstanding stock
options granted to them prior to September 30, 2000, in exchange for a new
option grant for an equal number of shares to be granted at a future date. The
new options will be issued no earlier than six months and one day after the
cancellation date, March 30, 2001, and the exercise price of the new options is
to be based on the trading price of our common stock on the date of the new
option grants. The exchange program is designed to comply with FASB
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation."
Risk Factors
You should carefully consider the following risk factors and all other
information contained in this Report on Form 10-K. Investing in our common stock
involves a high degree of risk. Risks and uncertainties, in addition to those we
describe below, that are not presently known to us or that we currently believe
are immaterial may also impair our business operations. If any of the following
risks occur, our business could be harmed, the price of our common stock could
decline and you may lose all or part of your investment. See the note regarding
forward-looking statements included at the beginning of Item 1. Business.
-----------------
We expect our quarterly results to fluctuate. If we fail to meet earnings
estimates, our stock price could decline.
Our quarterly and annual operating results have fluctuated in the past and
will vary in the future due to a variety of factors, many of which are outside
of our control. The factors outside of our control include:
. telecom market conditions and economic conditions generally;
. the timing and size of network deployment by our carrier customers and the
timing and size of orders for network equipment built by our vendor
customers;
. fluctuations in demand for our services;
. the length of sales cycles;
. reductions in the prices of services offered by our competitors; and
. costs of integrating technologies or businesses.
The factors substantially within our control include:
. changes in the actual and estimated costs and timing to complete fixed-
price, time-certain projects;
. the timing of expansion into new markets, both domestically and
internationally; and
. the timing and payments associated with possible acquisitions.
Due to these factors, quarterly revenues, expenses and results of operations
could vary significantly in the future. You should take these factors into
account when evaluating past periods, and, because of the potential variability
due to these factors, you should not rely upon results of past periods as an
indication of our future performance. In addition, we may from time to time
provide estimates of our future performance. Such estimates are inherently
uncertain and actual results are likely to deviate, perhaps substantially, from
such estimates as a result of the many risks and uncertainties in our business,
including those set forth in these risk factors. We undertake no duty to update
such estimates if given. In addition, the long-term viability of our business
could be negatively impacted if there were a downward trend in our revenues and
results of operations. Because our operating results may vary significantly from
quarter to quarter based upon the factors described above, results may not meet
the expectations of securities analysts and investors, and this could cause the
price of our common stock to decline significantly.
We have recently begun to experience a negative impact to our earnings and
stock price as a result of the factors that may cause our quarterly results to
fluctuate. We expect that this negative trend may continue for the forseeable
future, and at least through the second quarter of 2001. Due to the recent
downturn in the financial markets in general, and specifically the slowdown in
wireless telecommunications infrastructure spending, some of our customers have
recently cancelled or suspended their contracts with us and many of our
customers or potential customers have postponed entering into new contracts for
our services. As a result, we expect our revenues and earnings to decline from
previously estimated levels. In addition, unfavorable economic conditions are
causing some of our customers to take longer to pay us for services we perform,
increasing the average number of days that our sales are outstanding. Also due
to the difficult financing and economic conditions, some of our customers may
not be able to pay us for services that we have already performed. If we are not
able to collect amounts due to us, we may be required to write-off or convert
significant amounts of our accounts receivable. Because we are not able to
reduce our costs as fast as our revenues may decline, our costs as a percentage
of revenues may increase and, correspondingly, our net earnings may decline
disproportionately to any decrease in revenues. If we restructure our business
in an effort to minimize our expenses, we may incur associated charges. As a
result of these and other factors, it has become extremely difficult to forecast
our future revenues and earnings, and any predictions we make are subject to
significant change and are very uncertain.
Our success is dependent on the continued growth in the deployment of wireless
networks; and to the extent that such growth cannot be sustained our business
may be harmed.
The wireless telecom industry has historically experienced a dramatic rate of
growth both in the United States and internationally. Recently, however, many
telecom carriers have been re-evaluating their network deployment plans in
response to downturns in the capital markets, changing perceptions regarding
industry growth and the adoption of new wireless technologies, and a general
economic slowdown in the United States. It is difficult to predict whether
these changes will result in a sustained downturn in the telecom industry. If
the rate of growth slows and carriers reduce their capital investments in
wireless infrastructure or fail to expand into new geographies, our business
will be significantly harmed.
The uncertainty associated with rapidly changing telecommunications
technologies may also impact the rate of deployment of wireless networks and the
demand for our services. Telecommunications service providers face significant
challenges in assessing consumer demand and acceptance of rapidly changing
enhanced telecommunication capabilities. If telecommunications service providers
perceive that the rate of acceptance of next generation telecommunications
products will grow more slowly than expected, they may slow their development of
next generation technologies. Any significant slowdown will reduce the demand
for our services and adversely affect our financial results.
Our revenues will be negatively impacted if there are delays in the deployment
of new wireless networks.
A significant portion of our revenue is generated from new licensees seeking
to deploy their networks. To date, the pace of network deployment has sometimes
been slower than expected, due in part to difficulty experienced by holders of
licenses in raising the necessary financing, and there can be no assurance that
future bidders for licenses will not experience similar difficulties. There has
also been substantial regulatory uncertainty regarding payments owed to the
United States Government by past successful wireless bidders, and such
uncertainty has delayed network deployments. In addition, factors adversely
affecting the demand for wireless services, such as allegations of health risks
associated with the use of cellular phones, could slow or delay the deployment
of wireless networks. These factors, as well as future legislation, delays in
granting the use of spectrum by the United States Government, legal decisions
and regulation may slow or delay the deployment of wireless networks, which, in
turn, could harm our business.
If our customers do not receive sufficient financing, our business may be
seriously harmed.
Some of our customers and potential customers are companies with limited or no
operating histories and limited financial resources. These customers often must
obtain significant amounts of financing to pay for their spectrum licenses, fund
operations and deploy their networks. Other customers of ours rely upon outside
financing to pay the considerable costs of deploying their networks. In either
instance, we frequently work with such companies prior to their receipt of
financing. If these companies fail to receive adequate financing or experience
delays in receiving financing, particularly after we have begun working with
them, our results of operations may be harmed.
Our success is dependent on the continued trend toward outsourcing wireless
telecom services.
Our success is dependent on the continued trend by wireless carriers and
network equipment vendors to outsource for their network design, deployment and
management needs. If wireless carriers and network equipment vendors elect to
perform more network deployment services themselves, our revenues may decline
and our business would be harmed.
A loss of one or more of our key customers or delays in project timing for
such customers could cause a significant decrease in our net revenues.
We have derived, and believe that we will continue to derive, a significant
portion of our revenues from a limited number of customers. We anticipate that
our key customers will change in the future as current projects are completed
and new projects begin. The services required by any one customer can be limited
by a number of factors, including industry consolidation, technological
developments, economic slowdown and internal budget constraints. None of our
customers is obligated to purchase additional services and most of our customer
contracts can be terminated without cause or penalty by the customer on notice
to us of 90 days or less. As a result of these factors, the volume of work
performed for specific customers is likely to vary from period to period, and a
major customer in one period may not use our services in a subsequent period.
Accordingly, we cannot be certain that present or future customers will not
terminate their network service arrangements with us or significantly reduce or
delay their contracts. Any termination, change, reduction or delay in our
projects could seriously harm our business.
The consolidation of equipment vendors or carriers could impact our business.
Recently, the wireless telecom industry has been characterized by significant
consolidation activity. This consolidation may lead to a greater ability among
equipment vendors and carriers to provide a full suite of network services, and
could simplify integration and installation, which may lead to a reduction in
demand for our services. Moreover, the consolidation of equipment vendors or
carriers could have the effect of reducing the number of our current or
potential customers, which could result in their increased bargaining power.
This potential increase in bargaining power could create competitive pressures
whereby a particular customer may request our exclusivity with them in a
particular market and put downward pressure on the prices we charge for our
services. Accordingly, we may not be able to represent some customers who wish
to retain our services.
12
We may not be able to hire and retain a sufficient number of qualified
engineers or other employees to sustain our growth, meet our contract
commitments or maintain the quality of our services.
To the extent we continue to grow, our future success will depend on our
ability to hire and retain additional highly skilled engineering, managerial,
marketing and sales personnel. Competition for such personnel is intense,
especially for engineers, and project managers and we may be unable to attract
sufficiently qualified personnel in adequate numbers to meet the demand for our
services in the future. In addition, as of December 31, 2000, 20% of our
employees in the United States were working under H-1B visas. H-1B visas are a
special class of nonimmigrant working visas for qualified aliens working in
specialty occupations, including, for example, radio frequency engineers. We are
aware that the Department of Labor has issued interim final regulations that
place greater requirements on H-1B dependent companies, such as ours, and may
restrict our ability to hire workers under the H-1B visa category in the future.
In addition, immigration policies are subject to rapid change and any
significant changes in immigration law or regulations may further restrict our
ability to continue to employ or to hire new workers on H-1B visas and could
harm our business.
13
A significant percentage of our revenue is accounted for on a percentage-of-
completion basis which could cause our quarterly results to fluctuate.
A significant percentage of our revenue is derived from fixed priced contracts
which are accounted for on a percentage-of-completion basis. The portion of our
revenue from fixed price contracts accounted for approximately 70% of our
revenues for the year ended December 31, 2000. With the percentage-of-completion
method, in each period we recognize expenses as they are incurred and we
recognize revenue based on a comparison of the current costs incurred for the
project to the then estimated total costs of the project. Accordingly, the
revenue we recognize in a given quarter depends on the costs we have incurred
for individual projects and our then current estimate of the total remaining
costs to complete individual projects. If in any period we significantly
increase our estimate of the total costs to complete a project, we may recognize
very little or no additional revenue with respect to that project. As a result,
our gross margin in such period and in future periods may be significantly
reduced and in some cases we may recognize a loss on individual projects prior
to their completion. For example, in 1999 we revised the estimated costs to
complete two large contracts which resulted in a reduction of gross margins of
9.9% in the first quarter of 1999 and 6.9% in the second quarter of 1999. To the
extent that our estimates fluctuate over time or differ from actual
requirements, gross margins in subsequent quarters may vary significantly from
our estimates and could harm our business and financial results.
Similarly, the cancellation or modification of a contract which is accounted
for on a percentage-of-completion basis may adversely affect our gross margins
for the period during which the contract is modified or cancelled. Under certain
circumstances, a cancellation or modification of a fixed-price contract could
also result in us being required to reverse revenue that was recognized in a
prior period, which could significantly reduce the amount of revenues recognized
for the period in which the adjustment is made. For example, if we have a three
year fixed price contract where the contract fee is $1 million and the initial
estimated costs associated with the contract are $550,000, and if, during the
first year we incur $220,000 in costs related to the contract and
correspondingly estimate that the contract is 40% complete, then under the
percentage-of-completion accounting method we would recognize 40%, or $400,000
in revenue during the first year of the contract. If, during the second year of
the contract the project is terminated with 35% of the services deemed provided
to the client, then the total revenue for the project would be adjusted downward
to $350,000, and the revenue recognizable during the second year would be the
total revenue earned to date, the $350,000 less the revenue previously
recognized or $400,000, resulting in a reversal of $50,000 of revenue previously
recognized. To the extent we experience adjustments such as those described
above, our revenues and profit margins will be adversely affected.
Our business may be harmed if we maintain or increase our staffing levels in
anticipation of one or more projects and underutilize our personnel because such
projects are delayed, reduced or terminated.
Since our business is driven by large, and sometimes multi-year, contracts,
we forecast our personnel needs for future projected business. If we maintain or
increase our staffing levels in anticipation of one or more projects and such
projects are delayed, reduced or terminated, we may underutilize these
additional personnel, which would increase our general and administrative
expenses, reduce our earnings and possibly harm our business.
Additionally, due to recent market conditions, we are faced with the challenge
of managing the appropriate size of our workforce in light of projected demand
for our services. If we maintain a workforce sufficient to support a resurgence
in demand, then in the meantime our general and administrative expenses will be
high relative to our revenues and our profitability will suffer. Alternatively,
if we reduce the size of our workforce too quickly in response to any decrease
in the demand for our services, then our ability to quickly respond to any
resurgence in demand will be impaired. As a result, to the extent that we fail
to successfully manage this challenge our financial results will be harmed.
Our short operating history and recent growth in expanding services limits our
ability to forecast operating results.
14
We have generated revenues for only six years and, thus, we have only a short
history from which to predict future revenues. This limited operating
experience, together with the dynamic market environment in which we operate,
including fluctuating demand for our services, reduces our ability to
accurately forecast our quarterly and annual revenues. Further, we plan our
operating expenses based primarily on these revenue projections. Because most of
our expenses are incurred in advance of anticipated revenues, we may not be able
to decrease our expenses in a timely manner to offset any unexpected shortfall
in revenues. For further financial information relating to our business, see
"Selected Consolidated Financial Data" and "Management's Discussion and Analysis
of Financial Condition and Operating Results."
15
If we are unable to effectively manage potential growth in the demand for our
services our business will not operate efficiently and our results of operations
will be negatively affected.
We have experienced a period of significant expansion that has placed a
significant strain on our managerial, operational and financial resources. From
January 1, 2000 to December 31, 2000, we increased our number of employees from
828 to 2,072. If demand for our new and existing services continues to grow,
then in order to increase our revenues significantly, we will need to hire a
substantial number of additional employees, including project management,
engineering and direct sales and marketing personnel. The actual number of
employees we will need to hire is not determinable and may fluctuate drastically
depending on the size and number of new contracts we receive and any changes to
the scope of our existing projects.
If we continue to grow at a rapid pace, we will need to manage the expansion
of our operations and personnel. Specifically, we will be required to:
. improve existing and implement new operational, financial and management
controls, reporting systems and procedures;
. complete the implementation of a new financial management and accounting
software program and install other new management information systems; and
. integrate, train, motivate and manage employees.
If we fail to address the issues above or if our business does not continue to
grow, our business may be harmed.
Our operating results may suffer because of competition in the wireless
services industry.
The network services market is highly competitive and fragmented and is served
by numerous companies. Many of these competitors have significantly greater
financial, technical and marketing resources, generate greater revenues and have
greater name recognition and experience than us. We do not know of any
competitors that are dominant in our industry. For a further description of our
competition, see "Business-- Competition."
We believe that the principal competitive factors in our market include the
ability to deliver results within budget and on time, reputation,
accountability, project management expertise, industry experience and pricing.
In addition, expertise in new and evolving technologies, such as wireless
Internet services, has become increasingly important. We also believe our
ability to compete depends on a number of factors outside of our control,
including:
. the prices at which others offer competitive services;
. the ability and willingness of our competitors to finance customers'
projects on favorable terms;
. the ability of our customers to perform the services themselves; and
. the extent of our competitors' responsiveness to customer needs.
We may not be able to compete effectively on these or other bases, and, as a
result, our revenues or income may decline and harm our business.
We must keep pace with rapid technological change, market conditions and
industry developments to maintain or grow our revenues.
The market for wireless and other network system design, deployment and
management services is characterized by rapid change and technological
improvements. Our future success will depend in part on our ability to enhance
our current service offerings to keep pace with technological developments and
to address increasingly sophisticated customer needs. We may not be successful
in developing and marketing in a timely manner service offerings that respond to
the technological advances by others and our services may not adequately or
competitively address the needs of the changing marketplace. If we are not
successful in responding in a timely manner to technological change, market
conditions and industry developments, our revenues may decline and our business
may be harmed.
16
Our business operations could be significantly disrupted if we lose members of
our management team.
Our success depends to a significant degree upon the continued contributions
of our executive officers, both individually and as a group. See "Management--
Directors, Executive Officers and Key Employees", incorporated by reference
herein, for a listing of such executive officers. Our future performance will be
substantially dependent on our ability to retain and motivate them.
We may not be successful in our efforts to identify, acquire or integrate
acquisitions.
Our failure to manage risks associated with acquisitions could harm our
business. An important component of our business strategy is to expand our
presence in new or existing markets by acquiring additional businesses. During
2000, we acquired seven businesses. We are almost continuously engaged in
discussions or negotiations regarding the acquisition of businesses or strategic
investments in businesses, some potentially material in relation to our size. We
may not be able to identify, acquire or profitably manage additional businesses
or integrate successfully any acquired businesses without substantial expense,
delay or other operational or financial problems. Acquisitions involve a number
of risks, including:
. diversion of management's attention;
. difficulty in integrating and absorbing the acquired business, its
employees, corporate culture, managerial systems and processes and
services;
. failure to retain key personnel and employee turnover;
. customer dissatisfaction or performance problems with an acquired firm;
. assumption of unknown liabilities; and
. other unanticipated events or circumstances.
We may not be successful in our efforts to integrate international
acquisitions.
A key component of our business model is to expand our operations into
international markets. We have accomplished this through the establishment of
offices in Brazil, India and Mexico, among others, and through our recent
acquisition of Questus Ltd. in the United Kingdom and Telia Academy and Telia
Contracting in Sweden. International acquisitions pose a challenge to our
business, as we must integrate operations despite differences in culture,
language and legal environments. To date, we have limited experience with
international acquisitions and face certain related risks, including:
. difficulties in staffing, managing and integrating international
operations due to language, cultural or other factors;
. different, or conflicting regulatory or legal requirements;
. foreign currency fluctuations; and
. distractions of significant management time and attention.
17
Our failure to address these risks could inhibit or preclude our efforts to
pursue international acquisitions.
We have recently expanded our operations internationally. Our failure to
effectively manage our international operations could harm our business.
From January 1, 2000 through December 31, 2000, we were engaged on projects
in 54 countries, and we currently have operations overseas, including offices in
Mexico, the United Kingdom, India, Brazil and Sweden. For the year ended
December 31, 2000, international operations accounted for approximately 28% of
our total revenues. We believe that the percentage of total revenues
attributable to international operations will continue to be significant. We
intend to expand our existing international operations and may enter additional
international markets, which will require significant management attention and
financial resources and could adversely affect our operating margins and
earnings. In order to expand our international operations, we will need to hire
additional personnel and develop relationships with potential international
customers. To the extent that we are unable to do so on a timely basis, our
growth in international markets would be limited, and our business would be
harmed.
Our international business operations are subject to a number of material
risks, including, but not limited to:
. difficulties in building and managing foreign operations;
. difficulties in enforcing agreements and collecting receivables through
foreign legal systems and addressing other legal issues;
. longer payment cycles;
. taxation issues;
. fluctuations in the value of foreign currencies; and
. unexpected domestic and international regulatory, economic or political
changes.
To date, we have encountered each of the risks set forth above in our
international operations. If we are unable to expand and manage our
international operations effectively, our business may be harmed.
Fluctuations in the value of foreign currencies could harm our profitability.
The majority of our international sales are currently denominated in U.S.
dollars. As a result of some of our recent acquisitions as well as the growth of
our foreign operations, an increasing portion of our international sales are
denominated in foreign currencies. Fluctuations in the value of the U.S. dollar
and foreign currencies may make our services more expensive than local service
offerings. This could make our service offerings less competitive than local
service offerings, which could harm our business. To date, our experience with
this foreign currency risk has predominately related to the Brazilian real and
Mexican peso. We do not currently engage in currency hedging activities to limit
the risks of exchange rate fluctuations. Therefore, fluctuations in the value of
foreign currencies could have a negative impact on the profitability of our
global operations, which would harm our business and financial results.
We may encounter potential costs or claims resulting from project performance.
Our engagements often involve large scale, highly complex projects. Our
performance on such projects frequently depends upon our ability to manage our
relationship with our customers, effectively administer the project and deploy
appropriate resources, both our own personnel and third party contractors, in a
timely manner. Many of our engagements involve projects that are significant to
the operations of our customers' businesses. Our failure to meet a customer's
expectations in the planning or implementation of a project or the failure of
our personnel or third party contractors to meet project completion deadlines
18
could damage our reputation, result in termination of our engagement and
adversely affect our ability to attract new business. We frequently undertake
projects in which we guarantee performance based upon defined operating
specifications or guaranteed delivery dates. Unsatisfactory performance or
unanticipated difficulties or delays in completing such projects may result in a
direct reduction in payments to us, or payment of damages by us, which could
harm our business.
As of December 31, 2000, executive officers and directors and their affiliates
controlled 55.2% of our outstanding common stock and as a result are able to
exercise control over all matters requiring stockholder approval.
As of December 31, 2000, executive officers and directors and their affiliates
beneficially owned, in the aggregate, approximately 55.2% of our outstanding
common stock. In particular, as of December 31, 2000, our Chairman, Massih
Tayebi, and our Chief Executive Officer, Masood K. Tayebi, beneficially owned,
in the aggregate, approximately 40.3% of the outstanding common stock. In
addition, other members of the Tayebi family owned, as of December 31, 2000, in
the aggregate, approximately 9.9% of our outstanding common stock. As a result,
these stockholders are able to exercise control over matters requiring
stockholder approval, such as the election of directors and approval of
significant corporate transactions, which may have the effect of delaying or
preventing a third party from acquiring control over us. These transactions may
include those that other stockholders deem to be in their best interests and in
which those other stockholders might otherwise receive a premium for their
shares over their current prices. For further information regarding our stock
ownership, see "Security Ownership of Certain Beneficial Owners and Management"
incorporated by reference herein.
Our stock price may be particularly volatile because of the industry of our
business.
The stock market in general has recently experienced extreme price and volume
fluctuations. In addition, the market prices of securities of technology and
telecom companies have been extremely volatile, and have experienced
fluctuations that have often been unrelated to or disproportionate to the
operating performance of such companies. These broad market fluctuations could
adversely affect the price of our common stock. For further information
regarding recent stock trends, see " Market for Registrant's Common Equity and
Related Stockholder Matters".
Provisions in our charter documents and Delaware law may make it difficult for
a third party to acquire our company and could depress our common stock.
Delaware corporate law and our certificate of incorporation and bylaws contain
provisions that could delay, defer or prevent a change in control of our company
or our management. These provisions could also discourage proxy contests and
make it more difficult for our stockholders to elect directors and take other
corporate actions. As a result, these provisions could limit the price that
investors are willing to pay in the future for shares of our common stock. These
provisions include:
. authorizing the board of directors to issue additional preferred stock;
. prohibiting cumulative voting in the election of directors;
. limiting the persons who may call special meetings of stockholders;
. prohibiting stockholder action by written consent; and
. establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
We are also subject to certain provisions of Delaware law which could delay,
deter or prevent us from entering into an acquisition, including Section 203 of
the Delaware General Corporation Law, which prohibits a Delaware corporation
from engaging in a business combination with an interested stockholder unless
specific conditions are met.
19
Item 2. Properties
- -----------------------
Our principal executive offices are located in approximately 93,000 square
feet of office space in San Diego, California. The lease for such space expires
in April 2010. Other executive offices are located in the following locations:
Sao Paulo, Brazil; Mexico City, Mexico; New Delhi, India; Gothenberg, Sweden;
Kalmar, Sweden; and in London, U.K. The leases on these offices are on a month
to month basis. The Company also leases office space to support engineering
services in Reston, Virginia; Cherry Hill, New Jersey; Blackwood, New Jersey;
Los Angeles, California; San Jose, California; Sacramento, California;
Scottsdale, Arizona; Santa Fe, New Mexico; Mexico City; London and Sao Paulo.
The leases on these spaces expire at various times through April 2005.
In conjunction with asset acquisitions that occurred in 2000, we assumed
the operating leases of additional office space in the following locations:
Seattle, Washington; Chicago, Illinois; Houston, Texas; Denver, Colorado;
Milwaukee, Wisconsin; and Portland, Oregon. The Company expects to continue its
growth and will negotiate leased space to accommodate this growth as it occurs.
Item 3. Legal Proceedings
- --------------------------
Subsequent to our initial public offering in November 1999, we received
correspondence from certain former employees (or their stockbrokers) who
presented stock certificates of a predecessor of WFI delivered in 1996 as part
of an employee benefit plan. We did not register these shares in our books and
records because we 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 our common stock issued to them
for services rendered in 1996.
During the six months ended June 30, 2000, we completed settlements of
litigation that we brought against six former employees who had sold or who had
attempted to sell unregistered certificates purportedly representing 97,500 of
our shares. We also settled similar demands for recognition by two other former
employees without litigation. In each of these settlements we have 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, we filed a Complaint for Declaratory Relief in the Superior
Court of the State of California for the County of San Diego, against Dr. Rahim
Tafazolli, a former employee/consultant who received an unregistered certificate
purportedly representing 45,000 shares of our common stock. The complaint seeks
a declaration that the subject certificate is invalid due to the forfeiture
provisions of the employee benefit plan and due to Dr. Tafazolli's failure to
perform the agreed services. On 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. We intend to vigorously pursue our action in California and to
vigorously defend against the related action in Delaware.
The total number of shares represented by unregistered certificates delivered
to employees (all in 1996 and early 1997) is approximately 532,500. We have
settled or agreed to settle demands relating to 127,500 of such shares. We have
received no other demands for recognition of shares represented by unregistered
certificates other than the demand by Dr. Tafazolli. If we receive any other
demands, we intend to consider the circumstances surrounding the issuance of the
subject certificates in determining our response. We are therefore not certain
at this time how many of the shares represented by unregistered certificates
will be recognized.
As a result of the foregoing circumstances, we underreported the number of
shares of our 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.
20
Massih Tayebi, our Chairman, and Masood K. Tayebi, our Chief Executive
Officer, were the executive officers and directors of our 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
owned by them to WFI, share for share, for any shares represented by
unregistered certificates which we recognize as issued and outstanding. Each has
transferred to us one-half of the number of shares recognized during the year
ended December 31, 2000, and each will transfer one-half of any and all shares
recognized in the future as a result of similar circumstances.
Consequently, we have had no net increase in the number of outstanding shares
of our common stock and we expect no impact on the financial statements in
future periods as a result of recognizing unregistered certificates. Such
surrender of outstanding shares held by the Tayebis is not expected to diminish
materially the ownership interests of either of them in WFI.
We do not believe existing demands or future litigation associated with the
unregistered certificates will have a material effect on our 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 we anticipate. Other outcomes could have a material
adverse effect on our financial position or results of operations.
In October 2000, we were notified that Norm Korey, a former employee who was
terminated by us, has asserted that he is owed certain commissions and stock
options and severance pay from us. We were served with a formal arbitration
demand relating to the matter in January 2001, and anticipate that limited
discovery will ensue. We believe the claims of Mr. Korey are without merit and
intend to defend any lawsuit asserting such claims.
In addition to the foregoing matters, from time to time, we may become
involved in various lawsuits and legal proceedings which arise in the ordinary
course of business. However, litigation is subject to inherent uncertainties,
and an adverse result in this or other matters may arise from time to time that
may harm our business.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
21
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
- -------------------------------------------------------------------------
Matters
- -------
(a)
Our common stock is listed on the NASDAQ National Market System, under the
symbol "WFII" and has traded since November 5, 1999.
Our common stock began trading on the NASDAQ National Market System effective
November 5, 1999. Prior to that date, there was no public market for our common
stock. The following table sets forth for the periods indicated the high and low
closing prices for the common stock, as reported by NASDAQ. Such quotation
represents inter-dealer prices without retail markups, markdowns or commissions
and may not necessarily represent actual transactions.
High Low
---- ---
Fiscal Year Ending December 31, 2001
First Quarter (through March 22, 2001) $ 44.19 $ 6.13
Fiscal Year Ended December 31, 2000
First Quarter $157.88 $ 39.63
Second Quarter $ 93.63 $ 32.75
Third Quarter $ 80.50 $ 48.13
Fourth Quarter $ 62.66 $ 31.94
Fiscal Year Ended December 31, 1999
Fourth Quarter (from November 5, 1999) $ 65.50 $ 39.25
On March 22, 2001, there were approximately 43,844,089 shares of Common
Stock outstanding which were held by approximately 322 shareholders of record of
our common stock.
We have not declared any dividends since becoming a public company. Covenants
in our financing arrangements prohibit or limit our ability to declare or pay
cash dividends. We currently intend to retain any future earnings to finance the
growth and development of the business and therefore do not anticipate paying
any cash dividends in the foreseeable future. Any future determination to pay
cash dividends will be at the discretion of the board of directors and will be
dependent upon the future financial condition, results of operations, capital
requirements, general business conditions and other factors that the board of
directors may deem relevant.
On December 11, 2000, we issued an aggregate of 55,194 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 WFI 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 4,902 shares of common
stock underlying the warrants, valued at $51.00 per share, were issued as
payment of the exercise price. The issuance of the securities in connection with
these warrant exercises was 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.
(b)
On November 10, 1999, we completed an initial public offering of our
Common Stock, $0.001 par value per share. The managing underwriters in the
offering were Credit Suisse First Boston, J.P. Morgan Chase and Co. and Thomas
Weisel Partners LLC. The shares of Common Stock sold in our offering were
registered under the Securities Act of 1933 pursuant to a Registration Statement
on Form S-1, as amended (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 over-allotment option, were sold at a price to the public
of $15.00 per share. The offering resulted in gross proceeds of $69.0 million,
of which $4.8 million was applied toward commissions to the underwriters.
Expenses related to the offering were approximately $2.3 million.
We have used the net the proceeds from the offering to (i) repay $8.6 million
of short-term debt and notes payable; (ii) fund $40.0 million of acquisitions of
assets or equity interests in other businesses; and (iii) support $13.3 million
of operations. No proceeds from the offering remain.
22
Item 6. Selected Financial Data
- --------------------------------
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and related notes thereto
and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" which are included elsewhere in this report on Form 10-K.
(All amounts except per share data in millions)
Year Ended December 31,
Consolidated Statement of 1996 1997 1998 1999 2000
Operations Data:
Revenues $15.4 $22.7 $51.9 $ 92.7 $255.9
Gross profit $ 8.6 $10.9 $23.8 $ 38.4 $115.8
Operating income $ 6.8 $ 7.0 $10.7 $ 17.6 $ 52.0
Net income $ 6.7 $ 6.8 $ 4.7 $ 9.6 $ 31.8
Net income per share
Basic $0.24 $0.24 $0.17 $ 0.33 $ 0.76
Diluted $0.23 $0.23 $0.15 $ 0.27 $ 0.63
Weighted average shares
Basic 28.5 28.7 28.4 29.1 41.8
Diluted 29.4 29.3 30.7 35.2 50.5
Consolidated Balance Sheet 1996 1997 1998 1999 2000
Data:
Cash and Cash Equivalents $ .3 $ .8 $ 2.9 $ 34.3 $ 18.5
Working capital $ 6.6 $ 9.2 $ 7.7 $ 91.4 $103.7
Total assets $ 7.2 $11.1 $60.3 $134.4 $297.1
Total debt $ 0 $ 0 $16.0 $ 2.7 $ 37.7
Total stockholders equity $ 7.0 $ 9.8 $14.3 $101.4 $198.6
Item 7. Management's Discussion and Analysis of Financial Condition and
- --------------------------------------------------------------------------
Results of Operations ("MD&A")
- ------------------------------
This report contains forward-looking statements. These statements relate to
future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"potential" or "continue," the negative such terms or other comparable
terminology. These statements are only predictions. Actual events or results
may differ materially. Important factors which may cause actual results to
differ materially from the forward-looking statements are described in the
Section entitled "Risk Factors" in Item 1 in this Form 10-K, and other risks
identified from time to time in our filings with the Securities and Exchange
Commission, press releases and other communications.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we, nor any other
person, assume responsibility for the accuracy and completeness of the forward-
looking statements. We are under no obligation to update any of the forward-
23
looking statements after the filing of the Form 10-K to conform this statement
to actual results or to changes in its expectations.
Overview
Wireless Facilities, Inc. offers network business consulting, network
planning, design and deployment, and network operations and maintenance services
to the wireless telecommunications industry. During the years ended December
31, 1999 and December 31, 2000, we increased the number of our contracts, the
scope of our services and our geographic presence. In the final months of 1999,
we entered into our first contracts for network planning which contributed to
increased revenues and net income during the year ended December 31, 2000. For
the year ended December 31, 2000, our business consulting, design and
deployment, and network management segments contributed to 3%, 80% and 17% of
our revenues, respectively. 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 year ended December
31, 2000, we performed work in 54 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 to 28% of our total revenues for the
year ended December 31, 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.
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
year ended December 31, 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 also incur expenses related to a
given project in advance of the commencement of the project as we increase our
personnel to work on the project. New hires typically undergo training on our
systems and project management process prior to being deployed on a project.
Due to the recent downturn in the financial markets in general, and
specifically within the telecommunications industry, many of our customers are
having trouble raising money in the capital markets to fund the expansion of
their businesses, including telecom network deployments and upgrades. The recent
volatility of the financial markets and slowdown in the U.S. economy has also
intensified the uncertainty experienced by many of our customers, who are
finding it increasingly difficult to predict demand for their products and
services. As a result, many of our customers are slowing or postponing the
deployment of new wireless networks and the development of new technologies and
products, which has reduced the demand for our services. Some of our customers
have recently cancelled or suspended their contracts with us and many of our
customers or potential customers have postponed entering into new contracts for
our services. As a result, we expect our revenues and earnings to decline
from previously estimated levels. Also due to the difficult financing and
economic conditions, some of our customers may not be able to pay us for
services that we have already performed. If we are not able to collect amounts
owed to us, we may be required to write-off or convert significant amounts of
our accounts receivable. Because we are not able to reduce our costs as fast as
our revenues may decline, our costs as a percentage of revenues may increase
and, correspondingly, our net earnings may decline disproportionately to any
decreases in revenues. As a result of these and other factors, it has become
extremely difficult to forecast our future revenues and earnings, and we
therefore cannot re-affirm estimates of our revenues or projections of our
earnings that we have made in public statements prior to the date of this Annual
Report on Form 10-K.
As a result of the revenue shortfall that we expect due to the foregoing
factors, we are taking steps to reduce our level of expenditures. Additionally,
we expect to continue to review our internal processes throughout 2001 and make
further adjustments as necessary.
24
Results of Operations
Comparison of Results for the Year Ended December 31, 1999 to the Year Ended
December 31, 2000
Revenues. Revenues increased 176% from $92.7 million for the year ended
December 31, 1999 to $255.9 million for the year ended December 31, 2000. The
$163.2 million increase was primarily attributable to the addition of new
contracts from our acquisitions completed during 2000, expanded scope on several
large, existing contracts, and new contracts in our consulting and network
management segments, which generated no revenues in the year ended December 31,
1999. Significant new contracts included contracts acquired through our fiscal
year 2000 acquisitions of The Walter Group, the Dallas network operations
center, and Davis Bay. Revenues also increased from two significant deployment
contracts in the Mexican market serviced in the year ended December 31, 2000.
Revenues from our international markets comprised 34% of our total revenues
during the year ended December 31, 1999, compared to 28% of our total revenues
during the year ended December 31, 2000.
Cost of Revenues. Cost of revenues increased 158% from $54.3 million for the
year ended December 31, 1999 to $140.1 million for the year ended December 31,
2000, primarily due to increased staffing in support of new contracts. Gross
profit was 41% of revenues for the year ended December 31, 1999 compared to 45%
for the year ended December 31, 2000. The increase is primarily due to a more
favorable mix of project revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 186% from $18.7 million for the year ended
December 31, 1999 to $53.5 million for the year ended December 31, 2000. As a
percentage of revenues, selling, general and administrative expenses increased
from 20% for the year ended December 31, 1999 to 21% for the year ended December
31, 2000. The increase is due to staffing increases in 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 our orientation,
training and assignment processes.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased 390% from $2.1 million for the year ended December 31, 1999 to $10.3
million for the year ended December 31, 2000. The increase is primarily due to
goodwill and other identifiable intangibles resulting from our recent
acquisitions, which also contributed to our increase in revenues and overall
operations.
Net Other Income (Expense). For the year ended December 31, 1999, net other
expense was $0.5 million compared to net other income of $0.2 million for the
year ended December 31, 2000. This increase totaling $0.7 million was primarily
attributable to interest earned on our investments in marketable securities from
the proceeds of our November 1999 initial public offering and the reduction of
net foreign currency losses, partially offset by an increase in interest expense
on increasing balances on our line of credit.
Provision for Income Taxes. Our provisional income tax rate as a percentage of
income before taxes decreased from 42% for the year ended December 31, 1999, to
39% for the year ended December 31, 2000. The decrease is primarily attributable
to increases in our foreign revenues from operations.
Comparison of Results for the Year Ended December 31, 1998 to the Year Ended
December 31, 1999
Revenues. Revenues for the year ended December 31, 1999 increased 79% from
$51.9 for the year ended December 31, 1998 to $92.7 for the year ended December
31, 1999. The $40.8 million increase was primarily attributable to the addition
of new contracts, offset by a reduction in revenue of $5.0 million from the
effects of revised cost estimates related to two fixed-price contracts. The
revenue increase stemmed from the growth in our wireless data deployment
activity, including a large, 26-city contract for Metricom, as well as large
contracts in the WFI de Mexico subsidiary, and new deployment projects from our
established clients in the PCS sector. The percentage growth experienced for
the year ended December 31, 1999 was not typical and resulted from a small
number of large contract awards.
Cost of Revenues. Cost of revenues increased 93% from $28.1 million for the
year ended December 31, 1998 to $54.3 million for the year ended December 31,
1999, primarily due to increased staffing in support of new contracts. Gross
margin was 46% of revenues for the year ended December 31, 1998 compared to 41%
for the year ended December 31, 1999. Gross margin for the year ended December
31, 1999 was reduced primarily due to a reduction in revenue of $5.0 million
from the effects of revised cost estimates related to two fixed-price contracts.
25
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 58% from $11.8 million for the year ended
December 31, 1998 to $18.7 million for the year ended December 31, 1999. The
increase was primarily attributable to increases in executive, administrative,
sales and marketing personnel costs, as well as increases in purchases of
expendable tools and systems in support of our growth. As a percentage of
revenues, selling, general and administrative expenses decreased from 23% for
the year ended December 31, 1998 to 20% for the year ended December 31, 1999,
reflecting consolidation efficiencies following the Entel acquisition.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased 62% from $1.3 million for the year ended December 31, 1998 to $2.1
million for the year ended December 31, 1999. The increase was primarily due to
amortization of goodwill and other identifiable intangibles resulting from the
B. Communication International and C.R.D. acquisitions.
Net Other Income (Expense). For the year ended December 31, 1999, other
expenses were $0.5 million as compared to $0.5 million for the year ended
December 31, 1998. Interest income increased by $0.5 million of which $0.4
million was attributed to the investment of the proceeds from our initial public
offering. This increase was offset by an increase in interest expense primarily
due to higher utilization of the bank line of credit to support working capital
needs, as well as foreign currency losses attributed to our expansion into
Brazil.
Provision for Income Taxes. Our provisional income tax rate as a percentage
of income before taxes decreased from 54% for the year ended December 31, 1998,
to 42% for the year ended December 31, 1999. The decrease was primarily
attributable to increases in our foreign revenues from operations.
Liquidity and Capital Resources
Our sources of cash liquidity included cash and cash equivalents, cash from
operations, amounts available under credit facilities, and other external
sources of funds. As of December 31, 2000, we had cash of $18.5 million and
$24.9 million outstanding on our $50 million line of credit. In February 2001,
the aggregate commitment was increased from $50 million to $100 million.
Cash used in operations is primarily derived from our contracts in process and
changes in working capital. Cash provided by operations was $13.4 million for
the year ended December 31, 1999 and cash used in operations was $38.3 million
for the year ended December 31, 2000.
Cash used in investing activities was $42.9 million and $14.7 million for the
year ended December 31, 1999 and 2000, respectively. Investing activities for
the year ended December 31, 1999 consisted primarily of the investment of IPO
proceeds, cash paid for acquisitions and capital expenditures. Investing
activities for the year ended December 31, 2000 consisted primarily of cash paid
for acquisitions and investments of $47.1 million and capital expenditures of
$5.7 million partially offset by proceeds totaling $38.0 million received from
sales of marketable securities. Acquisitions during the year ended December 31,
2000 included the purchase of assets or securities from The Walter Group,
Comcor, Davis Bay, Questus, Telia Contracting, and Telia Academy, as well as the
purchase of a network operations center, an investment in CommVerge, and an
equity interest in Diverse Networks, Inc.
Cash provided by financing activities for the year ended December 31, 1999
was $61.0 million which was primarily derived from the proceeds from sales of
common stock in our November 1999 initial public offering. Other financing
activities include proceeds from sales of preferred stock totaling $15.0
million, which was offset by net repayments on borrowings totaling $16.3
million. Cash provided by financing activities was $37.5 million for the year
ended December 31, 2000. Financing activities for this period primarily
consisted of $24.9 million from net borrowings under our line of credit and
$12.9 million from sales of common stock issued through our stock option and
employee stock purchase plans.
At December 31, 2000, $24.9 million was outstanding under our line of credit
with a weighted average interest rate of 9.14%. In February 2001, we executed an
amended and restated credit agreement, which increased the aggregate commitment
under our line of credit to $100 million, extended the maturity date to February
2004, and adjusted the interest rate so that borrowings bear interest at either
(i) the greater of the bank prime rate or the Federal Funds Rate plus .5%, plus
a margin of 1.25%, the base rate margin, or (ii) at the London Interbank
Offering Rate ("LIBOR") plus a margin of 2.25%, the LIBOR rate margin, at our
discretion. Beginning in the third quarter of 2001, the base rate margin and
the LIBOR rate margin will be determined based on certain financial ratios as of
the end of the most recently ended fiscal quarter which will result in margins
ranging from .75% to 1.50% and 1.75% to 2.50%, respectively. 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.
26
We have no material cash commitments other than obligations under our credit
facilities, promissory notes, 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 but before expenses). As of December 30, 2000, the
proceeds were used as follows: (i) $8.6 million was used to repay short-term
debt and notes payable; (ii) $40.0 million was used to acquire assets or equity
interests in other businesses; and (iii) $15.6 million net of reinvested
interest and asset management fees was used in our operations.
We believe that our cash and cash equivalent balances and funds available
under the existing line of credit will be sufficient to satisfy cash
requirements for the next twelve months. Although we cannot accurately
anticipate the effect of inflation on our operations, we do not believe that
inflation has had, or is likely in the foreseeable future to have, a material
impact on our net revenues or results of operations.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("Statement No. 133"). Statement No. 133, as amended by
statement of Financial Accounting Standards No.137, requires companies to
recognize all derivatives as either assets or liabilities with the instruments
measured at fair value and became effective for the Company on January 1, 2001.
The accounting for changes in fair value gains and losses depends on the
intended use of the derivative and its resulting designation. We have not
completed our determination of the impact of the adoption of Statement No. 133
on our consolidated financial position or results of operations.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------------------
We are exposed to foreign currency risks due to both transactions and
translations between a functional and reporting currency in our Mexican,
Brazilian and United Kingdom subsidiaries. We currently do not hedge any of
these risks in our foreign subsidiaries because (i) cash flows from foreign
operations in Mexico are generally reinvested locally in Mexico, (ii) foreign
operations in Brazil are minimal, (iii) the British pound sterling is relatively
stable against the U.S. dollar, and (iv) we do not believe that to do so is
justified by the current exposure and the cost at this time. We are exposed to
the impact of foreign currency fluctuations due to the operations of and
intercompany transactions with our consolidated foreign subsidiaries. While
these intercompany balances are eliminated in consolidation, exchange rate
changes do affect consolidated earnings. At December 31, 2000, there was $0.2
million, $1.3 million and $3.2 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 insignificant from Mexico,
$0.1 million from Brazil and $0.3 million from the United Kingdom. In addition,
we estimate that a 10% change in foreign exchange rates would have impacted
reported operating profit for the year ended December 31, 2000 by approximately
$1.2 million. 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 December 31, 1999.
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
27
that it is not subject to any material risks arising from changes in interest
rates, foreign currency exchange rates, commodity prices, equity prices or other
market changes that affect market risk sensitive instruments.
As of December 31, 2000, we held a $50 million line of credit with a financial
institution. At December 31, 2000, $24.9 million was outstanding under this line
of credit with a weighted average interest rate of 9.14%. Pursuant to an amended
and restated credit agreement, our aggregate commitment was increased to $100
million in February 2001. The credit facility is due in February 2004 and bears
interest at either (i) the greater of the bank prime rate and the Federal Funds
Rate plus .5%, plus a margin of 1.25%, the base rate margin, or (ii) at the
London Interbank Offering Rate (LIBOR) plus 2.25%, the LIBOR rate margin, at our
discretion. Beginning in the third quarter of 2001, the base rate margin and the
LIBOR rate margin will be determined based on certain financial ratios as of the
end of the most recently ended fiscal quarter which will result in margins
ranging from .75% to 1.50% and 1.75% to 2.50%, respectively. The credit facility
is secured by substantially all of our assets. The credit 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. A hypothetical 10% adverse
change in the weighted average interest rate for 2000 would have reduced net
income by approximately $0.1 million.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
Our consolidated financial statements at December 31, 2000 and 1999 and the
Report of KPMG LLP, Independent Accountants, are included in this report on Form
10-K on pages beginning F-1.
28
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
None
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The information required by this item is incorporated by reference to the
information under the captions "Election of Directors" and "Compliance with
Section 16(a) of the Ex