Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
Commission file number 0-27231
-------
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 11, 2002 was approximately $100 million, based on the
closing sale price on the NASDAQ market exchange on that date. *
The number of shares outstanding of the Registrant's Common Stock was
47,621,270 as of March 11, 2002.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of registrant's proxy statement for the annual meeting to
be held on June 21, 2002 (the "Proxy Statement"), to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A not later than 120
days after the close of the Registrant's fiscal year, are incorporated by
reference under Part III of this Form 10-K.
* Excludes the common stock held by executive officers, directors and
stockholders whose ownership exceeds 5% of the Common Stock outstanding at
March 11, 2002.
WIRELESS FACILITIES, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
TABLE OF CONTENTS
Page No.
--------
PART I
Item 1. Business 3
Item 2. Properties 17
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 18
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 19
Item 6. Selected Financial Data 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 28
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 29
PART III
Item 10. Directors and Executive Officers of the Registrant 30
Item 11. Executive Compensation 30
Item 12. Security Ownership of Certain Beneficial Owners and Management 30
Item 13. Certain Relationships and Related Transactions 30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 31
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 of this Annual Report on Form 10-K and in
other sections of this Annual Report on Form 10-K, and other risks identified
from time to time in our filings with the Securities and Exchange Commission,
press releases and other communications.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of the forward-looking
statements. We are under no obligation to update any of the forward-looking
statements after the filing of the Form 10-K to conform such statements to
actual results or to changes in our expectations.
Description of the business
- ---------------------------
General
Wireless Facilities, Inc. is an independent provider of outsourced services
for the wireless communications industry. We were incorporated in the state of
New York on December 19, 1994, began operations in March 1995, and were
reincorporated in the state of Delaware in 1998. We completed our initial public
offering on November 5, 1999.
We plan, design, deploy and manage wireless telecommunications networks.
This work involves radio frequency engineering, site development, project
management and the installation of radio equipment networks. We also provide
network management services, which involve day-to-day optimization and
maintenance of wireless networks. As part of our strategy, we are technology and
vendor independent. We believe that this aligns our goals with those of our
customers and enables us to objectively evaluate and recommend specific products
or technologies. We provide network design and deployment services to wireless
carriers such as (in alphabetical order) AT&T Wireless, Cingular, Telcel and
Verizon and equipment vendors such as Ericsson, Nortel and Siemens. During 2001,
we also provided services to Bechtel Corporation, a global engineering and
project management company. In turn, Bechtel Corporation provides services to
both wireless carriers and equipment manufacturers.
The wireless telecom industry has experienced rapid growth over the past
few years and carriers have made large capital investments to expand their
networks. During 2001, however, a weakened economy and tightened capital markets
constrained the growth of these capital investments, thus reducing demand for
infrastructure equipment and related services. As carriers deploy their
networks, they have been faced with a proliferation in both the number and type
of competitors. Due to this increasingly competitive and capital constrained
environment, carriers are experiencing challenges associated with managing
complex networks and technologies and must focus now on satisfying customer
demand for enhanced services, seamless and comprehensive coverage, better call
quality, faster data transmission and lower prices. These changes have put
pressure on carriers and equipment vendors to allocate their resources
effectively, which we believe could increasingly lead them to outsource network
planning, design, deployment and management.
Our services are designed to improve our customers' competitive position
through the planning, design and deployment and management of their networks. We
developed a methodology of planning and deploying wireless networks that allows
us to deliver reliable, scalable network solutions. We offer our services
primarily on a fixed-price basis with scheduled deadlines for completion times,
that is, on a time-certain basis. We believe this enables our customers to more
reliably forecast the costs and timing of network deployment and management.
This allows our customers to focus on their core competencies and rely on us for
planning, designing, deploying and managing their networks.
In addition to our United States operations, as of December 31, 2001, we
had ongoing projects in countries within Europe, Middle East, Africa
(collectively, "EMEA") and Latin America. In 2001, 32% of our revenues were
derived from international operations.
Industry Background
Wireless networks are telecom systems built using radio equipment. The
implementation of a wireless network involves several project phases, including
planning, design and deployment. During the planning phase, decisions are made
about the type
3
of equipment to be used, where it will be located and how it will be configured.
These decisions are based on a number of analytical considerations, including
phone subscriber profiles and target markets, forecasts of call usage, financial
modeling and forecasting and radio engineering analysis. The design phase
follows, and involves the coordinated efforts of radio engineers, site
development professionals and other technical disciplines. Potential equipment
sites are identified, based on a range of variables including radio propagation
characteristics, economics, site access, and construction feasibility.
Once a network design has been accepted, land or building rooftops must be
bought or leased for towers or telecom equipment, including radio base stations,
antennas and supporting electronics. This site development phase requires input
from a number of specialists, including real estate, land use and legal
professionals who work with local jurisdictions to secure any necessary land
use, zoning and construction permits. Next, construction and equipment
installation must be performed. Finally, radio frequency engineers commission
the new radio equipment, test it, integrate it with existing networks and tune
the components to optimize performance.
Once placed in service, wireless networks must be continually updated,
recalibrated, tuned and monitored for performance and faults. Traffic patterns
change, trees or buildings may block radio signals and interference may be
encountered from neighboring or competing networks or other radio sources. Usage
patterns may change because of new rate plans, new features or increasing sales.
Optimization is the process of tuning the network to take into account such
changes, and often gives rise to maintenance tasks such as antenna changes, new
equipment installations or the replacement of substandard or failed components.
Changes in the Wireless Telecom Industry
Wireless carriers are under pressure to continuously upgrade their networks
with new technologies and expand into new geographic regions in order to remain
competitive and satisfy the demand for pervasive wireless service. The demand
for wireless Internet access and other data services, also known as mobile
wireless broadband services, has created the need to adopt new technologies such
as those embodied in the nearer-term 2.5G and emerging third-generation (3G)
standard. High-speed fiber networks are being coupled with mobile broadband
wireless technologies to deliver enhanced telecom capabilities and features to
new customers and markets. During 2001, a weakened world economy and tightened
capital markets constrained the growth of the wireless telecommunications
industry, resulting in a delay in buildouts of wireless communications networks.
As carriers deploy their wireless networks, they face significant
competition. Through privatization in the 1980s, domestic and international
deregulation in the 1990s, and more recently, tightened capital markets and the
lifting of spectrum caps in the United States, the competitive landscape has
changed for wireless carriers. For carriers to differentiate themselves and
remain competitive in this new environment, they have been required to deploy
networks to:
. provide seamless nationwide coverage and avoid expensive roaming costs
on competitors' networks in markets where carriers do not currently
own infrastructure;
. offer PCS service in new geographic markets;
. offer enhanced services, such as one rate plans, caller ID, text
messaging and emergency 911 locator services;
. implement third-generation (3G) network standards to deliver wireless
broadband data services, including Internet access and two-way e-mail;
and
. offer wireless local loop systems domestically to bypass incumbent
wireline competitors and in developing countries lacking modern
wireline telephone infrastructure.
A number of emerging telecommunication carriers, whose business models were
originally funded when the capital markets were more robust, have found it
increasingly difficult to secure additional funds to complete the build-out of
their technologies and networks and as a consequence, certain carriers filed for
bankruptcy during 2001. In addition, many established carriers have stopped or
deferred the build-out of their networks in the current uncertain markets for
capital and telecommunication services. As a result, notwithstanding long-term
growth projections for the wireless telecommunications industry, the near-term
outlook for the deployment of wireless networks remains uncertain. See the
section "Risk Factors" in Item 1 of this Annual Report on Form 10-K.
Challenges for Wireless Carriers and Equipment Vendors
Due to this increasingly competitive environment, carriers are focused on
satisfying customer demand for enhanced services, seamless and comprehensive
coverage, better quality, faster data transmission and lower prices. It has also
created an environment where speed to market is an important component of a
wireless carrier's success. Carriers are also faced with the
4
challenge of managing increasingly complex networks and technologies. For
example, the introduction of wireless Internet technologies and the growth in
mobile broadband wireless services requiring the transmission of large amounts
of data creates additional new technological hurdles for carriers establishing
or upgrading their networks. In this dynamic environment, customer acquisition
and retention are key determinants of success. In our experience, this has led
carriers to increasingly prioritize their resources and focus on revenue
generating activities by outsourcing functions outside their core competencies.
The changing environment is also placing significant operational challenges
on carriers. Carriers must make decisions about which geographic markets to
serve and which services and technologies to offer. Staffing challenges and
process implementations can present cost uncertainties and operational
challenges for carriers to deploy and manage their networks. The technical
complexity of wireless networks is increasing for carriers as the concurrent
management of analog, legacy digital and next generation technologies evolves.
Additionally, networks are being deployed with equipment from unrelated vendors,
posing system integration challenges. This situation is exacerbated by
consolidation within the industry as many emerging operators are acquired or
cease their operations. While consolidation creates opportunities for new
technology platforms and allows business models and data solutions to form new
nationwide networks, this often entails operational challenges for carriers to
effectively integrate their distinct networks.
Equipment vendors are also facing numerous challenges as they develop new
generations of equipment with increased features and functionality. Vendors
traditionally provide equipment and related services that can be deployed within
a carrier's existing network and integrate with equipment offered by other
vendors. As a result of the rapid pace of technological change, we believe that
equipment vendors have increasingly focused on offering competitive product
solutions and outsourced services such as network design, deployment and
management. During 2001, equipment manufacturers underwent substantial
downsizing as a result of tight capital markets and reduced carrier
infrastructure investments. In an effort to continue to provide the full range
of services required to implement their equipment, we believe manufacturers will
increasingly turn to outsourcing for these technical services.
The Need for Outsourcing
We believe that carriers, equipment vendors and related engineering and
project management companies are outsourcing network planning, design and
deployment and management to focus on their core competencies and refine their
competitive advantage. We believe wireless carriers and equipment vendors who
are seeking outsourcing are looking for service providers who:
. accommodate larger-scale, domestic and international design and
deployment projects through sufficient numbers of highly skilled and
experienced employees;
. offer turnkey solutions;
. are technology and vendor independent;
. offer fixed-price, time-certain services; and
. update, manage, optimize, monitor and maintain complex wireless
networks.
The WFI Solution
We provide outsourced services to telecom carriers, equipment vendors and
related engineering and project management companies for the planning, design,
deployment and ongoing optimization and management of wireless networks. We
offer turnkey solutions on a fixed-price, time-certain basis as well as on a
time and expense method. We have expertise with all major wireless technologies,
and have deployed equipment supplied by a majority of the world's leading
equipment vendors. We believe that we are better able to manage large-scale
deployments for our customers, both domestically and internationally than
telecommunications carriers using their own internal resources or coordinating
multiple sub-contractors. Our project management process enables us to meet our
customers' needs for high quality networks delivered on time and within budget.
Turnkey Solutions. Traditionally, carriers engaged a number of firms or
used internal personnel to build and operate their wireless networks. In this
case, the carrier was responsible for the coordination and integration of the
various groups and defined and implemented the process to be used. The turnkey
approach that we offer allows the carrier to engage a single responsible party
who is accountable for delivering and managing the network under a single master
service agreement. In contrast to traditional methods, we provide management
services during each phase of the engagement, enabling us to efficiently
schedule processes and resources, reducing the time and cost of network
deployment and management. We provide our customers with a primary point of
accountability and reduce the inefficiencies associated with coordinating
multiple subcontractors. In addition, we eliminate the need for a carrier or
equipment vendor to assemble, train and retain network deployment and management
staff,
5
resulting in potential cost and time efficiencies. This allows carriers and
vendors to focus their resources on revenue generating activities.
Technology and Vendor Independence for Both Mobile and Fixed Wireless
Operations. We have experience in all major wireless technologies, including:
conversion of analog, cellular systems to digital capability (CDMA, TDMA, GSM,
and iDEN); deployment of digital PCS systems; migration to 3G network platforms
to provide high speed wireless data Internet capability, such as UMTS spectrum
in Europe; and development of emerging broadband technologies in the MMDS and
LMDS spectrums. Two critical components of our ability to meet and exceed
customer expectations are our broad scope of services and our technology
expertise and independence. We are continually keeping abreast of next
generation technologies to maintain technology expertise. Consistent with our
vendor independent policy, we have not aligned ourselves with the products of
any particular vendor. We provide services to many of the largest wireless
carriers along with engineering staff that are qualified and approved by nearly
every major wireless equipment vendor. Our technology and vendor independence
results in objective recommendations to the customer based on the full profile
of the customer's needs.
Fixed-Price and Time-Certain Delivery. A majority of our services are sold
primarily on a fixed-price, time-certain basis, where our customers pay by the
cell site or project, rather than by the hour. By selling our services primarily
on a fixed-price, time-certain basis, we enable our customers to better forecast
their capital expenditures and more accurately forecast the timing and costs of
network deployment and management. This allows them to focus on their core
competencies and rely on us for the cost-effective planning, deployment and
management of their networks.
Time and Expense Services. We also provide services to customers on a time
and expense method whereby customers are billed for our services by the hour and
for related expenses incurred for materials required to complete a project. This
service type provides our customers with the flexibility to outsource certain
projects which allows them to leverage their own resources.
Proven Methodology. Our project management process enables us to meet our
customers' needs without compromising quality. We leverage our experience, which
we obtained from implementing hundreds of projects, to reduce time to market for
new projects. For example, project managers utilize our project management
process to chart project progress and coordinate the integration of numerous
specialized activities during the design and deployment of a network. We have
dedicated staff employed to facilitate efficient feedback of information among
the various specialized activities so that our project teams work quickly and
effectively. Through this coordinated effort and the use of Dynamic Tracker(TM),
our proprietary project tracking software tool, we are able to optimize resource
deployment and deliver solutions on time and within budget.
Depth and Scale. Our principal asset is our staff, 84% of whom work
directly on customer projects. As of December 31, 2001, we had approximately 625
engineers, 25% of whom have advanced degrees. Our technological expertise and
industry knowledge has enabled us to form strong customer relationships with
early stage telecom ventures, as well as established carriers and equipment
vendors. In addition, we have established corporate resource centers in Mexico,
Brazil, the United Kingdom and Sweden. We believe our presence in these
countries facilitates our ability to customize services to meet the needs of our
international customer base.
Strategy
Our objective is to be the global leader in telecom outsourcing. This means
being the leading independent provider of complete outsourced wireless telecom
network services, including network planning, design, deployment, and
management. The key elements of our strategy include:
Reinforce our focus on larger, top tier clients and customer satisfaction.
Our long-term success depends upon our ability to consistently deliver value to
our customers in the form of completed projects, rendered to the highest
professional standards, delivered on time and within budget. By offering turnkey
solutions on a fixed-price, time-certain basis, we hold ourselves to the
expectations set with our customers. We strive to exceed customer expectations
on every project. We believe we have been successful in developing customer
loyalty and trust because of our high standards and vendor and technology
independence. Customer satisfaction is demonstrated by the fact that a high
level of our customers has used WFI services for repeat projects.
Expand the suite of services we offer and pursue cross-selling
opportunities. Since our inception, we have continually looked for new ways to
serve our customers. Expanding our services provides new channels for revenues
and the ability to cross-sell our suite of services to existing customers. For
instance, we often utilize our pre-deployment consulting services to establish
relationships with customers as soon as a project is conceived. Based on this
relationship, we pursue opportunities for network design and deployment. Once a
network is deployed, we offer ongoing network operations, maintenance and
optimization services. Through our network operations center in Richardson,
Texas, we also centrally manage, monitor and optimize the networks of several of
our customers. Our experience with emerging technologies also offers
cross-selling opportunities for network upgrades and deployment of a carrier's
next generation network. As technologies continue to evolve and networks
6
become more complex, we will continue to expand our services to meet the
changing needs of our customers.
Remain at the forefront of new technologies. Emerging technologies present
numerous opportunities and challenges for existing carriers and vendors as well
as for new carriers. Our customers depend on us to draw upon our extensive
design and deployment experience to recommend optimal solutions to them. To
achieve this, we have in-house training programs for all technical personnel. We
will continue to actively market our technology expertise to wireless carriers
and equipment vendors that are deploying leading edge technologies. This permits
us to gain valuable experience deploying new technologies, while also adding
value to these customers' products and services offerings. Additionally,
employees in our Advanced Technology Group are members of and participate with
industry standards setting bodies to develop domestic and international
standards for next generation telecom products by attending standard setting
forums and making contributions to new standards.
Pursue opportunities for international growth. International markets
represent a significant opportunity for future growth. We established corporate
resource centers in Mexico and Brazil in 1998, the United Kingdom in 1999, and
Sweden in 2000. By the end of 2001, we had begun planning the emergence of
corporate resources in China. We intend to increasingly execute international
projects with both local professional resources and by the use of allocated
resources from other market segments. Initially, our international revenues
resulted from deployment contracts with multinational equipment vendors.
However, as we continue to penetrate foreign markets, we expect to continue to
capitalize on opportunities created by privatization, new licensees and the
expansion of wireless local loop networks.
Continue to attract and retain qualified personnel. Technology drives our
industry. As a result, our engineers and site development teams are critical to
our success. We have implemented an institutional process for career development
and training. We intend to continue to attract and retain qualified staff by
offering our employees challenging projects and opportunities to work with
emerging technologies within a corporate culture that fosters innovation and
encourages learning and professional development. We intend to continue to
invest in training and professional development.
Capitalize on prior project experience. We have participated in the
deployment of thousands of cell sites. The experience we have gained through
these projects is reflected in our project management process and proprietary
project management tools. This experience allows us to optimize the allocation
of our resources and consistently meet our customers' needs without compromising
quality. We will also seek to leverage our knowledge gained in international
markets, such as the deployment of 3G technology in domestic markets. We will
continue to refine our processes, methodologies and project management tools,
matching them to new customer and technology requirements.
Network Services
We provide a comprehensive suite of network solutions to wireless carriers
and equipment vendors, from feasibility planning, to design, deployment and
ongoing network management.
Business Consulting
We provide business consulting services for all pre-deployment planning
steps involved in technology assessment, market analysis, and business plan
development.
Market Analysis. The market team studies and analyzes the traffic patterns,
population density, topography and propagation environment in each market under
consideration. We have a well-developed capability in geographic information
systems (GIS) services, which is used for network design as well as deployment.
We have developed a proprietary methodology to assist customers in analysis of
the competitive landscape for broadband services.
Technology Evaluation and Vendor Selection. The Advanced Technology Group,
a group of experts in wireless telecommunications technologies and applications,
assists customers in determining the best equipment for a particular project,
analyzing the feasibility of a particular technology for a network plan and
managing the bidding process from multiple equipment vendors. Consistent with
our independence from vendors and technology, evaluation and selections are made
to suit the customers profile of needs.
Strategic and Business Consulting. Our business consulting group utilizes
its expertise and experience to analyze the financial, engineering, competitive
market and technology issues applicable to a proposed technology or network
deployment project. Drawing on the demographic analysis and preliminary network
dimensioning performed by the market analysis team and benchmarks for
deployment-related expenditures from our various functional groups, consultants
create new business strategies or evaluate existing deployment strategies.
Services include:
. defining subscriber profiles and target markets, including competitive
and regulatory analysis;
7
. developing service offerings and marketing plans that drive usage
forecasting;
. network design and backbone configuration; and
. business plan development and financial modeling.
We have worked on a number of high profile business and technology planning
projects in the wireless industry, covering a range of mobile broadband and
satellite technologies. Although the size of these projects is typically smaller
in scope than design and deployment projects, they are strategically important
to us because they represent opportunities to build relationships and
credibility with customers during the planning phase, and they enhance our
experiences with leading edge technologies. These services are offered on both a
time and materials and fixed price basis.
Design and Deployment Services
We provide a range of services for the full design and deployment of
wireless networks. Such services include:
Radio Frequency Engineering. Radio frequency engineers design each
integrated wireless system to meet the customer's transmission requirements.
These requirements are based upon a projected level of subscriber density and
traffic demand and the coverage area specified by the operator's license or
cost-benefit decisions. Our engineers perform the calculations, measurements and
tests necessary to determine the optimal placement of the wireless equipment. In
addition to meeting basic transmission requirements, the radio frequency network
design must make optimal use of radio frequency and result in the highest
possible signal quality for the greatest portion of subscriber usage within
existing constraints. The constraints may be imposed by cost parameters,
terrain, license limitations, interference with other operators, site
availability, applicable zoning requirements and other factors.
Microwave Relocation. To enable customers to use the radio frequency
spectrum they have licensed, it is often necessary for customers to analyze the
licensed spectrum for microwave interference and move incumbent users of this
portion of the spectrum to new frequencies. We assist our customers in
accomplishing this microwave relocation by providing complete point-to-point and
point-to-multipoint line-of-sight microwave engineering and support services.
Engineering and support services include identifying existing microwave paths,
negotiating relocation with incumbent users, managing and tracking relocation
progress and documenting the final decommissioning of incumbent users.
Fixed Network Engineering. Most wireless calls are ultimately routed
through a wireline network. As a result, the traffic from wireless networks must
be connected with switching centers within wireline networks. We establish the
most efficient method to connect cell sites to the wireline backbone, whether by
microwave radio or by landline connections. Our engineers are involved in
specifying, provisioning and implementing fixed network facilities.
Additionally, the convergence of voice and data networks, specifically through
broadband technologies, such as LMDS, MMDS and Fast Ethernet, has created a new
subset of specialized fixed network engineering skills. These skills include
planning, design, capacity and traffic analysis for packet-switched and Internet
protocol router-based network elements. Engineering teams are trained in
specialized data networking and Internet protocol engineering issues.
Site Development. Site development experts study the feasibility of placing
base stations in the area under consideration from a zoning perspective,
negotiate leases and secure building permits, supervise and coordinate the civil
engineering required to prepare the rooftop or tower site, manage multiple
construction subcontractors and secure the proper electrical and
telecommunications connections.
Installation and Optimization Services. We install radio frequency
equipment, including base station electronics and antennas, and recommend and
implement location, software and capacity changes required to meet the
customer's performance specifications. We provide installation and optimization
services for all major PCS, cellular and mobile broadband wireless air interface
standards and equipment manufacturers. We also perform initial optimization
testing of installed networks to maximize the efficiency of these networks.
Network Management Services
Network management services are comprised of post-deployment radio
frequency optimization services and network operations and maintenance services.
8
Post-Deployment Radio Frequency Optimization. Upon initial deployment, a
network is optimized to provide wireless service based upon a set of parameters
existing at that time, such as cell density, spectrum usage, base station site
locations and estimated calling volumes and traffic patterns. Over time, call
volumes or other parameters may change, requiring, for example, the relocation
of base stations, addition of new equipment or the implementation of system
enhancements. We offer ongoing radio frequency optimization services to
periodically test network elements, tune the network for optimal performance and
identify elements that need to be upgraded or replaced.
Network Operations and Maintenance. For customers with ongoing outsourcing
needs, we can assume responsibility for day-to-day operation and maintenance of
their wireless networks. The relationship we develop with our customers for this
type of outsourcing contract begins with a team of engineers and other
professional and support staff matched to the customer's specific needs. We take
into account such variables as grade of service and reliability requirements,
equipment manufacturer certification and geographic layout of the system in
question for determining the allocation of site maintenance and other
responsibilities between our service team and the customer's own personnel. We
provide staffing to perform the necessary services for centralized network
monitoring and optimization services and ongoing optimization, operations,
maintenance and repair of critical network elements, including base station
equipment, mobile switching centers and network operating centers to the extent
required by its customers. We also provide training services for the internal
network staff of our customers.
The WFI Methodology
We believe that our project management process is critical for the
successful execution of our business model. Project managers use our methodology
and proprietary tools to coordinate the various specialized activities involved
in bidding, planning, designing, deploying and optimizing networks on an ongoing
basis. Through the coordination of project managers and functional experts, we
are able to integrate and account for the various pieces of a turnkey
engagement.
We have built upon past experiences in developing an analytical framework
to provide scalable solutions to clients. While there are features unique to
each project, there are often similarities among projects. The project
management process is designed to bring the expertise developed during prior
engagements to bear on each new project.
We continue to dedicate resources to maintaining and improving the project
management process. At the conclusion of each engagement, incremental knowledge
gained during the course of the project is incorporated into a knowledge
database. We believe that the implementation and improvement of the project
management process ultimately benefits clients. The methodology enables us to
leverage technological and industry expertise to deliver reliable networks in a
rapid fashion without sacrificing quality. We are committed to continually
refining the project management process, customizing it for each new customer
and for each new technology opportunity.
Sales and Marketing
We market and sell services through a direct sales force to wireless
carriers and equipment vendors. As of December 31, 2001, we employed 34
full-time sales and marketing staff. Sales personnel work collaboratively with
senior management, consulting and deployment personnel to develop new sales
leads and secure new contracts. Each salesperson is expected to generate new
sales leads and take responsibility as an account manager for specified accounts
with existing customers. As account manager, the salesperson works with planning
and deployment personnel assigned to that customer to identify opportunities for
performing additional services for that customer.
Customers
We provide network design, deployment and management services to wireless
carriers, equipment vendors and related engineering and project management
companies. We have provided services to satellite service providers and wireless
tower companies. A representative list of our customers (in alphabetical order)
during 2001 includes AT&T Wireless, Bechtel, Cingular, Ericsson, Nextel,
Siemens, Triton PCS, Telecorp PCS, Telcel and Verizon.
Employees
As of December 31, 2001, we employed 1,486 full time employees worldwide,
including 1,249 in network, design and deployment services, 34 in sales and
marketing, and 203 in general and administrative positions. None of our
employees, with the exception of our Scandinavian employees, are represented by
a labor union, and we have not experienced any work stoppages. We consider our
employee relations to be satisfactory.
9
Competition
Our market is highly competitive and fragmented and is represented by numerous
service providers. However, primary competitors have been the internal
engineering departments of carrier and equipment vendor customers. With respect
to radio frequency engineering services, we compete with service providers that
include American Tower, CelPlan Technologies, Comsearch (a subsidiary of Allen
Telecom Inc.), Flextronics, LCC International, and Marconi Communications. We
compete with site acquisition service providers that include General Dynamics
and Whalen & Company, Inc. (a subsidiary of Tetra Tech, Inc.). These companies
have also engaged in some site management activities. Competitors that perform
civil engineering work during a build-out are normally regional construction
companies. We compete with engineering and project management companies like
Bechtel, Bovis Lend Lease and Fluor Daniel Inc. for the deployment of wireless
networks. These companies are significant competitors given their project
finance capabilities, reputations and international experience. Many of these
competitors have significantly greater financial, technical and marketing
resources, generate greater revenues and have greater name recognition than we
do. We have worked as a subcontractor for Bechtel, and have developed a
relationship whereby on occasions we have jointly pursued business
opportunities, and will continue to do so in the future.
We believe that the principal competitive factors in our market include the
ability to deliver results within budget and on time, reputation,
accountability, staffing flexibility, project management expertise, industry
experience and competitive pricing. In addition, expertise in new and evolving
technologies, such as mobile broadband wireless, has become increasingly
important. We believe that the ability to integrate these technologies, as well
as equipment from multiple vendors, gives us a competitive advantage as we can
offer the best technology and equipment to meet a customer's needs. We believe
our ability to compete also depends on a number of additional factors which are
outside of our control, including:
. the prices at which others offer competitive services;
. the ability and willingness of our competitors to finance customers'
projects on favorable terms;
. the ability of our customers to perform the services themselves; and
. the responsiveness of our competitors to customer needs.
Industry Segment Information
Our operations are organized along service lines and include three
reportable industry segments: Design and Deployment, Network Management, and
Business Consulting. The following table sets forth the contribution of our
industry segments to revenues and operating income (loss) for the fiscal years
ended December 31, 1999, 2000 and 2001 (in millions):
1999 2000 2001
------- -------- --------
Revenues:
Design and deployment $ 86.9 $ 205.6 $ 159.5
Network management 4.5 42.7 40.4
Business consulting 1.3 7.6 7.3
------- -------- --------
Total revenues $ 92.7 $ 255.9 $ 207.2
======= ======== ========
Operating income (loss):
Design and deployment $ 16.2 $ 38.9 $ (59.1)
Network management 1.1 10.7 (11.2)
Business consulting 0.3 2.4 (1.2)
------- -------- --------
Total operating income (loss) $ 17.6 $ 52.0 $ (71.5)
======= ======== ========
Geographic Segment Information
In 2001, we realized approximately 32% of our revenues from projects
outside of the United States. Revenues for the years ended December 31, 1999,
2000 and 2001 and long-lived assets at December 31, 1999, 2000 and 2001 derived
by geographic segment are as follows (in millions):
1999 2000 2001
----- ------ ------
United States $61.1 $183.7 $141.6
EMEA -- 18.0 22.5
Latin America 31.6 54.2 43.1
----- ------ ------
Total revenues $92.7 $255.9 $207.2
===== ====== ======
10
1999 2000 2001
----- ------ -----
United States $12.3 $ 71.5 $58.2
EMEA -- 29.2 21.9
Latin America 0.3 1.1 1.9
----- ------ -----
Total long-lived assets $12.6 $101.8 $82.0
===== ====== =====
Risk Factors
You should carefully consider the following risk factors and all other
information contained in this Annual Report on Form 10-K. Investing in our
common stock involves a high degree of risk. Risks and uncertainties, in
addition to those we describe below, that are not presently known to us or that
we currently believe are immaterial may also impair our business operations. If
any of the following risks occur, our business could be harmed, the price of our
common stock could decline and you may lose all or part of your investment. See
the note regarding forward-looking statements included at the beginning of Item
1. Business.
We expect our quarterly results to fluctuate. If we fail to meet earnings
estimates, our stock price could decline.
Our quarterly and annual operating results have fluctuated in the past and
will vary in the future due to a variety of factors, many of which are outside
of our control.
The factors outside of our control include:
. telecommunications market conditions and economic conditions
generally;
. the timing and size of network deployments by our carrier
customers and the timing and size of orders for network equipment
built by our vendor customers;
. fluctuations in demand for our services;
. the length of sales cycles;
. the ability of certain customers to sustain capital resources to
pay their trade accounts receivable balances;
. reductions in the prices of services offered by our competitors;
and
. costs of integrating technologies or businesses that we add.
The factors substantially within our control include:
. changes in the actual and estimated costs and time to complete
fixed-price, time-certain projects;
. the timing of expansion into new markets, both domestically and
internationally; and
. the timing and payments associated with possible acquisitions.
Due to these factors, our quarterly revenues, expenses and results of
operations have recently varied significantly and could continue to vary
significantly in the future. You should take these factors into account when
evaluating past periods, and, because of the potential variability due to these
factors, you should not rely upon results of past periods as an indication of
our future performance. In addition, we may from time to time provide estimates
of our future performance. Estimates are inherently uncertain and actual results
are likely to deviate, perhaps substantially, from our estimates as a result of
the many risks and uncertainties in our business, including, but not limited to,
those set forth in these risk factors. We undertake no duty to update estimates
if given. In addition, the long-term viability of our business could be
negatively impacted if the recent downward trend in our revenues and results of
operations is sustained. Because our operating results may vary significantly
from quarter to quarter based upon the factors described above, results may not
meet the expectations of securities analysts and investors, and this could cause
the price of our common stock to decline significantly.
During 2001, we experienced a negative impact to our earnings and stock
price as a result of the foregoing factors that may cause our quarterly results
to fluctuate. We may continue to incur losses for the foreseeable future. Due to
the recent downturn in the financial markets generally, and specifically the
slowdown in wireless telecommunications infrastructure spending, some of our
customers have cancelled or suspended their contracts with us and many of our
customers and potential customers have postponed entering into new contracts for
our services and or have asked for price concessions. The reduction in the
availability of capital due to the downturn has also delayed the completion of
mergers contemplated by some of our customers, which has resulted in project
delays. In addition, unfavorable economic conditions are causing some of our
customers to take longer to pay us for services we perform, increasing the
average number of days that our receivables are outstanding. Also due to the
difficult financing and economic conditions, some of our customers may not be
able to pay us for services that we have already performed
11
and three of our customers filed for bankruptcy protection in 2001. If we are
not able to collect amounts due to us, we may be required to write-off
significant amounts of our accounts receivable. For example, we recognized bad
debt expense of $3.5 million during the first quarter of fiscal 2001 due to
Advanced Radio Telecom's filing for bankruptcy protection and we recognized bad
debt expense of $13.9 million for the entire Metricom, Inc. receivable due to
Metricom's filing for bankruptcy protection and $1.3 million for US Wireless due
to US Wireless' filing for bankruptcy protection during the second quarter of
2001. Because we are not able to reduce our costs as fast as our revenues may
decline, our costs as a percentage of revenues may increase and,
correspondingly, our net earnings may decline disproportionately to any decrease
in revenues. If we restructure our business in an effort to minimize our
expenses, we may incur associated charges. As a result of these and other
factors, it has become extremely difficult to forecast our future revenues and
earnings, and any predictions we make are subject to significant revisions and
are very uncertain.
If the downturn in the telecommunications industry continues or if we are
unable to sufficiently increase our revenues or reduce our expenses, we may
experience a negative impact to our financial results which may cause us to
breach certain financial covenants. If we are unable to obtain waivers of
compliance for breach of certain financial covenants, additional adverse
consequences affecting availability of future funding could occur and repayment
of our debt obligations could be accelerated, thus limiting our available
liquidity and capital resources.
Our success is dependent on the continued growth in the deployment of wireless
networks, and to the extent that such growth cannot be sustained our business
may be harmed.
The wireless telecommunications industry has historically experienced a
dramatic rate of growth both in the United States and internationally. Recently,
however, many telecommunications carriers have been re-evaluating their network
deployment plans in response to downturns in the capital markets, changing
perceptions regarding industry growth, the adoption of new wireless
technologies, and a general economic slowdown in the United States and
internationally. It is difficult to predict whether these changes will result in
a sustained downturn in the telecommunications industry. If the rate of growth
continues to slow and carriers continue to reduce their capital investments in
wireless infrastructure or fail to expand into new geographic areas, our
business will be significantly harmed.
The uncertainty associated with rapidly changing telecommunications
technologies may also continue to negatively impact the rate of deployment of
wireless networks and the demand for our services. Telecommunications service
providers face significant challenges in assessing consumer demand and in
acceptance of rapidly changing enhanced telecommunications capabilities. If
telecommunications service providers continue to perceive that the rate of
acceptance of next generation telecommunications products will grow more slowly
than previously expected, they may, as a result, continue to slow their
development of next generation technologies. Any significant sustained slowdown
will further reduce the demand for our services and adversely affect our
financial results.
Our revenues will be negatively impacted if there are delays in the deployment
of new wireless networks.
A significant portion of our revenues is generated from new licensees
seeking to deploy their networks. To date, the pace of network deployment has
sometimes been slower than expected, due in part to difficulty experienced by
holders of licenses in raising the necessary financing, and there can be no
assurance that future bidders for licenses will not experience similar
difficulties. In addition, uncertainties regarding the availability and
allocation of spectrum have caused delays in network deployment both in the
Unites States and internationally. There has also been substantial regulatory
uncertainty regarding payments owed to the United States government by past
successful wireless bidders, and such uncertainty has also delayed network
deployments. In addition, factors adversely affecting the demand for wireless
services, such as allegations of health risks associated with the use of mobile
phones, could slow or delay the deployment of wireless networks. These factors,
as well as delays in granting the use of spectrum, legal decisions and future
legislation regulations may slow or delay the deployment of wireless networks,
which in turn, could harm our business.
If our customers do not receive sufficient financing, our business may be
seriously harmed.
Some of our customers and potential customers rely upon outside financing
to pay the considerable costs of deploying their networks. If these companies
fail to receive adequate financing or experience delays in receiving financing,
particularly after we have begun working with them, our results of operations
may be harmed. Even customers and potential customers that have adequate
financing may delay deploying or upgrading their networks as they prioritize or
ration their capital resources. In addition, to the extent our customers
continue to experience capital constraints, they could place pressure on us to
lower the prices we charge for our services, and they may be inclined to choose
the services of our competitors to the extent our competitors are willing and
able to provide project financing. If competitive pressures force us to make
price concessions or otherwise reduce prices for our services, then our revenues
and margins will decline and our results of operations would be harmed.
Our success is dependent on the continued trend toward outsourcing wireless
telecommunications services.
Our success is dependent on the continued trend by wireless carriers and
network equipment vendors to outsource their network design, deployment and
management needs. If wireless carriers and network equipment vendors elect to
perform more network deployment services themselves, our revenues would likely
decline and our business would be harmed.
12
A loss of one or more of our key customers or delays in project timing for key
customers could cause a significant decrease in our net revenues.
We have derived, and believe that we will continue to derive, a significant
portion of our revenues from a limited number of customers. We anticipate that
our key customers will change in the future as current projects are completed
and new projects begin. The services required by any one customer could be
limited by a number of factors, including industry consolidation, technological
developments, economic slowdown and internal budget constraints. None of our
customers is obligated to purchase additional services from us and most of our
contracts with customers can be terminated without cause or penalty by the
customer on notice to us. As a result of these factors, the volume of work
performed for specific customers is likely to vary from period to period, and a
major customer in one period may not use our services in a subsequent period.
Accordingly, we cannot be certain that present or future customers will not
terminate their network service arrangements with us or significantly reduce or
delay their contracts.
The consolidation of equipment vendors or carriers could adversely impact our
business.
Recently, the wireless telecommunications industry has been characterized
by significant consolidation activity. This future consolidation within the
wireless telecommunication industry may lead to a greater ability among
equipment vendors and carriers to provide a full suite of network services, and
may simplify integration and installation, which could lead to a reduction in
demand for our services. Moreover, the consolidation of equipment vendors or
carriers could have the effect of reducing the number of our current or
potential customers, which could increase the bargaining power of our remaining
customers. This potential increase in bargaining power could create competitive
pressures whereby a particular customer may request our exclusivity with them in
a particular market and put downward pressure on the prices we charge for our
services. Accordingly, we may not be able to represent some customers who wish
to retain our services.
We may not be able to hire and retain a sufficient number of qualified engineers
or other employees to sustain our growth, meet our contract commitments or
maintain the quality of our services.
Our future success will depend on our ability to hire and retain additional
highly skilled engineering, managerial, marketing and sales personnel.
Competition for such personnel is intense, especially for engineers and project
managers, and we may be unable to attract sufficiently qualified personnel in
adequate numbers to meet the demand for our services in the future. In addition,
as of December 31, 2001, 24% (approximately 250) of our employees in the United
States were working under H-1B visas. H-1B visas are a special class of
nonimmigrant working visas for qualified aliens working in specialty
occupations, including, for example, radio frequency engineers. We are aware
that the Department of Labor has issued interim final regulations that place
greater requirements on H-1B dependent companies, such as WFI, and may restrict
our ability to hire workers under the H-1B visa category in the future. In
addition, these regulations expose us to significant penalties, including a
prohibition on the hiring of H-1B workers, if the Department of Labor deems us
noncompliant.
In addition, immigration policies are subject to rapid change, and these
policies have generally become more stringent since the events of September 11,
2001. For example, the Mexican government will not issue visas to enter Mexico
for people of certain nationalities without a prior background check conducted
by the Gubernacion office in Mexico City. These policies may restrict our
ability to send certain of our employees to Mexico that we deem necessary to
sustain the growth of our subsidiary, WFI de Mexico. Any additional significant
changes in immigration law or regulations may further restrict our ability to
continue to employ or to hire new workers on H-1B visas and otherwise restrict
our ability to utilize our existing employees as we see fit, and, therefore,
could harm our business.
A significant percentage of our revenue is accounted for on a
percentage-of-completion basis, which could cause our quarterly results to
fluctuate.
A significant percentage of our revenue is derived from fixed priced
contracts which are accounted for on a percentage-of-completion basis. The
portion of our revenue from fixed price contracts accounted for approximately
52% of our revenues for the twelve months ended December 30, 2001. With the
percentage-of-completion method for revenue recognition, we recognize expenses
as they are incurred and we recognize revenue based on a comparison of the
current costs incurred for the project to date to the then estimated total costs
of the project. Accordingly, the revenue we recognize in a given quarter depends
on the costs we have incurred for individual projects and our then current
estimate of the total remaining costs to complete individual projects. If, in
any period, we significantly increase our estimate of the total costs to
complete a project, we may recognize very little or no additional revenue with
respect to that project. As a result, our gross margin in such period and in
future periods may be significantly reduced and in some cases we may recognize a
loss on individual projects prior to their completion. For example, in 1999 we
revised the estimated costs to complete two large contracts which resulted in a
reduction of gross margins by 9.9% in the first quarter of 1999 and 6.9% in the
second quarter of 1999. To the extent that our estimates fluctuate over time or
differ from actual requirements, gross margins in subsequent quarters may vary
significantly from our estimates and could harm our financial results.
13
Similarly, the cancellation or modification of a contract, which is
accounted for on a percentage-of-completion basis, may adversely affect our
gross margins for the period during which the contract is modified or cancelled.
In the first quarter of fiscal 2001, we experienced such gross margin
adjustments related to the suspension and termination of the Metricom and
Advanced Radio Telecom contracts. Under certain circumstances, a cancellation or
modification of a fixed price contract could also result in our having to
reverse revenue that we recognized in a prior period, which could significantly
reduce the amount of revenues we recognize for the period in which the
adjustment is made. For example, if we have a three year fixed price contract
where the contract fee is $1 million and the initial estimated costs associated
with the contract are $550,000, and if during the first year we incur $220,000
in costs related to the contract and correspondingly estimate that the contract
is 40% complete, then under the percentage-of-completion accounting method we
would recognize 40%, or $400,000 in revenue during the first year of the
contract. If, during the second year of the contract the project is terminated
with 35% of the services deemed provided to the client, then the total revenue
for the project would be adjusted downward to $350,000, and the revenue
recognizable during the second year would be the total revenue earned to date,
the $350,000 less the revenue previously recognized or $400,000, resulting in a
reversal of $50,000 of revenue previously recognized. To the extent we
experience additional adjustments such as those described above, our revenues
and gross margins will be adversely affected.
Our financial results may be harmed if we maintain or increase our staffing
levels in anticipation of one or more projects and underutilize our personnel
because such projects are delayed, reduced or terminated.
Since our business is driven by large, and sometimes multi-year contracts,
we forecast our personnel needs for future projected business. If we maintain or
increase our staffing levels in anticipation of one or more projects and those
projects are delayed, reduced or terminated, we may underutilize these
additional personnel, which would increase our general and administrative
expenses, reduce our earnings and possibly harm our results of operations.
Additionally, due to current market conditions, we are faced with the
challenge of managing the appropriate size of our workforce in light of
projected demand for our services. If we maintain a workforce sufficient to
support a resurgence in demand, then in the meantime our general and
administrative expenses will be high relative to our revenues and our
profitability will suffer. Alternatively, if we reduce the size of our workforce
in response to any decrease in the demand for our services, then our ability to
quickly respond to any resurgence in demand will be impaired. This challenge has
resulted in our underutilization of employees due to the unforseen reduction in
the demand for our services during fiscal 2001. To the extent that we fail to
successfully manage this challenge, our financial results will be harmed.
Our short operating history, our recent growth in expanding services, and the
recent and sudden slowdown due to the current economic conditions in our
industry limit our ability to forecast operating results.
We have generated revenues for only seven years and thus, we have only a
short history from which to predict future revenues. This limited operating
experience, together with the dynamic market environment in which we operate,
including fluctuating demand for our services, reduces our ability to accurately
forecast our quarterly and annual revenues. Further, we plan our operating
expenses based primarily on these revenue projections. Because most of our
expenses are incurred in advance of anticipated revenues, we may not be able to
decrease our expenses in a timely manner to offset any unexpected shortfall in
revenues. For further financial information relating to our business, see
"Management's Discussion and Analysis of Financial Condition and Operating
Results."
Our operating results may suffer because of competition in our industry.
The wireless network services market is highly competitive and fragmented
and is served by numerous companies. Many of these competitors have
significantly greater financial, technical and marketing resources, generate
greater revenues and have greater name recognition and experience than us. We do
not know of any competitors that are dominant in our industry. For a more
complete description of our competition, see the "Business--Competition" section
of this Annual Report on Form 10-K.
We believe that the principal competitive factors in our market include the
ability to deliver results within budget and on time, reputation,
accountability, staffing flexibility, project management expertise, industry
experience and pricing. In addition, expertise in new and evolving technologies,
such as wireless internet services, has become increasingly important. We also
believe our ability to compete depends on a number of factors outside of our
control, including:
. the prices at which others offer competitive services;
. the ability and willingness of our competitors to finance
customers' projects on favorable terms;
. the ability of our customers to perform the services themselves;
and
. the responsiveness of our competitors to customer needs.
14
We may not be able to compete effectively on these or other bases, and, as
a result, our revenues and income may decline. In addition, we have recently
begun to face competition from a new class of entrants into the wireless network
services market comprised of recently unemployed telecommunications workers who
have started their own businesses and are willing to operate at lower profit
margins than ours. To the extent that these competitors are able to increase
their market share, our business may suffer.
We must keep pace with rapid technological changes, market conditions and
industry developments to maintain and grow our revenues.
The market for wireless and other network system design, deployment and
management services is characterized by rapid change and technological
improvements. Our future success will depend in part on our ability to enhance
our current service offerings to keep pace with technological developments and
to address increasingly sophisticated customer needs. We may not successfully
develop or market service offerings that respond in a timely manner to the
technological advances of our customers and competitors. In addition, the
services that we do develop may not adequately or competitively address the
needs of the changing telecommunications marketplace. If we are not successful
in responding to technological changes, market conditions or industry
developments, our revenues may decline and our business may be harmed.
Our business operations could be significantly disrupted if we lose members of
our management team.
Our success depends to a significant degree upon the continued
contributions of our executive officers, both individually and as a group. See
"Directors and Executive Officers of the Registrant," incorporated by reference
in this Annual Report on Form 10-K, for a listing of our executive officers. Our
future performance will be substantially dependent on our ability to retain and
motivate them.
We may not be successful in our efforts to integrate international acquisitions.
A key component of our business model is to expand our operations in
international markets. International acquisitions pose a challenge, as we must
integrate operations despite differences in culture, language and legal
environments. To date, we have limited experience with international
acquisitions and face risks related to those transactions, including:
. difficulties in staffing, managing and integrating international
operations due to language, cultural or other differences;
. different or conflicting regulatory or legal requirements;
. foreign currency fluctuations; and
. diversion of significant time and attention of our management.
Our failure to address these risks could inhibit or preclude our efforts to
pursue or complete international acquisitions.
We continue to enter new international markets. Our failure to effectively
manage our international operations or respond to changing regulatory conditions
in foreign markets could harm our business.
We currently have international operations, including offices in Brazil,
Mexico, United Kingdom and Sweden. For the twelve months ended December 31,
2001, international operations accounted for approximately 32% of our total
revenues. We believe that the percentage of our total revenues attributable to
international operations will continue to be significant. We intend to enter
additional international markets, which will require significant management time
and financial resources and could adversely affect our operating margins and
earnings. In order to enter these new international markets, we will need to
hire additional personnel and develop relationships with potential international
customers. To the extent that we are unable to do so on a timely basis, our
growth in international markets will be limited, and our business could be
harmed.
Our international business operations are subject to a number of
material risks, including, but not limited to:
. difficulties in building and managing foreign operations;
. regulatory uncertainties in foreign countries, including changing
regulations and delays in licensing carriers to build out their
networks in various locations;
. difficulties in enforcing agreements and collecting receivables
through foreign legal systems and addressing other legal issues;
. longer payment cycles;
. foreign and U.S. taxation issues;
15
. potential weaknesses in foreign economies, particularly in
Europe, South America and Mexico;
. fluctuations in the value of foreign currencies; and
. unexpected domestic and international regulatory, economic or
political changes.
To date, we have encountered each of the risks set forth above in our
international operations. If we are unable to expand and manage our
international operations effectively, our business may be harmed.
Fluctuations in the value of foreign currencies could harm our profitability.
The majority of our international sales are currently denominated in U.S.
dollars. Fluctuations in the value of foreign currencies, compared to the U.S.
dollar, may make our services more expensive than local service offerings in
international locations. This would make our service offerings less price
competitive than local service offerings, which could harm our business. To
date, our experience with this foreign currency risk has predominately related
to the Brazilian real and Mexican peso. In addition, we conduct business in
Swedish krona, British pound sterling, and Euro. We do not currently engage in
currency hedging activities to limit the risks of currency fluctuations.
Therefore, fluctuations in foreign currencies could have a negative impact on
the profitability of our global operations, which would harm our financial
results.
We may encounter potential costs or claims resulting from project performance.
Our engagements often involve large scale, highly complex projects. Our
performance on such projects frequently depends upon our ability to manage the
relationship with our customers, and to effectively manage the project and
deploy appropriate resources, including third-party contractors, and our own
personnel, in a timely manner. Many of our engagements involve projects that are
significant to the operations of our customers' businesses. Our failure to meet
a customer's expectations in the planning or implementation of a project or the
failure of our personnel or third-party contractors to meet project completion
deadlines could damage our reputation, result in termination of our engagement
and adversely affect our ability to attract new business. We undertake projects
in which we guarantee performance based upon defined operating specifications or
guaranteed delivery dates. Unsatisfactory performance or unanticipated
difficulties or delays in completing such projects may result in a direct
reduction in payments to us, or payment of damages by us, which would harm our
business.
As of December 31, 2001, executive officers and directors and their affiliates
controlled 53% of our outstanding common stock (including the shares of common
stock into which the shares of Series A Convertible Preferred Stock may be
converted), and as a result are able to exercise control over matters requiring
stockholder approval.
As of December 31, 2001, executive officers and directors and their
affiliates beneficially owned, in the aggregate, approximately 53% of our
outstanding common stock, after giving effect to the conversion of Series A
Convertible Preferred Stock. In particular, our Chairman, Massih Tayebi, and our
Chief Executive Officer, Masood K. Tayebi, beneficially owned, in the aggregate,
approximately 38% of our outstanding common stock. In addition, other members of
the Tayebi family owned, in the aggregate, approximately 6% of our outstanding
common stock. As a result, these stockholders are able to exercise control over
matters requiring stockholder approval, such as the election of directors and
approval of significant corporate transactions, which include preventing a
third-party from acquiring control over us. These transactions may also include
those that other stockholders deem to be in their best interests and in which
those other stockholders might otherwise receive a premium for their shares. For
further information regarding our stock ownership, see "Security Ownership of
Certain Beneficial Owners and Management" incorporated by reference into this
Annual Report on Form 10-K.
Our stock price may be particularly volatile because of our industry.
The stock market in general has recently experienced extreme price and
volume fluctuations. In addition, the market prices of securities of technology
and telecommunications companies have been extremely volatile, and have
experienced fluctuations that have often been unrelated to or disproportionate
to the operating performance of those companies. These broad market fluctuations
could adversely affect the price of our common stock. For further information
regarding recent stock trends, see "Market for Registrant's Common Equity and
Related Stockholder Matters" in this Annual Report on Form 10-K.
Provisions in our charter documents and Delaware law may make it difficult for a
third-party to acquire us and could depress the price of our common stock.
Delaware corporate law and our certificate of incorporation and bylaws
contain provisions that could delay, defer or prevent a change in control of our
management or us. These provisions may also discourage proxy contests and make
it more difficult for our stockholders to elect directors and take other
corporate action. As a result, these provisions could limit the price that
investors are willing to pay for shares of our common stock. These provisions
include:
16
. authorizing the board of directors to issue preferred stock;
. prohibiting cumulative voting in the election of directors;
. limiting the persons who may call special meetings of
stockholders;
. prohibiting stockholder action by written consent; and
. establishing advance notice requirements for nominations for
election to our board of directors or for proposing matters that
can be acted on by stockholders at meetings of our stockholders.
We are also subject to certain provisions of Delaware law which could
delay, deter or prevent us from entering into an acquisition, including Section
203 of the Delaware General Corporation Law, which prohibits us from engaging in
a business combination with an interested stockholder unless specific conditions
are met.
Item 2. Properties
- ------------------
Our principal executive offices are located in approximately 93,000 square
feet of office space in San Diego, California. The lease for such space expires
in April 2010. Other executive offices are located in the following locations:
Sao Paulo, Brazil; Mexico City, Mexico; Stockholm, Sweden; and in London, U.K.
The Company also leases office space to support engineering and deployment
services in Reston, Virginia; Los Angeles, California; Oakland, California;
Honolulu, Hawaii; Hingham, Massachusetts; Grand Rapids, Michigan; Montvale, New
Jersey; Columbia, Maryland; Baltimore, Maryland; Bensalem, Pennsylvania and
Beijing, China. The leases on these spaces expire at various times through March
2009.
In conjunction with asset acquisitions that occurred in 2000, we assumed
the operating leases of additional office space in the following locations:
Seattle, Washington; Chicago, Illinois; Houston, Texas; Denver, Colorado;
Milwaukee, Wisconsin; and Portland, Oregon.
Item 3. Legal Proceedings
- -------------------------
In June and July 2001, the Company and certain of its directors and
officers were named as defendants in five purported class action complaints
filed in the United States District Court for the Southern District of New York
on behalf of persons and entities who acquired the Company's common stock at
various times on or after November 4, 1999. The complaints allege that the
registration statement and prospectus dated November 4, 1999, issued by the
Company in connection with the public offering of the Company's common stock
contained untrue statements of material fact or omissions of material fact in
violation of securities laws because the registration statement and prospectus
allegedly failed to disclose that the offering's underwriters had (a) solicited
and received additional and excessive compensation and benefits from their
customers beyond what was listed in the registration statement and prospectus
and (b) entered into tie-in or other arrangements with certain of their
customers which were allegedly designed to maintain, distort and/or inflate the
market price of the Company's common stock in the aftermarket. On August 8,
2001, the above-referenced lawsuits were consolidated for pretrial purposes with
similar lawsuits filed against hundreds of other initial public offering issuers
and their underwriters in the Southern District Court of New York. An initial
case management conference was held on September 7, 2001 for all the lawsuits,
at which time the court ordered that the time for all defendants to respond to
any complaint be postponed until further notice of the Court. The Company
believes these lawsuits are without merit and intends to vigorously defend
against them.
In October 2000, we were notified that Norm Korey, a former employee who
was terminated by us, asserted that he was owed certain commissions and stock
options and severance pay from us. We were served with a formal arbitration
demand relating to the matter in January 2001. In August 2001, the arbitration
concluded with an award of $316,700 in favor of Norm Korey, representing
severance pay, commissions and expense reimbursement. The outcome of this
proceeding did not have a materially adverse effect on the Company.
On July 25, 2000, we filed a complaint for Declaratory Relief in the
Superior Court of the State of California for the County of San Diego, against
Dr. Rahim Tafazolli, a former employee/consultant who received an unregistered
certificate purportedly representing 45,000 shares of our common stock. The
complaint sought a declaration that the subject certificate is invalid due to
the forfeiture provisions of the employee benefit plan and due to Dr.
Tafazolli's failure to perform the agreed services. On November 21, 2000, Dr.
Tafazolli filed a cross-complaint seeking money damages and a declaration that
he is entitled to receive an unrestricted WFI stock certificate for 45,000
shares. On July 2001, we entered into a settlement agreement with Dr. Tafazolli
agreeing to issue Dr. Tafazolli 15,000 unrestricted shares. Massih Tayebi, our
Chairman, and Masood K. Tayebi, our Chief Executive Officer, each agreed to
transfer to us one-half of the shares due to Dr. Tafazolli under the settlement
agreement. We have had no net increase in the number of outstanding shares of
our common stock and no impact on our financial statements for the year ended
December 31, 2001, as a result of this agreement.
17
Advanced Radio Telecom Corp. ("ART"), which initiated Chapter 11 bankruptcy
proceedings in 2001, has filed an action with the bankruptcy court against the
Company to recover alleged preference payments in the amount of $737,529. The
Company filed an answer contesting the allegations in this matter and intends to
vigorously defend against this matter. In a related matter, ART has filed a
partial objection to the Company's proof of claim. The Company has retained
counsel and is currently prosecuting the full value of its claim.
Metricom, Inc., which initiated Chapter 11 bankruptcy proceedings in 2001,
has filed an action with the bankruptcy court against the Company to recover
alleged preference payments in the amount of $1,416,240. The Company intends to
vigorously defend against this matter.
In addition to the foregoing matters, from time to time, we may become
involved in various lawsuits and legal proceedings which arise in the ordinary
course of business. However, litigation is subject to inherent uncertainties,
and an adverse result in these or other matters may arise from time to time that
may harm our business.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
None.
18
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------------------
Our common stock is listed on the NASDAQ National Market System, under the
symbol "WFII" and has traded since November 5, 1999.
Our common stock began trading on the NASDAQ National Market System
effective November 5, 1999. Prior to that date, there was no public market for
our common stock. The following table sets forth for the periods indicated the
high and low closing prices for our common stock, as reported by NASDAQ. Such
quotation represents inter-dealer prices without retail markups, markdowns or
commissions and may not necessarily represent actual transactions.
High Low
------- ------
Fiscal Year Ended December 31, 2001
First Quarter $ 44.19 $ 4.13
Second Quarter $ 7.61 $ 3.69
Third Quarter $ 9.69 $ 4.29
Fourth Quarter $ 7.15 $ 4.27
Fiscal Year Ended December 31, 2000
First Quarter $157.88 $39.63
Second Quarter $ 93.63 $32.75
Third Quarter $ 80.50 $48.13
Fourth Quarter $ 62.66 $31.94
On March 11, 2002, the closing price of our Common Stock as reported by
Nasdaq was $5.10 per share. On March 11, 2002, there were approximately
47,621,270 shares of Common Stock outstanding, which were held by approximately
269 shareholders of record of our common stock.
We have not declared any dividends since becoming a public company.
Covenants in our financing arrangements prohibit or limit our ability to declare
or pay cash dividends. We currently intend to retain any future earnings to
finance the growth and development of the business and therefore do not
anticipate paying any cash dividends in the foreseeable future. Any future
determination to pay cash dividends will be at the discretion of the board of
directors and will be dependent upon the future financial condition, results of
operations, capital requirements, general business conditions and other factors
that the board of directors may deem relevant.
On October 30, 2001, we issued an aggregate of 63,637 shares of Series A
Convertible Preferred Stock, and raised $34.9 million, net of issuance costs, in
a private placement to investment funds managed by Oak Investment Partners. The
shares were issued for a Common Stock equivalent price of $5.50 per share. Each
share of Series A Convertible Preferred Stock is initially convertible into 100
shares of Common Stock at the option of the holder at any time subject to
certain provisions in the agreement. After July 2004, the Series A Convertible
Preferred Stock will automatically convert into shares of the Company's Common
Stock if and when our Common Stock trades at or above $11.00 per share for 30
consecutive days after that date. Before any proceeds are distributed to the
holders of Common Stock, each share of Series A Convertible Preferred Stock is
entitled to receive $550.00 per share as a liquidation preference upon any
liquidation, dissolution, winding up, consolidation, merger, reorganization,
sale of all or substantially all of the Company's assets or certain change of
control transactions (each a "Liquidation Event"). The shares were issued
pursuant to the exemption from registration provided for under Rule 506 of
Regulation D of the Securities Act of 1933, based on the representation by the
purchasers that they are accredited investors. We intend to use the net the
proceeds from the offering to support future liquidity and expansion needs of
the Company.
19
Item 6. Selected Financial Data
- -------------------------------
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and related notes thereto
and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" which are included elsewhere in this Annual Report on
Form 10-K.
Year Ended December 31,
(All amounts except per share data in millions)
---------------------------------------------
Consolidated Statement of Operations Data: 1997 1998 1999 2000 2001
----- ----- ----- ------ ------
Revenues $22.7 $51.9 $92.7 $255.9 $207.2
Gross profit $10.9 $23.8 $38.4 $115.8 $ 66.2
Operating income (loss) $ 7.0 $10.7 $17.6 $ 52.0 $(71.5)
Net income (loss) $ 6.8 $ 4.7 $ 9.6 $ 31.8 $(60.1)
Net income (loss) per share:
Basic $0.24 $0.17 $0.33 $ 0.76 $(1.31)
Diluted $0.23 $0.15 $0.27 $ 0.63 $(1.31)
Weighted average shares:
Basic 28.7 28.4 29.1 41.8 45.9
Diluted 29.3 30.7 35.2 50.5 45.9
As of December 31,
(All amounts in millions)
-----------------------------------------------
Consolidated Balance Sheet Data: 1997 1998 1999 2000 2001
----- ----- ------ ------ ------
Cash and cash Equivalents $ .8 $ 2.9 $ 34.3 $ 18.5 $ 61.1
Working capital $ 9.2 $ 7.7 $ 91.4 $103.2 $104.3
Total assets $11.1 $60.3 $134.4 $297.1 $275.9
Total debt $ -- $16.0 $ 2.7 $ 37.7 $ 42.1
Total stockholders' equity $ 9.8 $14.3 $101.4 $198.6 $197.8
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations ("MD&A")
----------------------
This report contains forward-looking statements. These statements relate to
future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"potential" or "continue," the negative such terms or other comparable
terminology. These statements are only predictions. Actual events or results may
differ materially. Important factors which may cause actual results to differ
materially from the forward-looking statements are described in the Section
entitled "Risk Factors" in Item 1 in this Annual Report on Form 10-K and in
other sections of this Annual Report on Form 10-K, and other risks identified
from time to time in our filings with the Securities and Exchange Commission,
press releases and other communications.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we, nor any other
person, assume responsibility for the accuracy and completeness of the forward-
looking statements. We are under no obligation to update any of the
forward-looking statements after the filing of the Annual Report on Form 10-K to
conform this statement to actual results or to changes in its expectations.
Overview
Wireless Facilities, Inc. offers network business consulting, network
planning, design and deployment, and network operations and maintenance services
to the wireless telecommunications industry. During the years ended December 31,
2000 and December 31, 2001, we increased the number of our contracts, the scope
of our services and our geographic presence. In the final months of 1999, we
entered into our first contracts for network planning which contributed to
increased revenues and net income during the year ended December 31, 2000.
During 2000, we formed a subsidiary in the United Kingdom, Wireless Facilities
International Limited. ("WFIL"). WFIL began servicing existing contracts and
entering into new contracts in Europe, the Middle East and Africa ("EMEA") in
April 2000. This work included services performed for many of the latest
wireless technologies, including UMTS, broadband wireless applications, and
voice and video applications. For the year ended December 31, 2001, our design
and deployment, network management and business consulting segments contributed
to 77%, 19% and 4% of our revenues, respectively. Revenues from our
international operations contributed to 32% of our total revenues for the year
ended December 31, 2001.
Revenues from network planning, design and deployment contracts are
primarily fixed price contracts which are recognized using the
percentage-of-completion method. Under the percentage-of-completion method of
accounting, cost of revenues on each project
20
are recognized as incurred, and revenues are recognized based on a comparison of
the current costs incurred for the project to date compared to the then
estimated total costs of the project from start to completion. Accordingly,
revenue recognized in a given period depends on the costs incurred on each
individual project and the current estimate of the total costs to complete a
project, determined at that time. As a result, gross margins for any single
project may fluctuate as total project cost estimates are revised on a periodic
basis as deemed necessary. The full amount of an estimated loss is charged to
operations in the period it is determined that a loss will be realized from the
performance of a contract. For business consulting, network planning, design and
deployment contracts offered on a time and expense basis, we recognize revenues
as services are performed. We typically charge a fixed monthly fee for ongoing
radio frequency optimization and network operations and maintenance services.
With respect to these services, we recognize revenue as services are performed.
Cost of revenues includes direct compensation and benefits, living and
travel expenses, payments to third-party sub-contractors, allocation of
corporate overhead, costs of expendable computer software and equipment, and
other direct project-related expenses. Direct compensation and benefits is
computed based on standard costs and actual hours billed. We review these
standard costs periodically to ensure they are comparable to actual costs.
Selling, general and administrative expenses include compensation and
benefits, costs associated with underutilization, computer software and
equipment, facilities expenses and other expenses not directly related to
projects. Our sales personnel have, as part of their compensation package,
incentives based on their productivity. During the year ended December 31, 2000,
we completed the first phase of implementing a new financial management and
accounting software program in our domestic operations. We completed the same
software program implementation in Mexico by the second quarter of fiscal 2001
and as of December 31, 2001, we were in the final phases of implementation in
the United Kingdom. Such software is expected to better accommodate our growth.
We expect to incur expenses in subsequent periods related to licensing the
software package and related personnel costs associated with phasing in its
implementation in our international operations. We may also incur expenses
related to a given project in advance of the commencement of the project as we
increase our personnel to work on the project. New hires typically undergo
training on our systems and project management process prior to being deployed
on a project.
Due to the recent downturn in the financial markets in general, and
specifically within the telecommunications industry, many of our customers are
having trouble obtaining necessary capital resources which are required to fund
the expansion of their businesses (e.g., telecom network deployments and
upgrades). The current volatility of the financial markets and economic slowdown
in the U.S. and internationally has also intensified the uncertainty experienced
by many of our customers, who are finding it increasingly difficult to predict
demand for their products and services. As a result, many of our customers have
and continue to slow and postpone the deployment of new wireless networks and
the development of new technologies and products, which has reduced the demand
for our services. Some of our customers have recently cancelled or suspended
their contracts with us and many of our customers or potential customers have
postponed entering into new contracts for our services. For example, during the
first quarter of 2001, we announced that we received notice of contract
suspension and termination from Metricom, Inc. Also due to the difficult
financing and economic conditions, some of our customers may not be able to pay
us for services that we have already performed. If we are not able to collect
amounts owed to us, we may be required to write-off significant amounts of our
accounts receivable. For example, three of our customers, Metricom, Inc.,
Advanced Radio Telecom and US Wireless filed for bankruptcy protection this
year. This caused us to recognize bad debt expense of $3.5 million for Advanced
Radio Telecom in the first quarter of fiscal 2001, $13.9 million for Metricom,
Inc. and $1.3 million for US Wireless in the second quarter of fiscal 2002,
which thereby negatively affected our profitability.
Some of our contracts with our customers include billing milestones,
whereby the client is not invoiced until certain milestones are reached.
However, we recognize revenue under the percentage-of-completion method of
accounting. If a contract is terminated by a customer or modified before a
milestone is reached, we generally will be required to renegotiate the terms of
payment for work performed but not yet billed. As a result of the market
conditions described above, we began to experience this during fiscal 2001 with
a number of our contracts that contain billing milestones. Due to the
circumstances surrounding such cancellations or modifications and the financial
condition of the related customers, the amount we ultimately collect from such
customers may be, and often is, discounted from the amount we have previously
recorded in unbilled accounts receivable and revenue. Because we are not able to
reduce our costs as fast as our revenues may decline, our costs as a percentage
of revenues may increase and, correspondingly, our net earnings may decline
disproportionately to any decreases in revenues. We have experienced this
challenge particularly with respect to managing our employee base, and this has
resulted in underutilization of employees due to the unforeseen reduction in the
demand for our services during fiscal 2001. In response to these factors and the
lack of visibility and uncertain market conditions, we have taken steps and are
continuing to take steps to reduce our level of expenditures. Specifically, we
have reduced our headcount by approximately 28% since December 31, 2000. We have
also implemented a more stringent expenditure approval policy, in an effort to
further reduce our costs. Additionally, we expect to continue to review our
internal processes throughout 2001 and make further adjustments as necessary.
As a result of these and other factors, it has become extremely difficult
to accurately forecast our future revenues and
21
earnings, and we therefore cannot re-affirm estimates of our revenues or
projections of our earnings that we have made in public statements prior to the
date of this Annual Report on Form 10-K.
Results of Operations
Comparison of Results for the Year Ended December 31, 2000 to the Year
Ended December 31, 2001
Revenues. Revenues decreased 19% from $255.9 million for the twelve
months ended December 31, 2000 to $207.2 million for the twelve months ended
December 31, 2001. The $48.7 million decrease was primarily attributable to the
recent decline in the economy and specifically, in wireless telecommunications
infrastructure spending, which resulted in the suspension and termination of
certain contracts. Revenues from international markets comprised 28% of our
total revenues during the twelve months ended December 31, 2000 compared to 32%
of our total revenues during the twelve month period ended December 31, 2001.
Cost of Revenues. Cost of revenues increased slightly from $140.1
million for the twelve months ended December 31, 2000 to $141.0 million for the
twelve months ended December 31, 2001 and gross profit was 45% of revenues for
the twelve months ended December 31, 2000 compared to 32% for the twelve months
ended December 31, 2001. The increase in cost of revenues and decline in gross
profit is primarily attributable to the recent decline in the economy and
specifically, in wireless telecommunications infrastructure spending, which
resulted in the suspension and termination of certain contracts, including our
contracts with Metricom, Inc. and Advanced Radio Telecom. The sudden and
unexpected loss of these customers caused the expected overall margin on the
related contracts to decrease and therefore a cumulative adjusting entry in the
amount of $8.6 million was recorded in the first half of fiscal 2001 to adjust
the margin recorded to date to the expected final margin on the contracts. Gross
profit also decreased due to costs incurred to demobilize staff as well as work
performed on milestones that could not be completed and billed. Finally, we have
begun to experience continued pressure associated with competitive pricing
demands within the wireless telecommunications industry.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 93% from $53.5 million for the twelve months
ended December 31, 2000 to $103.2 million for the twelve months ended December
31, 2001. As a percentage of revenues, selling, general and administrative
expenses increased from 21% for the twelve months ended December 31, 2000 to 50%
for the twelve months ended December 31, 2001. The increase is due primarily to
higher administrative costs to accommodate our domestic and international
growth, combined with lower utilization rates caused by the downturn experienced
during 2001 in the wireless telecommunications industry. During the fiscal 2001,
the Company recorded approximately $2.4 million of severance costs associated
with the reduction of employee headcount. Also, bad debt expense totaling $21.3
million, which included allowances for receivables due from Metricom, Inc. of
$13.9 million, Advanced Radio Telecom of $3.1 million, and US Wireless of $1.3
million were recorded during the first half of fiscal 2001. The Company also
recorded accruals during fiscal 2001 for an estimated contractor liability in
our Mexico subsidiary of $2.2 million and for the estimated loss on unused
office space of $1.4 million.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased 110% from $10.3 million for the twelve months ended December
31, 2000, to $21.6 million for the twelve months ended December 31, 2001. The
increase is primarily due to the incremental amortization of goodwill and other
identifiable intangibles resulting from our acquisitions completed during the
latter part of fiscal 2000.
Asset Impairment Charges. For the twelve months ended December 31,
2001, asset impairment charges totaled $12.9 million, compared to no charge for
the twelve months ended December 31, 2000. The recent slowdown in the economy,
current economic conditions and visible trends in the telecommunications
industry triggered an impairment evaluation of our goodwill and other intangible
assets in the second quarter of fiscal 2001 in accordance with SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of". Based on our analyses of the results of operations and
projected future cash flows associated with certain goodwill and other
intangible assets, we determined that an impairment existed. Accordingly, we
recorded a $12.9 million impairment charge in the second quarter of fiscal 2001.
Assets determined to be impaired included goodwill and contract and workforce
intangibles approximating $8.2 million in our design and deployment segment and
$4.7 million in our network management segment.
Net Other Income (Expense). For the twelve months ended December 31,
2000, net other income was $0.2 million compared to net other expense of $3.5
million for the twelve months ended December 31, 2001. This increase in expense
of $3.7 million was primarily attributable to higher interest expense resulting
from increased debt outstanding during the periods under comparison, and a $1.1
million realized loss on available-for-sale investment securities related to the
bankruptcy filing of Advanced Radio Telecom which was recorded in the first
quarter of fiscal 2001.
22
Provision (Benefit) for Income Taxes. Our effective income tax rate
changed from a provision of 39% for the twelve months ended December 31, 2000 to
a benefit of 20% for the twelve months ended December 31, 2001. The change was
primarily attributable to the change from reported pre-tax earnings in 2000 to
reported pre-tax losses in 2001, as well as an increase in the valuation
allowances on certain U.S. and foreign deferred tax assets in 2001.
Comparison of Results for the Year Ended December 31, 1999 to the Year
Ended December 31, 2000
Revenues. Revenues increased 176% from $92.7 million for the year
ended December 31, 1999, to $255.9 million for the year ended December 31, 2000.
The $163.2 million increase was primarily attributable to the addition of new
contracts from our acquisitions completed during 2000, expanded scope on several
large, existing contracts, and new contracts in our consulting and network
management segments, which generated no revenues in the year ended December 31,
1999. Significant new contracts included contracts acquired through our fiscal
year 2000 acquisitions of The Walter Group, the Dallas network operations
center, and Davis Bay. Revenues also increased from two significant deployment
contracts in the Mexican market serviced in the year ended December 31, 2000.
Revenues from our international markets comprised 34% of our total revenues
during the year ended December 31, 1999, compared to 28% of our total revenues
during the year ended December 31, 2000.
Cost of Revenues. Cost of revenues increased 158% from $54.3 million
for the year ended December 31, 1999, to $140.1 million for the year ended
December 31, 2000, primarily due to increased staffing in support of new
contracts. Gross profit was 41% of revenues for the year ended December 31,
1999, compared to 45% for the year ended December 31, 2000. The increase is
primarily due to a more favorable mix of project revenues resulting from the
types of services provided.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 186% from $18.7 million for the year ended
December 31, 1999, to $53.5 million for the year ended December 31, 2000. As a
percentage of revenues, selling, general and administrative expenses increased
from 20% for the year ended December 31, 1999, to 21% for the year ended
December 31, 2000. The increase is due to staffing increases in general and
administrative departments to support our growth in operations, the increased
corporate support required for a public company, as well as time charged for new
employees during our orientation, training and assignment processes.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased 390% from $2.1 million for the year ended December 31, 1999,
to $10.3 million for the year ended December 31, 2000. The increase is primarily
due to goodwill and other identifiable intangibles resulting from our recent
acquisitions, which also contributed to our increase in revenues and overall
operating expenses.
Net Other Income (Expense). For the year ended December 31, 1999, net
other expense was $0.5 million compared to net other income of $0.2 million for
the year ended December 31, 2000. This increase totaling $0.7 million was
primarily attributable to interest earned on our investments in marketable
securities from the proceeds of our November 1999 initial public offering and
the reduction of net foreign currency losses, partially offset by an increase in
interest expense on increasing balances on our line of credit and the initiation
of certain capital leases.
Provision for Income Taxes. Our provisional income tax rate as a
percentage of income before taxes decreased from 42% for the year ended December
31, 1999, to 39% for the year ended December 31, 2000. The decrease is primarily
attributable to increases in our foreign revenues from operations.
Trends
During 2001, tightened capital markets constrained the growth of the
wireless telecommunications industry, resulting in a delay in buildouts of
wireless communications networks. If buildouts and deployments of wireless
communications networks continue to be delayed for a sustained period of time,
our customers may place pressure on us to lower the prices that we charge for
our services, which would harm our results of operations.
Indications regarding overall telecom market conditions available as
of the date of this Annual Report on Form 10-K show continuing weakness in
wireless telecommunications infrastructure spending. Due to this environment,
management presently expects that the Company will record a net loss for the
quarter ending March 31, 2002, resulting from the continued underutilization of
its billable employees. In response, management is taking steps intended to
restore the Company to profitability as soon as possible and is considering a
number of alternative cost cutting measures and significant expense reductions,
including further lowering work force levels, many of which may require the
Company to take an accounting charge in connection with their implementation.
Liquidity and Capital Resources
Our sources of liquidity included cash and cash equivalents, cash from
operations, amounts available under credit facilities, and other external
sources of funds. On October 30, 2001, the Company received $34.9 million, net
of issuance costs, from the investment funds
23
managed by Oak Investment Partners for the sale of its Series A Convertible
Preferred Stock. As of December 31, 2001, we had cash and cash equivalents of
$61.1 million and had $33.0 million outstanding on our senior secured credit
facility ("line of credit").
Cash used in or provided by operations is primarily derived from our
contracts in process and changes in working capital. Cash used in operations
totaled $38.3 million for the twelve months ended December 31, 2000 while cash
provided by operations totaled $5.2 million for the twelve months ended December
31, 2001.
Cash used in investing activities was $14.7 million and $5.0 million
for the years ended December 31, 2000 and 2001, respectively. Investing
activities for the year ended December 31, 2000 consisted primarily of cash paid
for acquisitions and investments of $47.1 million and capital expenditures of
$5.7 million which are partially offset by proceeds totaling $38.0 million
received from sales of marketable securities. Acquisitions during the year ended
December 31, 2000 included the purchase of assets or securities from The Walter
Group, Comcor, Davis Bay, Questus, Telia Contracting, and Telia Academy, as well
as the purchase of a network operations center, an investment in CommVerge
Solutions Inc., and an equity interest in Diverse Networks, Inc. Cash used in
investing activities for the twelve months ended December 31, 2001 consisted of
capital expenditures.
Cash provided by financing activities for the year ended December 31,
2000 was $37.5 million which was primarily derived from $24.9 million in net
borrowings under our line of credit and $12.9 million from sale of common stock
issued through our stock option and employee stock purchase plans. Cash provided
by financing activities totaled $42.3 million for the twelve months ended
December 31, 2001. Financing activities primarily consisted of proceeds from
issuance of Series A Convertible Preferred Stock, sales of common stock issued
through our stock option and employee stock purchase plans, and net borrowings
under our line of credit, partially offset by repayment of notes payable and
capital lease obligations.
As of December 31, 2001, $33.0 million was outstanding under our line
of credit with a weighted average interest rate of 6.40%. The line of credit
expires in February 2004. Loans under this line of credit bear interest, at our
discretion, at either (i) the greater of the bank prime rate and the Federal
Funds Rate plus 0.5%, plus a margin ranging from 0.75% to 2.50%, the ("base rate
margin"), or (ii) at the London Interbank Offering Rate ("LIBOR") plus a margin
ranging from 1.75% to 3.50%, the ("LIBOR rate margin"). The line of credit is
secured by substantially all of our assets. The line of credit agreement
contains restrictive covenants, which, among other things, require maintenance
of certain financial ratios. On July 19, 2001, we executed an amendment to our
line of credit agreement, which among other items, changed the minimum EBITDA
covenant to exclude unusual charges up to a specified amount with respect to the
first and second quarters of our fiscal 2001 financial results. On December 31,
2001, we executed a second amendment to our line of credit agreement, which
amended certain financial covenants for 2002, reduced the aggregate commitment
from $100 million to $80 million and waived the requirement for compliance for
two financial covenants as of December 31, 2001. As such, we were in compliance
with all required covenants as of December 31, 2001.
As discussed in the "Risk Factors" section of Part 1 of our Annual
Report on Form 10-K, our quarterly and annual operating results have fluctuated
in the past and will vary in the future due to a variety of factors, many of
which are outside of our control. If the downturn in the telecommunications
industry continues or if we are unable to sufficiently increase our revenues or
reduce our expenses, we may experience a negative impact to our financial
results which may cause us to breach certain financial covenants. If we are
unable to obtain waivers of compliance for breach of certain financial
covenants, additional adverse consequences affecting availability of future
funding could occur and repayment of our debt obligations could be accelerated,
thus limiting our available liquidity and capital resources.
We have no material cash commitments other than obligations under our
credit facilities, operating and capital leases. Future capital requirements
will depend upon many factors, including the timing of payments under contracts
and increases in personnel in advance of new contracts.
The following summarizes the Company's contractual obligations and
other commitments at December 31, 2001, and the effect such obligations could
have on its liquidity and cash flow in future periods (in millions):
Amount of Commitment Expiring by Period
-----------------------------------------------
2002 2003 2004 2005 2006 Thereafter
----- ---- ---- ---- ----
Capital leases .......... $ 5.1 $ 3.5 $0.5 $0.2 $ -- $ --
Operating leases ........ 4.9 4.3 3.7 3.5 2.4 8.2
Long-term debt .......... 0.2