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United States Securities and Exchange Commission

Form 10-Q

(Mark One)

LCC International, Inc.

Registrant’s telephone number, including area code: (703) 873-2000

Not Applicable

(Former name, former address and former fiscal year, if changed, since last report.)

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes                  No  X 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes                  No        

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of August 1, 2003 the registrant had outstanding 14,658,545 shares of Class A Common Stock, par value $0.01 per share (the “Class A Common Stock”) and 6,316,374 shares of Class B Common Stock, par value $0.01 per share (the “Class B Common Stock”).

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LCC International, Inc. and Subsidiaries

Quarterly Report on Form 10-Q

INDEX

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PART I: FINANCIAL INFORMATION

Item 1: Financial Statements

LCC International, Inc. and Subsidiaries

See accompanying notes to condensed consolidated financial statements.

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LCC International, Inc. and Subsidiaries

See accompanying notes to condensed consolidated financial statements.

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LCC International, Inc. and Subsidiaries

Supplemental disclosures of non-cash investing and financing activities:

In January 2002, the Company purchased all of the assets of Smith Woolley Telecom for a purchase price of approximately $8.6 million. The purchase price consisted of $7.1 million in cash included above as part of business acquisitions and the issuance of 215,000 shares of the Company’s Class A Common Stock, par value $0.01 per share. The value of the Class A Common Stock was approximately $1.5 million. As a result, common stock and additional paid in capital increased, offset by an increase to goodwill and other intangibles.

In May 2003, in satisfaction of the purchase agreement between the Company and Westminster Capital, B.V. (“Westminster”), the Company paid Westminster approximately $0.3 million in cash and assigned a note to Westminster in the amount of approximately $0.2 million. As a result of the note assignment, goodwill and other intangible assets increased, offset by an increase in due to related parties, which is included in accounts payable on the condensed consolidated balance sheet. (See note 8).

See accompanying notes to condensed consolidated financial statements.

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LCC International, Inc. and Subsidiaries

Note 1:     Description of Operations

      The Company provides integrated end-to-end solutions for wireless voice and data communication networks with service offerings to include high level technical consulting, system design and deployment and ongoing operations and maintenance services. The Company operates in a highly competitive environment subject to rapid technological change and emergence of new technologies. Historically, the key drivers of changes in the Company’s wireless services business have been (1) the issuance of new or additional licenses to wireless operators; (2) the introduction of new services or technologies; (3) increases in the number of subscribers served by wireless operators; (4) the increasing complexity of wireless systems in operation and (5) changes in wireless infrastructure spending and deployment. Although the Company believes that its services are transferable to emerging technologies, rapid changes in technology and deployment could have an adverse financial impact on the Company.

Note 2:     Basis of Presentation

      The condensed consolidated financial statements of the Company included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods.

      Certain information and footnote disclosure normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. Operating results for the interim periods are not necessarily indicative of results for an entire year.

Note 3:     Recent Accounting Pronouncements

      In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46). FIN 46 gives further guidance to Accounting Research Bulletin (“ARB”) No. 51, “Consolidated Financial Statements”. ARB No. 51 requires companies to consolidate their financial statements when one company has a controlling financial interest, which is usually having a majority of the voting interest. FIN 46 further defines a controlling financial interest where the majority voting interest requirement is not met, a variable interest entity, and if the assets, liabilities and results of activities of the variable interest entity should be included in the consolidated statements of the company. FIN 46 is effective for all arrangements entered into after January 31, 2003. As of June 30, 2003, the Company had not entered into any such arrangements.

Note 4:     Equity-Based Compensation

      The Company accounts for equity-based compensation arrangements in accordance with the provisions of Accounting Principles Board (“APB”) No. 25 and complies with the disclosure provisions of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 123, as amended by FASB SFAS No. 148. All equity-based awards to non-employees are accounted for at their fair value in accordance with FASB SFAS No. 123. Under APB No. 25, compensation expense is based upon the difference, if any, on the date of grant, between the fair value of the Company’s stock and the exercise price.

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      Had compensation cost for the Company’s stock based compensation plans and employee stock purchase plan been determined on the fair value at the grant dates for awards under those plans, consistent with FASB SFAS No. 123, the Company’s net loss and net loss per share would have been reported at the pro forma amounts indicated below.

Note 5:     Restructuring Charge

      During the second quarter of 2002, the Company adopted a restructuring plan and recorded a restructuring charge of $10.0 million. During the fourth quarter of 2002, the Company recorded an additional $3.5 million restructuring charge relating to the costs of excess office space. The restructuring plan was in response to the low utilization of professional employees caused by the completion of several large fixed-price contracts and the difficulty in obtaining new contracts as a result of the slowdown in wireless telecommunications infrastructure spending. The cost of the severance and associated expenses was approximately $1.0 million and resulted in a work force reduction of approximately 140 people. In addition, the Company had excess facility costs relative to the space occupied by the employees affected by the reduction in force, space previously occupied by divested operations, and reduced business use of office space resulting from a continued trend for clients to provide professional staff office space while performing their services. The charge for the excess office space was approximately $12.5 million, which included $1.5 million in written-off leasehold improvements and other assets related to the excess space. The facility charge takes the existing lease obligation, less the anticipated rental receipts to be received from existing and potential subleases. This charge required significant judgments about the length of time that space will remain vacant, anticipated cost escalators and operating costs associated with the leases, market rate of the subleased space, and broker fees or other costs necessary to market the space. During the first quarter of 2003, the Company reversed excess severance payable of approximately $0.2 million.

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      A reconciliation of the restructuring activities is as follows:

      The restructuring payable was classified as follows:

Note 6:     Other Comprehensive Income (Loss)

      Comprehensive income (loss) is defined as net income (loss) plus the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Other comprehensive income (loss) refers to revenues, expenses, gains and losses that under accounting principles generally accepted in the United States of America are included in comprehensive income (loss), but excluded from net income (loss). Other comprehensive income (loss) consists solely of foreign currency translation adjustments at June 30, 2002 and 2003. Comprehensive income (loss) for the three and six months ended June 30 2002 and 2003 is as follows (in thousands).

Note 7:     Related Party Transactions

      RF Investors, a subsidiary of Telcom Ventures, indirectly owns the Class B Common Stock shares outstanding, which have ten-to-one voting rights over the Class A Common Stock shares and therefore represent approximately 81.0% voting control.

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      During 2002 and the first half of 2003, the Company continued to make certain payments on behalf of Telcom Ventures consisting primarily of fringe and payroll-related costs of $155,000 and $43,000, respectively and received reimbursements of $464,000 in 2002 and $24,000 during the first half of 2003. At December 31, 2002 and June 30, 2003, outstanding amounts associated with these payments, totaling $9,000 and $19,000, respectively, are included in due from related parties and affiliates within the accompanying condensed balance sheets. During 2002, the Company also provided an allowance of $100,000 for amounts in dispute. In April 2003, the Company received $100,000 to resolve the dispute in its entirety.

      In September 1996, the Company lent $3.5 million to Telcom Ventures to assist in the payment of taxes due in connection with the assumption by the Company of $30.0 million of convertible subordinated debt from Telcom Ventures. The original note was payable over five years with equal annual principal payments over the term. Interest accrued at the rate of LIBOR, plus 1.75%. The Company received the final payment of principal and accrued interest of approximately $700,000 during the first quarter of 2002 in satisfaction of the note.

      In July 2002, the Company acquired 51 percent of the outstanding shares of Detron LCC Network Services B.V. (“Detron”), a newly formed corporation in the Netherlands. The Company acquired the shares from Westminster B.V. (“Westminster”), which transferred the shares to Detron Corporation B.V. in January 2003. Detron has certain ongoing transactions with Detron Corporation B.V. Under a five-year lease agreement for office space, Detron recorded approximately $28,000 and $50,000 of rent expense for the three and six months ended June 30, 2003. Detron seconded various idle employees to Detron Telematics, Detron Corporation’s wholly owned subsidiary and recorded revenue of approximately $181,000 and $284,000 respectively, for the three and six months ended June 30, 2003.

      Advances to employees aggregating approximately $33,000 and $11,000 at December 31, 2002 and June 30, 2003, respectively are included in due from related parties and affiliates on the accompanying condensed balance sheets.

Note 8:     Commitments and Contingencies

      The Company is party to various non-material legal proceedings and claims incidental to its business. Management does not believe that these matters will have a material adverse affect on the consolidated results of operations or financial condition of the Company.

      In connection with the acquisition of 51 percent of Detron in July 2002, the purchase agreement provided for the payment of an additional $0.5 million should Detron achieve certain objectives by the end of the calendar year as confirmed by its adopted accounts. Having determined that these objectives were achieved, the Company and the sellers, Westminster, agreed upon the payment of the second purchase price by way of (a) assignment of a note to the sellers in the amount of approximately $0.2 million and (b) the payment in cash of approximately $0.3 million. The payment in cash to Westminster was made in May in accordance with the deed of assignment agreement.

Note 9:     Line of Credit

      During the second quarter of 2003, Detron established a line of credit with NMB-Heller N.V. (“NMB”). The line of credit provides that NMB will provide credit to Detron in the form of advance payments collateralized by Detron’s outstanding receivables. The agreement provides for NMB to advance up to 75% of the receivable balance. There is no maximum on the amount of receivables Detron can assign to NMB. Detron must repay the advances from NMB within 90 days or upon customer payment whichever occurs first. Interest on the advance payments will be calculated at a rate equal to NMB’s overdraft base rate plus 2% subject to a minimum of 5.75% per year. The agreement has an initial term of two years and can be extended. During the second quarter, Detron received $2.8 million in proceeds from the line of credit and repaid $0.8 million. As of June 30, 2003, Detron had $2.0 million outstanding to NMB.

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Note 10:     Subsequent Events

      On August 4, 2003 the Company, through its wholly owned subsidiary LCC China Services, L.L.C., closed an investment in a newly created entity based in China, Beijing LCC Bright Oceans Communication Consulting Co. Ltd (“LCC/ BOCO”). The Company will contribute approximately $1,067,000 for a 49% share of LCC/ BOCO’s registered capital. Bright Oceans Inter-Telecom Corporation, a Chinese publicly traded network management and systems integrator (“BOCO”) will contribute approximately $1,108,000 to hold the remaining 51% of LCC/ BOCO’s registered capital. The Company’s capital contribution is paid in three equal installments of approximately $355,000 each and the first installment was made on the date of closing. The second and third installments will be made on the date three months from the date of closing and six months from the date of closing, respectively. LCC/ BOCO offers design, deployment and maintenance services to wireless carriers in China.

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LCC International, Inc. and Subsidiaries

For the Three and Six Months Ended June 30, 2002 and 2003

      This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1934. The Management’s Discussion and Analysis of Financial Condition and Results of Operations includes, without limitation, forward-looking statements regarding the Company’s ability to pursue and secure new business opportunities. A more complete discussion of business risks is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

Overview

      The Company provides integrated end-to-end solutions for wireless voice and data communication networks with service offerings that include high level technical consulting, system design and deployment and ongoing operations and maintenance services. Since its inception in 1983, the Company has delivered wireless network solutions to more than 350 customers in over 50 countries.

      In the last several years, the Company has made several strategic decisions that have enabled it to focus on its core competency in providing end-to-end wireless services. In October 1999, the Company disposed of its hardware and software products businesses and, in March 2000, the Company sold its telecommunication tower business. In addition, during the last two years, the Company has entered into a number of strategic acquisitions and investments to enhance its wireless capabilities with a particular focus on certain international markets.

      The Company operates in a highly competitive environment subject to rapid technological change and emergence of new technologies. Historically, the key drivers of changes in the Company’s wireless services business have been (1) the issuance of new or additional licenses to wireless operators; (2) the introduction of new services or technologies; (3) increases in the number of subscribers served by wireless operators; (4) the increasing complexity of wireless systems in operation and (5) changes in wireless infrastructure spending and deployment.

      The Company’s primary sources of revenues are from engineering design and system deployment services. Revenues from services are derived both from fixed price and time and materials contracts. The Company recognizes revenues from fixed price service contracts using the percentage-of-completion method. With fixed price contracts the Company recognizes revenue based on the ratio of individual contract costs incurred to date on a project compared with total estimated costs. Anticipated contract losses are recognized, as they become known and estimable. The Company recognizes revenues on time and materials contracts as the services are performed.

      Cost of revenues includes direct compensation and benefits, living and travel expenses, payments to third-party subcontractors and consultants, equipment rentals, expendable computer software and equipment, and allocated, or directly attributed, facility and overhead costs identifiable to projects.

      General and administrative expenses consist of compensation, benefits, office and occupancy, and other costs required for the finance, human resources, information systems, and executive office functions. Sales and marketing expenses consist of salaries, benefits, sales commissions, travel and other related expenses required to implement the Company’s marketing, sales and customer support plans.

Trends That Have Affected or May Affect Results of Operations and Financial Condition

      The Company has continued to see tightened capital markets, which among other things have contributed to a slowdown in wireless telecommunications infrastructure spending. The Company’s success depends upon continued growth in the design and deployment and optimization of wireless networks. Many wireless carriers are reliant upon the capital markets to obtain funds to finance building and improving their wireless networks. Most vulnerable are the customers that are new licensees and operator/carriers who have limited sources of funds from operations or have business plans that are dependent on funding from the capital markets. The slowdown in wireless telecommunications infrastructure spending caused some of the Company’s customers or

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      The completion of the XM Satellite contract in the first quarter of 2002, coupled with the industry slowdown, has caused revenue to decline dramatically since 2001. Additionally, the need to replace revenue derived from the XM Satellite contract and the difficult marketplace has caused gross profit as a percentage of total revenues to decline. Cost reduction measures taken by the Company are not sufficient to return the Company to profitability without additional growth in revenue.

      Europe is a promising area for revenue growth for the Company. This optimism is caused by the need of the European carriers to meet network-building obligations associated with their 3G licenses, which represent a significant investment on their part. With the recent availability of 3G equipment in Europe, the Company expects that demand for the types of services provided by the Company will increase. Revenue from 3G networks constituted 17.0% and 31.7% of the Company’s revenues for the quarter ended June 30, 2002 and 2003, respectively, and it is expected to continue to be an area of business growth in the future. In anticipation of this growth, and in order to complement its European Radio Frequency Engineering capacity with local deployment capability necessary to provide end-to-end services in key European markets, the Company acquired additional deployment capability in Europe. In December 2001, the Company acquired LCC Italia (formerly known as Transmast), a wireless infrastructure, deployment, civil engineering and project management firm located in Milan, Italy. In January 2002, the Company acquired the assets of Smith Woolley Telecom, a telecommunications consultancy company that specializes in the provision of search, acquisition, design, build, and management and maintenance services to the wireless industry in the United Kingdom. In July 2002, the Company acquired 51% of Detron LCC Network Services B.V., a newly formed company specializing in the provision of deployment, management and maintenance services to the wireless industry in the Netherlands. The Company also anticipates that its reliance upon fixed price contracts will continue to grow in connection with these acquisitions. These international operations provide more support for network deployment and construction management, where use of fixed price contracts is more typical. These contracts typically contain payment terms that are less favorable, and consequently require greater working capital than has historically been required by the Company, which is reflected as an increase in days sales outstanding. Additionally, the work may provide lower gross profit margins than engineering design services.

      In addition, the Company’s North America operations also have the chance to benefit from some increased spending by certain U.S. wireless carriers. Despite 2003 capital expenditure estimates for U.S. wireless carriers being lower than those reported for 2002, the Company has observed an increase in spending in the areas of network design, deployment and optimization by several carriers. This increased spending can be attributed to several trends: (1) preparation for number portability scheduled to be implemented by November 24, 2003, (2) license swaps as a result of carriers trying to maximize spectrum utilization and increase coverage, (3) enhanced network quality programs to reduce churn, (4) network expansion and capacity programs geared toward enabling new and enhanced services and (5) other miscellaneous network upgrades and enhancements required for market share maintenance and competitive reasons. Due to the strengthening of its sales initiatives, the Company has been successful in winning several major contracts awarded by carriers to specifically address these trends. For example, during the first half of 2003, the Company entered into agreements with Sprint Spectrum L.P. (“Sprint”) and US Cellular Corporation (“USCC”) to perform turnkey design and deployment services. In the case of Sprint, the Company will perform RF engineering and turnkey deployment services with an estimated contract value of approximately $70.0 million. In the case of USCC, the Company will perform turnkey design and deployment services with an estimated contract value of approximately $40.0 million. The Company’s ability to offer a full turnkey solution has been important in winning these awards. A mix of project management, engineering design and optimization, network deployment, construction and construction management services, characterizes these turnkey contracts. These types of contracts are frequently awarded on a fixed price basis and tend to generate lower gross profit margins than stand alone engineering design or network deployment services. The Company anticipates further growth in this area of business, resulting in an increased reliance upon fixed price turnkey contracts coupled with some degradation in its gross margins.

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Results of Operations

      The following table and discussion provide information which management believes is relevant to an assessment and understanding of the Company’s consolidated results of operations and financial condition. The discussion should be read in conjunction with the condensed consolidated financial statements and accompanying notes thereto included elsewhere herein.

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Three Months Ended June 30, 2003

      Revenues. Revenues for the three months ended June 30, 2003 were $18.2 million compared to $12.2 million for the prior year, an increase of $6.0 million or 49.2%. The EMEA and Americas regions increased $5.2 million and $0.8 million, respectively, over the same period last year. The EMEA region’s increase was primarily due to continued growth of LCC Italia and Detron, and to increased activity in Algeria. The Americas region increase in revenues of $0.8 million was primarily attributable to growth in North America.

      Cost of Revenues. Cost of revenues for the three months ended June 30, 2003 was $14.9 million compared to $10.7 million for the prior year, an increase of $4.2 million. Consistent with the explanation for the changes in revenue above, the increase of $4.2 million comprised a net increase in cost in the EMEA and the Americas regions of $4.1 million and $0.2 million, respectively and a decrease in cost in the Asia Pacific region of $0.1 million. The increase in cost of revenues in the EMEA region primarily represents an increase in cost for LCC Italia, Detron and Algeria of $4.8 million. In addition, costs increased over the prior year by $0.4 million reflecting the reversal in the prior year of employee benefit related accruals. The increase in cost of revenues in the Americas region was primarily attributable to growth in North America.

      Gross Profit. Gross profit for the three months ended June 30, 2003 was $3.3 million compared to $1.5 million for the prior year, an increase of $1.8 million. As a percentage of revenues, gross profit was 18.3% in 2003 compared to 12.2% in 2002, an increase of 6.1%. This increase of gross profit comprised increases in the EMEA region of $1.1 million (3.7%), in the Americas region of $0.6 million (1.6%) and in the Asia Pacific region of $0.1 million (0.8%). The increase of $1.1 million in the EMEA region is primarily composed of $1.1 million (6.7%) related to LCC Italia and Detron, $0.6 million (4.0%) related to Algeria and a $0.4 million decrease (3.4%) related to the reversal of employee benefit accruals in 2002. The increase in the Americas is mostly due to growth in North America.

      Sales and Marketing. Sales and marketing expenses were $1.5 million for the three months ended June 30, 2003 compared to $2.0 million for the prior year, a decrease of $0.5 million. Sales and marketing as a percentage of total revenues was 8.1% and 16.0%, respectively for the three months ended June 30, 2003 and 2002. The decrease in sales and marketing expenses is largely attributable to cost savings initiatives in the EMEA ($0.2 million) and Asia Pacific regions ($0.2 million).

      General and Administrative. General and administrative expenses were $4.7 million for the three months ended June 30, 2003 compared to $2.1 million for the prior year, an increase of $2.6 million. The Company recorded recoveries of previously reserved receivables for customers of $0.5 million and $1.6 million during the three months ended June 30, 2003 and 2002, respectively. Excluding the recoveries, general and administrative expenses for the three months ended June 30, 2003 would have been $5.2 million compared to $3.7 million for the prior year. The increase of $1.5 million is primarily due to continued growth of LCC Italia ($0.3 million), Detron ($0.4 million) and Algeria ($0.4 million).

      Restructuring Charge. A restructuring charge of $10.0 million was recorded for the three months ended June 30, 2002 pursuant to a restructuring plan adopted by the Company. The plan was formulated to respond to the low utilization of professional employees caused by the completion of several large fixed price contracts and the difficulty in obtaining new contracts as a result of a slowdown in wireless telecommunications infrastructure spending. The cost of the severance and associated expenses were approximately $1.0 million. Additionally, the Company had excess facility costs relative to the space occupied by the employees affected by the reduction in force and reduced business use of office space resulting from a continued trend for clients to provide professional staff office space while performing their services. The charge for the excess office space was approximately $9.0 million. The Company did not record any restructuring charges during the three months ended June 30, 2003.

      Gain on Sale of Tower Portfolio and Administration, Net. During February 2000, the Company entered into an agreement for the sale of telecommunications towers that it owned. As part of the sale agreement, the

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      Depreciation and Amortization. Depreciation and amortization expense was $0.8 million for both the three months ended June 30, 2003 and 2002.

      Other Income (Expense). Other income and expense for the three months ended June 30, 2003 was a net income of $0.2 million compared to a net expense of $5.0 million for the three months ended June 30, 2002, an increase of $5.2 million. The $5.0 million of other income (expense) for the three months ended June 30, 2002 contained an impairment charge of $5.2 million related to the investments the Company made in 2000 in Plan + Design Netcare AG and Mobilocity.

      Income Taxes. The provision for income taxes was recorded for the three months ended June 30, 2003 using an effective income tax rate of 13.1% compared to a benefit of 31.1% for the comparable period in 2002. The rates utilized included cumulative adjustments of a provision of $0.9 million and a benefit of $0.3 million for three months ended June 30, 2003 and 2002, respectively, to reflect a change in the estimated effective income tax rates for the year to 12.0% in 2003 and 29.0% in 2002. The estimated effective income tax rates differed from the federal statutory tax rate of 35.0% due primarily to no tax benefits being recognized for losses generated by the Company’s foreign subsidiaries and an increase in the valuation allowance for foreign tax credits.

      Net Loss. The net loss was $4.0 million for the three months ended June 30, 2003 compared to a net loss of $11.2 million in the prior year. The higher loss in 2002 reflected the restructuring charge and the impairment charge for the investments. These charges were offset by the recovery of the previously deferred amount related to the tower sale. Both periods were affected by the cumulative adjustments made to the estimated effective tax rates for the year, as described above.

Six Months Ended June 30, 2003

      Revenues. Revenues for the six months ended June 30, 2003 were $35.3 million compared to $29.6 million for the prior year, an increase of $5.7 million or 19.3%. The net increase consisted of an increase in revenues in the EMEA region of $8.9 million offset by decreases in both the Americas region ($2.5 million) and the Asia-Pacific region ($0.7 million). The change in the EMEA region was due to the continued growth of LCC Italia, Detron and Algeria of $12.3 million, offset by decreases representing the completion of other contracts primarily in Egypt and the Netherlands of $3.4 million. The Americas net decrease of $2.5 million consisted of $3.3 million related to the completion of the XM Satellite contract in 2002 offset by growth of $0.8 million.

      Cost of Revenues. Cost of revenues for the six months ended June 30, 2003 was $29.5 million compared to $27.0 million for the prior year, an increase of $2.5 million. The EMEA region increased cost of revenues by $6.2 million, which was offset by decreases in the Americas and Asia Pacific regions of $3.3 million and $0.4 million respectively. The increase in the EMEA region was primarily due to LCC Italia, Detron and Algeria ($9.8 million), offset by reductions in Egypt and the Netherlands of $4.0 million. The Americas decrease was primarily due to the completion of the XM Satellite contract of $3.2 million in 2002.

      Gross Profit. Gross profit for the six months ended June 30, 2003 was $5.9 million compared to $2.6 million for the prior year, an increase of $3.3 million. As a percentage of revenues, gross profit was 16.6% in 2003 compared to 8.9% in 2002, an increase of 7.7%. The EMEA and Americas regions increased by $2.7 million (6.8%) and $0.9 million (2.1%) respectively, while the Asia Pacific region decreased by $0.3 million (1.2%). The EMEA region’s increase was primarily due to LCC Italia, Detron, and Algeria ($2.6 million), the completion of a fixed price contract in Egypt ($0.7 million), offset by $0.4 million related

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      Sales and Marketing. Sales and marketing expenses were $3.4 million for the six months ended June 30, 2003 compared to $4.2 million for the prior year, a decrease of $0.8 million. The decrease is attributable to cost saving initiatives in the EMEA and Asia Pacific regions.

      General and Administrative. General and administrative expenses were $9.5 million for the six months ended June 30, 2003 compared to $7.2 million for the prior year, an increase of $2.3 million. Included in general and administrative expenses are net benefits from recoveries of previously reserved receivables of $1.3 million in 2003 and $1.0 million in 2002, respectively.

      Excluding the effects of bad debts, general and administrative expenses for 2003 was $10.8 million compared to $8.2 million for the prior year. The increase of $2.6 million was largely attributable to continued growth in the EMEA region, primarily Algeria ($0.5 million), LCC Italia ($0.6 million) and Detron ($0.9 million).

      Restructuring Charge. A restructuring charge of $10.0 million was recorded for the six months ended June 30, 2002 pursuant to a restructuring plan adopted by the Company. The plan was formulated to respond to the low utilization of professional employees caused by successful completion of several large fixed price contracts and difficulty in obtaining new contracts as a result of a slowdown in wireless telecommunications infrastructure spending. The cost of the severance and associated costs was approximately $1.0 million. Additionally, the Company had excess facility costs relative to the space occupied by the employees affected by the reduction in force and reduced business use of office space resulting from a continued trend for clients to provide professional staff office space while performing their services. The charge for the excess office space was approximately $9.0 million. During the first half of 2003, the Company reversed $0.2 million related to excess severance accruals.

      Gain on Sale of Tower Portfolio and Administration, Net. During February 2000, the Company entered into an agreement for the sale of telecommunications towers that it owned. As part of the sale agreement, the Company agreed to lease unoccupied space on the towers, effectively guaranteeing a minimum rent level of a fixed amount on the towers sold. The gain from the tower portfolio sale deferred an amount corresponding to this rent commitment, until the space was leased to another tenant or otherwise satisfied. The Company recognized $2.0 million of this previously deferred gain, for the six months ended June 30, 2002.

      Depreciation and Amortization. Depreciation and amortization expense was $1.6 million for the six months ended June 30, 2003 compared to $1.4 million for the prior year, an increase of $0.2 million. The increase in depreciation and amortization is due to the amortization of intangibles for the acquisitions the Company made in 2002.

      Other Income (Expense). Other income for the six months ended June 30, 2003 was $1.5 million compared to other expense of $4.7 million in the prior year, an increase of $6.2 million. Other expense for the six months ended June 30, 2002 contained an impairment charge of $5.2 million related to investments the Company made in 2000. Other income for the six months ended June 30, 2003 included approximately $1.0 million of cash received from the sale of NextWave Pre-Petition interest.

      Income Taxes. The benefit for income taxes was recorded for the six months ended June 30, 2003 and 2002 using an effective income tax rate of 12.0% in 2003 and 29.0% in 2002. The estimated effective income tax rates differed from the federal statutory tax rate of 35.0% due primarily to no tax benefits being recognized for losses generated by the Company’s foreign subsidiaries and an increase in the valuation allowance for foreign tax credits.

      Net Loss. The net loss was $6.1 million for the six months ended June 30, 2003 compared to a net loss of $16.3 million in the prior year. The higher net loss in 2002 reflected the restructuring charge and the impairment charge for the investments. These charges were offset by the recovery of the previously deferred amount related to the tower sale described above.

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Liquidity and Capital Resources

      Cash combined with restricted cash and short-term investments at June 30, 2003 provided total liquid assets of $27.9 million, compared to $39.3 million at December 31, 2002, a decrease of $11.4 million. This decrease in liquidity largely related to cash used in operations for the six months ended June 30, 2003.

      Cash used by operations was $12.7 million for the six months ended June 30, 2003, compared to $2.5 million for the prior year, an increase of $10.2 million. Of this increase, $4.9 million was used to fund operating losses and $5.3 million was used to fund the increase in working capital.

      Cash used by investing activities was $0.7 million for the six months ended June 30, 2003, compared to $7.9 million for the prior year. Cash used by investing activities in 2002 largely related to the acquisition of Smith Woolley Telecom in the United Kingdom.

      Cash provided by financing activities was $1.8 million for the six months ended June 30, 2003, compared to cash provided of $0.8 million for the prior year. During the second quarter of 2003, the Company’s subsidiary in the Netherlands, Detron, established a line of credit, collateralized by Detron’s outstanding accounts receivable. Detron received proceeds from the line of credit of $2.8 million and repaid $0.8 million during the second quarter of 2003. Additionally, the Company increased restricted cash by $0.2 million Cash provided in 2002 mostly related to the repayment to the Company of the final installment of a loan by Telcom Ventures, a shareholder. Except for the line of credit described above, the Company has no other debt. The Company has no material cash commitments other than obligations under its operating leases and to fund the joint venture in China. The Company does anticipate an increase in restricted cash in the future to serve as collateral for certain short term guarantees that will be necessary to support project procurements. The Company has not engaged in any off-balance sheet financing as of June 30, 2003. The Company believes it has sufficient assets and relationships with financial institutions to obtain additional debt facilities should the business need arise.

      The Company anticipates the receipt in the third quarter of approximately $9.0 million for US federal and state refunds. The recent award of certain major projects is anticipated to provide a source of longer-term cash from operations. As noted above, during the six months ended June 30, 2003, the Company increased working capital by approximately $5.0 million, and this use of cash is likely to continue during the execution period of these major projects. In addition, the Company may consider the sale of securities and/ or the use of debt facilities to support working capital requirements. As these projects are delivered and certain milestones are achieved, working capital should be reduced and cash balances increased. For the short term, the Company believes it has adequate cash and short-term investments, which, together with the receipt of tax refunds described above, will satisfy cash requirements for at least the next twelve months. Therefore, the Company believes that it will generate sufficient cash from operations to meet its long-term liquidity needs.

Critical Accounting Policies

      The Company’s critical accounting policies are as follows:

	•	Revenue recognition;
	•	Allowance for doubtful accounts and accrual of expatriate taxes;
	•	Accounting for income taxes; and
	•	Restructuring charge.

          Revenue recognition policy

      The Company’s principal source of revenues consists of design and system deployment services. The Company provides design services on a contract basis, usually in a customized plan for each client and generally charges for engineering services on a time and materials or fixed price basis. The Company generally offers its deployment services on a fixed price, time-certain basis. The portion of the Company’s revenue from

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          Allowance for doubtful accounts and accrual of expatriate taxes

      The preparation of financial statements requires the Company’s management to make estimates and assumptions that affect the reported amount of assets, liabilities, contingent assets and liabilities and the reported amounts of revenues and expenses during the reported period. Specifically, the Company’s management must make estimates of the probability of collection of its accounts receivable. Management specifically analyzes accounts receivable balances, customer concentrations, customer credit-worthiness, current economic trends and changes in its customer payment terms when evaluating the adequacy of the valuation allowance for doubtful accounts. For the quarter ended June 30, 2003, the Company derived 76.5% of its total revenues from its ten largest customers, indicating significant customer concentration risk with the Company’s receivables. These ten largest customers constituted 69.1% of the Company’s net receivable balance as of June 30, 2003. In addition, fixed-price contracts with unfavorable milestone payments can cause unbilled receivables to grow prior to achieving the applicable milestone that permits billing. At June 30, 2003, the Company had approximately $15.1 million of unbilled receivables, compared to approximately $12.4 million at December 31, 2002. Lastly, the Company frequently performs services for development-stage customers, which carry a higher degree of risk, particularly as to the collection of accounts receivable. These customers may be particularly vulnerable to current tightening of available credit and general economic slowdown.

      The Company estimates liabilities associated with taxes relative to employees sent to assignments in foreign countries. These expatriate employees are reimbursed for any additional personal income tax burden that was derived as a result of the assignment. Calculation of these obligations takes considerable knowledge of payroll, social, and other taxes in multiple countries, and the employee’s personal tax situation. In addition, it requires interpretation of tax laws, an assessment of potential audit risk from tax authorities, and often the resolution of the tax liabilities may not occur for several years. The Company has $2.6 million accrued for expatriate tax obligations as of June 30, 2003.

          Accounting for income taxes

      As part of the process of preparing the Company’s consolidated financial statements an estimate for income taxes is required for each of the jurisdictions in which the Company operates. This process requires estimating the Company’s actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheet. The Company must then assess the likelihood that its deferred tax assets will be recovered from future taxable income and to the extent the Company believes that recovery is not likely, it must establish a valuation allowance The valuation allowance is based on the Company’s estimates of taxable income by jurisdiction in which it operates and the period over which its deferred tax assets will be recoverable. In the event the actual results differ from these estimates the Company may need to increase or decrease its valuation allowance, which could materially have an impact on its financial position and results of operations.

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      Considerable management judgment may be required in determining the Company’s provision for income taxes, its deferred tax assets and liabilities and any valuation allowance recorded against its net deferred tax assets. The Company has recorded a valuation allowance of $6.7 million as of June 30, 2003, due to uncertainties related to its ability to utilize some of its deferred tax assets before they expire. These deferred tax assets primarily consist of foreign net operating losses carried forward, foreign tax credits and non-cash compensation accruals relating to stock options issued under a phantom membership plan in effect prior to the Company’s initial public offering. The net deferred tax assets, as of June 30, 2003 were $4.9 million.

          Restructuring charge

      The Company recorded a restructuring charge during the second quarter of 2002 and an additional charge during the fourth quarter of 2002. Included in this restructuring charge of $13.5 million was a charge for excess facilities aggregating approximately $12.5 million. This facility charge significantly relates to leased office space, which the Company no longer occupies. The facility charge takes the existing lease obligation less anticipated rental receipts to be received from existing and potential subleases. This requires significant judgments about the length of time space will remain vacant, anticipated cost escalators and operating costs associated with the leases, market rate the space will be subleased at, and broker fees or other costs necessary to market the space. These judgments were based upon independent market analysis and assessment from experienced real estate brokers. The restructuring charge calculation assumes $10.1 million will be derived in sublease income, for which the Company does not currently have a subtenant.

Related Party Transactions

      During 2002 and the first half of 2003, the Company continued to make certain payments on behalf of Telcom Ventures consisting primarily of fringe and payroll-related costs of $155,000 and $43,000, respectively and received reimbursements of $464,000 in 2002 and $24,000 during the first half of 2003. At December 31, 2002 and June 30, 2003, outstanding amounts associated with these payments, totaling $9,000 and $19,000, respectively, are included in due from related parties and affiliates within the accompanying condensed balance sheets. During 2002, the Company also provided an allowance of $100,000 for amounts in dispute. In April 2003, the Company received $100,000 to resolve the dispute in its entirety.

      In July 2002, the Company acquired 51 percent of the outstanding shares of Detron LCC Network Services B.V. (“Detron”), a newly formed corporation in the Netherlands. The Company acquired the shares from Westminster B.V., which in turn transferred the shares to Detron Corporation BV in January 2003. Detron has certain ongoing transactions with Detron Corporation BV. Under a five-year lease agreement for office space, Detron recorded approximately $28,000 and $50,000 of rent expense for the three and six months ended June 30, 2003. Detron seconded various idle employees to Detron Telematics, Detron Corporation’s wholly owned subsidiary and recorded revenue of approximately $181,000 and $284,000 respectively, for the three and six months ended June 30, 2003.

Recent Accounting Pronouncements

      In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46). FIN 46 gives further guidance to Accounting Research Bulletin (“ARB”) No. 51, “Consolidated Financial Statements”. ARB No. 51 requires companies to consolidate their financial statements when one company has a controlling financial interest, which is usually having a majority of the voting interest. FIN 46 further defines a controlling financial interest where the majority voting interest requirement is not met, a variable interest entity, and if the assets, liabilities and results of activities of the variable interest entity should be included in the consolidated statements of the company. FIN 46 is effective for all arrangements entered into after January 31, 2003. As of June 30, 2003, the Company had not entered into any such arrangements.

      The Company is exposed to the impact of foreign currency fluctuations. The Company’s exposure to exchange rates relates primarily to its foreign subsidiaries. Subsidiaries with material foreign currency

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      Approximately 62.8% of the Company’s revenues were generated outside the United States for the six months ended June 30, 2003, the majority of which were in Europe. In connection with the Company’s recent acquisitions and the increased availability of 3G equipment in Europe, the Company anticipates continued growth of its international operations, particularly in Europe, the Middle East and Africa, in 2003 and beyond. As a result, fluctuations in the value of foreign currencies against the U.S. dollar may have a significant impact on the reported results of the Company. Revenues and expenses denominated in foreign currencies are translated monthly into United States dollars at the weighted average exchange rate. Consequently, as the value of the dollar strengthens or weakens relative to other currencies in the Company’s major markets the resulting translated revenues, expenses and operating profits become lower or higher, respectively.

      Fluctuations in currency exchange rates also can have an impact on the United States dollar amount of shareholders’ equity of the Company. The assets and liabilities of the Company’s non-U.S. subsidiaries are translated into United States dollars at the exchange rate in effect at June 30, 2003. The resulting translation adjustments are recorded in shareholders’ equity as accumulated other comprehensive loss. The Euro was stronger relative to many of the foreign currencies at June 30, 2003 compared to June 30, 2002. Consequently, the accumulated other comprehensive loss component of shareholders’ equity decreased $1.1 million during the six months ended June 30, 2003. As of June 30, 2003, the total amount of long-term intercompany receivable/payables in non-U.S. subsidiaries subject to this equity adjustment, using the exchange rate as of the same date, was approximately $12.4 million.

      The Company is exposed to the impact of foreign currency fluctuations due to the operations of short-term intercompany transactions between its London office and its consolidated foreign subsidiaries. While these intercompany balances are eliminated in consolidation, exchange rate changes do affect consolidated earnings. Foreign subsidiaries with amounts owed to London operations at June 30, 2003 (denominated in Euros) include Italy in the amount of $1.2 million and the Netherlands in the amount of $0.6 million. These balances generated a foreign exchange gain of $0.1 million included in the Company’s consolidated results at June 30, 2003. In addition, a hypothetical 10% adverse change would result in a $0.2 million reduction to operating losses generated outside the United States. This was estimated using a 10% deterioration factor to the average monthly exchange rates applied to net income or loss for each of the subsidiaries in the respective period. Foreign exchange gains and losses recognized on any transactions are included in the Consolidated Statements of Operations.

      Although currency fluctuations can have an impact on the Company’s reported results and shareholders’ equity, such fluctuations generally do not affect the Company’s cash flow or result in actual economic gains or losses. The Company currently does not hedge any of these risks in its foreign subsidiaries because: (1) the Company’s Brazilian subsidiary derives revenues and incurs expenses within a single country, and consequently, does not incur currency risks in connection with the conduct of its normal operations, (2) the British pound sterling, U.S. dollar, and Euro are relatively stable against each other, (3) other foreign operations are minimal, and (4) the Company does not believe that hedging transactions are justified by the current exposure and cost at this time.

Item 4:     Controls and Procedures

(a) Evaluation of disclosure controls and procedures

      The Company’s Chief Executive Officer and the Company’s Chief Financial Officer carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of June 30, 2003. Based on that evaluation, these officers have concluded that the Company’s disclosure controls and procedures were adequate and designed to ensure that material information relating to the Company and the Company’s consolidated subsidiaries would be made known to them by others within those entities, particularly during the period ended June 30, 2003.

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(b) Changes in internal controls

      There were no significant changes in the Company’s internal controls or other factors that occurred during the reporting period that could materially affect or could significantly affect the Company’s disclosure controls and procedures.

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PART II: OTHER INFORMATION

Item 1:     Legal Proceedings

      The Company is party to various non-material legal proceedings and claims incidental to its business.

Item 2:     Changes in Securities

      Not Applicable

Item 3:     Defaults Upon Senior Securities

      Not Applicable

Item 4:     Submission of Matters to a Vote of Security Holders

      The Annual Meeting of Shareholders was held on May 22, 2003. All of the proposals for Shareholder consideration at the Annual Meeting were approved. The following is a tabulation of the voting on each proposal presented at the Annual Meeting.

      Proposal 1 — Election of Directors