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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
Exchange Act of 1934
For the quarterly period ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
Exchange Act of 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 0-21213
LCC INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 54-1807038
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) Number)
7925 JONES BRANCH DRIVE, MCLEAN, VA 22102
(Address of Principal Executive (Zip Code)
Offices)
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 PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
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 October 15, 2003 the registrant had outstanding 14,736,157 shares of Class
A Common Stock, par value $0.01 per share (the "Class A Common Stock") and
6,314,374 shares of Class B Common Stock, par value $0.01 per share (the "Class
B Common Stock").
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1
LCC INTERNATIONAL, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
INDEX
PAGE
NUMBER
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Condensed consolidated statements of operations
for the three months and nine months ended
September 30, 2002 and 2003 3
Condensed consolidated balance sheets as of December 31,
2002 and September 30, 2003 4
Condensed consolidated statements of cash flows for
the nine months ended 5
September 30, 2002 and 2003
Notes to condensed consolidated financial statements 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 10
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 20
ITEM 4: CONTROLS AND PROCEDURES 20
PART II: OTHER INFORMATION
ITEM 1: Legal Proceedings 21
ITEM 2: Changes in Securities 21
ITEM 3: Defaults Upon Senior Securities 21
ITEM 4: Submission of Matters to a Vote of Security Holders 21
ITEM 5: Other Information 21
ITEM 6: Exhibits and Reports on Form 8-K 21
2
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
LCC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ----------------------
2002 2003 2002 2003
----------- ----------- ----------- ---------
REVENUES...................................................... $17,425 $29,350 $47,042 $64,677
COST OF REVENUES.............................................. 15,189 23,756 42,183 53,215
------- ------- ------- -------
GROSS PROFIT.................................................. 2,236 5,594 4,859 11,462
------- ------- ------- -------
OPERATING (INCOME) EXPENSE:
Sales and marketing......................................... 2,186 1,302 6,432 4,739
General and administrative.................................. 7,941 4,118 15,130 13,587
Restructuring charge (recovery)............................. -- 150 10,030 (2)
Gain on sale of tower portfolio and administration, net..... -- -- (2,000) --
Depreciation and amortization............................... 610 1,338 2,057 2,944
------- ------- ------- -------
10,737 6,908 31,649 21,268
------- ------- ------- -------
OPERATING LOSS................................................ (8,501) (1,314) (26,790) (9,806)
------- ------- ------- -------
OTHER INCOME (EXPENSE):
Interest income............................................. 147 49 657 246
Other....................................................... 238 (186) (4,961) 1,134
------- ------- ------- -------
385 (137) (4,304) 1,380
------- ------- ------- -------
LOSS FROM OPERATIONS BEFORE INCOME TAXES...................... (8,116) (1,451) (31,094) (8,426)
BENEFIT FOR INCOME TAXES...................................... (1,100) (426) (7,773) (1,264)
------- ------- ------- -------
NET LOSS...................................................... $(7,016) $(1,025) $(23,321) $(7,162)
======= ======= ======== =======
NET LOSS PER SHARE:
Basic....................................................... $ (0.34) $(0.05) $ (1.12) $ (0.34)
======== ======== ======== ========
Diluted..................................................... $ (0.34) $(0.05) $ (1.12) $ (0.34)
======== ======== ======== ========
WEIGHTED AVERAGE SHARES USED IN CALCULATION OF NET
LOSS PER SHARE:
Basic....................................................... 20,900 21,002 20,889 20,977
======= ======= ======= =======
Diluted..................................................... 20,900 21,002 20,889 20,977
======= ======= ======= =======
See accompanying notes to condensed consolidated financial statements.
3
LCC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, SEPTEMBER 30,
2002 2003
------------- ------------
(AUDITED) (UNAUDITED)
ASSETS:
Current assets:
Cash and cash equivalents........................ $ 37,507 $ 26,695
Restricted cash.................................. 1,308 1,113
Short-term investments........................... 514 534
Receivables, net of allowance for doubtful
accounts of $3,122 and $1,289 at December
31, 2002 and September 30, 2003, respectively:
Trade accounts receivable................... 13,165 19,067
Unbilled receivables........................ 12,369 21,706
Due from related parties and affiliates..... 61 110
Deferred income taxes, net....................... 3,932 2,555
Prepaid expenses and other current assets........ 1,835 1,652
Prepaid tax receivable and prepaid taxes......... 8,285 224
-------- ---------
Total current assets........................ 78,976 73,656
Property and equipment, net.......................... 5,010 3,982
Deferred income taxes, net........................... 504 2,893
Goodwill and other intangibles....................... 11,273 11,337
Other assets......................................... 960 1,454
--------- ---------
$ 96,723 $ 93,322
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Line of credit................................... $ -- $ 1,092
Accounts payable................................. 7,316 10,578
Accrued expenses................................. 10,543 9,314
Accrued employee compensation and benefits....... 6,272 6,168
Deferred revenue................................. 41 1,159
Income taxes payable............................. 882 1,129
Accrued restructuring current.................... 3,937 3,313
Other current liabilities........................ 26 293
--------- ---------
Total current liabilities................... 29,017 33,046
Accrued restructuring ........................... 5,786 4,184
Other liabilities................................ 832 682
--------- ---------
Total liabilities........................... 35,635 37,912
--------- ---------
Shareholders' equity:
Preferred stock:
10,000 shares authorized; 0 shares issued and
outstanding................................... -- --
Class A common stock, $0.01 par value:
70,000 shares authorized; 14,632 and 14,725 shares
issued and outstanding at December 31, 2002 and
September 30, 2003, respectively................ 146 147
Class B common stock, $0.01 par value:
20,000 shares authorized; 6,319 and 6,316 shares
issued and outstanding at December 31, 2002 and
September 30, 2003, respectively................. 63 63
Paid-in capital...................................... 94,132 94,360
Accumulated deficit.................................. (30,079) (37,241)
Note receivable from shareholder..................... (1,625) (1,625)
--------- ---------
Subtotal......................................... 62,637 55,704
Accumulated other comprehensive loss -- foreign
currency translation adjustments................. (1,549) (294)
--------- ---------
Total shareholders' equity.................. 61,088 55,410
--------- ---------
$ 96,723 $ 93,322
========= -=========
See accompanying notes to condensed consolidated financial statements.
4
LCC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2002 2003
---------- --------
Cash flows from operating activities:
Net loss....................................... $(23,321) $(7,162)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization............. 2,057 2,944
Provision (recovery) for doubtful accounts 3,780 (2,073)
Loss on equity investment................. -- 52
Impairment of assets...................... 5,140 --
Restructuring charge (recovery)........... 10,030 (2)
Gain on sale of tower portfolio........... (2,000) --
Changes in operating assets and liabilities:
Trade, unbilled, and other receivables 16,084 (13,400)
Accounts payable and accrued expenses (6,251) 1,564
Other current assets and liabilities. (9,314) 8,170
Other non-current assets and
liabilities........................ (1,004) (957)
------- -------
Net cash used in operating activities............... (4,799) (10,864)
------- -------
Cash flows from investing activities:
Proceeds from sales of short-term investments.. (27) (20)
Purchases of property and equipment............ (1,040) (848)
Proceeds from disposals of property and equipment 31 56
Business acquisitions and investments.......... (9,021) (651)
------- -------
Net cash used in investing activities............... (10,057) (1,463)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock, net...... 109 58
Proceeds from exercise of options................ 30 170
Proceeds from line of credit..................... -- 6,517
Repayment of line of credit...................... -- (5,425)
Decrease in restricted cash...................... -- 195
Repayment of loan to shareholder................. 700 --
------- -------
Net cash provided by financing activities........... 839 1,515
------- -------
Net decrease in cash and cash equivalents........... (14,017) (10,812)
Cash and cash equivalents at beginning of period.... 52,658 37,507
------- -------
Cash and cash equivalents at end of period.......... $38,641 $26,695
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes................................... $ 1,545 $ 287
Interest....................................... -- 39
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 an intercompany note receivable
due from Detron 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.
5
LCC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: DESCRIPTION OF OPERATIONS
The Company provides integrated end-to-end solutions for wireless voice and
data communication networks with offerings ranging from high level technical
consulting, to system design and deployment, to ongoing operations and
maintenance services. 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 service providers; (2) the introduction of new services or
technologies; (3) increases in the number of subscribers served by wireless
service providers; and (4) the increasing complexity of wireless systems in
operation. The Company operates in a highly competitive environment subject to
rapid technological change and emergence of new technologies. 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 Financial Accounting Standards Board, or FASB, issued
Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities".
FIN 46 addresses off-balance sheet assets, liabilities and obligations and
provides guidance for determining which entities should consolidate the assets
and liabilities associated with an obligation. FIN 46, as amended, is effective
for fiscal periods beginning after December 15, 2003. Immediate adoption is
required for entities created after January 31, 2003. The Company does not
expect the adoption of FIN 46 to have a material impact on its financial
condition or results of operations.
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.
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.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2003 2002 2003
----------- --------- ----------- ----------
Net loss:
As reported.................................... $ (7,016) $ (1,025) $ (23,321) $ (7,162)
Pro forma...................................... $ (7,942) $ (1,553) $ (25,671) $ (9,124)
Net loss per share As reported:
Basic........................................ $ (0.34) $ (0.05)$ (1.12) $ (0.34)
=========== =========== =========== =========
Diluted...................................... $ (0.34) $ (0.05)$ (1.12) $ (0.34)
=========== =========== =========== =========
Pro forma:
Basic........................................ $ (0.38) $ (0.07)$ (1.23) $ (0.43)
============ =========== ============ =========
Diluted...................................... $ (0.38) $ (0.07)$ (1.23) $ (0.43)
============ =========== ============ =========
6
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. During the third quarter of 2003, the
Company reoccupied a portion of its office space in McLean, Virginia and
reversed $0.4 million of the payable and recorded an increase in the
restructuring payable of $0.5 million related to an estimated increase in the
time period expected to sublease space in the Company's London office.
A reconciliation of the restructuring activities is as follows:
SEVERANCE FACILITIES TOTAL
(in thousands)
Restructuring charge...................................... $ 1,030 $ 12,492 $ 13,522
Reclassification of deferred rent......................... -- 639 639
--------- --------- ---------
1,030 13,131 14,161
Charges against the provision:
Excess office space .................................. -- (2,152) (2,152)
Severance and associated costs paid................... (878) -- (878)
Leasehold improvements and other assets written-off... -- (1,461) (1,461)
Other................................................. -- 53 53
--------- --------- ---------
Restructuring payable as of December 31, 2002............. 152 9,571 9,723
--------- --------- ---------
Charges against the provision
Excess office space................................... -- (2,224) (2,224)
Reversal of excess severance.......................... (152) -- (152)
Reversal for reoccupied space......................... -- (386) (386)
-------
Additional charge for reduction of sublease income.... -- 536 536
--------- ---------
Restructuring payable as of September 30, 2003............ $ -- $ 7,497 $ 7,497
========= ========= =========
The restructuring payable was classified as follows:
DECEMBER 31, SEPTEMBER 30,
2002 2003
--------- ----------
Accrued restructuring current............................. $ 3,937 $ 3,313
Accrued restructuring .................................... 5,786 4,184
--------- ---------
Accrued restructuring total............................... $ 9,723 $ 7,497
========= =========
7
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 September 30, 2002 and 2003. Comprehensive income
(loss) for the three and nine months ended September 30, 2002 and 2003 is as
follows (in thousands).
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ------------------
2002 2003 2002 2003
---------- ---------- ---------- -------
Net loss...................................... $(7,016) $(1,025) $(23,321) $(7,162)
------- ------- -------- -------
Other comprehensive income, before tax 151 225 1,252 1,476
Income tax provision related to items of
comprehensive income (loss).............. (6) 71 313 221
------- ------ ------- -------
Other comprehensive income, net of tax 157 154 939 1,255
------- ------ ------- -------
Comprehensive loss............................ $(6,859) $ (871) $(22,382) $(5,907)
======= ====== ======== =======
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.
Prior to the Company's initial public offering, both the Company's
employees and the employees of Telcom Ventures were eligible to participate in
the Company's life, medical, dental, and 401(k) plans. In connection with the
Company's initial public offering in 1996, the Company agreed pursuant to an
Overhead and Administrative Services Agreement to allow the employees of Telcom
Ventures to continue to participate in the Company's employee benefit plans in
exchange for full reimbursement of the Company's cash costs and expenses. The
Company billed Telcom Ventures $141,000 during 2002 and $59,000 during the nine
months ended September 30, 2003 for payments made by the Company pursuant to
this agreement. The Company received reimbursements from Telcom Ventures of
$324,000 during 2002 (which included payments for prior periods) and $55,000
during the nine months ended September 30, 2003. At December 31, 2002 and
September 30, 2003, outstanding amounts associated with payments made by the
Company under this agreement were $9,000 and $4,000, respectively, and are
included as due from related parties and affiliates within the accompanying
condensed consolidated balance sheets.
The Company also had an understanding with Telcom Ventures pursuant to
which from July 1, 2000 to December 31, 2000, the Company retained five
employees who had worked in the business development group of the Company's
tower subsidiary, Microcell Management, Inc., before the assets of that
subsidiary were sold in March 2000. During the six-month period, these employees
pursued international telecommunications tower business opportunities on Telcom
Ventures' behalf. In return, the Company would be Telcom Ventures' exclusive
provider of project management, radio frequency engineering and deployment
services for any tower-related projects secured by these employees during this
six-month period. In addition, Telcom Ventures reimbursed the Company for all
costs incurred in employing these persons (including payroll and benefit costs).
This arrangement has been terminated. The Company received reimbursement from
Telcom Ventures of $140,000 during 2002 for outstanding amounts associated with
this arrangement. At December 31, 2002, outstanding amounts associated with
payments made by the Company under this arrangement were $100,000 in expense
reimbursements and other payments for 2001 that were questioned by Telcom
Ventures. This matter was fully resolved in April 2003 with Telcom Ventures
payment of the full $100,000 in question. At September 30, 2003, no amounts were
outstanding under this arrangement. The amounts outstanding as of December 31,
2002, less reserves, are included as due from related parties and affiliates
within the accompanying condensed consolidated balance sheets.
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.
8
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 Westminster. Under a
five-year lease agreement for office space, Detron recorded approximately
$30,000 and $71,000 of rent expense for the three and nine months ended
September 30, 2003. Detron seconded various idle employees to Detron Telematics,
Detron Corporation's wholly owned subsidiary and recorded revenue of
approximately $10,000 and $256,000 respectively, for the three and nine months
ended September 30, 2003.
Advances to employees aggregating approximately $33,000 and $50,000 at
December 31, 2002 and September 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 an intercompany note
receivable from Detron 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 2003 in accordance with the deed of
assignment agreement.
NOTE 9: LINE OF CREDIT
In 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. As
of September 30, 2003, Detron received $6.5 million in proceeds from the line of
credit and repaid $5.4 million. As of September 30, 2003, Detron had $1.1
million outstanding under the credit facility.
NOTE 10: INVESTMENT IN JOINT VENTURE
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 million 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 million to hold the remaining 51% of LCC/BOCO's
registered capital. The Company's capital contribution is paid in three equal
installments of approximately $357,000 each and the first installment was made
on the date of closing. The second installment was made in October 2003. The
third installment is due in Janury 2004. LCC/BOCO offers design, deployment and
maintenance services to wireless carriers in China. The Company accounts for its
investment in LCC/BOCO using the equity method of accounting. The Company
recorded an equity loss of $52,000 to reflect its proportionate share of
LCC/BOCO's losses through September 30, 2003.
9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LCC INTERNATIONAL, INC. AND SUBSIDIARIES
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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
our ability to pursue and secure new business opportunities. A more
complete discussion of business risks is included in our Annual Report
on Form 10-K for the year ended December 31, 2002.
OVERVIEW
We provide integrated end-to-end solutions for wireless voice and data
communications networks with offerings ranging from high level technical
consulting, to system design and turnkey deployment, to ongoing management and
optimization services. We leverage initial opportunities to provide high level
technical consulting services to secure later-stage system design and deployment
contracts. Long-term engagements to provide design and deployment services also
enable us to secure ongoing management and operations projects. Providing
ongoing operations and maintenance services also positions us well for
additional opportunities as new technologies continue to be developed and
wireless service providers must either upgrade their existing networks or deploy
new networks utilizing the latest available technologies.
The key drivers of growth in our wireless services business have been:
-- the issuance of new or additional licenses to wireless service providers,
which generates new network buildout;
-- the introduction of new services or technologies such as wireless number
portability, or WNP, satellite digital radio, wireless broadband, and
push-to-talk services;
-- the increases in the number of subscribers served by wireless service
providers, the increase in usage by those subscribers, and the scarcity
of wireless spectrum, which require wireless service providers to expand
and optimize system coverage and capacity to maintain network quality;
and
-- the increasing complexity of wireless systems in operation, which
requires wireless service providers to upgrade their existing networks or
deploy new networks to benefit from the latest available technologies.
Our 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. We recognize revenues from fixed price service
contracts using the percentage-of-completion method. With fixed price contracts
we recognize revenues 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. We recognize 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.
10
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 our marketing, sales and customer support
plans.
Our firm backlog was approximately $142 million at September 30, 2003. We define
firm backlog as the value of work-in-hand to be done with customers as of a
specific date where the following conditions are met: (i) the price of the work
to be done is fixed; (ii) the scope of the work to be done is fixed, both in
definition and amount (for example, the number of sites has been determined);
and (iii) there is a written contract, purchase order, agreement or other
documentary evidence which represents a firm commitment by the client to pay us
for the work to be performed. We also had implied backlog of approximately $8
million as of September 30, 2003. We define implied backlog as the estimated
revenues from master service agreements and similar arrangements, which have met
the first two conditions set forth above but for which we have not received a
firm contractual commitment.
TRENDS THAT HAVE AFFECTED OR MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
The major trends that have affected or may affect our business may be summarized
as follows:
-- project related revenues derived from a limited set of customers in each
market where we do business;
-- the difficulties that those customers often face in obtaining financing
to fund the development, expansion and upgrade of their networks;
-- the acceleration or the delay associated with the introduction of new
technologies and services by our customers;
-- the management and the services composition of our fixed price contracts;
and
-- increased spending by wireless service providers in the areas of network
design, deployment and optimization.
Our business is characterized by a limited number of projects awarded by a
limited number of customers. This can lead to volatility in our results as
projects initially ramp up and then wind down. As projects are completed, we are
faced with the task of replacing project revenues with new projects, either from
the same customer or from new customers. For example, the completion of the XM
Satellite Radio contract in the first quarter of 2002 caused our revenues in
2002 to decline dramatically, compared to 2001. The delay in replacing revenues
derived from the XM Satellite Radio contract and the difficult marketplace
caused gross profit as a percentage of total revenues to decline and our cost
reduction measures were not sufficient to return us to profitability. In
addition, the wireless industry is composed of a relatively small number of
wireless service providers and equipment vendors, and this inevitably leads to
issues of customer concentration. Consequently, our business may be affected in
any single market by the changing priorities of a small group of customers.
Some of our customers have faced difficulty in obtaining the necessary financing
to fund the development, expansion and upgrade of their networks. The slowdown
in the world economies since 2000 and the volatility in the financial markets
have made it increasingly difficult for our customers to predict both future
demand for their services and future levels of capital expenditure. This has
resulted in the delay or postponement of the development of new networks and the
expansion and upgrade of existing networks, all of which have had and may
continue to have a negative impact on our business.
We tend to benefit from projects undertaken by our customers to introduce new
technologies and services in their networks and we tend to suffer when projects
are delayed. For example, the introduction of 3G equipment and services by
several major wireless service providers in Europe has resulted in an increase
in demand for our services in certain markets, while in the United States the
delay by the Federal Communications Commission in issuing the required spectrum
has delayed the widespread introduction of 3G technologies, thereby affecting
project awards for 3G design and deployment. Revenues from 3G networks
constituted approximately 20% and 37% of our total revenues for the year ended
December 31, 2002 and nine months ended September 30, 2003, respectively, and it
is expected to continue to be an area of business growth in the future.
11
We have experienced an increase in the percentage of fixed price contracts
awarded by our customers, and we expect this trend to continue. We recognize
revenues on our fixed price contracts using the percentage-of-completion method
of accounting, and this has resulted in some volatility in our results following
changes to our estimates to complete major projects. In addition, fixed price
contracts are typically paid on a milestone basis, and we have experienced
customers reducing the number of milestones, which in turn requires us to
finance an increased amount of unbilled receivables. A recent trend is for the
award of fixed price contracts to cover the design and deployment of a certain
geographic network area on a full turnkey basis, including planning, engineering
design, site acquisition, construction and deployment services. To the extent
that these large turnkey projects include a relatively large proportion of
construction related activities, it may reduce our average gross margins because
construction related activities are typically performed by our subcontractors
and generally command lower margins.
We believe our North America operations may benefit from increased spending by
certain United States wireless service providers. Despite some estimates that
2003 capital expenditures by United States wireless service providers would be
lower than expenditures for 2002, we have observed an increase in spending in
the areas of network design, deployment and optimization by several of these
providers. This increased spending can be attributed to several trends: (i)
preparation for number portability scheduled to be implemented by November 24,
2003; (ii) license swaps as a result of wireless service providers trying to
maximize spectrum utilization and increase coverage; (iii) network quality
enhancement programs to reduce churn; (iv) network expansion and capacity
programs geared toward enabling new and enhanced services; and (v) other
miscellaneous network upgrades and enhancements required for market share
maintenance and competitive reasons.
For example, Sprint engaged us in July 2003 to perform project management and
deployment services in Sprint's Northern Central region and to provide radio
frequency engineering and cell site acceptance testing throughout several of
Sprint's other regions. We estimate that the value of the Sprint contract is
approximately $70 million and the duration of the engagement to be between 15 to
20 months.
U.S. Cellular engaged us in April 2003 to perform project management and radio
frequency engineering services primarily in Midwest and Northeast markets. We
estimate that the value of the U.S. Cellular contract is approximately $40
million and the duration of the engagement to be between 12 to 18 months. Both
the U.S. Cellular and Sprint contract awards are included in our calculation of
firm backlog as of September 30, 2003.
We have also observed an increase in spending on wireless networks in developing
countries. For example, in early 2003, we commenced two new projects in Algeria,
building upon the presence that we established in that country in 2001. Our
projects in Algeria include consulting services, equipment supply and turnkey
deployment. We believe our business in Algeria will contribute a significant
part of our revenues in 2003 for the Europe, Middle East and Africa, or EMEA,
region.
12
RESULTS OF OPERATIONS
The following table and discussion provide information which management
believes is relevant to an assessment and understanding of our 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.
PERCENTAGE OF REVENUES
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------
2002 2003 2002 2003
------------ ------------ ------------ --------
Revenues...................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues.............................. 87.2 80.9 89.7 82.3
------ ------ ------ ------
Gross profit.................................. 12.8 19.1 10.3 17.7
------ ------ ------ ------
Operating (income) expense:
Sales and marketing.......................... 12.5 4.4 13.7 7.3
General and administrative................... 45.6 14.0 32.2 21.0
Restructuring charge...................... .. 0.0 0.5 21.3 0.0
Tower portfolio sale and administration, net 0.0 0.0 (4.3) 0.0
Depreciation and amortization............ 3.5 4.6 4.4 4.6
------ ------ ------ ------
Total operating (income) expense.... 61.6 23.5 67.3 32.9
------ ------ ------ ------
Operating loss................................ (48.8) (4.4) (57.0) (15.2)
------ ------ ------ ------
Other income (expense):
Interest income.......................... 0.8 0.2 1.4 0.4
Other.................................... 1.4 (0.7) (10.5) 1.7
------ ------ ------ ------
Total other income (expense)........ 2.2 (0.5) (9.1) 2.1
------ ------- ------ ------
Loss from operations before income taxes...... (46.6) (4.9) (66.1) (13.1)
------ ------ ------ ------
Benefit for income taxes...................... (6.3) (1.5) (16.5) (2.0)
------ ------- ------ ------
Net loss...................................... (40.3)% (3.4)% (49.6)% (11.1)%
====== ====== ====== ======
13
THREE MONTHS ENDED SEPTEMBER 30, 2003
COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 2002
Revenues. Revenues for the three months ended September 30, 2003 were
$29.4 million compared to $17.4 million for the corresponding period for 2002,
an increase of $12.0 million or 69.0%. The EMEA, Americas and Asia Pacific
regions increased $5.0 million, $6.8 million and $0.2 million, respectively,
over the same period last year. The EMEA region's increase was primarily due to
continued growth of LCC Italia and projects in Algeria ($7.4 million). These
increases were offset by the completion of other contracts ($2.4 million)
primarily in England and the Netherlands. The Americas region increase of $6.8
million was primarily due to revenues generated by new contracts, including
Sprint and US Cellular.
Cost of Revenues. Cost of revenues for the three months ended September
30, 2003, was $23.8 million compared to $15.2 million for the corresponding
period for 2002, and increase of $8.6 million. Both the EMEA region ($3.2
million) and the Americas region ($5.5 million) had increases in cost of
revenues, offset by a decrease in the Asia Pacific region ($0.1 million). The
increase in the EMEA region was primarily due to an increase of $5.6 million
from LCC Italia and Algeria, offset by decreases due primarily to the completion
of other contracts primarily in England and the Netherlands ($2.0 million). The
Americas region increase of $5.5 million was due to the growth in new contracts,
including Sprint and US Cellular.
Gross Profit. Gross profit for the three months ended September 30,
2003, was $5.6 million compared to $2.2 million for the corresponding period for
2002, an increase of $3.4 million. As a percentage of revenues, gross margin was
19.1% in 2003 compared to 12.8% in 2002, an increase of 6.3 percentage points.
The EMEA, Americas and Asia Pacific regions increased by $1.8 million (3.3
percentage points), $1.3 million (2.4 percentage points) and $0.3 million (0.6
percentage points), respectively. The EMEA region's increase was due to LCC
Italia and Algeria ($1.8 million). The Americas region increase of $1.3 million
was due to growth in new contracts, including Sprint and US Cellular.
Sales and Marketing. Sales and marketing expenses were $1.3 million for
the three months ended September 30, 2003, compared to $2.2 million for the
corresponding period for 2002, a decrease of $0.9 million. The decrease is
attributable to cost saving initiatives across all regions.
General and Administrative. General and administrative expenses were
$4.1 million for the three months ended September 30, 2003 compared to $7.9
million for the prior year, a decrease of $3.8 million. Included in general and
administrative expenses are benefits from recoveries of previously reserved
receivables of $0.8 million in 2003 and net expense for reserves against
receivables of $3.1 million in 2002.
Excluding the effect of bad debts, general and administrative expenses
for the three months ended September 30, 2003, were $4.9 million compared to
$4.8 million for the corresponding period for 2002.
Restructuring charge. Restructuring charges for the three months ended
September 30, 2003, were $0.2 million. There was no comparable charge in the
corresponding period for 2002. The expense of $0.2 million represented an
adjustment to the restructuring payable established in prior periods relating to
the costs of excess office space.
Depreciation and Amortization. Depreciation and amortization expense was
$1.3 million for the three months ended September 30, 2003, compared to $0.6
million for the corresponding period for 2002, and increase of $0.7 million. The
increase in depreciation and amortization was due primarily to writing off the
$0.5 million unamortized balance of intangible cost for a trade name acquired in
the acquisition of Smith Woolley Telecom, which we have ceased to use.
Other Income (Expense). Other expense for the three months ended
September 30, 2003 was $0.1 million compared to other income of $0.4 million for
the prior year, a decrease of $0.5 million. The decrease is primarily due to
foreign exchange gains in 2002 on a Euro money market account previously held by
us.
Income Taxes. The income tax benefit was recorded for the three months
ended September 30, 2003 using an estimated annual effective tax rate of 29%,
compared to an estimated annual effective tax rate of 14% for the corresponding
period for 2002. The rate for the current quarter reflected a change in the
estimated annual effective tax rate for 2003 from 12% to 15%, compared to 25%
for 2002. The estimated annual effective income tax rates differed from the
federal statutory rate of 35% due primarily to no tax benefits being recognized
for losses generated by our foreign subsidiaries and an increase in the
valuation allowance for foreign tax credits.
14
Net Loss. The net loss was $1.0 million for the three months ended
September 30, 2003, compared to $7.0 million for the corresponding period for
2002. The higher net loss in 2002 reflected a net expense for bad debts,
together with a lower overall volume of trading activity, which generated less
gross profit to cover operating expenses.
NINE MONTHS ENDED SEPTEMBER 30, 2003
COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 2002
Revenues. Revenues for the nine months ended September 30, 2003, were
$64.7 million compared to $47.0 million for the corresponding period for 2002,
an increase of $17.7 million or 37.7%. The net increase consisted of increases
in both the EMEA region ($13.8 million) and the Americas region ($4.4 million)
offset by decreases in the Asia Pacific region of $0.5 million. The net increase
in the EMEA region of $13.8 million was due partly to the continued growth of
LCC Italia and projects in Algeria ($14.5 million) and partly to the acquisition
of Detron ($5.0 million) in July 2002, since revenues were recorded for Detron
only from the date of its acquisition, offset by the completion of other
contracts ($5.7 million) primarily in Egypt and The Netherlands. The Americas
region increase of $4.4 million consisted of $7.8 million related to the growth
in new contracts, including Sprint and US Cellular, offset by a decrease of $3.4
million related to the completion of the XM Satellite Radio contract in 2002.
Cost of Revenues. Cost of revenues for the nine months ended September
30, 2003, was $53.2 million compared to $42.2 million for the corresponding
period for 2002, an increase of $11.0 million. Both the EMEA region ($9.4
million) and the Americas region ($2.1 million) had increases in cost of
revenues, offset by a decrease in the Asia Pacific region ($0.5 million). The
increase in the EMEA region was primarily due to an increase of $15.3 million
from LCC Italia, Detron and Algeria, offset by reductions primarily in Egypt and
the Netherlands of $6.4 million. The Americas region increase of $2.1 million
was primarily due to an increase of $5.9 million for new contracts, including
Sprint and US Cellular, offset by a decrease of $3.4 million following the
completion of the XM Satellite Radio contract in 2002.
Gross Profit. Gross profit for the nine months ended September 30, 2003,
was $11.5 million compared to $4.9 million for the corresponding period for
2002, an increase of $6.6 million. As a percentage of revenues, gross margin was
17.7% in 2003 compared to 10.3% in 2002, an increase of 7.4 percentage points.
The EMEA and Americas regions increased by $4.4 million (4.9 percentage points)
and $2.3 million (2.6 percentage points) respectively, while the Asia Pacific
region decreased by $0.1 million (0.1 percentage points). The EMEA region's
increase was primarily due to LCC Italia, Detron, and Algeria. The Americas
region increase of $2.3 million reflects the growth in revenues described above.
Sales and Marketing. Sales and marketing expenses were $4.7 million for
the nine months ended September 30, 2003, compared to $6.4 million for the
corresponding period for 2002, a decrease of $1.7 million. The decrease is
attributable to cost saving initiatives across all the regions.
General and Administrative. General and administrative expenses were
$13.6 million for the nine months ended September 30, 2003, compared to $15.1
million for the corresponding period for 2002, a decrease of $1.5 million.
Included in general and administrative expenses are net benefits from recoveries
of previously reserved receivables of $2.1 million in 2003 and net expense for
reserves against receivables of $2.2 million in 2002.
Excluding the effect of bad debts, general and administrative expenses
for the nine months ended September 30, 2003, were $15.7 million compared to
$12.9 million for the corresponding period in 2002. The increase of $2.8 million
was attributable to the EMEA region. There were increased costs both from the
acquisition of Detron ($0.9 million) and from LCC Network Deployment ($0.5
million). Continued growth in Algeria ($0.7 million) and LCC Italia ($0.7
million) caused an increase in general and administrative expenses.
15
Restructuring Charge. A restructuring charge of $10.0 million was
recorded for the nine months ended September 30, 2002, pursuant to a
restructuring plan adopted by us. 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 $1.0 million. Additionally, we
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 $9.0 million. During the first nine months of 2003, we reversed $0.2
million related to excess severance accruals and provided another $0.2 million
for excess office costs.
Gain on Sale of Tower Portfolio and Administration, Net. During February
2000, we entered into an agreement for the sale of telecommunications towers
that we owned. As part of the sale agreement, we 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. We recognized $2.0 million of this
previously deferred gain during the nine months ended September 30, 2002.
Depreciation and Amortization. Depreciation and amortization expense was
$2.9 million for the nine months ended September 30, 2003, compared to $2.1
million for the corresponding period for 2002, an increase of $0.8 million.
There were increases of $0.8 million associated with the amortization of
intangibles related to our acquisitions, offset by decreases in depreciation of
$0.5 million. Additionally, the amortization expense increase was due to writing
off the $0.5 million unamortized balance of intangible cost for a trade name
acquired in the acquisition of Smith Woolley Telecom, which we have ceased to
use.
Other Income (Expense). Other income for the nine months ended September
30, 2003 was $1.4 million compared to other expense of $4.3 million in the
corresponding period for 2002, an increase of $5.7 million. Other expense for
the nine months ended September 30, 2002 contained an impairment charge of $5.1
million related to investments we made in 2000. Other income for the nine months
ended September 30, 2003 included approximately $1.0 million of cash received
from the sale of NextWave pre-petition bankruptcy interest.
Income Taxes. The income tax benefit was recorded for the nine months
ended September 30, 2003 using an estimated annual effective tax rate of 15%,
compared to an estimated annual effective tax rate of 25% for the corresponding
period for 2002. The estimated annual effective income tax rates differed from
the federal statutory rate of 35% due primarily to no tax benefits being
recognized for losses generated by our foreign subsidiaries and an increase in
the valuation allowance for foreign tax credits.
Net Loss. The net loss was $7.2 million for the nine months ended
September 30, 2003, compared to $23.3 million for the corresponding period for
2002. The higher net loss in 2002 reflected the restructuring charge, the
impairment charge for investments and the net expense for bad debts, together
with a lower overall volume of trading activity which generated less gross
profit to cover operating expenses.
16
LIQUIDITY AND CAPITAL RESOURCES
Cash, restricted cash and short-term investments at September 30, 2003,
provided total liquid assets of $28.3 million, compared to $39.3 million at
December 31, 2002 and $53.1 million at December 31, 2001. The decrease in cash
during 2002 of $13.8 million principally consisted of cash used in investing
activities. The decrease in cash of $11.0 million during 2003 consisted of cash
used to fund operating losses of $9.8 million and growth in accounts receivable
of $15.2 million due to an increase in revenue, partially offset by the receipt
of $8.6 million for United States federal and state income tax refunds and net
proceeds from the new line of credit in The Netherlands as discussed below, and
other changes in working capital. We believe that the recent award of new
contracts, including Sprint and U.S. Cellular, will improve operating results in
future periods and provide a source of cash from operations in the long term.
We have filed a registration statement with the Securities and Exchange
Commission pursuant to which we propose to offer 2,000,000 newly issued shares
of our class A common stock and certain of our stockholders propose to offer an
additional number of shares of class A common stock. In addition, we have
granted the underwriters of the offering an over-allotment option to purchase
up to a maximum of 1,050,000 additional newly issued shares. However, excluding
any proceeds from the offering, we expect our cash balances to further decline
in the short term primarily due to the ramp-up of these contract awards and the
expected growth in receivables at the onset of these contracts. We believe that
for at least the next twelve months we have adequate cash and short-term
investments to fund our operations. We plan to use a portion of the proceeds
from the offering to support working capital requirements and may consider
selling additional equity securities or using debt facilities as necessary. This
may include obtaining financing through lines of credit or other short-term
financing at a foreign entity level or on a contract specific basis such as our
line of credit at Detron, our subsidiary in The Netherlands. During 2003, Detron
established a line of credit, collateralized by Detron's outstanding accounts
receivable, and received proceeds from the line of credit of $6.5 million and
repaid $5.4 million during the third quarter of 2003. From time to time, we are
asked to provide performance and bid bonds, letters of credit or similar
instruments primarily to support the execution of contracts. Our current
practice is to provide cash collateral to support these instruments, which
results in an increase in restricted cash. We anticipate an increase in the need
for such collateral, which will be provided by restricted cash, credit
facilities or some combination thereof.
Working capital was $40.6 million at September 30, 2003, compared to
$50.0 million at December 31, 2002, a decrease of $9.4 million. The decrease was
due mostly to a reduction in cash used to fund operating losses as discussed
above. Working capital was $50.0 million at December 31, 2002, compared to $72.1
million at December 31, 2001, a decrease of $22.1 million. The decrease in
working capital in 2002 was due principally to the use of cash to fund
acquisitions and operating losses, and the reduction of receivables following
the decrease in revenues during the year.
For the nine months ended September 30, 2003, cash used in operating
activities was $10.8 million compared to $4.8 million for the nine months ended
September 30, 2002, an increase of $6.0 million. Of this increase, $1.9 million
was attributable to operating losses and $4.1 million was attributable to
changes in non-cash working capital.
Cash used in investing activities was $1.5 million for the nine months
ended September 30, 2003, compared to $10.1 million for the nine months ended
September 30, 2002. Cash used by investing activities in 2003 related primarily
to the purchase of property and equipment of $0.8 million and acquisitions and
investments of $0.7 million. Cash used by investing activities in 2002
principally related to the acquisition of substantially all the assets of Smith
Woolley Telecom in the United Kingdom and Detron in the Netherlands.
Cash provided by financing activities was $1.5 million for the nine
months ended September 30, 2003, compared to cash provided of $0.8 million for
the nine months ended September 30, 2002. Cash provided by financing activities
in 2003 related primarily to the net proceeds of $1.1 million made available
under the line of credit at Detron. Cash provided by financing activities in
2002 related primarily to the repayment of $0.7 million of a loan by Telcom
Ventures.
We have no material cash commitments other than obligations under our
operating leases and to fund Beijing LCC Bright Oceans Communication Consulting
Co., Ltd., which amount is not expected to exceed $1.1 million, of
which $0.4 million has been funded as of September 30, 2003. A second payment of
$0.4 million was made in October 2003 and the remaining amount is expected to be
paid in 2004. We have not engaged in any off-balance sheet financing as of
September 30, 2003.
17
CRITICAL ACCOUNTING POLICIES
Our critical accounting policies are as follows:
- Revenue recognition;
- Allowance for doubtful accounts;
- Accounting for income taxes;and
- Restructuring charge.
REVENUE RECOGNITION POLICY
Our principal source of revenues consists of design and system
deployment services. We provide design services on a contract basis, usually in
a customized plan for each client and generally charge for engineering services
on a time and materials or fixed price basis. We generally offer our deployment
services on a fixed price, time-certain basis. The portion of our revenue from
fixed-price contracts was 61.1% in 2002 and 79.0% during the nine months ended
September 30, 2003. We recognize revenue on fixed-price contracts using the
percentage-of-completion method. With the percentage-of-completion method,
expenses on each project are recognized as incurred, and revenues are recognized
based on the ratio of the current costs incurred for the project to the then
estimated total costs of the project. Accordingly, revenue recognized in a given
period depends on, among other things, the costs incurred on each individual
project and its then current estimate of the total remaining costs to complete
individual projects. Considerable judgment on the part of our management may be
required in determining estimates to complete a project including the scope of
the work to be completed, and reliance on the customer or other vendors to
fulfill some task(s). 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. If total contract cost
estimates increase, gross profit for any single project may be significantly
reduced or eliminated. If the total contract cost estimates indicate that there
is a loss, the loss is recognized in the period the determination is made. At
September 30, 2003, we had $21.7 million of unbilled receivables. At December
31, 2002, we had $12.4 million of unbilled receivables, compared to $10.2
million at December 31, 2001. The increase in unbilled receivables is
attributable to an increase in fixed-price contracts and the overall growth in
revenues.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The preparation of financial statements requires the our 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, our 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 year end December 31, 2002 and the nine
months ended September 30, 2003, we derived 60.3% and 78.1%, respectively, of
our total revenues from our ten largest customers, indicating significant
customer concentration risk with our receivables. These ten largest customers
constituted 78.8% and 66.4% of our net receivable balance as of September 30,
2003 and December 31, 2002, respectively. Lastly, we frequently perform 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. For the years ended December 31, 2001 and 2002, we recorded a
provision for doubtful accounts of $2.4 million and $5.0 million, respectively,
and for the nine months ended September 30, 2003 we recorded recovery of bad
debts of $2.1 million.
18
ACCOUNTING FOR INCOME TAXES
As part of the process of preparing our consolidated financial
statements an estimate for income taxes is required for each of the
jurisdictions in which we operate. This process requires estimating our actual
current tax exposure together with assessing temporary differences resulting
from differing treatment of items, such as deferred revenues, for tax accounting
purposes. These differences result in deferred tax assets and liabilities, which
are included in the consolidated balance sheet. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable
income and to the extent we believe that recovery is not likely, we must
establish a valuation allowance. The valuation allowance is based on our
estimate of taxable income by jurisdiction in which we operate and the period
over which our deferred tax assets will be recoverable. In the event the actual
results differ from these estimates we may need to increase or decrease our
valuation allowance, which could materially have an impact on our financial
position and results of operations.
Considerable management judgment may be required in determining our
provision for income taxes, our deferred tax assets and liabilities and any
valuation allowance recorded against its net deferred tax assets. We have
recorded a valuation allowance of $6.7 million and $6.2 million as of September
30, 2003, and December 31, 2002, respectively, due to uncertainties related to
our ability to utilize some of our 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 our
initial public offering. The net deferred tax assets, as of September 30, 2003
and December 31, 2002, were $5.4 million and $4.4 million, respectively.
RESTRUCTURING CHARGE
We 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 we no longer occupy. 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 as of September 30, 2003 that we will receive $10.9 million
in sublease income, of which $5.5 million is committed.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board, or FASB, issued
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. FIN
46 addresses off-balance sheet assets, liabilities and obligations and provides
guidance for determining which entities should consolidate the assets and
liabilities associated with an obligation. FIN 46, as amended, is effective for
fiscal periods beginning after December 15, 2003. Immediate adoption is required
for entities created after January 31, 2003. The adoption of FIN 46 is not
expected to have a material impact on our financial condition and results of
operations.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to the impact of foreign currency fluctuations. Our exposure
to exchange rates relates primarily to our foreign subsidiaries. Subsidiaries
with material foreign currency exposure are in Great Britain, The Netherlands,
Italy and Brazil. For our foreign subsidiaries, exchange rates can have an
impact on the U.S. dollar value of their reported earnings and the intercompany
transactions with the subsidiaries.
Customers outside of the United States accounted for 57.0% and 57.9% of our
revenues for the year ended December 31, 2002 and for the nine months ended
September 30, 2003, the majority of which were in Europe. In connection with our
recent acquisitions and the increased availability of 3G equipment in Europe, we
anticipate 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 our reported results. 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 our 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 our shareholders' equity. The assets and
liabilities of our non-U.S. subsidiaries are translated into United States
dollars at the exchange rate in effect at September 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 September 30, 2003 compared to September 30, 2002. Consequently,
the accumulated other comprehensive loss component of shareholders' equity
decreased $1.3 million during the nine months ended September 30, 2003. As of
September 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 $8.2 million.
We are exposed to the impact of foreign currency fluctuations due to the
operations of short-term intercompany transactions between our London office and
our 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
September 30, 2003 (denominated in Euros) include Italy in the amount of $1.5
million and The Netherlands in the amount of $0.2 million. These balances
generated a foreign exchange gain of $0.2 million included in our consolidated
results at September 30, 2003. In addition, a hypothetical appreciation of the
Euro of 10% would result in a $0.2 million increase to our operating losses
generated outside the United States. This was estimated using a 10%
appreciation 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 our reported results
and shareholders' equity, such fluctuations generally do not affect our cash
flow or result in actual economic gains or losses. We currently do not hedge any
of these risks in our foreign subsidiaries because: (i) our subsidiaries
generally earn revenues and incur expenses within a single country, and
consequently, do not incur currency risks in connection with the conduct of
their normal operations, (ii) other foreign operations are minimal, and (iii) we
do 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 September 30, 2003. Based on that
evaluation, these officers have concluded that as of September 30, 2003, 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.
(b) Changes in internal controls
There were no significant changes in the Company's internal controls or
other factors that could significantly affect the Company's disclosure controls
and procedures subsequent to September 30, 2003.
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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
Not Applicable
ITEM 5: OTHER INFORMATION
Not Applicable
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 -- Calculation of Net Income Per Share
31.1-- Written Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 -- Written Certification of Chief
Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 -- Written Statement of Chief Executive Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32.2 -- Written Statement of Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On August 4, 2003, the Company filed a Current Report on Form 8-K, which
reported that the Company on August 4, 2003, issued a press release announcing
its second quarter results for 2003.
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Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LCC International, Inc. and Subsidiaries
/s/ Graham B. Perkins
Graham B. Perkins
Senior Vice President, Chief Financial
Officer and Treasurer
Date: October 24, 2003 (Principal Financial Officer and Principal
Accounting Officer)
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