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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 2, 2004 the registrant had outstanding 19,861,194 shares of Class A Common Stock, par value $0.01 per share (the “Class A Common Stock”) and 4,537,577 shares of Class B Common Stock, par value $0.01 per share (the “Class B Common Stock”).

LCC International, Inc. and Subsidiaries

Quarterly Report on Form 10-Q

INDEX

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PART I:     FINANCIAL INFORMATION

LCC International, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

See accompanying notes to condensed consolidated financial statements.

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LCC International, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

See accompanying notes to condensed consolidated financial statements.

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LCC International, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

Supplemental disclosures of cash flow information:

      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 intangibles assets increased, offset by an increase in due to related parties, which is included in accounts payable on the condensed consolidated balance sheet.

See accompanying notes to condensed consolidated financial statements.

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LCC International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(1) Description of Operations

      LCC International Inc. a Delaware Corporation (“LCCI”), was formed in 1983. Unless the context indicates otherwise, the terms the “Company”, “we”, “us”, and “our” refer herein to LCCI.

      We provide integrated end-to-end solutions for wireless voice and data communication networks with service offerings to include high level technical consulting, to system design and deployment, to ongoing operations and maintenance services. We operate in a highly competitive environment subject to rapid technological change and emergence of new technologies. Historically, the key drivers of changes in our 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 we believe that our services are transferable to emerging technologies, rapid changes in technology and deployment could have an adverse financial impact on us.

(2) Basis of Presentation

      We have prepared the condensed consolidated financial statements included herein without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and they reflect all adjustments that 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 our Annual Report on Form 10-K for the year ended December 31, 2003. Operating results for the interim periods are not necessarily indicative of results for an entire year.

(3) Equity-Based Compensation

      We account for equity-based compensation arrangements in accordance with the provisions of Accounting Principles Board (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations including FASB Interpretation No. 44, and comply with the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” 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 our stock and the exercise price.

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      Our pro-forma net income (loss) would have been the following had compensation cost for our 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.

(4) 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). Accumulated other comprehensive income (loss) consists solely of foreign currency translation adjustments at June 30, 2003 and 2004. Comprehensive income (loss) for the three and six months ended June 30 is as follows (in thousands).

(5) Related Party Transactions

      RF Investors, a subsidiary of Telcom Ventures, 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 70% voting control.

      Prior to our initial public offering, both our employees and the employees of Telcom Ventures were eligible to participate in our life, medical, dental and 401(k) plans. In connection with our initial public offering in 1996, we agreed pursuant to an Overhead and Administrative Services Agreement to allow the employees of Telcom Ventures to continue to participate in our employee benefit plans in exchange for full

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      During the second quarter of 2004, we provided services to two customers where Telcom Ventures has a minority investment. Dr. Rajendra Singh, a director of Telcom Ventures, is a member of our Board of Directors. Revenues earned from these customers during the quarter were $90,000 and receivables of $77,000 were outstanding at June 30, 2004, and are included in trade accounts receivable in the accompanying condensed consolidated balance sheet.

      In December 1999, we issued approximately 108,000 shares of Class A Common Stock in exchange for a $1.6 million note receivable from our President and Chief Executive Officer. The note is payable on the earlier of December 2004 or the date he is no longer our President and Chief Executive Officer. Upon the event of a change in control of our ownership, the note will be forgiven. Interest accrues at the federal midterm rate on the date of the note and is payable quarterly. The note is reflected as a reduction of shareholders’ equity in the accompanying statement of shareholders’ equity.

      In July 2002, we acquired 51 percent of the outstanding shares of Detron LCC Network Services B.V. (“Detron”), a newly formed corporation in the Netherlands. Our 49% partner, Detron Corporation B.V. through various corporate affiliates has certain ongoing transactions with Detron. Under a five-year lease agreement for office space, Detron recorded approximately $50,000 of rent expense for the six months ended June 30, 2003 and 2004. During the six months ended June 30, 2003 and 2004, respectively Detron seconded various idle employees to Detron Telematics, an affiliate of Detron Corporation B.V. and recorded revenue of approximately $284,000 and $46,000, respectively.

(6) Restructuring Charge

      In 2002, we adopted a restructuring plan and recorded restructuring charges of $13.5 million. 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, we 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 for our employees 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 equals 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. As of June 30, 2004, the restructuring charge calculation assumes we will receive $11.9 million in sublease income, of which $6.0 million is committed.

      During the first quarter of 2003, we reversed excess severance payable of approximately $0.2 million. During the third quarter of 2003, we reoccupied a portion of our 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 our London office. During the second quarter of 2004, we reversed $0.9 million of the payable due to reoccupied office space in McLean, Virginia and a decrease in the estimated time period expected to sublease space in our McLean and London offices.

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      A reconciliation of the restructuring activities is as follows:

      At December 31, 2003 and June 30, 2004, the restructuring payable was classified as follows:

(7) Investments

      We held 1,666,666 shares of Class B Common Stock of NextWave Telecom, Inc. (“NextWave Telecom”) which is the parent corporation of NextWave Personal Communications Inc. We acquired the shares of NextWave Telecom in May 1996 for a purchase price of $5.0 million in connection with a series of transactions entered into between NextWave Telecom and us under an agreement dated March 12, 1996 (the “March Agreement”). We also acquired warrants to purchase an additional 123,356 shares of Class B Common Stock of NextWave Telecom at $3.00 per share. Under the March Agreement, NextWave Telecom agreed to use us to provide not less than (a) $14.0 million of radio frequency engineering services and (b) $35.0 million of system deployment services. These services were to be provided in increments of twenty-percent (20%) each year during the five-year period following the execution of the March Agreement. NextWave Telecom filed for bankruptcy protection on December 23, 1998. The March Agreement has not been assumed or rejected by NextWave Telecom in the bankruptcy proceeding. We did not carry any assets or liabilities on our books relating to our equity investment in NextWave, any pre-petition debts due us, or the March Agreement; these balances were written off in previous years.

      The total amount of pre-petition debt owed to us by NextWave Telecom and certain of its subsidiaries (collectively, “NextWave”) was approximately $14.3 million, plus post-petition interest thereon. This amount

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      In September 2001, we sold all of our 1,666,666 shares of Class B common stock and pre-petition debt claims (excluding a 92.5% interest in pre-petition interest that May be payable with respect to the claims, the “Pre-Petition Interest Amount”) against NextWave Telecom resulting in a gain of $21.4 million, which equaled the proceeds from the sale. The September 2001 sale of current pre-petition debt excluded (a) the Koll Claim, (b) any claims resulting from the assumption or rejection of the March Agreement, and (c) the Pre-Petition Interest Amount. In February 2003, we sold our interest in the Pre-Petition Interest Amount for $1.0 million in cash, which was paid in March 2003 and recorded in other income in the accompanying condensed consolidated statement of operations. In May 2004, we sold our interest in the Koll Claim for approximately $0.8 million in cash, which was paid in May 2004 and recorded in other income in the accompanying condensed consolidated statement of operations.

      On August 4, 2003 we, through our 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”). We contributed approximately $1.1 million for a 49.0% share of LCC/BOCO’s registered capital. Bright Oceans Inter-Telecom Corporation, a Chinese publicly traded network management and systems integrator (“BOCO”), contributed approximately $1.1 million to hold the remaining 51.0% of LCC/BOCO’s registered capital. Our capital contribution was 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 and the third installment was made in January 2004. LCC/BOCO offers design, deployment and maintenance services to wireless carriers in China. We account for the investment in LCC/BOCO using the equity method of accounting. We recorded an equity loss of $0.1 million to reflect our proportionate share of LCC/BOCO’s losses through March 31, 2004, and an additional equity loss of $0.3 million in the second quarter, both of which are recorded in other expense. BOCO has advised us that it has made a strategic decision to exit the wireless telecommunications infrastructure services business and we have been in discussions to dissolve the joint venture. We have undertaken to transfer selected projects and joint venture employees to our wholly-owned Chinese subsidiary, which continues to pursue projects independently with customers in China. After distribution of the assets and cash remaining in the joint venture, we anticipate an additional loss of $0.2 million, which we recorded in other expense in the accompanying condensed consolidated statement of operations.

(8) 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 December 31, 2003, Detron had $1.8 million outstanding under the credit facility compared to $1.3 million as of June 30, 2004.

(9) Commitments and Contingencies

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

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(10) Segment reporting

      SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information established standards for reporting information about the operating segments in interim and annual financial reports issued to stockholders. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and assess performance. Our chief operating decision-making group is the Operating Committee, which comprises the Chief Executive Officer, our Senior Vice Presidents and our General Counsel.

      Our operating segments are defined geographically by region, namely the Americas region and the EMEA region. Both regions provide design and deployment services, operations and maintenance services and technical consulting services.

      Segment detail is summarized as follows (in thousands):

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      A reconciliation of totals reported for the operating segments to the applicable line items in the consolidated financial statements is as follows (in thousands):