<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-Q
(MARK ONE)
<TABLE>
<S> <C>
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .
</TABLE>
COMMISSION FILE NUMBER: 0-21213
------------------------
LCC INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 54-1807038
(State of Incorporation) (IRS Employer Identification Number)
ARLINGTON COURTHOUSE PLAZA II
2300 CLARENDON BOULEVARD, SUITE 800,
ARLINGTON, VA 22201
(Address of principal executive offices) (Zip Code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (703) 351-6666
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 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 November 11, 1996, the registrant had outstanding 6,065,911 shares of
Class A common stock and 8,460,984 shares of Class B common stock.
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<PAGE> 2
LCC INTERNATIONAL, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Condensed consolidated statements of operations for the three and nine
months ended September 30, 1995 and 1996............................... 2
Condensed consolidated balance sheets as of December 31, 1995 and
September 30, 1996..................................................... 3
Condensed consolidated statements of cash flows for the nine months ended
September 30, 1995 and 1996............................................ 4
Notes to condensed consolidated financial statements..................... 5
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.......................................................... 10
PART II: OTHER INFORMATION........................................................ 15
ITEM 1: Legal Proceedings
ITEM 2: Changes in Securities
ITEM 3: Defaults Upon Senior Securities
ITEM 4: Submission Of Matters to a Vote of Security Holders
ITEM 5: Other Information
ITEM 6: Exhibits and Reports on Form 8K
</TABLE>
<PAGE> 3
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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1995 1996 1995 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES:
Service revenues...................................... $16,720 $24,838 $45,969 $64,119
Product revenues...................................... 8,417 13,018 25,728 34,101
------- ------- ------- -------
25,137 37,856 71,697 98,220
------- ------- ------- -------
COST OF REVENUES:
Service revenues...................................... 11,756 19,090 33,187 45,193
Product revenues...................................... 6,119 7,437 17,669 22,156
------- ------- ------- -------
17,875 26,527 50,856 67,349
------- ------- ------- -------
GROSS PROFIT............................................ 7,262 11,329 20,841 30,871
------- ------- ------- -------
OPERATING EXPENSES:
Sales and marketing................................... 1,428 1,553 4,362 4,594
General and administrative............................ 2,342 3,139 7,319 9,104
Non-cash compensation................................. 1,144 2,736 3,516 6,335
Depreciation and amortization......................... 1,038 1,257 2,389 3,779
------- ------- ------- -------
5,952 8,685 17,586 23,812
------- ------- ------- -------
OPERATING INCOME........................................ 1,310 2,644 3,255 7,059
------- ------- ------- -------
OTHER INCOME (EXPENSE):
Interest income....................................... 350 246 744 578
Interest expense...................................... (1,193) (764) (2,227) (2,391)
Other................................................. 430 443 625 2,113
------- ------- ------- -------
(413) (75) (858) 300
------- ------- ------- -------
INCOME BEFORE INCOME TAXES.............................. 897 2,569 2,397 7,359
PROVISION (BENEFIT) FOR INCOME TAXES.................... 521 (8,312) 1,279 (6,543)
------- ------- ------- -------
NET INCOME.............................................. $ 376 $10,881 $ 1,118 $13,902
======= ======= ======= =======
PRO FORMA INCOME DATA:
Income before income taxes............................ $ 897 $ 2,569 $ 2,397 $ 7,359
Pro forma provision for income taxes.................. 359 1,028 959 2,944
------- ------- ------- -------
Pro forma net income.................................. $ 538 $ 1,541 $ 1,438 $ 4,415
======= ======= ======= =======
PRO FORMA NET INCOME PER SHARE:......................... $ 0.05 $ 0.11 $ 0.13 $ 0.32
======= ======= ======= =======
COMMON AND COMMON EQUIVALENT SHARES USED IN THE
CALCULATION OF PRO FORMA NET INCOME PER SHARE:........ 15,579 15,836 15,579 15,693
======= ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 4
LCC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
(UNAUDITED)
<CAPTION>
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 6,571 $ 30,755
Short-term investments.............................................. 778 352
Receivables, net of allowance for doubtful accounts of $3,131 and
$4,403 at December 31, 1995 and September 30, 1996, respectively:
Trade accounts receivable...................................... 28,293 30,511
Due from related parties and affiliates........................ 2,938 2,504
Notes receivable from affiliate................................ 1,382 --
Unbilled receivables........................................... 6,096 13,749
Inventory, net...................................................... 4,949 5,273
Deferred income taxes, net.......................................... -- 7,998
Prepaid expenses and other current assets........................... 300 1,235
------- --------
Total current assets........................................... 51,307 92,377
Property and equipment, net............................................. 5,440 5,302
Software development costs, net......................................... 3,745 5,015
Notes receivable........................................................ -- 6,650
Investments in joint ventures........................................... 1,403 2,061
Deferred income taxes, net.............................................. -- 748
Other assets............................................................ 146 5,424
------- --------
$ 62,041 $ 117,577
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable........................................................ $ 10,000 $ --
Accounts payable.................................................... 2,170 2,918
Accrued expenses.................................................... 11,137 17,371
Deferred revenue.................................................... 3,137 2,742
Income taxes payable................................................ 6,312 7,987
Due to related parties and affiliates............................... 73 170
Other current liabilities........................................... 829 2,334
------- --------
Total current liabilities........................................... 33,658 33,522
Convertible subordinated debt........................................... 20,000 50,000
Obligations under incentive plans, net of current portion............... 8,623 1,148
Other liabilities....................................................... 4 310
------- --------
Total liabilities................................................... 62,285 84,980
------- --------
Preferred Stock:
10,000,000 shares authorized; -0- shares issued and outstanding..... -- --
Class A common stock, $.01 par value:
70,000,000 shares authorized; -0- shares and 6,065,911 shares issued
and outstanding at December 31, 1995 and September 30, 1996,
respectively...................................................... -- 61
Class B Common stock, $.01 par value:
20,000,000 shares authorized; -0- shares and 8,460,984 shares issued
and outstanding at December 31, 1995 and September 30, 1996,
respectively...................................................... -- 85
Paid-in capital......................................................... -- 27,387
Retained earnings....................................................... -- 8,764
Cumulative foreign currency translation adjustment...................... (40) (200)
Note receivable from shareholder........................................ (9,382) (3,500)
Members' capital........................................................ 9,178 --
------- --------
Total shareholders' equity.......................................... (244) 32,597
------- --------
$ 62,041 $ 117,577
======= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 5
LCC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1995 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income......................................................... $ 1,118 $ 13,902
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................. 2,389 3,779
Provision for doubtful accounts............................... 331 2,306
Non-cash compensation......................................... 3,516 6,335
Income from investments in joint ventures, net................ (394) (757)
Gain on disposition of joint venture, net..................... -- (514)
Changes in operating assets and liabilities:
Trade, unbilled, and other receivables................... (6,701) (13,244)
Accounts payable and accrued expenses.................... (1,745) 4,758
Inventory................................................ (414) (324)
Other current assets and liabilities..................... (26) (7,562)
Other noncurrent assets and liabilities.................. (45) (5,499)
-------- --------
Net cash (used in) provided by operating activities..................... (1,971) 3,180
-------- --------
Cash flows from investing activities:
(Increase) decrease in short term investments, net................. (470) 426
Purchases of property and equipment................................ (3,493) (2,122)
Increase in capitalized software................................... (2,041) (2,717)
Investments in joint ventures...................................... (350) (787)
Proceeds from sale of joint venture................................ -- 3,800
Issuance of convertible notes receivable........................... -- (5,150)
-------- --------
Net cash used in investing activities................................... (6,354) (6,550)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net........................ -- 46,981
Proceeds from note payable/line of credit.......................... 10,000 10,000
Payments on note payable/line of credit............................ -- (20,000)
Distributions and loans to member.................................. (7,290) (5,927)
Payments of dividends to members................................... (9,500) (16,950)
Repayment of loan to member........................................ -- 16,950
Loan to shareholder................................................ -- (3,500)
-------- --------
Net cash (used in) provided by financing activities..................... (6,790) 27,554
-------- --------
Net (decrease) increase in cash and cash equivalents.................... (15,115) 24,184
Cash and cash equivalents at beginning of period........................ 18,469 6,571
-------- --------
Cash and cash equivalents at end of period.............................. $ 3,354 $ 30,755
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest...................................................... $ 1,080 $ 1,788
Income taxes.................................................. 174 529
Supplemental schedule of non-cash investing and financing activities:
Assumption of convertible subordinated debt................... $ -- $ 30,000
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 6
LCC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: DESCRIPTION OF OPERATIONS
LCC International, Inc. (also referred to as the "Company") is a leading
provider of integrated services and products relating to the design and
engineering of wireless communications systems. The services and products
provided by the Company are as follows:
SERVICES
Engineering and design services. The Company provides engineering and
design services for cellular phone system operators, personal communication
system (PCS) operators and other wireless communication system providers. These
services are predominantly provided on a time-and-material or fixed-price
contract basis.
Program management services. The Company provides program management
services related to the build-out of wireless communications systems.
PRODUCTS
Software products. The Company develops and markets proprietary software
and data, which support the design and operation of wireless communications
systems.
Hardware products. The Company designs, assembles and sells field
measurement equipment used in the implementation, testing and maintenance of
wireless communications systems.
NOTE 2: BASIS OF PRESENTATION
The condensed consolidated financial statements of LCC International, Inc.
and subsidiaries 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 period.
Certain information and footnote disclosure normally included in the
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The interim financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto contained in the Company's Registration Statement on Form S-1
dated September 24, 1996. Operating results for the interim periods are not
necessarily indicative of results for an entire year.
NOTE 3: MERGER AND INITIAL PUBLIC OFFERING
The Company is the successor to the business formerly conducted by LCC,
L.L.C. ("LCC"). Effective September 27, 1996, in connection with the Company's
initial public offering of Class A Common Stock, LCC merged with and into LCC
International, Inc. The Company is the surviving company in the merger, and owns
all of the assets and rights and is subject to all of the obligations and
liabilities of LCC. Immediately prior to the merger, LCC assumed $30 million of
convertible subordinated debt from Telcom Ventures, L.L.C., its then parent
company. The repayment obligation for principal and interest became the sole
obligation of LCC and, following the merger, the sole obligation of the Company.
The $30 million of convertible subordinated debt assumed from Telcom Ventures,
L.L.C. and the $20 million of existing convertible subordinated debt
(collectively, the "Exchangeable Notes") are due to a third party investor and
are exchangeable at certain specified times, including during the 45 day period
commencing on June 27, 1997 (Investor exchange right), the 45 day period
commencing on August 27, 1997 (Company exchange right), and the respective
periods in 1998 and 1999, and including upon certain extraordinary events, such
as merger or sale of all assets of the Company, tender offer for more than 25%
of the Common Stock or distribution of assets representing 5% or more of the
total assets of the Company. Any exchange of one note must include the
5
<PAGE> 7
exchange of the other. The Company presently intends to exercise its exchange
option in August 1997 to cause the Exchangeable Notes to be converted into
2,841,099 shares of Class A Common Stock.
Effective with the merger, the Company converted to a Subchapter C
Corporation under the Internal Revenue Code of 1986, as amended. As of September
30, 1996, the Company recorded a one-time deferred income tax benefit of $8.7
million (net of a valuation allowance of $2.4 million) as a result of the change
in its tax status from a Limited Liability Corporation to a Subchapter C
Corporation. The income tax benefit has been recorded as a reduction of income
tax expense for the three and nine month periods ended September 30, 1996.
On September 30, 1996, the Company completed its initial public offering,
which involved the sale of 6,037,500 shares (3,162,500 shares were sold by the
Company and 2,875,000 shares were sold by the selling stockholder) of Class A
Common Stock at $16.00 per share. Net proceeds to the Company, after deducting
underwriting discounts and commissions, were approximately $47.0 million.
NOTE 4: PRO FORMA INCOME DATA
The accompanying pro forma information has been prepared as if the Company
was treated as a Subchapter C corporation for Federal and state income tax
purposes from January 1, 1995.
Pro forma income per share information has been computed by dividing pro
forma net income by the weighted average number of common shares and common
share equivalents. Common share equivalents include all outstanding stock
options after applying the treasury stock method and the assumed conversion of
the Company's convertible subordinated debt.
NOTE 5: NOTES RECEIVABLE FROM AFFILIATE
At December 31, 1995, notes receivable from affiliate consisted of two
promissory notes due from an entity owned approximately 4.5 percent by a 100
percent-owned subsidiary of Telcom Ventures, L.L.C., and approximately 15.0
percent by a member of Telcom Ventures, L.L.C. The notes carried interest at
approximately 16.5 percent and were payable monthly. Late payments were subject
to an additional charge of 2.0 percent on the entire unpaid principal balance
and any outstanding interest. The notes and all outstanding interest were paid
in September 1996.
NOTE 6: INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Raw materials....................................... $4,142 $ 4,528
Finished goods...................................... 1,148 1,265
------------ -------------
5,290 5,793
Less -- reserve for obsolescence.................... 341 520
------------ -------------
$4,949 $ 5,273
========== ==========
</TABLE>
NOTE 7: INVESTMENTS
In January 1996, LCC sold its 50.0 percent interest in Telemate and certain
distribution rights for LCC's software and hardware products for $3.8 million.
Approximately $1.4 million of the proceeds were received for LCC's investment in
Telemate, resulting in a gain of approximately $0.5 million, which was
recognized by LCC in January 1996. The remaining proceeds of $2.4 million
represent distribution rights which are being recognized on a straight-line
basis over 24 months beginning January 1996.
The Company's investments also include a 33 1/3 percent interest in Koll
Telecommunications Services, L.L.C. ("Koll"), which was formed in October 1994
with two other unrelated parties. Koll provides site
6
<PAGE> 8
acquisition and construction management services to operators of wireless
communications systems. From January 1, 1996, through September 30, 1996, the
Company contributed an additional $587,000 to Koll.
NOTE 8: LOAN AGREEMENTS
In March 1996, LCC's financing facility with Nomura Holding America, Inc.
(Nomura) was purchased by Chase Manhattan Bank, N.A. (Chase). Also in March,
additional draws aggregating $10 million were made by LCC, resulting in a total
outstanding balance under the facility of $20 million. The additional $10
million draws were used to fund two investments in customers. One investment
consists of loans aggregating $6.5 million, convertible into shares of
non-voting common stock at the Company's option, upon the satisfaction of
certain conditions. In connection with this investment, the Company obtained a
commitment from the customer to purchase services and products aggregating $65.0
million over the next five years. The other investment consists of an equity
investment of $5.0 million. In connection with this investment, the Company
obtained a commitment from the customer for the purchase of services and
products aggregating $50.0 million over the next 5 years.
In May 1996, LCC entered into a new credit facility with Chase which
replaced the March 1996 Facility (discussed above). Under the new credit
facility, Chase has extended (1) a revolving loan and letter of credit facility
in an aggregate principal amount not to exceed the lesser of $12.5 million or
80% of LCC's receivables which are deemed "eligible" as a basis for obtaining
credit, minus the aggregate amount of letter of credit obligations outstanding
at such time, and (2) a term loan in the principal amount of $7.5 million. The
availability of revolving loans and letters of credit is scheduled to expire on
May 15, 1999. The term loan is scheduled to amortize in 20 equal quarterly
installments with the final principal installment due on May 15, 2001. Interest
on the loans will accrue at LCC's election at either (1) a variable rate
determined with reference to the higher of (a) the Federal funds rate plus
one-half of one percent and (b) the announced prime commercial lending rate of
Chase; or (2) a fixed rate determined with reference to the London Interbank
Market. The payment and performance of the obligations of LCC under the credit
facility are secured by substantially all the assets of LCC. The credit facility
contains certain covenants which include the maintenance of debt service and
other financial ratios as well as a restriction in the declaration or payment of
dividends.
In September 1996, the credit facility with Chase was transferred from LCC
to LCC International, Inc. and amended and restated to reflect the transactions
contemplated by the merger immediately prior to the closing of the Company's
initial public offering. The credit facility consists of a revolving loan and
letter of credit facility in an aggregate principal amount not to exceed $20
million. Limitation on the amount of outstanding principal based on a
calculation of "eligible" receivables as required in the May 1996 credit
facility has been eliminated. The revolving loan commitment expires in September
1999. Interest under the credit facility accrues at the Company's election
(subject to certain restrictions and limitations) at either (i) the variable
rate equal to the greater of (a) the Federal funds rate plus one-half of one
percent, and (b) the announced prime commercial lending rate of Chase, or (c) a
fixed rate for a designated period of time determined by reference to the London
Interbank Market. In September 1996, approximately $16.2 million of the proceeds
of the Company's initial public offering was used to pay all amounts outstanding
under the Company's credit facility with Chase.
NOTE 9: LEASE AGREEMENTS
In May 1996, LCC entered into 10 year and 5 year facility lease agreements
effective March 1, 1997 and July 1, 1997, respectively. The lease agreements
contain renewal options for up to three five-year periods. The lease agreements
also provide for LCC to pay maintenance, real estate taxes and certain other
operating costs of the leased property.
Termination costs associated with the current facility leases of
approximately $1.4 million will be offset by existing deferred rent benefits of
$1.5 million.
Future minimum rental payments under the new facility leases, excluding
executory costs, are $2.1 million in 1997, $3.1 million in 1998, $3.2 million in
1999, $3.3 million in 2000 and $21.9 million thereafter.
7
<PAGE> 9
NOTE 10: OPTIONS
In March 1996, LCC adopted an Employee Option Plan for certain key
executives under which the Members' Committee was granted the authority to grant
options for up to an aggregate six percent interest in the Company. Options
representing approximately a 6.0 % interest were outstanding as of March 15,
1996. The Options were granted at an exercise price equal to fair market value
at time of grant, and generally became exercisable at 20% a year over a five
year period. Unexercised options generally expire 10 years after issuance.
In connection with the initial public offering, the Company established the
1996 Employee Stock Option Plan, which authorized the issuance of up to
3,224,000 shares of Class A Common Stock pursuant to options granted under the
plan. Options to purchase approximately 580,000 shares of Class A Common Stock
at the offering price of $16 were granted to approximately 260 employees of the
Company under the Company's 1996 Employee Stock Option Plan. The options vest
with respect to one-third of the shares subject to option on each of the first
three anniversaries of the date of grant. Unexercised options generally expire
10 years after issuance. In addition, options to purchase up to an aggregate of
approximately 2,160,000 shares of Class A Common Stock were issued under the
1996 Employee Stock Option Plan to certain employees of the Company to replace
the options granted by LCC in connection with the Employee Option Plan (see
above) and the Phantom Membership Awards under the LCC Membership Plan adopted
in 1994. The exercise price and number of options granted were intended to
maintain a comparable value with the options/awards under the previous plans.
Also in connection with the Company's initial public offering, the Company
established the 1996 Director's Stock Option Plan and the Employee Stock
Purchase Plan. The Director's Plan provides for the "formula" grant of options,
and authorizes the issuance of up to 60,000 shares of Class A Common Stock and
250,000 shares of Class B Common Stock. The option exercise price for options
granted under the Director's Plan is 100% of the fair value of the shares on the
date of grant. Each eligible director who is not eligible to hold shares of
Class B Common Stock was granted an initial option to purchase 10,000 shares of
Class A Common Stock in connection with the offering. Each eligible director who
is eligible to hold shares of Class B Common Stock and who was a director as of
the offering was granted an initial option to purchase 35,000 shares of Class B
Common Stock in connection with the offering, and will be granted additional
options to purchase 22,500 shares of Class B Common Stock as of each of the next
four annual meetings of the stockholders of the Company if the director
continues to be an eligible director. Options granted with respect to Class A
Common Stock will become immediately exercisable with respect to directors who
were directors of the Company prior to July 1, 1996, and will become exercisable
with respect to one-third of the shares of Class A Common Stock that are subject
to the options on each of the first three anniversaries of the date of grant
subject to acceleration of vesting on a change of control with respect to
directors who became directors of the Company after July 1, 1996.
Under the Company's Employee Stock Purchase Plan, 360,000 shares of Class A
Common Stock are available for purchase by eligible employees of the Company.
Rights to purchase shares will be deemed granted to participating employees as
of the beginning of each applicable period, as specified by the Compensation and
Stock Option Committee of the Company's Board of Directors. The purchase price
for each share will not be less than 85% of the fair market value of the share
of Class A Common Stock on the first or last trading day of such period,
whichever is lower.
The Company has reserved 85,000 shares of Class A Common Stock for issuance
pursuant to options to be granted to a person or entity designated by one of the
investors in the Company. The option exercise price for these options will be
100% of the fair market value of the Class A Common Stock on the date of grant
of the option. An initial option to purchase 25,000 shares of Class A Common
Stock was granted in connection with the Offering, and an additional option will
be granted to purchase 15,000 shares of Class A Common Stock on each of the next
four anniversaries of the initial date of grant. Options granted will vest
immediately. The options will expire no later than the fifth anniversary of the
date of grant.
8
<PAGE> 10
NOTE 11: CONTINGENCIES
The Company is party to various legal proceedings and claims incidental to
their business. Management does not believe that these matters will have a
material adverse effect on the consolidated results of operations or financial
condition of the Company.
9
<PAGE> 11
LCC INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996
OVERVIEW
The Company is one of the world's largest independent providers of RF
engineering and network design services and products to the wireless
telecommunications industry. The Company has provided these services, along with
related proprietary software tools and field measurement and analysis equipment,
to operators of more than 200 wireless systems in more than 40 countries.
The Company's revenues are generated through contracts for RF engineering
and program management services, licenses of the Company's software products and
sales of the Company's field measurement and analysis products. The Company
provides engineering services on a contract basis, usually in a customized plan
for each client and generally charges for engineering services on a time and
materials basis, although projects of short duration may involve a fixed price
or success fee. The Company generally provides program management services on a
time and materials basis; such contracts often have ceilings on cost per cell
site. The Company's revenues also include reimbursement for expenses, including
the living expenses of engineers on customer sites. The software tools used by
the Company's engineers, which are used as part of the customer's system after
completion of the project pursuant to a license, are recorded as product, not
service revenues. Revenues from software tools are earned under license
arrangements, which in the U.S. often consists of an annual fee per workstation
or per cell site and which are for a fixed term that requires renewal by the
customer to retain the software. The Company charges an up-front fee in many
cases outside the U.S. where customers are not accustomed to paying annual
licensing fees for software. A portion of the revenues from licensing software
to customers, apart from those associated with engineering services contracts,
consists of upgrades or additional software modules developed by the Company
following the initial licensing. Revenues from field measurement and analysis
equipment consist primarily of one-time payments, although there are some
periodic rental payments and there may be additional charges for equipment
maintenance and upgrades.
Service revenue consists of revenues from engineering services and program
management services, which the Company commenced providing in 1995. Product
revenue consists of revenue from software tools and revenue from field
measurement and analysis products. The Company derives a significant proportion
of its revenues from its international customers. Since almost all of the
Company's contracts are denominated in U.S. dollars, the Company generally does
not maintain currency hedge agreements.
Cost of revenues consists of costs associated with engineering design
services and program management services as well as costs associated with the
production and design of field measurement and analysis equipment, licensing of
software and related maintenance costs. Sales and marketing expenses consist of
salaries, sales commissions, travel and other expenses required to implement the
Company's marketing, sales and customer support plans. General and
administrative expenses consist of the compensation, finance, information
systems, professional services, office and occupancy costs required to manage
the Company's business. Non-cash compensation consists of awards under a program
for key executives adopted in 1994. Such plan is accounted for as a variable
plan, and therefore, to the extent that the deemed fair market value of the
Company increases, compensation expense will increase accordingly. In connection
with the Company's initial public offering, the Company granted stock options to
replace the awards granted under this plan. Such options were granted with
exercise prices substantially below the initial public offering price (See Note
10 to the accompanying condensed consolidated financial statements).
The key drivers of the Company's growth have historically been (i) the
issuances of new or additional wireless telecommunications licenses by
governmental authorities to wireless operators, (ii) increases in the number of
cell sites operated and the number of subscribers served by wireless network
operators, (iii) the introduction of new services or technologies, (iv) the
increasing complexity of the systems deployed by
10
<PAGE> 12
wireless network operators and (v) the expansion and optimization of existing
systems by wireless network operators.
To keep pace with the subscriber growth currently anticipated by most
industry analysts, the Company expects that there will continue to be
significant investment by network system operators over the next few years in
design services, software tools and field measurement and analysis equipment.
The Company expects that as system build-out is completed and areas
(particularly in the U.S.) begin to have multiple network operators, the demand
for RF engineering services will change.
RESULTS OF OPERATIONS
The following table and discussion provides information which management
believes is relevant to an assessment and understanding of the Company's
consolidated results of operations and financial condition. The discussion
should be read in conjunction with the condensed consolidated financial
statements and accompanying notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
--------------------------------------
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- ----------------
1995 1996 1995 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues:
Service revenues.................................... 66.5% 65.6% 64.1% 65.3%
Product revenues.................................... 33.5 34.4 35.9 34.7
----- ----- ----- -----
Total revenues................................. 100.0 100.0 100.0 100.0
Cost of revenues......................................... 71.1 70.1 70.9 68.6
----- ----- ----- -----
Gross profit............................................. 28.9 29.9 29.1 31.4
----- ----- ----- -----
Operating expenses:
Sales and marketing................................. 5.7 4.1 6.1 4.7
General and administrative.......................... 9.3 8.3 10.2 9.2
Non-cash compensation............................... 4.6 7.2 4.9 6.5
Depreciation and amortization....................... 4.1 3.3 3.3 3.8
----- ----- ----- -----
Total operating expenses....................... 23.7 22.9 24.5 24.2
----- ----- ----- -----
Operating income......................................... 5.2 7.0 4.6 7.2
----- ----- ----- -----
Other income (expense):
Interest income..................................... 1.4 0.6 1.0 0.6
Interest expense.................................... (4.7) (2.0) (3.1) (2.4)
Other............................................... 1.7 1.1 0.9 2.1
----- ----- ----- -----
Total other income (expense)................... (1.6) (0.3) (1.2) 0.3
----- ----- ----- -----
Income before income taxes............................... 3.6 6.7 3.4 7.5
Provision (benefit) for income taxes..................... 2.1 (22.0) 1.8 (6.7)
----- ----- ----- -----
Net income............................................... 1.5% 28.7% 1.6% 14.2%
===== ===== ===== =====
</TABLE>
11
<PAGE> 13
THREE MONTHS ENDED SEPTEMBER 30, 1996
COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1995
Revenues. Revenues for the three months ended September 30, 1996 were
$37.9 million compared to $25.1 million for the three months ended September 30,
1995, an increase of $12.8 million or 50.6%. Service revenues were $24.8 million
compared to $16.7 million the prior year, an increase of $8.1 million or 48.6%.
The increase was due to new demand for engineering design services from the PCS
market and revenues generated by the program management division, which
commenced operations in 1995. Product revenues were $13.0 million compared to
$8.4 million the prior year, an increase of $4.6 million or 54.7%. The increase
was due primarily to growth in software revenues, which increased $3.0 million
or 72.4%.
Cost of Revenues and Gross Profit. Cost of revenues was $26.5 million
compared to $17.9 million for the prior year, an increase of $8.6 million or
48.4%. As a percentage of total revenues, cost of revenues was 70.1% and 71.1%
for 1996 and 1995, respectively. Gross profit was $11.3 million compared to $7.3
million for the prior year, an increase of $4.0 million or 56.0%. As a
percentage of total revenues, gross profit was 29.9% and 28.9% for 1996 and
1995, respectively. The $4.0 million increase in gross profit largely resulted
from corresponding revenue growth.
Sales and Marketing. Sales and marketing expenses were $1.6 million for
1996 compared to $1.4 million for 1995, an increase of $0.2 million or 8.8%. As
a percentage of total revenues, sales and marketing expenses decreased to 4.1%
for 1996 compared to 5.7% for 1995, as a result of allowing sales and marketing
expenses to grow, but at a rate of growth lower than revenue growth. The
increase of $0.2 million was primarily due to an increase in commissions paid to
agents.
General and Administrative. General and administrative expenses were $3.1
million for 1996 compared to $2.3 million for 1995, an increase of $0.8 million
or 34.0%. The increase was primarily the result of an increase in the allowance
for doubtful accounts due to increasing revenues. As a percentage of total
revenues, general and administrative expenses were 8.3% and 9.3% for 1996 and
1995, respectively, as a result of allowing general and administrative expenses
to grow, but at a rate of growth lower than revenue growth.
Non-Cash Compensation. Non-cash compensation increased to $2.7 million for
1996 from $1.1 million for 1995, an increase of $1.6 million or 139.2%. The
increase is the result of the vesting of certain portions of the award of
non-cash compensation under the Limited Liability Corporation Membership Plan
and an increase in the deemed fair market value of the Company.
Net Income. Net income was $10.9 million for 1996 compared to $0.4 million
for 1995, an increase of $10.5 million. The increase was primarily the result of
an increase in gross profit from corresponding revenue growth, an increase in
other income due to the realization of deferred income related to the sale of
the distribution rights to Telemate, S.A., the recognition of a deferred tax
benefit of $8.7 million related to the conversion of the Company to a Subchapter
C Corporation, and a decrease in interest expense of $0.4 million due to a
decline in the interest rate charged on the Company's outstanding debt and loan
fees incurred in 1995, offset by an increase in general and administrative
expenses, non-cash compensation, and depreciation and amortization expenses.
Depreciation and amortization expenses increased $0.2 million during 1996 to
$1.3 million as a result of an increase in the amount of amortization of
capitalized software development costs.
Non-cash and non-recurring items recognized in association with the
Company's initial public offering (non-cash compensation of $2.7 million and
deferred tax benefit of $8.7 million) increased net income for the quarter.
Normalizing for these items, and assuming a 40% effective income tax rate, net
income would have been $3.2 million (pro forma $.21 per share) for the quarter
ended September 30, 1996, as compared to $1.2 million (pro forma $.09 per share)
for the same quarter of the prior year. Accordingly, on a normalized basis, net
income increased 159.8% and pro forma earnings per share increased 133.3%
compared to the same quarter of the prior year.
12
<PAGE> 14
NINE MONTHS ENDED SEPTEMBER 30, 1996
COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1995
Revenues. Revenues for the nine months ended September 30, 1996 were $98.2
million compared to $71.7 million for the nine months ended September 30, 1995,
an increase of $26.5 million or 37.0%. Service revenues were $64.1 million
compared to $46.0 million for the prior year, an increase of $18.1 million or
39.5%. The increase was due to new demand for engineering design services from
the PCS market and an increase in revenues generated by the program management
division, which commenced operations in 1995. Product revenues were $34.1
million compared to $25.7 million for the prior year, an increase of $8.4
million or 32.5%. The increase was due to growth in software sales, which
increased $4.5 million or 35.6%, and hardware sales, which increased $3.9
million or 29.6%.
Cost of Revenues and Gross Profit. Cost of revenues was $67.3 million for
1996 compared to $50.9 million for 1995, an increase of $16.4 million or 32.4%.
As a percentage of total revenues, cost of revenues was 68.6% and 70.9% for 1996
and 1995, respectively. Gross profit was $30.9 million for 1996 compared to
$20.8 million for the prior year, an increase of $10.1 million or 48.1%. As a
percentage of total revenues, gross profit was 31.4% and 29.1% for 1996 and
1995, respectively. The $10.1 million increase in gross profit largely resulted
from corresponding revenue growth.
Sales and Marketing. Sales and marketing expenses were $4.6 million for
1996 compared to $4.4 million for 1995, an increase of $0.2 million or 5.3%. As
a percentage of total revenues, sales and marketing expenses decreased to 4.7%
for 1996 compared to 6.1% for 1995, as a result of allowing sales and marketing
expenses to grow, but at a rate of growth lower than revenue growth. The
increase of $0.2 million was primarily due to an increase in commissions paid to
agents.
General and Administrative. General and administrative expenses were $9.1
million for 1996 compared to $7.3 million for 1995, an increase of $1.8 million
or 24.4%. The increase was primarily the result of an increase in the allowance
for doubtful accounts due to increasing revenues. As a percentage of total
revenues, general and administrative expenses were 9.2% and 10.2% for 1996 and
1995, respectively, as a result of allowing general and administrative expenses
to grow, but at a rate of growth lower than revenue growth.
Non-Cash Compensation. Non-cash compensation increased to $6.3 million for
1996 from $3.5 million for 1995, an increase of $2.8 million or 80.2%. The
increase is the result of the vesting of certain portions of the award of
non-cash compensation under the Limited Liability Corporation Membership Plan
and an increase in the deemed fair market value of the Company.
Net Income. Net income was $13.9 million for 1996 compared to $1.1 million
for 1995, an increase of $12.8 million. The increase was primarily the result of
an increase in gross profit from corresponding revenue growth, an increase in
other income due to the gain on sale of the Company's 50% interest in Telemate,
S.A. and realization of related distribution right deferred revenue, and the
recognition of a deferred tax benefit of $8.7 million related to the conversion
of the Company to a Subchapter C Corporation, offset by an increase in general
and administrative expenses, non-cash compensation, and depreciation and
amortization expenses. Depreciation and amortization expense increased $1.4
million during 1996 to $3.8 million as a result of an increase in the amount of
amortization of capitalized software development costs.
Non-cash and non-recurring items recognized in association with the
Company's initial public offering (non-cash compensation of $6.3 million and
deferred tax benefit of $8.7 million) increased net income for the nine month
period ended September 30, 1996. Normalizing for these items, and assuming a 40%
effective income tax rate, net income would have been $8.2 million (pro forma
$.56 per share) for the nine month period ended September 30, 1996, as compared
to $3.5 million (pro forma $.27 per share) for the same period of the prior
year. On a normalized basis, net income increased 131.6% and pro forma earnings
per share increased 107.4% compared to the same period of the prior year.
13
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
The Company has generally maintained a positive cash flow and has generally
funded its operating requirements with cash generated from operations. Cash and
cash equivalents were $30.8 million at September 30, 1996, an increase of $24.2
million from December 31, 1995. The increase is due primarily to the completion
of the Company's initial public offering, which involved the sale of 6,037,500
shares (3,162,500 by the Company and 2,875,000 by the selling stockholder) of
Class A Common Stock at $16.00 per share. The net proceeds to the Company (after
deducting underwriting discounts and commissions) were $47.0 million. Of this
amount, approximately $16.2 million was used to pay all remaining amounts
outstanding under the Company's credit facility with Chase in September 1996
(see Note 8 to the accompanying condensed consolidated financial statements) and
$3.5 million was advanced to Telcom Ventures, L.L.C. ("Telcom Ventures") to
assist in paying certain taxes due in connection with the assumption by the
Company of $30 million of convertible subordinated debt (see Note 3 to the
accompanying condensed consolidated financial statements). The remainder of the
proceeds will be used for strategic financing for customers as incentives for
new business, acquisitions, working capital and general corporate purposes.
Net cash used in operations was $2.0 million for the nine months ended
September 30, 1995. Net cash used in investing activities was $6.4 million,
consisting primarily of cash paid for additions to property and equipment ($3.5
million), increase in capitalized software ($2.0 million) and increase in
investments in joint ventures and short term investments ($0.8 million). Net
cash used in financing activities was $6.8 million, consisting primarily of
payment of dividends ($9.5 million) and distributions and loans to Telcom
Ventures ($7.3 million), partially offset by proceeds of note payable ($10.0
million).
Net cash generated from operations was $3.2 million for the nine months
ended September 30, 1996. Net cash used in investing activities was $6.6
million, consisting primarily of cash paid for additions to property and
equipment ($2.1 million), increase in capitalized software ($2.7 million) and
issuance of convertible notes receivable ($5.2 million), partially offset by the
proceeds of the sale of the Company's interest in Telemate S.A. and certain
distribution rights ($3.8 million -- see Note 7 to the accompanying condensed
consolidated financial statements). Net cash provided by financing activities
was $27.6 million, primarily representing net proceeds from the Company's
initial public offering of $47.0 million, partially offset by a $20 million
reduction in short-term debt under the Company's credit facility with Chase.
Dividends paid were $16.9 million for the nine months ended September 30,
1996. In addition, in September 1996, LCC received $16.9 million as repayment of
its loans to Telcom Ventures. Also in September 1996, the Company loaned $3.5
million to Telcom Ventures to assist in the payment of taxes due in connection
with the assumption by the Company of $30 million of convertible subordinated
debt from Telcom Ventures (see Note 3 to the accompanying condensed consolidated
financial statements).
Working capital was $58.9 million at September 30, 1996 versus $17.6
million at December 31, 1995, an increase of $41.3 million or 233.5%. The
increase was primarily due to the proceeds raised in connection with the
Company's initial public offering.
In September 1996, the Company amended and restated its credit facility
with Chase to reflect the transactions contemplated by the merger of LCC with
and into LCC International, Inc. (see Notes 3 and 8 to the accompanying
condensed consolidated financial statements). The credit facility consists of a
revolving loan and letter of credit facility in an aggregate principal amount
not to exceed $20 million. The revolving loan commitment expires in September
1999. Interest under the credit facility accrues at the Company's election
(subject to certain restrictions and limitations) at either (i) the variable
rate equal to the greater of (a) the Federal funds rate plus one-half of one
percent, and (b) the announced prime commercial lending rate of Chase, or (c) a
fixed rate for a designated period of time determined by reference to the London
Interbank Market. The payment and performance of the obligations of the Company
under the credit facility are secured by substantially all of the assets of the
Company. All amounts outstanding under the credit facility were paid in
September from the proceeds of the Company's initial public offering.
14
<PAGE> 16
PART II -- OTHER INFORMATION
<TABLE>
<S> <C>
Item 1: Legal Proceedings
Not Applicable
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
There are no exhibits included with this filing.
(b) Reports on Form 8-K
Not applicable
</TABLE>
15
<PAGE> 17
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.
<TABLE>
<S> <C>
LCC International, Inc. and Subsidiaries
Date: November 13, 1996 Signed: /s/ RICHARD HOZIK
----------------------------------- ---------------------------------
Richard Hozik
Senior Vice President, Treasurer
and Chief Financial Officer
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 30,755
<SECURITIES> 0
<RECEIVABLES> 30,511
<ALLOWANCES> 4,403
<INVENTORY> 5,273
<CURRENT-ASSETS> 92,377
<PP&E> 5,302
<DEPRECIATION> 12,931
<TOTAL-ASSETS> 117,577
<CURRENT-LIABILITIES> 33,522
<BONDS> 0
0
0
<COMMON> 146
<OTHER-SE> 32,451
<TOTAL-LIABILITY-AND-EQUITY> 117,577
<SALES> 34,101
<TOTAL-REVENUES> 98,220
<CGS> 22,156
<TOTAL-COSTS> 67,349
<OTHER-EXPENSES> 23,812
<LOSS-PROVISION> 2,306
<INTEREST-EXPENSE> 2,391
<INCOME-PRETAX> 7,359
<INCOME-TAX> (6,543)
<INCOME-CONTINUING> 13,902
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,902
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
</TABLE>
