<PAGE> 1
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 March 31, 1997
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 of Incorporation) (IRS Employer Identification Number)
---------------------------------------------
7925 Jones Branch Drive
McLean, VA 22102
(Address of principal executive offices) (Zip Code)
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
--- ---
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 May 14, 1997, the registrant had outstanding 6,082,405 shares of Class A
Common Stock, par value $0.01 per share (the "Class A Common Stock") and
8,460,984 shares of Class B Common Stock, par value $0.01 per share (the "Class
B Common Stock").
<PAGE> 2
LCC INTERNATIONAL, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1997
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Condensed consolidated statements of operations for
the three months ended March 31, 1996 and 1997 3
Condensed consolidated balance sheets as of December 31,
1996 and March 31, 1997 4
Condensed consolidated statements of cash flows for the
three months ended March 31, 1996 and 1997 6
Notes to condensed consolidated financial statements 7
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. 10
PART II: OTHER INFORMATION 16
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 2
<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
MARCH 31,
---------------------------
1996 1997
---- ----
<S> <C> <C>
REVENUES:
Service revenues $17,457 $20,224
Product revenues 9,631 14,146
--------- --------
27,088 34,370
--------- --------
COST OF REVENUES:
Service revenues 11,352 14,780
Product revenues 6,774 9,833
--------- --------
18,126 24,613
--------- --------
GROSS PROFIT 8,962 9,757
--------- --------
OPERATING EXPENSES:
Sales and marketing 1,432 1,949
General and administrative 2,655 3,526
Research and development 635 1,293
Non-cash compensation 466 158
Depreciation and amortization 1,213 1,720
--------- --------
6,401 8,646
--------- --------
OPERATING INCOME 2,561 1,111
--------- --------
OTHER INCOME (EXPENSE):
Interest income 135 140
Interest expense (673) (876)
Other 1,164 395
--------- --------
626 (341)
--------- --------
INCOME BEFORE INCOME TAXES 3,187 770
PROVISION FOR INCOME TAXES 708 380
--------- --------
NET INCOME $ 2,479 $ 390
========= ========
NET INCOME PER SHARE N/A $ 0.05
========= ========
PRO FORMA INCOME DATA:
Income before income taxes $ 3,187
Pro forma provision for income taxes 1,275
---------
Pro forma net income $ 1,912
=========
PRO FORMA NET INCOME PER SHARE: $ 0.14
=========
COMMON AND COMMON EQUIVALENT
SHARES USED IN THE CALCULATION
OF NET INCOME AND PRO FORMA
NET INCOME PER SHARE: 15,579 18,559
========= ========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
Page 3
<PAGE> 4
LCC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 13,732 $ 2,730
Short-term investments 6,934 6,334
Receivables, net of allowance for doubtful
accounts of $17,942 and $17,372 at December 31, 1996
and March 31, 1997, respectively:
Trade accounts receivable 35,563 33,543
Due from related parties and affiliates 2,244 1,513
Unbilled receivables 9,819 8,680
Inventory, net 6,387 6,127
Deferred income taxes, net 12,755 11,784
Prepaid expenses and other current assets 4,413 804
---------- ----------
Total current assets 91,847 71,515
Property and equipment, net 5,952 6,579
Software development costs, net 5,069 5,679
Notes receivable 602 602
Investments in joint venture 1,650 1,739
Deferred income taxes, net 4,584 3,846
Other assets 5,243 5,640
---------- ----------
$114,947 $95,600
========== ==========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
Page 4
<PAGE> 5
LCC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
---- ----
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Note payable $ 10,445 $ -
Accounts payable 6,218 6,707
Accrued expenses 23,296 14,935
Deferred revenue 4,951 5,344
Income taxes payable 7,446 5,797
Obligations under incentive plans 448 467
Other current liabilities 1,806 2,305
-------- -------
Total liabilities 54,610 35,555
Convertible subordinated debt 50,000 50,000
Obligations under incentive plans, net
of current portion 807 831
Other liabilities 1,053 420
-------- -------
Total liabilities 106,470 86,806
-------- -------
Preferred Stock:
10,000 shares authorized; -0- shares
issued and outstanding - -
Class A common stock, $.01 par value:
70,000 shares authorized; 6,066
shares issued and outstanding at December 31,
1996 and March 31, 1997 61 61
Class B Common stock, $.01 par value:
20,000 shares authorized; 8,461
shares issued and outstanding at December 31,
1996 and March 31, 1997 85 85
Paid-in capital 28,353 28,511
Retained (deficit) (16,422) (16,032)
Cumulative foreign currency translation adjustment (100) (331)
Note receivable from shareholder (3,500) (3,500)
-------- -------
Total shareholders' equity 8,477 8,794
-------- -------
$114,947 $95,600
======== =======
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
Page 5
<PAGE> 6
LCC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------------------
1996 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,479 $ 390
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,213 1,720
Provision for doubtful accounts 598 622
Non-cash compensation 466 158
Income from investments in joint venture, net (349) (89)
Gain on disposition of joint venture, net (514) -
Changes in operating assets and liabilities:
Trade, unbilled, and other receivables (2,679) 3,269
Accounts payable and accrued expenses 281 (7,872)
Inventory (249) 326
Other current assets and liabilities (2,098) 3,744
Other noncurrent assets and liabilities (3,994) (600)
------- --------
Net cash (used in) provided by operating activities (4,846) 1,668
------- --------
Cash flows from investing activities:
Decrease in short term investments, net - 600
Purchases of property and equipment (415) (1,784)
Increase in capitalized software (740) (1,041)
Investments in joint ventures (437) -
Proceeds from sale of joint venture 3,800 -
Issuance of notes receivable from uncombined affiliate (2,150) -
------- --------
Net cash provided by (used in) investing activities 58 (2,225)
------- --------
Cash flows from financing activities:
Proceeds from note payable/line of credit 10,000 -
Payments on note payable/line of credit - (10,445)
Distributions and loans to member (3,184) -
------- --------
Net cash provided by (used in) financing activities 6,816 (10,445)
------- --------
Net increase (decrease) in cash and cash equivalents 2,028 (11,002)
Cash and cash equivalents at beginning of period 6,571 13,732
------- --------
Cash and cash equivalents at end of period $ 8,599 $ 2,730
======= ========
Supplemental disclosures of cash flow information:
Cash paid during the quarter for:
Interest $ 274 $ 25
Income taxes 220 273
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
Page 6
<PAGE> 7
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.
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
and network analysis tools 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
included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996. Operating results for the interim periods are not necessarily
indicative of results for an entire year.
NOTE 3: 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, 1996.
Pro forma net income per share information has been computed by dividing pro
forma net income by the pro forma 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.
Page 7
<PAGE> 8
NOTE 4: INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
---- ----
<S> <C> <C>
Field measurement and network analysis tools $1,641 $4,002
Parts and accessories 5,488 2,881
------- -------
7,129 6,883
Less - reserve for obsolete and slow moving inventory (742) (756)
------- -------
$6,387 $6,127
======= =======
</TABLE>
NOTE 5: SPECIAL CHARGE
In March 1996, the Company made investments in Pocket Communications, Inc.
("Pocket", formerly known as DCR Communications, Inc.) and NextWave Telecom,
Inc. ("NextWave") of $6.5 million and $5.0 million, respectively. The $6.5
million investment in Pocket consists of loans convertible into shares of
non-voting common stock upon the satisfaction of certain conditions. In
connection with this investment, the Company obtained a commitment from Pocket
for the purchase of services and products aggregating $65.0 million over the
subsequent five-year period. The $5.0 million investment in NextWave consists of
an equity investment. In connection with this investment, the Company obtained a
commitment from NextWave for the purchase of services and products aggregating
$50.0 million over the subsequent five-year period. Through December 31, 1996,
revenues recognized under the commitments with Pocket and NextWave were
approximately $2.2 million and $12.5 million, respectively, and related amounts
receivable were approximately $2.2 million and $10.6 million, respectively.
Included in the amounts receivable are notes receivable from Pocket and NextWave
of approximately $950,000 and $5.9 million, respectively. The notes bear
interest at prime plus 2%, and were payable upon maturity of the notes on March
31, 1997. Both customers are development stage enterprises pursuing the buildout
and operation of networks pursuant to licenses obtained in the auction of
C-Block licenses by the FCC and are subject to risks typically associated with
start-up entities, such as (i) the uncertainty of securing sufficient financing,
(ii) competition from other providers of telecommunications services, (iii)
dependence on key vendors and strategic partners, and (iv) delays encountered in
the development and successful operation of their PCS networks.
On March 31, 1997, Pocket failed to pay interest due the Company under the $6.5
million convertible loan agreement and failed to pay principal and interest due
the Company under the $950,000 note agreement. Also on March 31, 1997, NextWave
failed to pay principal and interest due under the $5.9 million note agreement.
In addition, on April 1, 1997, Pocket announced that it had voluntarily sought
court protection under Chapter 11 of the U.S. Bankruptcy Code. Given these
developments and the uncertainty related to Pocket's and NextWave's ability to
meet their future obligations under the agreements outlined above, the Company
fully reserved for its exposure with these customers and consequently recorded a
special charge of $30.1 million pre-tax ($24.5 million after tax) at December
31, 1996. The $30.1 million special charge consisted of a reserve against the
Company's aggregate receivable exposure at December 31, 1996 of $12.4 million
(net of payments of $0.4 million received in January 1997), the recognition of
an other than temporary impairment of the Company's investments of $11.5 million
and accruals of approximately $6.2 million related to loss contracts under which
the Company was obligated to perform at December 31, 1996. The Company suspended
all work performed for Pocket and has significantly decreased the level of work
performed for NextWave. Any work performed beyond March 31, 1997 for NextWave is
being done solely on a prepayment basis. The Company experienced lower than
historical margins in the first quarter of calendar year 1997 as a result
of the decision to suspend or decrease work performed for these two customers,
and anticipates the same during the second quarter.
Page 8
<PAGE> 9
On April 15, 1997, the Company and NextWave agreed to a revised payment
schedule for amounts outstanding under the note receivable and other
receivables due from NextWave. Under the terms of the agreement, the Company is
to receive $1.0 million on the 15th of each month beginning May 1997 through
May 1998. In addition, in the event of the sale or issuance of any debt or
equity instruments/securities or the sale of any assets by NextWave, the
Company would be entitled to a prepayment equal to 30% of the gross proceeds
from such transaction(s).
NOTE 6: INVESTMENTS
In January 1996, the Company sold its 50.0 percent interest in Telemate and
certain distribution rights for the Company's software and hardware products for
$3.8 million. Approximately $1.4 million of the proceeds were received for the
Company's investment in Telemate, resulting in a gain of approximately $0.5
million, which was recognized by the Company 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.
During 1996, the Company entered into master service, convertible note and stock
option agreements with Communication Consulting Services, Inc. ("CCS"), a
provider of radio frequency engineering services in connection with the design,
optimization and operation of wireless systems. Under the master service
agreement, CCS will provide the Company with radio frequency engineers effective
November 1, 1996. The agreement has an initial term of two years, and is
automatically renewable for successive one-year terms unless terminated by the
Company or CCS. Under the convertible note agreement, the Company loaned CCS a
total of approximately $602,000 which is included in long-term notes receivable
in the accompanying consolidated balance sheet. Interest accrues on the loan at
a variable rate equal to the prime rate plus 1.5%. Interest is payable in
arrears on the last day each of March 1997, June 1997, September 1997, and
December 1997. The entire principal balance, together with any unpaid interest,
is due January 2, 1998. The loan is convertible, at the Company's option, into
shares representing 50% of the authorized capital stock and/or equity securities
of CCS. The stock option agreement gives the Company an option to purchase an
additional 10% of the common stock of CCS for a total purchase price of
$150,000. On April 7, 1997, the Company provided CCS with notice of its
intention to exercise both the conversion right in the convertible note and the
10% purchase right set forth in the stock option agreement.
NOTE 7: 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.
NOTE 8: NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share" ("Statement 128"). Statement 128 supersedes Accounting
Principles Board Opinion No. 15, "Earnings per Share" ("APB 15") and its related
interpretations, and promulgates new accounting standards for the computation
and manner of presentation of the Company's earnings per share data. The Company
is required to adopt the provisions of Statement 128 for the year ending
December 31, 1997. Earlier application is not permitted; however, upon adoption,
the Company will be required to restate previously reported annual and interim
earnings per share data in accordance with the provisions of Statement 128. The
Company does not believe that the adoption of Statement 128 will have a material
impact on the computation or manner of presentation of its earnings per share
data as currently or previously presented under APB 15.
Page 9
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LCC INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
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 design services on a contract basis, usually in a
customized plan for each client and generally charges for engineering services
on a time and materials 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 or fixed price basis. 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 design 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. Product revenues consist of revenues from software tools
and field measurement and analysis products. The Company derives a significant
portion 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, bonuses, 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 was accounted for as a variable
plan, and therefore, to the extent that the deemed fair market value of the
Company increased, compensation expense increased accordingly. In connection
with the Company's initial public offering, the Company granted stock options to
replace the awards granted under this plan.
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 wireless network operators, and (v) the
expansion and optimization of existing systems by wireless network operators.
Page 10
<PAGE> 11
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, program management 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 ENDED
MARCH 31,
------------------------------------
1996 1997
---- ----
<S> <C> <C>
Revenues:
Service revenues 64.4 % 58.8 %
Product revenues 35.6 41.2
----- -----
100.0 100.0
----- -----
Cost of revenues 66.9 71.6
----- -----
Gross profit 33.1 28.4
----- -----
Operating expenses:
Sales and marketing 5.3 5.7
General and administrative 9.8 10.2
Research and development 2.3 3.8
Non-cash compensation 1.7 0.5
Depreciation and amortization 4.5 5.0
----- -----
23.6 25.2
----- -----
Operating income 9.5 3.2
----- -----
Other income (expense):
Interest income 0.5 0.4
Interest expense (2.5) (2.5)
Other 4.3 1.1
----- -----
2.3 (1.0)
----- -----
Income before income taxes 11.8 2.2
Provision for income taxes 2.6 1.1
----- -----
Net income 9.2 % 1.1 %
===== =====
</TABLE>
Page 11
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THREE MONTHS ENDED MARCH 31, 1996
COMPARED TO
THREE MONTHS ENDED MARCH 31, 1997
Revenues. Revenues for the three months ended March 31, 1997 were $34.4 million
compared to $27.1 million for the three months ended March 31, 1996, an increase
of $7.3 million or 26.9%. Service revenues were $20.2 million compared to $17.5
million the prior year, an increase of $2.7 million or 15.9%. The increase was
due to increased demand for engineering design services offset by a decline in
program management revenues as a result of the Company's decision to suspend
program management services performed for Pocket Communications, Inc. ("Pocket")
and to significantly decrease the amount of work performed for NextWave Telecom,
Inc. ("NextWave") (see Note 5 to the Condensed Consolidated Financial
Statements). Product revenues were $14.1 million compared to $9.6 million the
prior year, an increase of $4.5 million or 46.9%. The increase was due primarily
to an increase in field measurement and analysis product sales due, in part, to
the acquisition of European Technology Partner AS ("ETP") in December 1996 and
due to strong sales in North America.
Cost of Revenues. Cost of revenues was $24.6 million compared to $18.1 million
for the prior year, an increase of $6.5 million or 35.8%. As a percentage of
total revenues, cost of revenues was 71.6% and 66.9% for 1997 and 1996,
respectively. The increase in cost of revenues largely resulted from revenue
growth. The increase in cost of revenues as a percentage of total revenues is
due primarily to the decreased chargeability of design engineering and program
management personnel as a result of ceasing work performed for Pocket and
significantly decreasing work performed for NextWave.
Gross Profit. Gross profit was $9.8 million compared to $9.0 million for the
prior year, an increase of $0.8 million or 8.9%. As a percentage of total
revenues, gross profit was 28.4% and 33.1% for 1997 and 1996, respectively. The
$0.8 million increase in gross profit largely resulted from revenue growth. The
decline in gross profit as a percentage of total revenues was due almost
entirely to the decreased chargeability of design engineering and program
management personnel discussed above.
Sales and Marketing. Sales and marketing expenses were $1.9 million, compared to
$1.4 million for the prior year, an increase of $0.5 million or 36.1%. The
increase was primarily due to an increase in sales commissions ($0.1 million)
and the inclusion of the ETP marketing department ($0.3 million) in 1997 as a
result of the acquisition of ETP in December 1996.
General and Administrative. General and administrative expenses were $3.5
million, compared to $2.7 million for the prior year, an increase of $0.8
million or 32.8%. The increase is due primarily to costs associated with the
Company's newly formed subsidiary, Microcell Management, Inc. ($0.2 million -
see below), the inclusion of the general and administrative costs of ETP ($0.4
million) in 1997 and costs associated with the Company's Brazilian operations
which began in the fourth quarter of 1996 ($0.2 million).
Research and Development. Research and development expenses were $1.3 million,
compared to $0.6 million for the prior year, an increase of $0.7 million or
103.6%. The increase is due primarily to the inclusion of the research and
development costs of ETP ($0.3 million) in 1997 and an increase in research and
development costs related to the Company's field measurement and analysis
products.
Non-Cash Compensation. Non-cash compensation was $0.2 million, compared to $0.5
million for the prior year, a decrease of $0.3 million or 66.1%. The decrease
is a result of certain employees reaching the latter stages of the vesting
period of the related award. The amount of expense recognized by the Company
decreases as the vesting period lapses.
Depreciation and Amortization. Depreciation and amortization expense was $1.7
million, compared to $1.2 million for the prior year, an increase of $0.5
million or 41.8%. The increase was primarily the result of increased capital
additions and additional amortization resulting from increased deferred software
costs related to the development of software tools and field measurement and
analysis products.
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Other Income (Expense). Interest expense was $0.9 million, compared to $0.7
million for the prior year, an increase of $0.2 million or 30.2%. The increase
was the result of the assumption of $30.0 million of convertible subordinated
debt from Telcom Ventures, L.L.C. in September 1996 in connection with the
merger of LCC, L.L.C. with and into the Company. Other income was $0.4 million
compared to $1.2 million for the prior year, a decrease of $0.8 million or
66.1%. The decrease was the result of the gain recorded on the sale of the
Company's 50.5% interest in Telemate S.A. in January 1996 ($0.5 million) and
decreased income from the Company's joint venture with Koll Telecommunications
Services, L.L.C. ($0.3 million).
Net Income. Net income was $0.4 million compared to $2.5 million for the prior
year, a decrease of $2.1 million or 84.3%. As a percentage of total revenues,
net income decreased to 1.1% from 9.2% in the prior year. The decrease in net
income was due primarily to the items discussed above. Adjusting for non-cash
compensation and assuming an effective income tax rate of $40.0% and 28.0% for
the Company's U.S. and Norwegian operations, respectively, net income would
have been $0.5 million compared to $2.2 million for 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $2.7 million at March 31, 1997, a decrease of
$11.0 million from December 31, 1996. The decrease is due primarily to payments
made for the acquisition of ETP. In December 1996, the Company, through its
wholly owned subsidiary LCCI AS, acquired the business of ETP for $13.1 million,
including $250,000 of acquisition costs. ETP designs, develops, manufactures,
sells and licenses hardware and software products for the testing, monitoring
and management of the operations of wireless telecommunications networks.
Exclusive of the acquisition costs, (i) $10.45 million was paid in January 1997
in satisfaction of a note agreement dated December 30, 1996, (ii) $1.4 million
is being held in escrow for two years as security for ETP's indemnity
obligations under the asset purchase agreement, and (iii) $667,000 and $308,000
will be paid in January 1998 and 1999, respectively. Payments under (i) and (ii)
above were made in January 1997 from the remaining net proceeds of the Offering.
In December 1996, the Company, through its newly formed subsidiary, Microcell
Management, Inc. ("Microcell"), acquired certain of the assets and liabilities
of Microcell Management, L.L.C. Microcell provides consulting services to the
wireless telecommunications industry and offers a package to finance the
construction of telecommunications towers on a sale-leaseback or build-to-suit
basis. Assets acquired included contract rights of $393,000 which are being
amortized on a straight-line basis over the 10 year life of the related
contract.
Net cash provided by operations was $1.7 million for the three months ended
March 31, 1997. Net cash used in investing activities was $2.2 million,
consisting primarily of additions to property and equipment ($1.8 million) and
an increase in capitalized software ($1.0 million), offset by a decrease in
short term investments ($0.6 million). Net cash used in financing activities was
$10.4 million, representing cash paid in satisfaction of the note agreement
established for the purchase of ETP in December 1996.
Net cash used in operations was $4.8 million for the three months ended March
31, 1996. Net cash provided by investing activities was $0.1 million, consisting
primarily of cash paid for additions to property and equipment ($0.4 million),
investments in joint ventures ($0.4 million), increase in capitalized software
($0.7 million) and issuance of notes receivable ($2.2 million), 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 6 to the accompanying Condensed
Consolidated Financial Statements). Net cash provided by financing activities
was $6.8 million, consisting of the net proceeds from the Company's credit
facility of $10.0 million, partially offset by advances of $3.2 million to
Telcom Ventures, L.L.C., the Company's parent company.
Page 13
<PAGE> 14
In November 1996, the Company entered into master service, convertible note and
stock option agreements with Communication Consulting Services, Inc. ("CCS"), a
provider of radio frequency engineering services in connection with the design,
optimization and operation of wireless systems. Under the convertible note
agreement, the Company loaned CCS a total of approximately $0.6 million.
Interest accrues on the loan at a variable rate equal to the prime rate plus
1.5%. The loan is convertible, at the Company's option, into shares representing
50% of the capital stock of CCS. The stock option agreement gives the Company an
option to purchase an additional 10%, for a total purchase price of $0.15
million. On April 7, 1997, the Company provided CCS with notice of its intention
to exercise both the conversion right in the convertible note and the 10%
purchase right set forth in the stock option agreement.
In March 1996, the Company made investments in Pocket and NextWave of $6.5
million and $5.0 million, respectively. The $6.5 million investment in Pocket
consists of loans convertible into shares of non-voting common stock upon the
satisfaction of certain conditions. In connection with this investment, the
Company obtained a commitment from Pocket for the purchase of services and
products aggregating $65.0 million over the subsequent five-year period. The
$5.0 million investment in NextWave consists of an equity investment. In
connection with this investment, the Company obtained a commitment from NextWave
for the purchase of services and products aggregating $50.0 million over the
subsequent five-year period. Through December 31, 1996, revenues recognized
under the commitments with Pocket and NextWave were approximately $2.2 million
and $12.5 million, respectively, and related amounts receivable were
approximately $2.2 million and $10.6 million, respectively. Included in the
amounts receivable are notes receivable from Pocket and NextWave of
approximately $950,000 and $5.9 million, respectively. The notes bear interest
at prime plus 2%, and were payable upon maturity of the notes on March 31, 1997.
Both customers are development stage enterprises pursuing the buildout and
operation of networks obtained in the auction of C-Block licenses by the FCC and
subject to risks typically associated with start-up entities, such as (i) the
uncertainty of securing sufficient financing, (ii) competition from other
providers of telecommunications services, (iii) dependence on key vendors and
strategic operation of its PCS networks and (iv) delays encountered in the
development and successful operation of their PCS networks.
On March 31, 1997, Pocket failed to pay interest due the Company under the $6.5
million convertible loan agreement and failed to pay principal and interest due
the Company under the $950,000 note agreement. Also on March 31, 1997, NextWave
failed to pay principal and interest due under the $5.9 million note agreement.
In addition, on April 1, 1997, Pocket announced that it had voluntarily sought
court protection under Chapter 11 of the U.S. Bankruptcy Code. Given these
developments and the uncertainty related to Pocket's and NextWave's ability to
meet their future obligations under the agreements outlined above, the Company
decided to fully reserve for its exposure with these customers and has
consequently recorded a special charge of $30.1 million pre-tax ($24.5 million
after tax) at December 31, 1996. The $30.1 million special charge consisted of a
reserve against the Company's aggregate receivable exposure at December 31, 1996
of $12.4 million (net of payments of $0.4 million received in January 1997), the
recognition of an other than temporary impairment of the Company's investments
of $11.5 million and accruals of approximately $6.2 million related to loss
contracts under which the Company was obligated to perform at December 31, 1996.
The Company suspended all work performed for Pocket and has significantly
decreased the level of work performed for NextWave. Any work performed beyond
March 31, 1997 for NextWave is being done solely on a prepayment basis. The
Company experienced lower than historical margins in the first quarter of
calendar year 1997 as a result of the decision to suspend or decrease work
performed for these two customers, and anticipates the same during the second
quarter.
On April 15, 1997, the Company and NextWave agreed to a revised payment schedule
for amounts outstanding under the note receivable and other receivables due from
NextWave. Under the terms of the agreement, the Company is to receive $1.0
million on the 15th of each month beginning May 1997 through May 1998. In
addition, in the event of the sale or issuance of any debt or equity
instruments/securities or the sale of any assets by NextWave, the Company
would be entitled to a prepayment equal to 30% of the gross proceeds from such
transaction(s).
Working capital was $36.0 million at March 31, 1997 versus $37.2 million at
December 31, 1996, a decrease of $1.2 million or 3.4%. The decrease is the
result of a greater decline in cash and cash equivalents and receivables than
the decline in accrued liabilities and accounts payable.
Page 14
<PAGE> 15
The Company has a credit facility with Chase Manhattan Bank Co. N.A. which
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. The credit facility requires
that the Company satisfy certain financial tests, including the maintenance of
certain leverage, net worth and other financial ratios. Effective December 30,
1996, the credit facility was amended to revise the financial ratios and
certain other covenants contained therein for the effect of the special charge
recorded by the Company. (See Note 5 to the accompanying Condensed Consolidated
Financial Statements). No amounts were outstanding under the credit facility at
March 31, 1997.
Page 15
<PAGE> 16
PART II - OTHER INFORMATION
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
11 - Computation of Earnings Per Common Share
27 - Financial Data Schedule
(b) Reports on Form 8-K
On January 14, 1997 the Company filed a Current Report on Form 8-K
(the "ETP Form 8-K") which reported that, on December 30, 1996, the Company's
wholly-owned subsidiary, LCC International AS ("LCCI AS"), a Norwegian limited
liability company, acquired the business of European Technology Partner AS
("ETP"), a Norwegian limited liability company.
On March 17, 1997, the Company filed a Current Report on Form 8-K/A
(the "ETP Form 8-K/A") amending item 7(a) of the ETP Form 8-K to file the
consolidated financial statements of ETP described below and further amending
Item 7(b) of the ETP Form 8-K to file the pro forma financial information for
the Company reflecting the acquisition of ETP described below. The following
financial statements of ETP were filed with the ETP Form 8-K/A: Independent
Auditor's Report, Balance Sheet as of December 31, 1995, Statement of Operations
for the year ended December 31, 1995, Statement of Shareholder's Equity for the
year ended December 31, 1995, Statement of Cash Flows for the year ended
December 31, 1995, Notes to Financial Statement, Unaudited Condensed Balance
Sheet as of September 30, 1996, Unaudited Condensed Statements of Operations as
of September 30, 1995 and 1996, Unaudited Condensed Statements of Cash Flows for
the nine months ended September 30, 1995 and 1996 and Notes to Unaudited
Condensed Financial Statements. The following pro forma financial information
for the Company was filed with the ETP Form 8-K/A: Unaudited Pro Forma Condensed
Consolidated Balance Sheet as of September 30, 1996, Unaudited Pro Forma
Condensed Consolidated Statement of Operations for the year Ended December 31,
1995 and for the Nine Months Ended September 30, 1996 and Notes to Unaudited Pro
Forma Condensed Consolidated Financial Information.
On February 11, 1997, the Company filed a Current Report on Form 8-K
which reported that, on February 10, 1997, the Company announced that its 1997
Annual Shareholders' Meeting will be held on Tuesday, May 20, 1997, and that
proposals for business to be transacted at this meeting must be addressed to the
Company's Secretary and received at the Company's principal offices no later
than Thursday, February 20, 1997.
On April 11, 1997, the Company filed a Current Report on Form 8-K
which reported that, on April 9, 1997, the Company announced that it intended to
reserve with respect to 1996 earnings $30.1 million pre-tax ($24.5 million
post-tax or $1.30 per share for the fourth quarter and $1.49 for the full
calendar year 1996) against certain receivables from, investments in and costs
associated with Pocket Communications, Inc. (formerly known as DCR
Communications, Inc.) and NextWave Telecom, Inc.
Page 16
<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.
LCC International, Inc. and Subsidiaries
Date: May 15, 1997 Signed: /s/ RICHARD HOZIK
------------------------ ----------------------------------
Richard Hozik
Senior Vice President, Treasurer
and Chief Financial Officer
Page 17
<PAGE> 1
EXHIBIT 11
Computation of Earnings Per Common Share
<TABLE>
<CAPTION>
Pro Forma
Three Months Three Months
Ended 3/31/96 Ended 3/31/97
------------- --------------
<S> <C> <C>
Weighted average common shares outstanding:
Average shares outstanding during the period (1) 11,364,394 11,364,395
Options issued in place of Phantom Membership Plan 1,007,362 950,989
Cheap stock options (2) 366,188 240,335
Common shares issuable to MCI in conversion (3) 2,841,099 2,841,099
Common shares issued in the offering -- 3,162,500
---------- ----------
Total weighted average common shares 15,579,043 18,559,318
========== ==========
Pro forma net income/Net income applicable to
common shares:
Pro forma net income/Net incomes $1,912,000 $390,000
Increase in earnings, net of taxes, resulting
from the MCI Conversion (3) 203,000 510,000
---------- ----------
Pro forma net income/Net income applicable
to common shares $2,115,000 $900,000
========== ========
Pro forma net income/Net income per Common Share $0.14 $0.05
===== =====
</TABLE>
(1) After considering the Merger in conjunction with the Company's initial
public offering.
(2) Pursuant to Staff Accounting Bulletin Topic 4:D, stock options granted and
stock issued within one year of the initial public offering have been
included in the calculation of weighted average common shares outstanding
using the treasury stock method based on an assumed initial public offering
price of $16.00 and have been treated as outstanding for all reported
periods.
(3) Assumes such transactions occurred on January 1, 1996.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> MAR-31-1996 MAR-31-1997
<CASH> 8,599 2,730
<SECURITIES> 0 0
<RECEIVABLES> 29,024 33,543
<ALLOWANCES> 3,786 17,372
<INVENTORY> 5,198 6,127
<CURRENT-ASSETS> 56,119 71,515
<PP&E> 5,167 6,579
<DEPRECIATION> 11,389 14,644
<TOTAL-ASSETS> 75,352 95,600
<CURRENT-LIABILITIES> 46,195 35,555
<BONDS> 0 0
0 0
0 0
<COMMON> 0 146
<OTHER-SE> (960) 8,648
<TOTAL-LIABILITY-AND-EQUITY> 75,352 95,600
<SALES> 9,631 14,146
<TOTAL-REVENUES> 27,088 34,370
<CGS> 6,774 9,833
<TOTAL-COSTS> 18,126 24,613
<OTHER-EXPENSES> 6,401 8,646
<LOSS-PROVISION> 598 622
<INTEREST-EXPENSE> 673 876
<INCOME-PRETAX> 3,187 770
<INCOME-TAX> 708 380
<INCOME-CONTINUING> 2,479 390
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,479 390
<EPS-PRIMARY> 0.14 0.05
<EPS-DILUTED> 0.14 0.05
</TABLE>
