<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 September 30, 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 November 10, 1997, the registrant had outstanding 6,643,828 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 SEPTEMBER 30, 1997
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Condensed consolidated statements of operations for the
three and nine month periods ended September 30, 1996 and 1997 3
Condensed consolidated balance sheets as of December 31, 4
1996 and September 30, 1997
Condensed consolidated statements of cash flows for the 6
nine months ended September 30, 1996 and 1997
Notes to condensed consolidated financial statements 7
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. 11
PART II: OTHER INFORMATION 20
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>
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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,
------------------------ -------------------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Service revenues $24,838 $24,587 $64,119 $ 68,623
Product revenues 13,018 15,906 34,101 43,540
------- ------- ------- --------
37,856 40,493 98,220 112,163
------- ------- ------- --------
COST OF REVENUES:
Service revenues 19,090 16,754 45,193 48,601
Product revenues 6,710 9,207 20,133 28,092
------- ------- ------- --------
25,800 25,961 65,326 76,693
------- ------- ------- --------
GROSS PROFIT 12,056 14,532 32,894 35,470
------- ------- ------- --------
OPERATING EXPENSES:
Sales and marketing 1,553 2,180 4,594 5,836
General and administrative 3,028 2,609 8,846 10,089
Research and development 838 1,104 2,281 3,333
Special charge (credit) - (3,894) - (3,894)
Non-cash compensation 2,736 44 6,335 534
Depreciation and amortization 1,257 2,052 3,779 5,415
------- ------- ------- --------
9,412 4,095 25,835 21,313
------- ------- ------- --------
OPERATING INCOME 2,644 10,437 7,059 14,157
------- ------- ------- --------
OTHER INCOME (EXPENSE):
Interest income 246 225 578 478
Interest expense (764) (893) (2,391) (2,693)
Other 443 142 2,113 745
------- ------- ------- --------
(75) (526) 300 (1,470)
------- ------- ------- --------
INCOME BEFORE INCOME TAXES 2,569 9,911 7,359 12,687
(BENEFIT) PROVISION FOR
INCOME TAXES (8,312) 4,328 (6,543) 5,585
------- ------- ------- --------
NET INCOME $10,881 $ 5,583 $13,902 $ 7,102
======= ======= ======= ========
NET INCOME PER SHARE N/A $ 0.32 N/A $ 0.46
======= ======= ======= ========
PRO FORMA INCOME DATA:
Income before income taxes $ 2,569 $ 7,359
Pro forma provision for income taxes 1,028 2,944
------- -------
Pro forma net income $ 1,541 $ 4,415
======= =======
PRO FORMA NET INCOME PER SHARE: $ 0.11 $ 0.32
======= =======
COMMON AND COMMON EQUIVALENT
SHARES USED IN THE CALCULATION
OF NET INCOME AND PRO FORMA
NET INCOME PER SHARE: 15,836 18,994 15,693 18,670
======= ======= ======= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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LCC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
---- ----
(UNAUDITED)
ASSETS:
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 13,732 $ 7,452
Short-term investments 6,934 11,536
Receivables, net of allowance for doubtful accounts
of $17,942 and $13,281 at December 31, 1996
and September 30, 1997, respectively:
Trade accounts receivable 35,563 30,792
Due from related parties and affiliates 2,244 1,497
Unbilled receivables 9,819 12,273
Inventory, net 6,387 6,554
Deferred income taxes, net 12,755 11,862
Prepaid expenses and other current assets 4,413 3,681
------------ ------------
Total current assets 91,847 85,647
Property and equipment, net 5,952 6,987
Software development costs, net 5,069 6,480
Note receivable 602 -
Investment in joint venture 1,650 1,428
Deferred income taxes, net 4,584 1,569
Other assets 5,243 5,905
------------ ------------
$ 114,947 $ 108,016
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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LCC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
---- ----
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Note payable $ 10,445 $ -
Accounts payable 6,218 3,910
Accrued expenses 23,296 15,517
Deferred revenue 4,951 5,453
Income taxes payable 7,446 9,269
Obligations under incentive plans 448 937
Other current liabilities 1,806 1,802
-------- ---------
Total current liabilities 54,610 36,888
Convertible subordinated debt 50,000 50,000
Obligations under incentive plans, net
of current portion 807 70
Other liabilities 1,053 2,472
-------- ---------
Total liabilities 106,470 89,430
-------- ---------
Preferred stock:
10,000 shares authorized; -0- shares
issued and outstanding - -
Class A common stock, $.01 par value:
70,000 shares authorized; 6,066 and 6,594
shares issued and outstanding at December 31,
1996 and September 30, 1997, respectively. 61 66
Class B Common stock, $.01 par value:
20,000 shares authorized; 8,461
shares issued and outstanding at December 31,
1996 and September 30, 1997 85 85
Paid-in capital 28,353 32,184
Retained deficit (16,422) (9,316)
Cumulative foreign currency translation adjustment (100) (933)
Note receivable from shareholder (3,500) (3,500)
-------- ----------
Total shareholders' equity 8,477 18,586
-------- ----------
$114,947 $108,016
======== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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LCC INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1996 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 13,902 $ 7,102
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,779 5,415
Provision for doubtful accounts 2,306 1,313
Non-cash compensation 6,335 534
(Income) loss from investments in joint ventures, net (757) 222
Gain on disposition of joint venture, net (514) -
Changes in operating assets and liabilities:
Trade, unbilled, and other receivables (13,244) 1,752
Accounts payable and accrued expenses 4,758 (10,087)
Inventory (324) (101)
Other current assets and liabilities (7,562) 3,826
Other noncurrent assets and liabilities (5,499) 3,328
--------- --------
Net cash provided by operating activities 3,180 13,304
--------- --------
Cash flows from investing activities:
Decrease (increase) in short term investments, net 426 (4,602)
Purchases of property and equipment (2,122) (4,287)
Increase in capitalized software (2,717) (3,293)
Investments in joint ventures (787) -
Proceeds from sale of joint venture 3,800 -
Issuance of notes receivable from uncombined affiliate (5,150) -
--------- --------
Net cash (used in) investing activities (6,550) (12,182)
--------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 46,981 289
Proceeds from exercise of options - 2,754
Proceeds from note payable/line of credit 10,000 -
Payments on note payable/line of credit (20,000) (10,445)
Distributions and loans to member (5,927) -
Payments of dividends to members (16,950) -
Repayment of loan to member 16,950 -
Loan to shareholder (3,500) -
--------- --------
Net cash provided by (used in) financing activities 27,554 (7,402)
--------- --------
Net increase (decrease) in cash and cash equivalents 24,184 (6,280)
Cash and cash equivalents at beginning of period 6,571 13,732
--------- --------
Cash and cash equivalents at end of period $ 30,755 $ 7,452
========= ========
Supplemental disclosures of cash flow information:
Cash paid during the quarter for:
Interest $ 1,788 $ 1,783
Income taxes 529 956
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.
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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 communication systems.
Hardware products - The Company designs, assembles and sells field measurement
and network analysis tools used in the implementation, testing and maintenance
of wireless communication 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.
Certain reclassifications of prior year amounts have been made to conform with
the current year presentation.
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.
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NOTE 4: INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------ ------
<S> <C> <C>
Field measurement and network analysis tools $1,641 $1,684
Parts and accessories 5,488 5,913
------ ------
7,129 7,597
Less - reserve for obsolete and slow moving inventory (742) (1,043)
------ ------
$6,387 $6,554
====== ======
</TABLE>
NOTE 5: SPECIAL CHARGE (CREDIT)
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 consisted 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 consisted
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 5-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 were 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 agreement 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 as of January 31, 1997 and significantly decreased
and ultimately suspended all work performed for NextWave during the second
quarter of calendar 1997. The Company experienced lower than historical margins
in the first two quarters of calendar year 1997 as a result of the decision to
suspend or decrease work performed for these two customers.
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 was to receive $1.0
million on the 15th of each month beginning May 1997 through May 1998. In
addition, under certain circumstances, 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
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transaction(s). In May and June of 1997, the Company agreed to defer NextWave's
obligations to prepay the foregoing obligations out of the proceeds of
NextWave's debt or equity financings to August 20, 1997. Payments of $2.0
million were received under the revised payment schedule through June 30, 1997.
NextWave has failed to make the $1.0 million monthly payments which were due
July 15, 1997 through October 15, 1997, as well as any payment that would have
been due on August 20, 1997 related to any debt or equity financings.
During September 1997, the Company recognized an approximate $3.9 million
recovery of the $30.1 million special charge. Of the $3.9 million, $2.0 million
represents the payments received through June 1997 under the revised payment
schedule and $1.9 million represents additional payments of $2.0 million
received in April 1997 from NextWave, net of related expenses. For financial
reporting purposes, income recognition of the entire $3.9 million balance was
deferred pending the lapse in the third quarter of a 90 day window during which
such funds could have been subject to being treated as preference payments
recoverable by NextWave had it filed for protection under the bankruptcy laws.
NOTE 6: LEASE AGREEMENTS
In May 1996, the Company entered into 10 and 5 year facility lease agreements
effective March 1, 1997 and July 1, 1997, respectively. The lease agreements
contain certain 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 7: NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128 supersedes Accounting
Principles Board Opinion No. 15, "Earnings per Share" 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 SFAS No. 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 SFAS No. 128. The
Company has not completed its analysis of the impact on the financial statements
that will be caused by the adoption of this statement.
In February 1997, the FASB issued Statement of Financial Accounting Standards
No. 129 (SFAS No. 129), "Disclosure of Information about Capital Structure." The
Company is required to adopt the provisions of this Statement for the year
ending December 31, 1997. This Statement continues the previous requirements to
disclose certain information about an entity's capital structure found in APB
Opinions No. 10, "Omnibus Opinion-1966," No. 15, "Earnings per Share," and FASB
Statement No. 47, "Disclosure of Long-Term Obligations," for entities that were
subject to the requirements of those standards. As the Company has been subject
to the requirements of each of those standards, adoption of SFAS No. 129 will
have no impact on the Company's financial statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130 (SFAS No. 130), "Reporting Comprehensive Income." SFAS No. 130 established
standards for the reporting and display of comprehensive income and its
components in the financial statements. The Company is required to adopt the
provisions of the Statement for the year ending December 31, 1998. Earlier
application is permitted; however, upon adoption the Company will be required to
reclassify previously reported annual and interim financial statements. The
Company has not completed its analysis of the impact on the financial statements
that will be caused by the adoption of this statement.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131 (SFAS No. 131), "Disclosure about Segments of an Enterprise and Related
Information." SFAS No. 131 requires the Company to present certain information
about operating segments and related information, including geographic and major
customer data, in its annual financial statements and in condensed financial
statements for interim periods. The Company is required to adopt the provisions
of this Statement for the year ending December 31, 1998. Earlier application is
permitted; however, upon adoption the Company will be required to restate
previously reported annual segment and related information in accordance with
the provisions of SFAS No. 131. The Company has not completed its analysis of
the impact on the financial statements that will be caused by the adoption of
this Statement.
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NOTE 8: SUBSEQUENT EVENTS
In June 1994, the Company and Telcom Ventures, L.L.C. (Telcom Ventures) sold $20
million and $30 million, respectively, of notes to MCI Telecommunications
Corporation ("MCI") , which are exchangeable, at certain times, consisting of 45
day periods commencing in June and August of 1997, 1998 and 1999 into 2,841,099
shares of the Company's Class A Common Stock. The $30 million owned by Telcom
Ventures was assumed by the Company in connection with its initial public
offering in September 1996. On October 23, 1997, the Company announced that it
had agreed with MCI to defer the Company's option to convert the notes in 1997.
As part of the agreement, interest payable under the notes was reduced from 6.8%
to 4.4% per annum. The notes are also convertible upon the happening of certain
specified corporate events, including certain tender offers, sale of
substantially all of the Company's assets, and are partially convertible (up to
one million shares) in the event of an underwritten public offering during
certain periods in 1998. The events of default under the notes (which would
cause such notes to become due and payable) include non-payment and bankruptcy.
Subsequent to September 30, 1997, the Company received approximately $1.0
million from Telcom Ventures, representing payment of $0.7 million principal
and approximately $0.3 million interest under the terms of the Company's $3.5
million loan to Telcom Ventures.
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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, 1996 AND 1997
This quarterly report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Exchange Act of 1934. These are in
paragraphs 3, 7, 8, 37, 45 and 47 of the Management's Discussion and Analysis of
Financial Condition and Results of Operations (beginning below). A more
complete discussion of business risks is included in the Company's Annual
Report on Form 10-K for the year ended December 31, 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 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 may involve a fixed price. 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. Export sales were
approximately 30.0% of consolidated revenues in 1996, but due to strong
international wireless growth are expected to increase in 1997 to approximately
35.0% to 40.0% of consolidated revenues. Since almost all of the Company's
contracts are denominated in U.S. dollars, the Company generally does not
maintain currency hedge agreements.
In December 1996, through the formation of a new subsidiary, Microcell
Management, Inc. ("Microcell"), the Company entered the wireless infrastructure
asset management business to acquire/develop and manage RF transmission towers.
Capitalized cost related to tower development was $0.7 at September 30, 1997.
Expenses of $0.2 and $0.7 million for the three and nine month periods ending
September 30, 1997, respectively, were incurred related to the asset management
business and are included in general and administrative expenses in the
accompanying condensed consolidated statement of operations.
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
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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 in September 1996, 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 issuance
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.
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.
Although the Company's revenues from the sales of products and services is
primarily derived from the design, build-out and optimization of wireless
systems, increased emphasis has been placed on products and services which
assist in achieving network efficiency and cost savings. The Company's
acquisition of European Technology Partner AS ("ETP") in December 1996 (see
discussion below) is expected to facilitate the Company's development of
hardware and software products and services designed to enhance system
performance by providing automated data collection, analysis and optimization
capabilities.
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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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-----------------------------------------------------------------------------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Service revenues 65.6 % 60.7 % 65.3 % 61.2 %
Product revenues 34.4 39.3 34.7 38.8
---- ---- ---- ----
Total revenues 100.0 100.0 100.0 100.0
Cost of revenues 68.2 64.1 66.5 68.4
---- ---- ---- ----
Gross profit 31.8 35.9 33.5 31.6
---- ---- ---- ----
Operating expenses:
Sales and marketing 4.1 5.4 4.7 5.2
General and administrative 8.0 6.5 9.0 9.0
Research and development 2.2 2.7 2.3 3.0
Special charge (credit) 0.0 (9.6) 0.0 (3.5)
Non-cash compensation 7.2 0.1 6.5 0.5
Depreciation and amortization 3.3 5.1 3.8 4.8
---- --- --- ---
Total operating expenses 24.8 10.2 26.3 19.0
----- ---- ----- ----
Operating income 7.0 25.7 7.2 12.6
--- ---- --- ----
Other income (expense):
Interest income 0.6 0.6 0.6 0.4
Interest expense (2.0) (2.2) (2.4) (2.4)
Other 1.1 0.4 2.1 0.7
--- --- --- ---
Total other income (expense) (0.3) (1.2) 0.3 (1.3)
---- ---- --- ----
Income before income taxes 6.7 24.5 7.5 11.3
(Benefit) provision for income taxes (22.0) 10.7 (6.7) 5.0
----- ---- ---- ---
Net income 28.7 % 13.8 % 14.2 % 6.3 %
==== ==== ==== ===
</TABLE>
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<PAGE> 14
THREE MONTHS ENDED SEPTEMBER 30, 1996
COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1997
Revenues. Revenues for the three months ended September 30, 1997 were $40.5
million compared to $37.9 million for the prior year, an increase of $2.6
million or 7.0%. Service revenues were $24.6 million compared to $24.8 million
for the prior year, a decrease of $0.2 million or 1.0%. The decrease was due to
a decline in program management revenues due to the change in project mix and
volume between years including full deployment in 1996 on the Pocket and
NextWave engagement. Product revenues were $15.9 million compared to $13.0
million for the prior year, an increase of $2.9 million or 22.2%. The increase
was due primarily to an increase in field test measurement and analysis product
sales due to the acquisition of ETP in December 1996 and strong domestic sales.
Cost of Revenues. Cost of revenues for the three months ended September 30, 1997
was $26.0 million compared to $25.8 million for the prior year, an increase of
$0.2 million or 0.6%. As a percentage of total revenues, cost of revenues was
64.1% and 68.2% for 1997 and 1996, respectively. The increase in cost of
revenues largely resulted from products revenue growth, including the
acquisition of ETP, offset by a decrease in services cost of revenue due
primarily to a decline in program management volume between years. The overall
decrease in cost of revenues as a percentage of total revenues is due to a
decrease in services cost of revenues as a percentage of service revenue, offset
by an increase in products cost of revenues as a percentage of products revenue.
The decrease in services cost of revenues as a percentage of services revenues
is due to improved program management chargeability as a result of the change in
project mix between years. The increase in products cost of revenue as a
percentage of products revenue is primarily due to a change in software revenue
mix between years.
Gross Profit. Gross profit for the three months ended September 30, 1997 was
$14.5 million compared to $12.1 million for the prior year, an increase of $2.4
million or 20.5%. As a percentage of total revenues, gross profit was 35.9% and
31.8% for 1997 and 1996, respectively. The increase in gross profit is due
primarily to improved program management chargeability and an increase in field
test measurement and analysis product sales, offset by a change in software
products revenue mix between years.
Sales and Marketing. Sales and marketing expenses were $2.2 million for the
three months ended September 30, 1997, compared to $1.6 million for the prior
year, an increase of $0.6 million or 40.4%. The increase is due primarily to the
inclusion of ETP marketing expenses in 1997 ($0.2 million) as well as an
increase in agent commissions ($0.3 million) due, in part, to an increase in
international sales.
General and Administrative. General and administrative expenses for the three
months ended September 30, 1997 were $2.6 million, compared to $3.0 million for
the prior year, a decrease of $0.4 million or 13.8%. The decrease is due
primarily to a decrease in the provision for doubtful accounts as a result of
the improvement between years in the overall collection status of outstanding
receivables, offset by the inclusion in 1997 of costs associated with the
Company's Microcell and ETP subsidiaries.
Research and Development. Research and development expenses for the three months
ended September 30, 1997 were $1.1 million, compared to $0.8 million for the
prior year, an increase of $0.3 million or 31.7%. The increase is primarily due
to the inclusion of research and development costs of ETP in 1997 and an
increase in research and development costs related to the Company's field test
measurement and analysis products.
Special Charge (credit). During September 1997, the Company recognized an
approximate $3.9 million recovery of the $30.1 million special charge recorded
in December 1996 related to Pocket and NextWave. Of the $3.9 million, $2.0
million represents payments received through June 1997 under the revised
payment schedule established with NextWave on April 15, 1997 and $1.9 million
represents additional payments of $2.0 million received in April 1997 from
NextWave, net of related expenses. For financial reporting purposes, income
recognition of the entire $3.9 million balance was deferred pending the lapse
in the third quarter of a 90 day window during which such funds could have been
subject to being treated as preference payments recoverable by NextWave had it
filed for protection under the bankruptcy laws.
Non-Cash Compensation. Non-cash compensation was negligible for the three
months ended September 30, 1997, compared to $2.7 million for the prior year.
The balance recorded in the prior year includes additional compensation expense
as a result of the increase in the deemed fair market value of the Company.
Awards under
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<PAGE> 15
the related compensation plans were converted to stock options in connection
with the Company's initial public offering in September 1996.
Depreciation and Amortization. Depreciation and amortization expense was $2.1
million for the three months ended September 30, 1997, compared to $1.3 million
for the prior year, an increase of $0.8 million or 63.2%. The increase is the
result of an increase in the amount of capitalized software development costs,
the acquisition of ETP and related amortization of intangibles and a generally
higher capital asset base as compared to the prior year.
Other Income. Other income was $0.1 million for the three months ended September
30, 1997, compared to $0.4 million for the prior year, a decrease of $0.3
million or 67.9%. The decrease is primarily the result of a decrease in the
amount of income recognized from the Company's 33 1/3% investment in Koll
Telecommunications Services, L.L.C.
(Benefit) Provision for Income Taxes. The provision for income taxes was $4.3
million for the three months ended September 30, 1997, compared to a benefit of
$8.3 million for the prior year. The provision for income taxes was recorded in
1997 based on an effective tax rate of 40.0% for the Company's U.S. operations
and various effective tax rates ranging from 28% to 50% for the Company's
foreign operations. The provision for income taxes was recorded in 1996 assuming
that the Company was a Limited Liability Corporation. In addition, during the
third quarter of 1996, the Company recorded a one-time deferred tax benefit of
$8.7 million as a result of its conversion from a Limited Liability Corporation
to a Subchapter C Corporation in connection with the merger of LCC, L.L.C. with
and into the Company prior to the initial public offering in September 1996.
Net Income. Net income was $5.6 million for the three months ended September 30,
1997 compared to $10.9 million for the prior year, a decrease of $5.3 million.
The decrease in net income is due primarily to the items discussed above.
Adjusting for non-cash compensation, 1996 earnings from the Pocket and Nextwave
engagements, recovery of special charge in 1997 and assuming an effective tax
rate of 40.0% in 1996, net income would have been $3.3 million compared to $2.1
million for 1996.
Page 15
<PAGE> 16
NINE MONTHS ENDED SEPTEMBER 30, 1996
COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1997
Revenues. Revenues for the nine months ended September 30, 1997 were $112.2
million compared to $98.2 million for the prior year, an increase of $14.0
million or 14.2%. Service revenues were $68.6 million compared to $64.1 million
for the prior year, an increase of $4.5 million or 7.0%. The increase was due
to an increase in Engineering Design Services and reimbursable expenses, offset
by a decline in Program Management revenue. The increase in Engineering Design
Services was due to an increase in chargeable hours between years and was
offset by a decrease in average rates per hour resulting from a change in the
mix of work which favored lower priced consultants. The decline in Program
Management revenue was a result of ceasing all work for Pocket and NextWave in
the first quarter of 1997. Product revenues were $43.5 million compared to
$34.1 million for the prior year, an increase of $9.4 million or 27.7%. The
increase resulted primarily from an increase in field test measurement and
analysis product sales due, in part, to the acquisition of ETP in December 1996
and strong domestic sales. The increase in sales of field test measurement and
analysis products was offset by a decrease in software products sales.
Cost of Revenues. Cost of revenues for the nine months ended September 30, 1997
was $76.7 million compared to $65.3 million for the prior year, an increase of
$11.4 million or 17.4%. As a percentage of total revenues, cost of revenues was
68.4% and 66.5% for 1997 and 1996, respectively. The increase in cost of
revenues largely resulted from revenue growth, including the acquisition of ETP
as discussed above. The increase in cost of revenues as a percentage of total
revenues is due primarily to the decreased chargeability of program management
personnel as a result of ceasing work for Pocket and NextWave and a change in
software products revenue mix between years.
Gross Profit. Gross profit for the nine months ended September 30, 1997 was
$35.5 million compared to $32.9 million for the prior year, an increase of $2.6
million or 7.8%. As a percentage of total revenues, gross profit was 31.6% and
33.5% for 1997 and 1996, respectively. The dollar increase in gross profit is
primarily due to the increase in Engineering Design Services and field test
measurement and analysis product sales volume. The decrease in gross profit as
a percentage of total revenues is a result of the decrease in chargeability
that resulted from ceasing all program management work for Pocket and NextWave
as well as the change in software products revenue mix.
Sales and Marketing. Sales and marketing expenses were $5.8 million for the nine
months ended September 30, 1997 compared to $4.6 million for the prior year, an
increase of $1.2 million or 27.0%. The increase is primarily due to the
inclusion of ETP marketing expenses in 1997 as well as an increase in agent
commissions due, in part, to an increase in international sales.
General and Administrative Expenses. General and administrative expenses for the
nine months ended September 30, 1997 were $10.1 million, compared to $8.8
million for the prior year, an increase of $1.3 million or 14.1%. The increase
is due primarily to costs associated with the Company's Microcell Management,
Inc. subsidiary and the inclusion of costs associated with ETP.
Special Charge (credit). During September 1997, the Company recognized an
approximate $3.9 million recovery of the $30.1 million special charge recorded
in December 1996 related to Pocket and NextWave. Of the $3.9 million, $2.0
million represents payments received through June 1997 under the revised
payment schedule established with NextWave on April 15, 1997 and $1.9 million
represents additional payments of $2.0 million received in April 1997 from
NextWave, net of related expenses. For financial reporting purposes, income
recognition of the entire $3.9 million balance was deferred pending the lapse
in the third quarter of a 90 day window during which such funds could have been
subject to being treated as preference payments recoverable by NextWave had it
filed for protection under the bankruptcy laws.
Research and Development. Research and development expenses for the nine months
ended September 30, 1997 were $3.3 million, compared to $2.3 million for the
prior year, an increase of $1.0 million or 46.1%. The increase is primarily due
to the inclusion of research and development costs of ETP in 1997 and an
increase in research and development costs related to the Company's field test
measurement and analysis products.
Non-Cash Compensation. Non-cash compensation was $0.5 million for the nine
months ended September 30, 1997, compared to $6.3 million for the prior year, a
decrease of $5.8 million or 91.6%. The balance recorded in the prior
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<PAGE> 17
year includes additional compensation expense as a result of the increase in the
deemed fair market value of the Company. Awards under the related compensation
plans were converted to stock options in connection with the Company's initial
public offering in September 1996.
Depreciation and Amortization. Depreciation and amortization expense was $5.4
million for the nine months ended September 30, 1997, compared to $3.8 million
for the prior year, an increase of $1.6 million or 43.3%. The increase is the
result of an increase in the amount of capitalized software development costs,
the acquisition of ETP and related amortization of intangibles and a generally
higher capital asset base as compared to the prior year.
Interest Expense. Interest expense was $2.7 million for the nine months ended
September 30, 1997, compared to $2.4 million for the prior year, an increase of
$0.3 million or 12.6%. Interest expense in 1997 results from $50.0 million of
convertible subordinated debt ($30.0 million of which was assumed from Telcom
Ventures in September 1996 as a result of the merger of LCC, L.L.C. with and
into the Company), whereas during the nine months ended September 30, 1996, the
Company had a total of $20.0 million debt outstanding under its convertible
subordinated debt instrument and up to an additional $20.0 million outstanding
under the Company's credit facility. All amounts outstanding under the credit
facility were paid from the proceeds of the Company's initial public offering
in September 1996 and no amounts have been outstanding under the credit
facility from that date through September 30, 1997. The increase in interest
expense results from the change in amount and mix of the debt as well as
related interest rates.
Other Income. Other income was $0.7 million for the nine months ended September
30, 1997, compared to $2.1 million for the prior year, a decrease of $1.4
million or 64.7%. The decrease is primarily 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 a decrease in the amount of income recognized from the Company's 33
1/3% investment in Koll Telecommunications Services, L.L.C.
(Benefit) Provision for Income Taxes. The provision for income taxes was $5.6
million for the nine months ended September 30, 1997, compared to a benefit of
$6.5 million for the prior year. The provision for income taxes was recorded in
1997 based on an effective income tax rate of 40.0% for the Company's U.S
operations and various effective tax rates ranging from 28% to 50% for the
Company's foreign operations. The provision for income taxes was recorded in
1996 assuming that the Company was a Limited Liability Corporation. In addition,
the Company recorded a one-time deferred tax benefit of $8.7 million in 1996 as
a result of its conversion from a Limited Liability Corporation to a Subchapter
C Corporation in connection with the merger of LCC, L.L.C with and into the
Company prior to the initial public offering in September 1996.
Net Income. Net income for the nine months ended September 30, 1997 was $7.1
million compared to $13.9 million for the prior year, a decrease of $6.8
million. The decrease in net income is due primarily to the items discussed
above. Adjusting for non-cash compensation, 1996 earnings from the Pocket and
NextWave engagements, recovery of special charge in 1997 and assuming an
effective tax rate of 40.0% in 1996, net income would have been $5.1 million
compared to $5.9 million for 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents, including short-term investments, were $19.0 million
at September 30, 1997 compared to $20.7 million for the prior year, a decrease
of $1.7 million. The decrease is due primarily to payments made for the
acquisition of ETP ($10.4 million) and for additions to property and equipment
and capitalized software (total of $7.6 million), offset by cash provided by
operations ($13.3 million) and cash received from exercise of stock options and
from the issuance of shares under the Company's Employee Stock Purchase Plan
($3.0 million). 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 and 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 Company's initial
public offering.
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Net cash provided by operations was $13.3 million for the nine months ended
September 30, 1997. Net cash used in investing activities was $12.2 million,
consisting primarily of cash paid for additions to property and equipment ($4.3
million), an increase in capitalized software ($3.3 million) and an increase in
short-term investments ($4.6 million). Net cash used in financing activities was
$7.4 million, representing cash paid in satisfaction of the note established for
the purchase of ETP in December 1996 of $10.4 million, offset by cash received
from stock issuances as a result of options exercised during the period and cash
received for shares purchased under the Company's Employee Stock Purchase Plan
($3.0 million).
The Company anticipates a significant commitment for capital expenditures for
its Microcell subsidiary. This effort is expected to be funded from the
Company's current working capital. In addition, under the Company's software
development program, in accordance with Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed," the Company capitalized and amortized $3.3
million and $1.9 million, respectively in the nine month period ended September
30, 1997.
Net cash provided by 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), investments in joint
ventures ($0.8 million) and issuance of notes receivable ($5.2 million), offset
by the proceeds of the sale of the Company's interest in Telemate, S.A. and
certain distribution rights ($3.8 million). Net cash provided by financing
activities was $27.6 million, consisting primarily of the net proceeds from the
Company's initial public offering of $47.0 million, partially offset by a $20.0
million reduction in short-term debt under the Company's credit facility.
Dividends paid were $16.9 million for the nine months ended September 30, 1996.
In addition, in September 1996, the Company 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 in connection with the Company's initial
public offering. Subsequent to September 30, 1997, the Company received
approximately $1.0 million representing payment of $0.7 million principal and
approximately $0.3 million interest under the terms of the $3.5 million loan to
Telcom Ventures.
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
consisted 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 consisted 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
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<PAGE> 19
obligated to perform at December 31, 1996. The Company suspended all work
performed for Pocket as of January 31, 1997 and significantly decreased and
ultimately suspended all work performed for NextWave during the second quarter
of calendar 1997. The Company experienced lower than historical margins in the
first two quarters of Calendar year 1997 as a result of the decision to suspend
or decrease work performed from these two customers.
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 to the Company. Under the terms of the agreement,
the Company was to receive approximately $1.0 million per month from May 15,
1997 through May 15, 1998. In addition, under certain circumstances, 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). In May
and June 1997, the Company agreed to defer NextWave's obligations to prepay the
foregoing obligations out of the proceeds of NextWave's debt or equity
financings to August 20, 1997. Payments of $2.0 million were received under the
revised payment schedule through June 30, 1997. NextWave has failed to make the
$1.0 million monthly payments which were due July 15, 1997 through October 15,
1997, as well as any payment that would have been due on August 20, 1997
related to any debt or equity financings.
During September 1997, the Company recognized an approximate $3.9 million
recovery of the $30.1 million special charge. Of the $3.9 million, $2.0 million
represents the payments received through June 1997 under the revised payment
schedule and $1.9 million represents additional payments received in April 1997
from NextWave, net of related expenses. For financial reporting purposes, income
recognition of the entire $3.9 million balance was deferred pending the lapse in
the third quarter of a 90 day window during which such funds could have been
subject to being treated as preference payments recoverable by NextWave had it
filed for protection under the bankruptcy laws.
Working capital was $48.8 million at September 30, 1997 versus $37.2 million at
December 31, 1996, an increase of $11.6 million or 30.9%. The increase in
working capital was primarily due to a decrease in notes payable and accrued
expenses, offset by a net decrease in receivables.
In June 1994, the Company and Telcom Ventures sold $20 million and $30 million,
respectively, of notes to MCI, which notes are exchangeable, at certain times,
consisting of 45 day periods commencing in June and August of 1997, 1998 and
1999, into 2,841,099 shares of the Company's Class A Common Stock. The $30
million owned by Telcom Ventures was assumed by the Company in connection with
its initial public offering in September 1996. On October 23, 1997, the Company
announced that it had agreed with MCI to defer the Company's option to convert
the notes in 1997. As part of the agreement, interest payable under the notes
was reduced from 6.8% to 4.4% per annum. The notes are also convertible upon the
happening of specified corporate events, including certain tender offers, sale
of substantially all of the Company's assets, and are partially convertible (up
to 1 million shares) in the event of an underwritten public offering during
certain periods in 1998. The Company presently intends to exercise its option in
August 1998 to cause the notes to be exchanged into Class A Common Stock. The
events of default under the notes (which would cause such notes to become due
and payable) include non-payment and bankruptcy.
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. 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. No amounts were outstanding under the credit facility during the period
from January 1, 1997 to September 30, 1997.
The Company believes that its cash and cash equivalents, short-term investments,
cash flow from operations and available credit will be sufficient to satisfy the
current and anticipated future capital requirements of the Company.
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<PAGE> 20
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
Not Applicable
Item 2: Changes in Securities and Use of Proceeds
The following use of proceeds information relates to the registration
statement on Form S-1, Registration No. 2-33360-67, effective
September 24, 1996; The Company completed a public offering in
September 1996. The managing underwriters for offering were
Donaldson, Lufkin & Jenrette Securities Corporation, Alex Brown &
Sons Incorporated and Oppenheimer & Co., Inc. The offering consisted
of shares of Class A Common Stock, for a price of $16 per share,
including 3,162,500 shares (offering proceeds of $50.6 million) sold
by the Company and 2,875,000 shares (offering proceeds of $46.0
million) sold by a selling stockholder. Offering expenses were
$5,337,050, consisting of $3,542,000 for underwriting discounts and
commissions and $2,224,050 for other expenses, none of which involved
direct or indirect payments to directors or officers of the Company
or their associates, holders of 10% or more of any class of equity
securities of the Company or affiliates of the Company ("Affiliated
Payments"). Net offering proceeds to the Company equaled $44,833,950.
Since completion of the offering, the following amounts of net
proceeds have been expended for the purposes listed below, none of
which involved Affiliated Payments: $11,850,000 for acquisition of
other businesses, $16,205,567 for repayment of indebtedness,
$2,000,000 for working capital, $4,428,383 for tax exempt municipals
and overnight repurchase agreements, $3,500,000 for advance to Telcom
Ventures, Inc., and $6,850,000 for vendor financing. The uses of
proceeds do not represent a material change in the uses of proceeds
described in the offering prospectus. No significant changes in uses
have occurred since the most recent report regarding use of proceeds
(on Form SR dated July 3, 1997).
Item 3: Defaults Upon Senior Securities
Not Applicable
Item 4: Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5: Other Information
Not Applicable
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
11 - Calculation of Net Income Per Share
27 - Financial Data Schedule
(b) Reports on Form 8-K
On October 7, 1997, the Company filed a Current Report on Form
8-K which reported that, on October 7, 1997, the Company had
agreed with MCI Telecommunications Corporation ("MCI") to
extend from October 8, 1997 until October 23, 1997 the period
of time within which the Company shall be entitled to exercise
its annual conversion rights under the Company's Subordinated
Notes due 2000, dated June 28, 1994, to MCI, as amended, in the
aggregate principal amount of $50,000,000 (the "Notes"), which
are convertible into 2,841,099 shares of Class A Common Stock,
par value $0.01 per share.
On October 27, 1997, the Company filed a Current Report on Form
8-K which reported that, on October 23, 1997, the Company and
MCI had agreed that the Company would not exercise its annual
conversion right under the Notes during 1997. The Notes
continue to be convertible during the period between June 27,
1998 and August 10, 1998, at MCI's option, and during the
period between August 25, 1998 and October 8, 1998, at the
Company's option, and in each case during the same periods of
1999. The Notes are also convertible upon certain
extraordinary events, as described in the Company's Current
Report on Form 8-K and the Company's prior filings. MCI and
the Company also agreed to certain amendments to the Notes,
including an immediate reduction in the annual interest rate
on the Notes from 6.8% to 4.4%, which are described in the
Company's Current Report on Form 8-K.
Page 20
<PAGE> 21
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: November 14, 1997 Signed: /s/ Richard Hozik
----------------- -----------------
Richard Hozik
Senior Vice President, Treasurer
and Chief Financial Officer
Page 21
<PAGE> 1
<TABLE>
<CAPTION>
EXHIBIT 11
Computations of Earnings Per Common Share
Pro Forma Primary
Income per common share
-------------------------------- --------------------------------
Three Nine Three Nine
Months Months Months Months
Ended Ended Ended Ended
9/30/96 9/30/96 9/30/97 9/30/97
------- ------- ------- -------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding:
Average shares outstanding during the period (1) 11,364,395 11,364,395 11,401,425 11,823,372
Options issued in place of Phantom Membership Plan 1,048,761 1,048,761 1,064,967 979,659
Cheap stock options (2) 375,520 369,321 422,647 295,896
Common shares issuable to MCI in conversion (3) 2,841,099 2,841,099 2,841,099 2,841,099
Common shares issued in the offering 206,250 69,252 3,162,500 3,162,500
Options issued under Employee Stock Option Plan -- -- 57,230 342
Options issued under Director's Plan -- -- 44,391 8,534
---------- ---------- ---------- ----------
Total weighted average common shares 15,836,025 15,692,828 18,994,259 18,670,402
========== ========== ========== ==========
Pro forma net income/net income applicable to common shares:
Pro forma net income/net income $1,541 $4,415 $5,583 $7,102
Increase in earnings, net of taxes, resulting from the MCI 221 629 510 1,530
Conversion (3) ---------- ---------- ---------- ----------
Net income applicable to common shares $1,762 $5,044 $6,093 $8,632
====== ====== ====== ======
Earnings per Common Share $0.11 $0.32 $0.32 $0.46
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Computations of Earnings Per Common Share
Fully diluted
Income per common share
--------------------------------
Three Nine
Months Months
Ended Ended
9/30/97 9/30/97
------- -------
<S> <C> <C>
Weighted average common shares outstanding:
Average shares outstanding during the period (1) 11,599,287 11,455,821
Options issued in place of Phantom Membership Plan 996,804 1,059,857
Cheap stock options (2) 411,024 437,604
Common shares issuable to MCI in conversion (3) 2,841,099 2,841,099
Common shares issued in the offering 3,162,500 3,162,500
Options issued under Employee Stock Option Plan 146,752 146,774
Options issued under Director's Plan 70,971 47,142
---------- ----------
Total weighted average common shares 19,228,437 19,150,797
========== ==========
Pro forma net income/net income applicable to common shares:
Pro forma net income/net income $5,583 $7,102
Increase in earnings, net of taxes, resulting from the MCI 510 1,530
Conversion (3) ---------- ----------
Net income applicable to common shares $6,093 $8,632
====== ======
Earnings per Common Share $0.32 $0.45
===== =====
</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>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 7,452
<SECURITIES> 0
<RECEIVABLES> 30,792
<ALLOWANCES> 13,281
<INVENTORY> 6,554
<CURRENT-ASSETS> 85,647
<PP&E> 6,987
<DEPRECIATION> 16,740
<TOTAL-ASSETS> 108,016
<CURRENT-LIABILITIES> 36,888
<BONDS> 0
0
0
<COMMON> 151
<OTHER-SE> 18,435
<TOTAL-LIABILITY-AND-EQUITY> 108,016
<SALES> 43,540
<TOTAL-REVENUES> 112,163
<CGS> 28,092
<TOTAL-COSTS> 76,693
<OTHER-EXPENSES> 21,313
<LOSS-PROVISION> 1,313
<INTEREST-EXPENSE> 2,693
<INCOME-PRETAX> 12,687
<INCOME-TAX> 5,585
<INCOME-CONTINUING> 7,102
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,102
<EPS-PRIMARY> .46
<EPS-DILUTED> .45
</TABLE>
