##### 



United States Securities and Exchange Commission Washington, DC 20549
   Form 10-Q (Mark One) þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
 For the quarterly period ended March 31, 2005
or o
    
    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.    Delaware
    
    54-1807038(State or Other Jurisdiction of
    
    (I.R.S. Employer Identification Number)Incorporation or Organization)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 
  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 þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes þ No o 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 o No o 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 April 29, 2005 the registrant had outstanding 20,304,152 shares of Class A Common Stock, par
value $0.01 per share (the Class A Common Stock) and 4,427,577 shares of Class B Common Stock,
par value $0.01 per share (the Class B Common Stock).




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##### 



LCC International, Inc. and Subsidiaries Quarterly Report on Form 10-Q
For the quarter ended March 31, 2005 INDEX PageNumberPART I:
    
    FINANCIAL INFORMATION
    
    3ITEM 1:
    
    Financial Statements
    
    3Condensed consolidated statements of operations for the three months ended March 31, 2004 and 2005
    
    3Condensed consolidated balance sheets as of December 31, 2004 and March 31, 2005.
    
    4Condensed consolidated statements of cash flows for the three months ended March 31, 2004 and 2005
    
    5Notes to condensed consolidated financial statements.
    
    6ITEM 2:
    
    Managements Discussion and
Analysis of Financial Condition and Results of Operations.
    
    10ITEM 3:
    
    Quantitative and Qualitative
Disclosures about Market Risk.
    
    17ITEM 4:
    
    Controls and Procedures.
    
    18PART II:
    
    OTHER INFORMATION
    
    19ITEM 1:
    
    Legal Proceedings.
    
    19ITEM 2:
    
    Unregistered Sales of Equity
Securities and Use of Proceeds.
    
    19ITEM 3:
    
    Defaults Upon Senior Securities.
    
    19ITEM 4:
    
    Submission of Matters to a Vote of Security Holders.
    
    19ITEM 5:
    
    Other Information.
    
    19ITEM 6:
    
    Exhibits.
    
    19
 2




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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) Three Months EndedMarch 31,2004
    
    
    2005REVENUES
    
    $
    45,049
    
    
    $
    42,512COST OF REVENUES
    
    
    38,097
    
    
    
    33,586GROSS PROFIT
    
    
    6,952
    
    
    
    8,926OPERATING EXPENSES:Sales and marketing
    
    
    1,768
    
    
    
    2,258General and administrative
    
    
    6,233
    
    
    
    7,377Depreciation and amortization
    
    
    756
    
    
    
    7188,757
    
    
    
    10,353OPERATING LOSS
    
    
    (1,805
    )
    
    
    (1,427
    )OTHER INCOME (EXPENSE):Interest income
    
    
    59
    
    
    
    40Interest expense
    
    
    (51
    )
    
    
    (82
    )Other
    
    
    152
    
    
    
    (468
    )160
    
    
    
    (510
    )LOSS FROM OPERATIONS BEFORE INCOME TAXES
    
    
    (1,645
    )
    
    
    (1,937
    )EXPENSE (BENEFIT) FOR INCOME TAXES
    
    
    (91
    )
    
    
    809NET LOSS
    
    $
    (1,554
    )
    
    $
    (2,746
    )NET LOSS PER SHARE:Basic
    
    $
    (0.06
    )
    
    $
    (0.11
    )Diluted
    
    $
    (0.06
    )
    
    $
    (0.11
    )WEIGHTED AVERAGE SHARES USED IN CALCULATION OF NET LOSS PER SHARE:Basic
    
    
    24,275
    
    
    
    24,418Diluted
    
    
    24,275
    
    
    
    24,418
 See accompanying notes to condensed consolidated financial statements. 3




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##### 



LCC International, Inc. and Subsidiaries Condensed Consolidated Balance Sheets
(In thousands, except per share data) December 31,
    
    
    March 31,2004
    
    
    2005(Unaudited)ASSETS:Current assets:Cash and cash equivalents
    
    $
    21,820
    
    
    $
    16,901Restricted cash
    
    
    1,162
    
    
    
    1,032Receivables, net of allowance for doubtful accounts of $620 and $317 at
December 31, 2004 and March 31, 2005, respectively:Trade accounts receivable
    
    
    46,298
    
    
    
    33,838Unbilled receivables
    
    
    34,279
    
    
    
    40,646Due from related parties and affiliates
    
    
    96
    
    
    
    109Deferred income taxes, net
    
    
    1,148
    
    
    
    1,148Prepaid expenses and other current assets
    
    
    1,586
    
    
    
    1,227Prepaid tax receivable and prepaid taxes
    
    
    683
    
    
    
    683Total current assets
    
    
    107,072
    
    
    
    95,584Property and equipment, net
    
    
    4,218
    
    
    
    3,766Investments in affiliates
    
    
    677
    
    
    
    653Goodwill
    
    
    12,246
    
    
    
    11,896Other intangibles
    
    
    602
    
    
    
    531Other assets
    
    
    1,565
    
    
    
    1,472$
    126,380
    
    
    $
    113,902LIABILITIES AND SHAREHOLDERS EQUITY:Current liabilities:Line of credit
    
    $
    147
    
    
    $
    Accounts payable
    
    
    19,790
    
    
    
    14,076Accrued expenses
    
    
    26,285
    
    
    
    23,647Accrued employee compensation and benefits
    
    
    4,850
    
    
    
    5,473Deferred revenue
    
    
    985
    
    
    
    499Income taxes payable
    
    
    1,683
    
    
    
    1,253Accrued restructuring current
    
    
    1,562
    
    
    
    1,427Other current liabilities
    
    
    239
    
    
    
    222Total current liabilities
    
    
    55,541
    
    
    
    46,597Accrued restructuring non-current
    
    
    1,339
    
    
    
    1,252Other liabilities
    
    
    780
    
    
    
    744Total liabilities
    
    
    57,660
    
    
    
    48,593Shareholders equity:Preferred stock:10,000 shares authorized; 0 shares issued and outstanding
    
    
    
    
    
    
    Class A common stock, $0.01 par value:70,000 shares authorized; 20,209 and 20,301 shares issued and outstanding at
December 31, 2004 and March 31, 2005, respectively
    
    
    202
    
    
    
    203Class B common stock, $0.01 par value:20,000 shares authorized; 4,428 and 4,428 shares issued and outstanding at
December 31, 2004 and March 31, 2005, respectively
    
    
    44
    
    
    
    44Paid-in capital
    
    
    107,773
    
    
    
    108,025Accumulated deficit
    
    
    (41,914
    )
    
    
    (44,660
    )Subtotal
    
    
    66,105
    
    
    
    63,612Accumulated other comprehensive income  foreign currency translation adjustments
    
    
    3,497
    
    
    
    2,579Treasury stock (159,209 shares)
    
    
    (882
    )
    
    
    (882
    )Total shareholders equity
    
    
    68,720
    
    
    
    65,309$
    126,380
    
    
    $
    113,902
 See accompanying notes to condensed consolidated financial statements. 4




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##### 



LCC International, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited) Three Months EndedMarch 31,2004
    
    
    2005Cash flows from operating activities:Net loss
    
    $
    (1,554
    )
    
    $
    (2,746
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    756
    
    
    
    718Provision for doubtful accounts
    
    
    
    
    
    
    15Loss on equity method investment
    
    
    97
    
    
    
    28Changes in operating assets and liabilities:Trade, unbilled, and other receivables
    
    
    (6,212
    )
    
    
    6,078Accounts payable and accrued expenses
    
    
    2,298
    
    
    
    (7,730
    )Other current assets and liabilities
    
    
    (223
    )
    
    
    (627
    )Other non-current assets and liabilities
    
    
    (1,235
    )
    
    
    (683
    )Net cash used in operating activities
    
    
    (6,073
    )
    
    
    (4,947
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (460
    )
    
    
    (174
    )Investments
    
    
    (360
    )
    
    
    Net cash used in investing activities
    
    
    (820
    )
    
    
    (174
    )Cash flows from financing activities:Payments on line of credit
    
    
    (5,813
    )
    
    
    (2,411
    )Borrowings on line of credit
    
    
    5,531
    
    
    
    2,243Proceeds from issuance of common stock, net
    
    
    22
    
    
    
    30Proceeds from exercise of options
    
    
    682
    
    
    
    223Decrease of short-term investments
    
    
    520
    
    
    
    Decrease in restricted cash
    
    
    159
    
    
    
    117Net cash provided by financing activities
    
    
    1,101
    
    
    
    202Net decrease in cash and cash equivalents
    
    
    (5,792
    )
    
    
    (4,919
    )Cash and cash equivalents at beginning of period
    
    
    28,943
    
    
    
    21,820Cash and cash equivalents at end of period
    
    $
    23,151
    
    
    $
    16,901Supplemental disclosures of cash flow information:Cash paid during the quarter for:Income taxes
    
    $
    182
    
    
    $
    1,288Interest
    
    $
    
    
    
    $
    6
 See accompanying notes to condensed consolidated financial statements. 5




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##### 



LCC International, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements
(Unaudited) (1) Description of Operations LCC International Inc. a Delaware Corporation (LCCI), was formed in 1983. Unless the context
indicates otherwise, the terms the Company, we, us, and our refer herein to LCCI. We provide integrated end-to-end solutions for wireless voice and data communication networks
with service offerings to include high level technical consulting, to system design and deployment,
to ongoing operations and maintenance services. We operate in a highly competitive environment
subject to rapid technological change and emergence of new technologies. Historically, the key
drivers of changes in our wireless services business have been (1) the issuance of new or
additional licenses to wireless operators; (2) the introduction of new services or technologies;
(3) increases in the number of subscribers served by wireless operators; (4) the increasing
complexity of wireless systems in operation; and (5) changes in wireless infrastructure spending
and deployment. Although we believe that our services are transferable to emerging technologies,
rapid changes in technology and deployment could have an adverse financial impact on us. (2) Basis of Presentation We have prepared the condensed consolidated financial statements included herein without
audit, pursuant to the rules and regulations of the Securities and Exchange Commission and they
reflect all adjustments that are, in the opinion of management, necessary for a fair presentation
of the results for the interim periods. Certain information and footnote disclosure normally included in the consolidated financial
statements prepared in accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted. The interim financial statements should be read
in conjunction with the consolidated financial statements and notes thereto included in our Annual
Report on Form 10-K for the year ended December 31, 2004. Operating results for the interim periods
are not necessarily indicative of results for an entire year. (3) Equity-Based Compensation We account for equity-based compensation arrangements in accordance with the provisions of
Accounting Principles Board (APB) No. 25, Accounting for Stock Issued to Employees,and related
interpretations including FASB Interpretation No. 44, and comply with the disclosure provisions of
SFAS No. 123, Accounting for Stock-Based
Compensation.The Company has adopted the disclosure
provisions of SFAS No. 148, Accounting for Stock-Based CompensationTransition and
Disclosure Amendment of SFAS Statement No. 123. All equity-based awards to non-employees
are accounted for at their fair value in accordance with SFAS No. 123. Under APB No. 25,
compensation expense is based upon the difference, if any, on the date of grant between the fair
value of our stock and the exercise price. Our pro-forma net income (loss) would have been the following had compensation cost for our
stock based-compensation plans and employee stock purchase plan been determined on the fair value
at the grant dates for awards under those plans, consistent with SFAS No. 123. Three Months EndedMarch 31,2004
    
    
    2005(in thousands, exceptper share data)Net loss as reported
    
    $
    (1,554
    )
    
    $
    (2,746
    )Deduct total stock-based employee compensation expense determined under fair value based method
    
    
    (637
    )
    
    
    (453
    )Pro forma net loss
    
    $
    (2,191
    )
    
    $
    (3,199
    )Net loss per share
As reported:Basic
    
    $
    (0.06
    )
    
    $
    (0.11
    )Diluted
    
    $
    (0.06
    )
    
    $
    (0.11
    )Pro forma:Basic
    
    $
    (0.09
    )
    
    $
    (0.13
    )Diluted
    
    $
    (0.09
    )
    
    $
    (0.13
    )
 6




---



##### 



(4) Other Comprehensive Income (Loss) Comprehensive income (loss) is defined as net income (loss) plus the change in equity of a
business enterprise during a period from transactions and other events and circumstances from
non-owner sources. Other comprehensive income (loss) refers to revenues, expenses, gains and losses
that under accounting principles generally accepted in the United States of America are included in
comprehensive income (loss), but excluded from net income (loss). Accumulated other comprehensive
income (loss) consists solely of foreign currency translation adjustments at March 31, 2004 and
2005. Comprehensive income (loss) for the three months ended March 31 is as follows (in thousands). 2004
    
    
    2005Net loss
    
    $
    (1,554
    )
    
    $
    (2,746
    )Other comprehensive loss, before tax
    
    
    (61
    )
    
    
    (918
    )Income tax benefit related to items of comprehensive loss
    
    
    
    
    
    
    Other comprehensive loss, net of tax
    
    
    (61
    )
    
    
    (918
    )Comprehensive loss
    
    $
    (1,615
    )
    
    $
    (3,664
    )
 (5) Related Party Transactions RF Investors, a subsidiary of Telcom Ventures, owns the Class B Common Stock shares
outstanding, which have ten-to-one voting rights over the Class A Common Stock shares and therefore
represent approximately 69% voting control. Prior to our initial public offering, both our employees and the employees of Telcom Ventures
were eligible to participate in our life, medical, dental and 401(k) plans. In connection with our
initial public offering in 1996, we agreed pursuant to an Overhead and Administrative Services
Agreement to allow the employees of Telcom Ventures to continue to participate in our employee
benefit plans in exchange for full reimbursement of our cash costs and expenses. We billed Telcom
Ventures $77,000 during the year ended December 31, 2004 and $20,000 for the first quarter of 2005
for payments made by us pursuant to this agreement. We received reimbursements from Telcom Ventures
of $82,000 during 2004 and $14,000 for the first quarter of 2005. At December 31, 2004 and March
31, 2005, outstanding amounts associated with payments made by us under this agreement were $1,000
and $7,000, respectively, and are included as due from related parties and affiliates within the
consolidated balance sheets in the accompanying financial statements. During the three months ended March 31, 2005, we provided services to two customers where
Telcom Ventures has a minority investment. Dr. Rajendra Singh, a director of Telcom Ventures, is
a member of our Board of Directors. Revenues earned from these customers were $156,000 for the
quarter ending March 31, 2005. Billed and unbilled receivables outstanding were $211,000 as of
December 31, 2004 and $251,000 as of March 31, 2005, and are included in trade accounts receivable
and unbilled receivables in the accompanying condensed consolidated balance sheet. In July 2002, we acquired 51 percent of the outstanding shares of Detron LCC Network Services
B.V. (Detron), a newly formed corporation in the Netherlands. We acquired the shares from
Westminster Capital B.V. (Westminster) which transferred the shares to Detron in January 2003.
Detron has certain ongoing transactions with Westminster. Under a five-year lease agreement for
office space, Detron recorded approximately $36,000 and $48,000 of rent expense for the quarters
ended March 31, 2004 and 2005, respectively. During the first quarters of 2004 and 2005, Detron
seconded various idle employees to Detron Telematics, Westminsters wholly-owned subsidiary and
recorded revenue of approximately $46,000 and $18,000, respectively. During the quarters ended
March 31, 2004 and 2005, Detron recorded approximately $42,000 and $0, respectively, of management
and advisory fees. (6) Restructuring Charge During the second quarter of 2002, we adopted a restructuring plan and recorded a
restructuring charge of $10.0 million. During the fourth quarter of 2002, we recorded an
additional $3.5 million relating to the costs of excess office space. The restructuring plan was
in response to the low utilization of professional employees caused by the completion of several
large fixed-price contracts and the difficulty in obtaining new contracts as a result of the
slowdown in wireless telecommunications infrastructure spending. The cost of the severance and
associated expenses was approximately $1.0 million and resulted in a work force reduction of
approximately 140 people. In addition, we had excess facility costs relative to the space occupied
by the employees affected by the reduction in force, space previously occupied by divested
operations, and reduced business use of office space resulting from a continued trend for clients
to provide professional staff office space for our employees while performing their services. The
charge for the excess office space
was approximately $12.5 million, which included $2.0 million in written-off leasehold
improvements and other assets related to the excess space. The facility charge equals the existing
lease obligation, less the anticipated rental receipts to be received from existing and potential
subleases. This charge required significant judgments about the length of time that space will
remain vacant, anticipated cost escalators and operating costs associated with the leases, market
rate of the subleased space, and broker fees or other costs necessary to market the space. As of
March 31, 2005, the restructuring charge calculation assumes we will receive $10.6 million in
sublease income, of which $8.3 million is committed. 7




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##### 



During the first quarter of 2003, we reversed excess severance payable of approximately $0.2
million. During the third quarter of 2003, we reoccupied a portion of our office space in McLean,
Virginia and reversed $0.4 million of the payable and recorded an increase in the restructuring
payable of $0.5 million related to an estimated increase in the time period expected to sublease
space in our London office. During the second quarter of 2004, we reversed $0.9 million of the
payable due to reoccupied office space in McLean, Virginia and a decrease in the estimated time
period expected to sublease space in our McLean and London offices. During the fourth quarter of
2004 we reversed an additional $0.2 million of the payable due to reoccupied office space in
McLean, Virginia. A reconciliation of the restructuring activities is as follows: Severance
    
    
    Facilities
    
    
    Total(in thousands)Restructuring charge
    
    $
    1,030
    
    
    $
    12,492
    
    
    $
    13,522Reclassification of deferred rent
    
    
    
    
    
    
    639
    
    
    
    6391,030
    
    
    
    13,131
    
    
    
    14,161Charges against the provision:Payments for excess office space, net of sublease income
    
    
    
    
    
    
    (2,152
    )
    
    
    (2,152
    )Severance and associated costs paid
    
    
    (878
    )
    
    
    
    
    
    
    (878
    )Leasehold improvements and other assets written-off
    
    
    
    
    
    
    (1,461
    )
    
    
    (1,461
    )Other
    
    
    
    
    
    
    53
    
    
    
    53Restructuring payable as of December 31, 2002
    
    $
    152
    
    
    $
    9,571
    
    
    $
    9,723Reversal of excess severance
    
    
    (152
    )
    
    
    
    
    
    
    (152
    )Reversal for reoccupied space
    
    
    
    
    
    
    (385
    )
    
    
    (385
    )Additional charge for reduction of sublease income
    
    
    
    
    
    
    535
    
    
    
    535Restructuring charge
    
    
    (152
    )
    
    
    150
    
    
    
    (2
    )Charges against the provision:Payments for excess office space, net of sublease income
    
    
    
    
    
    
    (2,971
    )
    
    
    (2,971
    )Leasehold improvements and other assets written-off
    
    
    
    
    
    
    (564
    )
    
    
    (564
    )Other
    
    
    
    
    
    
    149
    
    
    
    149Restructuring payable as of December 31, 2003
    
    $
    
    
    
    $
    6,335
    
    
    $
    6,335Reversal for reoccupied space
    
    
    
    
    
    
    (1,166
    )
    
    
    (1,166
    )Charges against the provision:Payments for excess office space, net of sublease income
    
    
    
    
    
    
    (2,131
    )
    
    
    (2,131
    )Leasehold improvements and other assets written-off
    
    
    
    
    
    
    (214
    )
    
    
    (214
    )Other
    
    
    
    
    
    
    77
    
    
    
    77Restructuring payable as of December 31, 2004
    
    $
    
    
    
    $
    2,901
    
    
    $
    2,901Charges against the provision:Payments for excess office space, net of sublease income
    
    
    
    
    
    
    (212
    )
    
    
    (212
    )Other
    
    
    
    
    
    
    (10
    )
    
    
    (10
    )Restructuring payable as of March 31, 2005
    
    $
    
    
    
    $
    2,679
    
    
    $
    2,679
 At December 31, 2004 and March 31, 2005, the restructuring payable was classified as
follows: December 31,
    
    
    March 31,2004
    
    
    2005Accrued restructuring current
    
    $
    1,562
    
    
    $
    1,427Accrued restructuring
    
    
    1,339
    
    
    
    1,252Accrued restructuring total
    
    $
    2,901
    
    
    $
    2,679
 8




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##### 



(7) Investments We held 1,666,666 shares of Class B Common Stock of NextWave Telecom, Inc. (NextWave
Telecom) which is the parent corporation of NextWave Personal Communications Inc. We acquired the
shares of NextWave Telecom in May 1996 for a purchase price of $5.0 million in connection with a
series of transactions entered into between NextWave Telecom and us under an agreement dated March
12, 1996 (the March Agreement). We also acquired warrants to purchase an additional 123,356
shares of Class B Common Stock of NextWave Telecom at $3.00 per share. Under the March Agreement,
NextWave Telecom agreed to engage us to provide not less than (a) $14.0 million of radio frequency
engineering services and (b) $35.0 million of system deployment services. These services were to be
provided in increments of twenty-percent (20%) each year during the five-year period following the
execution of the March Agreement. NextWave Telecom filed for bankruptcy protection on December 23,
1998. The March Agreement was rejected by NextWave Telecom upon confirmation of its bankruptcy
plan on March 2, 2005. On March 23, 2005, we agreed to settle our rejection damages claims against
Nextwave Telecom by executing a Network Deployment Agreement whereby Nextwave Telecom agreed to
engage us to perform $30.0 million of radio frequency engineering and system deployment services
over three years in future markets commencing with Las Vegas. On August 4, 2003 we, through our wholly owned subsidiary LCC China Services, L.L.C., closed
an investment in a newly created entity based in China, Beijing LCC Bright Oceans Communication
Consulting Co. Ltd. (LCC/BOCO). We contributed approximately $1.1 million for a 49.0% share of
LCC/BOCOs registered capital. Bright Oceans Inter-Telecom Corporation, a Chinese publicly traded
network management and systems integrator (BOCO), contributed approximately $1.1 million to hold
the remaining 51.0% of LCC/BOCOs registered capital. We account for the investment in LCC/ BOCO
using the equity method of accounting. BOCO has advised us that it has made a strategic decision to
exit the wireless telecommunications infrastructure services business and we have agreed to
dissolve the joint venture. We have undertaken to transfer selected projects and joint venture
employees to our wholly-owned Chinese subsidiary, which continues to pursue projects independently
with customers in China. We expect to liquidate this investment in the third quarter of 2005. (8) Line of Credit In 2003, Detron established a line of credit with NMB-Heller N.V. (NMB). The line of credit
provides that NMB will provide credit to Detron in the form of advance payments collateralized by
Detrons outstanding receivables. The agreement provides for NMB to advance up to 75% of the
receivable balance. There is no maximum on the amount of receivables Detron can assign to NMB.
Detron must repay the advances from NMB within 90 days or upon customer payment whichever occurs
first. Interest on the advance payments will be calculated at a rate equal to NMBs overdraft base
rate plus 2% subject to a minimum of 5.75% per year. The agreement had an initial term of two years
and was terminated on January 26, 2005 under mutual agreement. As of December 31, 2004, Detron had
$0.1 million outstanding under the credit facility. (9) Commitments and Contingencies We are party to various non-material legal proceedings and claims incidental to our business.
Management does not believe that these matters will have a material adverse affect on our
consolidated results of operations or financial condition. (10) Segment reporting SFAS No. 131, Disclosures about Segments of an Enterprise and Related Informationestablished
standards for reporting information about the operating segments in interim and annual financial
reports issued to stockholders. It also established standards for related disclosures about
products and services and geographic areas. Operating segments are defined as components of an
enterprise about which separate financial information is available that is evaluated regularly by
the chief operating decision maker, or decision-making group, in deciding how to allocate resources
and assess performance. Our chief operating decision-making group is the Executive Committee, which
comprises the Chief Executive Officer and our Senior Vice Presidents. Our operating segments are defined geographically by region (see Overview), namely the
Americas region and the EMEA region. Both regions provide design and deployment services,
operations and maintenance services and technical consulting services. Segment detail is summarized as follows (in thousands): Americas
    
    
    EMEA
    
    
    Segment Total2004
    
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005Three Months Ended March 31,Revenues:From external customers
    
    $
    26,990
    
    
    $
    19,447
    
    
    $
    17,228
    
    
    $
    22,248
    
    
    $
    44,218
    
    
    $
    41,695Inter-segment revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total revenues
    
    $
    26,990
    
    
    $
    19,447
    
    
    $
    17,228
    
    
    $
    22,248
    
    
    $
    44,218
    
    
    $
    41,695Income (loss) before taxes
    
    $
    2,100
    
    
    $
    1,479
    
    
    $
    (884
    )
    
    $
    749
    
    
    $
    1,216
    
    
    $
    2,228Total assets
    
    $
    39,286
    
    
    $
    40,305
    
    
    $
    52,588
    
    
    $
    58,799
    
    
    $
    91,874
    
    
    $
    99,104
 9




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##### 



A reconciliation of totals reported for the operating
segments to the applicable line items in
the consolidated financial statements is as follows (in thousands): Three Months EndedMarch 31,2004
    
    
    2005Revenues:Revenues for reportable segments
    
    $
    44,218
    
    
    $
    41,695Revenues for non-reportable segments
    
    
    831
    
    
    
    817Total consolidated revenues
    
    
    45,049
    
    
    
    42,512AssetsAssets for reportable segments
    
    $
    91,874
    
    
    $
    99,104Assets not attributable to reportable segments:Cash and cash equivalents
    
    
    18,618
    
    
    
    9,856Restricted Cash
    
    
    
    
    
    
    232Receivables
    
    
    913
    
    
    
    1,175Deferred and prepaid taxes
    
    
    5,823
    
    
    
    1,831Property and equipment
    
    
    971
    
    
    
    741Investments
    
    
    1,026
    
    
    
    636Prepaid and Other
    
    
    771
    
    
    
    327Total consolidated assets
    
    $
    119,996
    
    
    $
    113,902
 (11) Receivables For the year ended December 31, 2004 and the quarter ended March 31, 2005, we derived 81.7%
and 83.7%, respectively, of total revenues from our ten largest customers, indicating significant
customer concentration risk with our receivables. Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations This quarterly report on Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Exchange Act of 1934, which are made under the safe harbor provisions
of Section 21E of the Securities Exchange Act of 1934. These statements involve known and unknown
risks, uncertainties, and other factors that may cause our actual results, levels of activity,
performance, or achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by such forward-looking statements. In
some cases, these statements can be identified by forward-looking words such as anticipate,
believe, could, estimate, expect, intend, may, plan, potential, should, will,
and would or similar words. The statements that contain these words should be read carefully
because they discuss our future expectations, contain projections of our future results of
operations or of our financial position, or state other forward-looking information. These
statements include, among others, our estimates of future revenues and our expectations that those
revenues will fluctuate significantly, our belief that we have adequate cash, available borrowing
capacity and short-term investments which will satisfy cash requirements for at least the next
twelve months, and our ability to pursue and secure new business opportunities. The factors listed under Risk Factors in our annual report on Form 10-K for the fiscal year
ended December 31, 2004, among others, could cause actual results to differ materially from those
contained in forward-looking statements made in this report and presented elsewhere by management
from time to time. Such factors, among others, may have a material adverse effect upon our
business, financial condition, and results of operations. We undertake no obligation to update
publicly or revise any forward-looking statements, whether as a result of new information, future
events, or otherwise. Accordingly, you are cautioned not to place undue reliance on
forward-looking statements, which speak only as of the date on which they are made. Overview We provide integrated end-to-end solutions for wireless voice and data communications networks
with offerings ranging from high level technical consulting, to system design and turnkey
deployment, to operations and maintenance services. We have been successful on occasion in using
initial opportunities to provide high level technical consulting services to secure later-stage
system design and deployment contracts. Long-term engagements to provide design and deployment
services also enable us to secure ongoing operations and maintenance projects. Providing ongoing
operations and maintenance services also positions us well for additional opportunities as new
technologies continue to be developed and wireless service providers must either upgrade their
existing networks or deploy new networks utilizing the latest available technologies. 10




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We provide these services through a regional organization, which comprises two principal
regions and several smaller divisions. Our primary operating segments are Americas and EMEA
(Europe, Middle East and Africa). Americas:
    
    The Americas region provides the full range of service
offerings to wireless operators and equipment vendors
through a network of project offices in North America and
South America. In the first quarter of 2005, Americas
generated approximately 46% of our total revenue The
decision has been made to move the headquarters for the
Americas region from Los Angeles, California to the Companys
headquarters in McLean, Virginia. This transition should be
complete by third quarter of 2005.EMEA:
    
    Based in London, the Europe, Middle East and Africa region
is responsible for operations in the U.K., Italy,
Netherlands, Algeria, Germany, Spain, Greece, Saudi Arabia
and the Middle East. In the first quarter of 2005, EMEA
generated approximately 52% of our total revenue.Asia & other:
    
    This includes our operations in Asia, the Wireless Institute
and LCC Wireline. The decision has been made to wind down
and dissolve the Wireline business. In the first quarter of
2005, these combined operations generated approximately 2%
of our total revenues. Our operations in Asia comprise
representative offices in Beijing and New Delhi, India. We
provide training to our engineers and customers through our
Wireless Institute, which covers the latest technologies
developed and employed throughout the world.
 Our primary sources of revenues are from engineering design and system deployment services.
Revenues from services are derived both from fixed price and time and materials contracts. We
recognize revenues from fixed price service contracts using the percentage-of-completion method.
With fixed price contracts, we recognize revenues based on the ratio of individual contract costs
incurred to date on a project compared with total estimated costs on completion. Anticipated
contract losses are recognized as they become known and estimable. We recognize revenues on time
and materials contracts as the services are performed. Cost of revenues includes direct compensation and benefits, living and travel expenses,
payments to third-party subcontractors and consultants, equipment rentals, expendable computer
software and equipment, and allocated, or directly attributed, facility and overhead costs
identifiable to projects. General and administrative expenses consist of compensation, benefits, office and occupancy,
and other costs required for the finance, human resources, information systems, and executive
office functions. Sales and marketing expenses consist of salaries, benefits, sales commissions,
travel and other related expenses required to implement our marketing, sales and customer support
plans. We generate cash from fixed price contracts by billings associated with contract milestones,
which are typically agreed with our customers at the time the contracts are negotiated. For our
time and materials contracts, we usually bill our customers on a monthly basis as services are
performed. On large network deployment contracts, which involve the design and construction of
complex wireless networks, it is increasingly common for our customers to require fewer contract
milestones than in previous years. This results in extending the periods during which we are
obliged to fund our operating costs until a milestone can be billed to the customer. This increases
the capital that we require to operate the business, and is evidenced by increases in unbilled
receivables on our balance sheet. This is an integral part of our business and we are constantly
striving to manage our working capital requirements. We expect to experience increasing demands for
working capital in the future as we grow our revenues. Another
critical statistic that we monitor is our contract backlog, which at
March 31, 2005,
comprised firm backlog of $84.9 million and implied backlog of $5.6 million. We expect that our
contract backlog will vary from time to time as we deliver contract revenues and win new awards. Since 2001, we have engaged in a number of business dispositions, acquisitions and
investments, some of which have either generated significant cash proceeds or created significant
requirements for cash and these transactions significantly affect the year-to-year comparability of
our financial statements. In 2001, we sold certain of our interests in NextWave Telecom, Inc. or
NextWave for cash proceeds of about $21 million. Later in that year and during 2002, we acquired
operations in our EMEA region, which required cash of approximately $10 million. In 2003 we sold
further interests in NextWave for another $1 million and we initiated our investment in the joint
venture in China, which required a total cash commitment of about $1.1 million. In 2004, we sold an
unsecured claim against NextWave for $0.8 million and recorded an impairment charge of $0.2 million
for our investment in the joint venture in China, following changes in the local business
conditions. We expect to continue to consider business dispositions, acquisitions and investments
as a way of supporting our longer-term strategies. 11




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Trends That Have Affected or May Affect Results of Operations and Financial Condition The major trends that have affected or may affect our business are as follows:  
    project related revenues derived from a limited set of customers in each market where we
do business;  
    our customers have faced difficulties in obtaining financing to fund the development,
expansion and upgrade of their networks;  
    the acceleration or the delay associated with the introduction of new technologies and services by our customers;  
    the management and the services composition of our fixed price contracts;  
    the impact of the percentage of subcontracted work (versus self perform work) on our
large programs and the associated margin degradations; and  
    increased spending by wireless service providers in the areas of network design,
deployment and optimization. Our business is characterized by a limited number of projects awarded by a limited number of
customers. This can lead to volatility in our results as projects initially ramp up and then wind
down. As projects are completed, we are faced with the task of replacing project revenues with new
projects, either from the same customer or from new customers. In addition, the wireless industry
is composed of a relatively small number of wireless service providers and equipment vendors, and
this inevitably leads to issues of customer concentration. Consequently, our business may be
affected in any single market by the changing priorities of a small group of customers. During 2001 and 2002, some of our customers faced difficulty in obtaining the necessary
financing to fund the development, expansion and upgrade of their networks. The state of the
wireless industry and the overall financial market have an impact on our business, and to the
extent there is a slowdown in the wireless sector of the overall economy in the future, there could
be an adverse effect on the company. We tend to benefit from projects undertaken by our customers to introduce new technologies and
services in their networks and we tend to suffer when projects are delayed. Revenues from 3G
networks constituted approximately 7% and 17% of our total revenues for the three months ended
March 31, 2004 and 2005, respectively, and it is expected to continue to be an area of business
growth in the future. A large proportion of the contracts awarded by our customers are fixed price,
and we expect this trend to continue. We have experienced an increase in the percentage of fixed
price contracts awarded by our customers, and we expect this trend to continue. A recent trend is
for the award of fixed price contracts to cover the design and deployment of a certain geographic
network area on a full turnkey basis, including planning, engineering design, site acquisition,
construction and deployment services. In the three months ended March 31, 2005, approximately 39% of our revenues were generated by
work done by subcontractors, for construction related activities, compared to 32% for the same
period in the previous year. To the extent that these large turnkey projects include a relatively
large proportion of construction related activities, we expect that the composition of our revenues
by delivery method will vary so as to decrease the proportion of services that we perform ourselves
through our own workforce and increase the services that we deliver through third parties,
typically subcontractors for construction. A consequence of this change in mix may be to reduce our
average gross margins because subcontracted work generally commands lower margins. We believe our Americas region may benefit from increased spending by certain United States
wireless service providers. This increased spending can be attributed to several trends: (i) the
implementation of new technologies such as 3G wireless and broadband wireless; (ii) activity
generated by efforts to consolidate networks resulting from merger activity in 2004/2005; (iii)
network quality enhancement programs to reduce churn; (iv) network expansion and capacity programs
geared toward enabling new and enhanced services; and (v) other miscellaneous network upgrades and
enhancements required for market share maintenance and competitive reasons. We have also observed an increase in spending on wireless networks in developing countries.
However, the increase in worldwide terrorism may affect our business in these countries. For
example, the U.S. State Department has issued security advisories for U.S. nationals in Saudi
Arabia and certain other countries in the Middle East. While we tend to staff these projects
largely with local or
regional personnel, we do recognize that undertaking work in such areas at this time carries a
higher level of operating and political risk than in other more developed areas. 12




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Three Months Ended March 31, 2005
Compared to
Three Months Ended March 31, 2004 Results of Operations The discussion below provides information which management believes is relevant to an
assessment and understanding of our consolidated results of operations and financial condition. The
discussion should be read in conjunction with the consolidated financial statements and
accompanying notes thereto included elsewhere herein. Revenues, Cost of Revenues and Gross Margins Three Months EndedMarch 31, 2004
    
    
    March 31, 2005(in thousands)
    
    
    
    
    
    
    (in thousands)Revenues:Americas
    
    $
    26,990
    
    
    
    
    
    
    $
    19,447EMEA
    
    
    17,228
    
    
    
    
    
    
    
    22,248Asia and other
    
    
    831
    
    
    
    
    
    
    
    817$
    45,049
    
    
    
    
    
    
    $
    42,512Cost of revenues:
    
    
    
    
    
    (% of revenue)
    
    
    
    
    
    (% of revenue)Americas
    
    $
    23,386
    
    
    
    86.6
    %
    
    $
    16,333
    
    
    
    84.0
    %EMEA
    
    
    14,145
    
    
    
    82.1
    
    
    
    16,682
    
    
    
    75.0Asia and other
    
    
    566
    
    
    
    68.1
    
    
    
    571
    
    
    
    69.9$
    38,097
    
    
    
    84.6
    %
    
    $
    33,586
    
    
    
    79.0
    %Gross margins:Americas
    
    $
    3,604
    
    
    
    13.4
    %
    
    $
    3,114
    
    
    
    16.0
    %EMEA
    
    
    3,083
    
    
    
    17.9
    
    
    
    5,566
    
    
    
    25.0Asia and other
    
    
    265
    
    
    
    31.9
    
    
    
    246
    
    
    
    30.1$
    6,952
    
    
    
    15.4
    %
    
    $
    8,926
    
    
    
    21.0
    %
 Americas In the first quarter of 2004, we had already completed significant portions of the
implementation plans associated with the large network deployment programs that we won in the
second and third quarters of 2003, while our RF/wireless design services exhibited strong growth.
Network deployment represented about $17.1 million of revenue in 2004, an increasing percentage of
which included construction activities, which we subcontracted to third parties. RF/wireless design
services represented about $9.9 million in 2004. Revenues and cost of revenues included $0.3
million and $0.8 million, respectively, for a new service offering undertaken in the quarter and
now curtailed. In addition, cost of revenues and gross margins were affected by costs of $0.4
million, which represented labor, recruiting and overhead expenses for RF engineers hired in the
quarter in contemplation of specific future customer needs. In the first quarter of 2005, revenues from network deployment contracts declined $6.7 million
in North America compared to first quarter 2004 due primarily to the
winding down of the US
Cellular turnkey contract. Revenues from RF contracts in North America
declined $1.8 million over the same period due primarily to completion of Nokia design contracts.
However, revenues from South and Central America increased $0.9 million due primarily to the start
of new projects in Brazil and Mexico. Gross margins improved from 13.4% in the first quarter of
2004 to 16.0% for the same period. This improvement occurred because of a higher percentage of
revenues throughout the Americas being derived from RF contracts as opposed to network deployment
contracts. EMEA In 2004, our total revenues of $17.2 million for the region represented a larger portfolio of
activities, including our projects in Algeria and our recently awarded technical consulting
contract in Saudi Arabia. During the quarter we expensed approximately $0.2 million of start up
costs associated with our contract in Saudi Arabia. The period-to-period increase in revenues for the first quarter of 2005 is attributable to a
$7.0 million increase in revenues from the technical consulting contract in Saudi Arabia, which had
just commenced during the first quarter of 2004. Revenues from Algeria were essentially
unchanged. European revenues were down quarter-to-quarter about $1.7 million. Gross margins for
the EMEA region improved dramatically due to the Saudi contract. 13




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Asia and other Revenues for Asia and other were unchanged at $0.8 million in the first quarters of both 2004
and 2005, Gross margin is also essentially unchanged from quarter-to-quarter. In 2004, the
revenues were generated by our Wireless Institute and Wireline activities. In 2005, we experienced
increased activity in Asia and declines for the Wireless Institute and Wireline activities.
Because of declining revenues and poor margins, the Wireline business is being wound down and
dissolved. Operating Expenses Three Months EndedMarch 31,
    
    
    March 31,2004
    
    
    2005(in thousands)Operating expenses:Net bad debt expense
    
    $
    
    
    
    $
    14General and administrative
    
    
    6,233
    
    
    
    7,363Total general and administrative
    
    
    6,233
    
    
    
    7,377Sales and marketing
    
    
    1,768
    
    
    
    2,258Depreciation
    
    
    756
    
    
    
    718$
    8,757
    
    
    $
    10,353
 The increase in sales and marketing expenses from $1.8 million in the first quarter of 2004 to
$2.3 million in 2005 is largely attributable to an increase in commission expense relating to the
technical consulting contract in Saudi Arabia. The increase in general and administrative expenses from $6.2 million in the first quarter of
2004 to $7.3 million in 2005 is largely attributable to severance costs in the Americas, EMEA, and
corporate of approximately $0.7 million, and an additional $0.3 million due to higher consulting
and audit fees associated with Sarbanes-Oxley Act compliance. Other Income and Expense Three Months EndedMarch 31, 2004
    
    
    March 31, 2005(in thousands)Other income (expense):Interest income
    
    $
    59
    
    
    $
    40Interest expense
    
    
    (51
    )
    
    
    (82
    )Other, primarily foreign exchange transactions
    
    
    152
    
    
    
    (468
    )$
    160
    
    
    $
    (510
    )
 The loss in Other is attributable to foreign currency transaction losses in the first quarter
of 2005 as a result of the U.S. dollar appreciating against the British pound and the Euro. Tax Benefit or (Expense) A tax expense of $0.8 million was recognized in the first quarter of 2005 as compared to a tax
benefit of $0.1 million in the first quarter of 2004. The 2005 tax expense arises from
international operations that generate taxable income. A valuation allowance has been established
for tax benefits associated with losses in the U.S. and certain foreign operations. No tax benefit
is recognized for these losses because we do not have sufficient history of taxable income in these
jurisdictions to conclude that it is more likely than not that tax benefits associated with net
operating loss carryforwards will be realized. 14




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##### 



Net Income or (Loss) In the first quarter of 2004, revenues of $45.0 million generated operating losses of $1.8
million. We reported a loss before taxes of $1.6 million and we recorded a tax benefit of $0.1
million, equivalent to an effective tax rate of 5.5%, resulting in a reported net loss of $1.6
million. In the first quarter of 2005,
revenues of $42.5 million generated operating losses of $1.4 million.
We reported a loss before taxes of $1.9 million and we recorded
a tax expense of $0.8 million
resulting in a reported net loss of $2.8 million. Liquidity and Capital Resources The following discussion relates to our sources and uses of cash and cash requirements during
the three months ended March 31, 2004 and 2005. Sources and Uses of Cash Three Months EndedMarch 31, 2004
    
    
    March 31, 2005(in thousands)Net cash used in operating activities
    
    $
    (6,073
    )
    
    $
    (4,947
    )Net cash used in investing activities
    
    
    (820
    )
    
    
    (174
    )Net cash provided by (used in) financing activities
    
    
    1,101
    
    
    
    202Net decrease in cash and cash equivalents
    
    $
    (5,792
    )
    
    $
    (4,919
    )
 In the first quarter of 2004, operating activities increased significantly compared to the
prior year, and we reported revenues of $45.0 million for the quarter and operating losses of $1.8
million. Cash used in operating activities increased to $6.1 million, mostly reflecting the
increase in receivables following the growth in revenues compared to 2003 and an increase in
amounts due from certain key customers with whom extended credit terms were negotiated. Cash used
in investing activities was $0.8 million, which was offset by cash provided by financing activities
of $1.1 million. Overall, cash decreased by $5.8 million during the quarter. In the first quarter of 2005, operating activities were down slightly compared to the prior
year, and we reported revenues of $42.5 million for the quarter with an operating loss of $1.4
million. Cash used in operating activities declined to $4.9 million, primarily due to a decrease in
accounts payable and accrued expenses representing net payments of $7.7 million during the first
quarter of 2005. This was partially offset by a combined decrease of $6.1 million in trade and
unbilled receivables representing net collections during the quarter. The combined decline in total
receivables of $6.2 million is due to a $12.5 million decline in trade accounts receivable, which
was partially offset by an increase of $6.3 million in unbilled receivables reflective of the
timing of milestone payment collections on some major contracts. Cash used in investing activities
was $0.2 million, which was offset by cash provided by financing activities of $0.2 million.
Overall, cash decreased by $4.9 million during the quarter. Cash Requirements December 31, 2004
    
    
    March 31, 2005(thousands)Cash and cash equivalents
    
    $
    21,820
    
    
    $
    16,901Restricted cash
    
    
    1,162
    
    
    
    1,032Total cash and short-term investments
    
    $
    22,982
    
    
    $
    17,933Line of credit
    
    $
    147
    
    
    $
    Working capital
    
    $
    51,531
    
    
    $
    48,987
 During the first quarter of 2005, the principal requirements for cash were to finance
operating losses and the decrease in accounts payable and accrued expenses of $7.7 million
Although working capital declined by $2.5 million during the quarter, we anticipate that collection
of existing unbilled receivables will largely fund our cash requirements as we continue to perform
work ahead of contractual billing milestones, primarily in the Americas region. This expectation
may be affected by the timing of the milestone payments by major customers. Despite the decline in
working capital for the first quarter of 2005, we believe that for at least the next twelve months
we have adequate cash and other working capital to fund our operations. 15




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##### 



As of March 31, 2005, we had no material cash commitments and we had not engaged in any
off-balance sheet financing. Critical Accounting Policies Our critical accounting policies are as follows:  
    revenue recognition;
    allowance for doubtful accounts;
    accounting for income taxes; and
    restructuring charge. Revenue recognition Our principal sources of revenues consists of design and system deployment services. We
provide design services on a contract basis, usually in a customized plan for each client, and
generally charge for engineering services on a time and materials or fixed price basis. We
generally offer deployment services on a fixed price, time-certain basis. The portion of our
revenues from fixed-price contracts was 74.8% and 81.7% for the three months ended March 31, 2004
and 2005, respectively. We recognize revenues on fixed-price contracts using the
percentage-of-completion method. With the percentage-of-completion method, expenses on each project
are recognized as incurred, and revenues are recognized based on the ratio of the current costs
incurred for the project to the then estimated total costs of the project. Accordingly, revenues
recognized in a given period depend on, among other things, the costs incurred on each individual
project and our then current estimate of the total costs at completion for individual projects.
Considerable judgment on the part of our management may be required in determining estimates to
complete a project including the scope of the work to be completed, and reliance on the customer or
other vendors to fulfill some task(s). If in any period we significantly increase the estimate of
the total costs to complete a project, we may recognize very little or no additional revenues with
respect to that project. If total contract cost estimates increase, gross profit for any single
project may be significantly reduced or eliminated. If the total contract cost estimates indicate
that there is a loss, the loss is recognized in the period the determination is made. At December
31, 2004 and March 31, 2005, respectively, we had $34.3 million and $40.6 million of unbilled
receivables. Allowance for doubtful accounts The preparation of our consolidated financial statements requires our management to make
estimates and assumptions that affect the reported amount of assets, liabilities, contingent assets
and liabilities and the reported amounts of revenues and expenses during the reported period.
Specifically, our management must make estimates of the probability of collection of accounts
receivable. Management specifically analyzes accounts receivable balances, customer concentrations,
customer credit-worthiness, current economic trends and changes in customer payment terms when
evaluating the adequacy of the valuation allowance for doubtful accounts. For the year ended
December 31, 2004 and the quarter ended March 31, 2005, we
derived 81.7% and 83.7%, respectively,
of total revenues from our ten largest customers, indicating significant customer concentration
risk with our receivables. These ten largest customers constituted 75.3% and 82.4% of our net
receivable balance as of December 31, 2004 and March 31, 2005, respectively. Lastly, we frequently
perform services for development stage customers, which carry a higher degree of risk, particularly
as to the collection of accounts receivable. These customers may be particularly vulnerable to the
current tightening of available credit and general economic slowdown. 16




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##### 



Accounting for income taxes As part of the process of preparing our consolidated financial statements an estimate for
income taxes is required for each of the jurisdictions in which we operate. This process requires
estimating the actual current tax expense together with assessing temporary differences resulting
from differing treatment of items, such as deferred revenues, for tax accounting purposes. These
differences result in deferred tax assets and liabilities, which are included in the consolidated
balance sheet. We must then assess the likelihood that the deferred tax assets will be recovered
from future taxable income and to the extent we believe that recovery is not likely, we must
establish a valuation allowance. The valuation allowance is based on our estimates of taxable
income by jurisdiction in which we operate and the period over which the deferred tax assets will
be recoverable. In the event the actual results differ from these estimates, we may need to
increase or decrease the valuation allowance, which could have a material impact on the financial
position and results of operations. Considerable management judgment may be required in determining our provision for income
taxes, the deferred tax assets and liabilities and any valuation allowance recorded against the net
deferred tax assets. We have recorded a valuation allowance of $14.7 million and $16.0 million as
of December 31, 2004 and March 31, 2005, respectively, due to uncertainties related to our ability
to utilize some of the deferred tax assets before they expire. These deferred tax assets primarily
consist of net operating losses carried forward, foreign tax credits and compensation accruals. The
net deferred tax assets as of December 31, 2004 and March 31, 2005, remained unchanged at $1.1
million. Restructuring charge In 2002 we recorded restructuring charges of $13.5 million. Included in these restructuring
charges was a charge for excess facilities aggregating $12.5 million. This facility charge
primarily relates to leased office space, which we no longer occupy. The facility charge equals the
existing lease obligation less anticipated rental receipts to be received from existing and
potential subleases. This requires significant judgments about the length of time the space will
remain vacant, anticipated cost escalators and operating costs associated with the leases, the
market rate at which the space will be subleased, and broker fees or other costs necessary to
market the space. These judgments were based upon independent market analysis and assessment from
experienced real estate brokers. The restructuring charge calculation assumes as of March 31, 2005
that we will receive $10.6 million in sublease income, of which
$8.3 million is committed. Related Party Transactions For a description of related party transactions, see note 5 to the consolidated financial
statements. Item 3: Quantitative and Qualitative Disclosures about Market Risk We are exposed to the impact of foreign currency fluctuations. The exposure to exchange rates
relates primarily to our foreign subsidiaries. Subsidiaries with material foreign currency exposure
are in Great Britain, Algeria and Italy. For our foreign subsidiaries, exchange rates can have an
impact on the United States dollar value of their reported earnings and the intercompany
transactions with the subsidiaries. Customers outside of the United States accounted for 38.8% and 56.4% of our revenues for the
quarters ended March 31, 2004 and 2005, respectively. In connection with the increased
availability of 3G equipment in Europe, we anticipate continued growth of our international
operations, particularly in Europe, the Middle East and Africa, in 2005 and beyond. As a result,
fluctuations in the value of foreign currencies against the United States dollar may have a
significant impact on our reported results. Revenues and expenses denominated in foreign currencies
are translated monthly into United States dollars at the weighted average exchange rate.
Consequently, as the value of the dollar strengthens or weakens relative to other currencies in our
major markets the resulting translated revenues, expenses and operating profits become lower or
higher, respectively. Fluctuations in currency exchange rates also can have an impact on the United States dollar
amount of our shareholders equity. The assets and liabilities of the non-U.S. subsidiaries are
translated into United States dollars at the exchange rate in effect on the date of the balance
sheet for the respective reporting period. The resulting translation adjustments are recorded in
shareholders equity as accumulated other comprehensive loss. Consequently, the accumulated other
comprehensive income (loss) component of shareholders equity decreased $0.1 million during the quarters ended March 31, 2004 and 2005. As of March 31, 2005,
the net amount invested in non-U.S. subsidiaries subject to this equity adjustment, using the
exchange rate as of the same date, was $18.9 million. 17




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We are exposed to the impact of foreign currency fluctuations due to the operations of
short-term intercompany transactions between the London office and its consolidated foreign
subsidiaries and between the McLean office and its consolidated foreign subsidiaries. While these
intercompany balances are eliminated in consolidation, exchange rate changes do affect consolidated
earnings. Foreign subsidiaries with amounts owed to or from the London operations at March 31, 2005
(denominated in Euros) include Italy in the amount of $1.9 million and Algeria in the amount of
$1.6 million. Foreign subsidiaries with amounts owed to or from the McLean operations at March 31,
2005 (denominated in Euros or British Pounds) include Italy in the amount of $4.4 million and
England in the amount of $5.6 million. These balances generated a foreign exchange loss of $0.4
million included in our consolidated results at March 31, 2005. A hypothetical appreciation of the
Euro and British Pound of 10% would result in a $16,000 net increase to our operating losses
generated outside the United States. This was estimated using a 10% appreciation factor to the
average monthly exchange rates applied to net income or loss for each of our subsidiaries in
the respective period. A hypothetical appreciation of the Euro and the British Pound of 10% would result in a gain of
$1.1 million on the intercompany receivables denominated in these currencies. Foreign exchange gains and losses recognized on any transactions are
included in our consolidated statements of operations. Although currency fluctuations can have an impact on our reported results and shareholders
equity, such fluctuations can affect our cash flow and could result in actual economic gains or
losses. We currently do not hedge any of these risks in our foreign subsidiaries because: (i) our
subsidiaries generally earn revenues and incur expenses within a single country and, consequently,
do not incur currency risks in connection with the conduct of their normal operations; (ii) other
foreign operations are minimal; and (iii) we do not believe that hedging transactions are justified
by the current exposure and cost at this time. Item 4: Controls and Procedures (a) Evaluation of disclosure controls and procedures The
Chief Executive Officer and Chief Financial Officer as of
March 31, 2005 carried out an evaluation of the
effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934). Based on that
evaluation, these officers have concluded that as of March 31, 2005, our disclosure controls and
procedures were adequate and designed to ensure that material information relating to us and our
consolidated subsidiaries would be made known to them by others within those entities. (b) Changes in internal controls There were no significant changes in our internal controls or other factors that could
significantly affect our disclosure controls and procedures subsequent to December 31, 2004. 18




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PART II: OTHER INFORMATION Item 1: Legal Proceedings We are party to various non-material legal proceedings and claims incidental to our business. Item 2: Unregistered
Sales of Equity Securities and Use of Proceeds 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 10.1
    
    
    
    Consulting Agreement, dated as of April 25, 2005, between the Company and C. Thomas Faulders, III.10.2
    
    
    
    Interim Executive Services Agreement, dated as of April 25, 2005, between the Company and Tatum CFO Partners, LLP10.3
    
    
    
    Consulting Agreement, dated as of March 30, 2005, between the Company and Michael S. McNelly10.4
    
    
    
    Employee Agreement and General Release, dated as of March 30, 2005, between the Company and Michael S. McNelly10.5
    
    
    
    Employee Agreement and General Release, dated as of April 29, 2005, between the Company and Vincent Gwiazdowski10.6
    
    
    
    Letter Agreement, dated as of March 29, 2005, between the Company and Graham Perkins10.7
    
    
    
    Letter Agreement, dated as of March 31, 2005, between the Company and James W. Greenwell11
    
    
    
    Calculation of Net Loss Per Share31.1
    
    
    
    Certification of Chief Executive Officer pursuant to Exchange Act Rules
13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    
    Certification of Chief Financial Officer pursuant to Exchange Act Rules
13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 19




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Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LCC International, Inc. and Subsidiaries/s/ PETER A. DELISOPeter A. Deliso
Interim Chief Executive Officer, Vice President,
General Counsel and
SecretaryDate: May 10, 2005
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