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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
MARK ONE ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
[X] SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 5(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-31105
LEXENT INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3990223
(State or other jurisdiction of (IRS Employer identification no.)
incorporation or organization)
THREE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
(Address of principal executive offices, including ZIP Code)
(212) 981-0700
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS
---------------------------------------------
Common Stock, $.001 par value
(including rights attached thereto)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 15, 2002, the aggregate market value of the Common Stock of
the Registrant held by non-affiliates of the Registrant, based on the last sale
price of the Common Stock of the Registrant was approximately $56,517,697 on
that date.
The number of shares of the Common Stock of the Registrant outstanding
as of March 15, 2002 was 41,741,793.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for the 2001
Annual Meeting of Stockholders to be held on May 13, 2002, are incorporated by
reference into Part III of this Form 10-K.
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LEXENT INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2001
INDEX
PAGE
NUMBER
------
PART I
Item 1. Business.......................................................... 3
Item 2. Properties........................................................ 7
Item 3. Legal Proceedings................................................. 8
Item 4. Submission of Matters to a Vote of Security Holders............... 8
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters............................................... 8
Item 6. Selected Consolidated Financial Data.............................. 9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........ 16
Item 8. Financial Statements and Supplementary Data....................... 17
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures............................................. 17
PART III
Item 10. Directors and Executive Officers of the Registrant................ 17
Item 11. Executive Compensation............................................ 17
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 17
Item 13. Certain Relationships and Related Transactions.................... 17
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.. 17
Page 2
PART I
ITEM 1. BUSINESS
GENERAL
We are an infrastructure services company, which designs, deploys and
maintains telecommunications, electrical, life safety and other systems. We
deliver a full spectrum of services including engineering, management,
deployment and installation in local metropolitan markets. Our principal focus
is to provide the expertise and resources our customers need to design, build,
and operate their infrastructure systems. We generally offer our services 24
hours a day, seven days a week.
During our most recent fiscal years, our customers included primarily
competitive local exchange carriers, internet service providers and carriers'
carriers. Given the current market conditions in the telecommunications
industry, we have taken steps to broaden our customer base to include large
enterprise customers, the real estate community and government entities and to
diversify our service offerings to include systems integration, electrical
contracting, installation of security systems, and other infrastructure
services.
We have offices in New York, Boston, Washington D.C., Philadelphia,
Miami, Long Island, White Plains and in New Jersey. In 2001, we closed our
offices in Atlanta, Dallas, and San Jose to concentrate our efforts in our core
markets. Some of our key customers include AT&T Local Services, IBM,
Cablevision, the Dormitory Authority of the State of New York, WorldCom,
conEdison and Level 3 Communications.
Our largest customers in 2001 were Level 3 Communications and AT&T. We
generated 22.5% and 16.4%, respectively, of our revenues from each of these
customers during 2001.
Lexent was incorporated in Delaware in January 1998. Our wholly owned
subsidiaries, Hugh O'Kane Electric Co., LLC, National Network Technologies LLC,
Lexent Services, Inc., HOK Datacom, Inc., and Lexent Capital, Inc. were formed
in June 1998, August 1998, May 2000, November 2000 and July 2001 respectively.
In July 1998, Hugh O'Kane Electric Co., Inc., our predecessor company,
merged into Lexent, and Lexent issued 22,716,600 shares of common stock to the
stockholders of our predecessor. Following the merger, substantially all of our
assets were contributed to our subsidiary, Hugh O'Kane Electric Co., LLC, and
that entity also assumed all of the obligations of Lexent, including those of
our predecessor company. On August 2, 2000, we completed an initial public
offering (IPO) of 6,900,000 shares of common stock at a price of $15.00 per
share, resulting in our receipt of net proceeds of $96.3 Million Dollars.
INDUSTRY OVERVIEW
The Telecommunications Act of 1996 opened the local telephone market to
competition by requiring the incumbent local exchange carriers (ILEC) to provide
competitive local exchange carriers with conditional access to their networks.
Competitive local exchange carriers (CLEC) were permitted to offer local, long
distance and data services to their customers including high bandwidth services
to businesses and consumers.
The telecommunications industry grew rapidly with competitive
telecommunications companies building fiber broadband networks in various
locations in the United States. The proliferation of telecommunications
companies and new technologies created an environment in which speed to market
in the design and construction of the telecommunication network was a critical
component of many telecommunication companies' business plans.
The expected demand for broadband services failed to materialize to the
extent anticipated. Along with the economic recession, the unmet expectations in
the telecommunications and broadband market resulted in the supply of fiber
optic network capacity outstripping current demand. Several telecommunications
companies faced significant economic setbacks in 2001, and some of these
companies filed for bankruptcy. Most of the competitive local exchange carriers
announced cutbacks in their expansion plans and in their capital expenditures
for 2001 and beyond.
Page 3
We believe that the changing environment in the telecommunications
industry has placed significant challenges not only upon the telecommunication
carriers but upon those companies that provide services or equipment to those
carriers. As a result, we resized our operations and closed certain offices
during 2001.
Although a number of telecommunications carriers have ceased to operate
or have significantly reduced their operations and/or capital expenditures in
2001, we believe that the need for telecommunication solutions at the enterprise
level continues. Accordingly, we offer our telecommunication services to
enterprise customers, the real estate community and governmental entities. We
have also diversified our service offerings to include not only
telecommunication services but also other infrastructure services such as
systems integration, electrical contracting, security and closed circuit TV. Our
Hugh O'Kane Electric Co., LLC subsidiary has a long history of providing
electrical services to enterprise customers, and we believe that the
diversification of our service offerings and the expansion of our customer base
is an appropriate strategy in today's market.
COMPETITION
Our markets are highly competitive and fragmented and are served by
numerous vendors. We believe that there is no dominant provider of
infrastructure services on a national level. Often the internal departments of
our customers and prospective customers are our primary competitors for the
services we offer. We may also compete with independent vendors and equipment
manufacturers. Moreover, as there may be relatively few barriers to entry in the
market in which we operate, any entity with adequate financial resources and
access to technical expertise and personnel may become our competitor.
We believe that the principal competitive factors in our markets
include quality and responsiveness of service, industry experience, reputation,
the ability to deliver timely results and pricing. In addition, expertise in
multiple disciplines and in new and evolving technologies has become
increasingly important. Because some of our customers, especially government
entities, utilize bidding procedures to award contracts, price often becomes the
most significant factor in the decision making process. We believe that we can
compete effectively in our markets on the basis of our experience and reputation
in the industries, our knowledge of the multiple disciplines required by our
customers, our highly trained work force, our knowledge of emerging
technologies, and our familiarity with equipment for multiple vendors.
STRATEGY
Because of the economic difficulties facing telecommunications
carriers, we altered our business strategy during 2001. We broadened our
infrastructure offerings beyond telecommunications services. We believe that
electrical contracting, systems integration, security, and related
infrastructure services are a natural outgrowth of our core telecommunications
services. Since one of our subsidiaries, Hugh O'Kane Electric Co., LLC, has a
long history of providing electrical services in our legacy New York City
metropolitan market, its reputation is well established.
We often utilize our design and engineering services to establish
relationships with customers as soon as a project is conceived. Based on these
relationships, we pursue opportunities for program management and network
deployment. Once a network is deployed, we offer ongoing network upgrade and
maintenance services. Our experience with emerging technologies also offers
opportunities for network upgrades and deployment of a carrier's next generation
network. As technologies continue to evolve and networks become more complex, we
continue to broaden our services to meet the changing needs of our customers.
In addition to the diversification of our service offerings, we seek to
broaden our customer base while still maintaining and strengthening our long
term and strategic relationships with stable telecommunications companies. Our
customer base currently includes cable television companies, electric utilities
and incumbent telecommunications carriers. We believe that the
telecommunications needs of the enterprise customers and government entities
continue to increase in a world where technology is changing rapidly. By
diversifying our telecommunications customer base beyond the competitive local
exchange carriers, we intend to reduce our exposure to the economic hardships of
the competitive local exchange carriers. We believe that our diversification
strategy will continue to result in the creation of relationships with new
customers and expanded relationships with existing customers.
Page 4
As part of our strategy to deal with the changing telecommunication
environment, we have taken steps to reduce our operational overhead and head
count. During 2001 and continuing into 2002, we significantly reduced our work
force and closed offices which are no longer strategically consistent with our
business plans. We have scaled back our plans to expand and will focus on our
core geographic markets. We are carefully monitoring our expenses and intend to
utilize strict credit practices to reduce receivable collection risk. We are
focusing on leveraging our administrative organization to achieve other cost
savings and efficiencies.
We continue to develop and test a Web-based work flow and management
software system which is intended to enable us to process orders and maintain
on-line records of all work performed at our customers' facilities. We have
entered agreements with various telecommunications companies and a real estate
venture to offer these software services in connection with their
telecommunication systems.
We believe that the aforementioned strategies will permit us to
stabilize our business in 2002 and beyond. However, current economic conditions,
both nationally and in the telecommunications industry, may impact our abilities
to continue to maintain our business at recent levels.
ACQUISITIONS AND INVESTMENTS
There were no significant acquisitions or investments during 2001.
SERVICES
DESIGN, ENGINEERING AND PROGRAM MANAGEMENT
DESIGN AND ENGINEERING. Our engineers and technical staff design
telecommunication and other types of infrastructure systems to suit our
customers' needs. Because of our knowledge of the areas where we operate and our
familiarity with different technologies, we are often able to achieve
efficiencies and avoid disruptions or delays in installations by designing
networks and systems avoiding known or potential problem areas. In addition, we
design layouts for facilities, which include equipment configurations, power
distribution systems and cable routes throughout building riser systems. We also
develop record keeping and maintenance procedures.
PROGRAM MANAGEMENT. Our program management staff is responsible for
managing all aspects of the various relationships with our infrastructure
customers. Program managers oversee the total scope of services we provide,
including supervision and coordinating the engineering and design process,
securing building and zoning permits, managing multiple vendors and documenting
the entire process for the customer. The program management team provides our
customers with a single point of contact to ensure that their needs are
continually being met.
SPECIALIZED TELECOMMUNICATIONS SERVICES
We believe one of our competitive strengths is that we are a single
source provider of vertically integrated services that have traditionally been
offered separately by multiple vendors and coordinated by a carrier's internal
deployment staff. We provide a wide range of services for the deployment of
telecommunications networks that allow for broadband connectivity. We install
fiber backbone, local SONET rings, dense wave division multiplexing (DWDM)
systems, fixed wireless systems, digital subscriber line (DSL) and digital loop
carrier equipment, digital cross connect systems, routers, power distribution
systems and telemetry monitoring systems. We also provide daily circuit testing
of DS0, DS1 and DS3 services provided by the ILECs for our customers. Our
technicians can install any of these and other options for our customers. We
have the expertise to install equipment from most major telecommunications
equipment vendors. Additionally, we set up the interconnections between CLECs,
long distance carriers and ILECs, which allow calls and data to install
equipment from most major telecommunications equipment vendors.
Page 5
ELECTRICAL CONSTRUCTION, SYSTEMS INTEGRATION, SECURITY, AND MAINTENANCE
SERVICES
We provide systems integration services, electrical construction, and
security system installation along with related maintenance services for our
customers. Sometimes these services are performed as stand-alone services. At
other times, they are performed in conjunction with our providing
telecommunications services. Our customers include enterprise customers, the
real estate community and government entities. The services also include premise
wiring services within buildings and among individual offices.
UPGRADE AND MAINTENANCE SERVICES
We provide daily upgrade and maintenance services to our customers. As
usage increases, we install new access lines, electrical lines, and other
telecommunications and electrical equipment to handle the additional capacity.
We also upgrade equipment and reconfigure as the technology changes or improves.
We sometimes have technicians based at customers' premises to monitor any
service issues that may arise and perform routine maintenance. Our technicians
are available 24 hours a day, seven days a week to handle emergency repairs,
such as fiber cuts or equipment problems, while preventing or minimizing service
disruptions. These services allow our customers to maintain the reliability of
their networks without building a large workforce in all of their locations to
handle day-to-day problems.
RISK FACTORS
In this section, we describe several significant risks affecting our
Company. These risks and uncertainties are not the only ones facing our Company.
There are unknown risks and those that we currently consider immaterial. Should
any of the risks set forth below occur, our business, financial condition, or
results of operations could be materially and adversely affected.
The telecommunications industry has been in a state of rapid change in
2001 and 2002. Several of the competitive telecommunications carriers which have
supplied significant revenue to our company have suffered significant losses,
and some have filed for bankruptcy protection. Most of our telecommunications
customers have announced reductions in their future plans for capital
expenditures. The telecommunications industry which had projected dramatic
growth in the need for broadband services has been materially and adversely
impacted by the failure of such growth to materialize. Companies that serve the
telecommunications industry by providing equipment, engineering and/or
installation services have been adversely affected by the deterioration of the
financial stability of their telecommunications customers. It is uncertain when
and if the telecommunications industry will recover and to what extent future
growth, if any, in the telecommunications industry will materialize.
As a result of our telecommunications customers experiencing financial
difficulties and curtailing their capital expenditures, revenues from those
customers have declined. We do not expect to continue to derive historical
levels of revenue from those customers. We are developing a diversification
strategy to diversify both our services and our customer base because we do not
intend to be reliant upon the competitive telecommunications carriers for the
bulk of our revenues. Since our diversification strategy is untested and may not
succeed, there can be no assurance of our ability to replace revenues from our
telecommunications carriers with revenues from new services and new customers.
The economic downturn has also reduced demand for telecommunications
services. If the general level of economic activity does not recover, our
customers may delay or not proceed with their projects. The inability of our
customers, particularly the competitive telecommunications carriers, to obtain
capital may reduce the size or number of projects undertaken by our customers.
Many of the factors affecting our customers are beyond our control, and we
cannot be certain that our strategies will be successful.
We have also taken steps to lower operational overhead, reduce head
count, monitor expenses and impose stricter credit guidelines. We cannot be
certain that our actions will result in profitability for our company or the
improvement of our operating margins. In addition, because we have reduced our
overhead and the number of employees, our business may not operate as
efficiently. If we fail to properly balance the goals of lowering costs while
maintaining efficient operations, our results of operations will be negatively
affected.
Our service agreements do not assure the continuation of our revenue
and may be cancelled on short notice. We may be unsuccessful in replacing those
agreements when they expire or if they are cancelled. We have also
Page 6
derived a significant portion of our revenues from a limited number of
customers, and the loss of a few customers could cause a significant decrease in
our revenues if we are not able to replace those customers with new customers
for equivalent services. We also expect our quarterly results to fluctuate based
upon a mix of factors. Furthermore, although we seek to enter into long term,
recurring revenue agreements, we cannot be certain these will materialize.
Our operating results may suffer because of competition in the
infrastructure services industries. Both the telecommunications services market
and the other markets in which we compete are highly competitive and are served
by numerous companies. We believe that our ability to compete depends on a
number of factors outside of our control, including: the prices at which others
offer competitive services, the abilities of our customers to perform the
services themselves, the general economic climate, and the downturn in the
telecommunications industry.
The departure of key personnel could also disrupt our business
operations. Our success depends to a significant degree upon the continued
contributions of our executive officers, both individually and as a group, and
upon our ability to attract and retain qualified technical staff. The loss of
key personnel or the inability to hire and retain qualified employees could
adversely affect our business.
To the extent that our customers suffer adverse developments in their
financial condition, they may be unable to repay some or all of our accounts
receivable, and as a result, our financial results would be adversely impacted.
Provision for doubtful accounts represents our estimates of the amounts of our
receivables which will be uncollectible. If in any period there are adverse
developments in the financial condition of our customers, we may significantly
increase our provision for doubtful accounts. The amounts of our receivables,
which will ultimately be collected from each of our customers, may differ from
our estimates, and accordingly, our operating results in any period may vary
significantly depending on changes in our customers' financial condition or
changes in our estimates of the uncollectible amounts of our receivables.
EMPLOYEES
As of December 31, 2001, we had 747 employees, 601 of whom are billable
employees working directly on projects. Approximately 431 of our employees are
represented by a labor union, the International Brotherhood of Electrical
Workers or IBEW. We have not experienced any work stoppages in the past 25 years
and we believe that our relationships with our employees and union
representatives are excellent.
TRAINING AND CAREER DEVELOPMENT. We believe that our training and
career development helps us to retain our employees. Employees participate in
ongoing educational programs to enhance their technical and management skills
through classroom and field training. Manufacturers of telecommunications
equipment also sponsor training programs covering the installation and
maintenance of their equipment, which our employees regularly attend. We also
provide opportunities for promotion and mobility within Lexent that we believe
are key components of employee retention.
We believe our employee training, development and advancement structure
better aligns the interests of our employees with our interests and creates a
cooperative, entrepreneurial atmosphere and shared vision. We are dedicated to
maintaining an innovative, creative and empowering environment where we work as
a team to exceed the expectations of our customers and provide our employees
with personal and professional growth opportunities.
ITEM 2. PROPERTIES
FACILITIES
We lease space at 31 separate locations throughout California,
Connecticut, Delaware, Florida, Georgia, Illinois, Massachusetts, New Jersey,
New York, Pennsylvania, Texas and Virginia. Of these 31 locations, we currently
sublease one location in each of California, Connecticut, Massachusetts and
Texas to unrelated third parties. Additionally, three of our leased locations
are owned by Hugh J. O'Kane, Jr., our Chairman, and Kevin M. O'Kane, our Vice
Chairman, President and Chief Executive Officer, and two of these three
locations are also owned by Denis J. O'Kane, a stockholder in Lexent Inc. and
the brother of each of Kevin and Hugh O'Kane, Jr. Our principal executive
offices are located in approximately 20,000 square feet of office space at Three
New York Plaza in New York, New York. The lease for this office space expires in
February 2005.
Page 7
ITEM 3. LEGAL PROCEEDINGS
We are subject to various claims and proceedings that occur from time
to time. In particular, several employment related lawsuits or administrative
complaints have been filed alleging wrongful termination, breach of contract or
employment discrimination. There was also a class action suit filed in the U.S.
District Court, Southern District of New York, entitled LABANSKY, ET AL. V.
LEXENT INC., ET AL. on October 26, 2001 against the Company, certain of its
senior executive and its underwriters, alleging violation of the Securities laws
in connection with the initial public offering. Based upon information currently
available to us, we believe that none of the current claims or proceedings,
either individually or in the aggregate, is likely to have a material effect
upon our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the stockholders during
the fourth quarter of the year ended December 31, 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the NASDAQ National Market System under
the symbol "LXNT." The following table sets forth, for the quarters indicated,
the high and low sale prices of the Company's common stock as reported by
NASDAQ.
HIGH LOW
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YEAR ENDED DECEMBER 31, 2000
3rd Quarter .................................. $37.81 $18.75
4th Quarter .................................. $30.94 $11.19
YEAR ENDED DECEMBER 31, 2001
1st Quarter .................................. $24.13 $ 4.03
2nd Quarter .................................. $ 8.64 $ 2.60
3rd Quarter .................................. $ 7.69 $ 4.70
4th Quarter .................................. $ 7.60 $ 4.90
YEAR ENDED DECEMBER 31, 2002
1st Quarter (through March 15, 2002) ......... $ 6.68 $ 2.95
On March 15, 2002, there were approximately 41,741,793 shares of Common
Stock outstanding which were held by approximately 3,100 stockholders of record
of the Company's common stock. The last sale price for the common stock as
reported by NASDAQ was $3.44 per share on that date.
DIVIDEND POLICY
We currently intend to retain any future earnings to finance the growth
and development of our business and therefore do not anticipate paying any cash
dividends in the foreseeable future. Any future determination to pay cash
dividends will be at the discretion of the board of directors and will be
dependent upon our financial condition, results of operations, capital
requirements, general business conditions and other factors that the board of
directors may deem relevant.
RECENT SALES OF UNREGISTERED SECURITIES
In 2001, the Company did not sell or issue any securities that were not
registered under the Securities Act.
Page 8
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth certain selected consolidated financial
data of the Company for the years ended December 31, 2001, 2000, 1999, 1998, and
1997. The selected consolidated data is derived from our consolidated financial
statements. You should read the following selected consolidated financial data
together with our consolidated financial statements and their notes as well as
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(in thousands, except per share amounts)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues $240,578 $295,993 $150,862 $ 70,959 $ 53,718
Cost of revenues 195,001 222,754 119,577 55,752 42,801
General and administrative expenses 20,237 20,340 9,012 6,815 6,907
Depreciation and amortization 5,803 3,628 1,495 779 510
Non-cash stock-based compensation 6,058 26,159 2,191 -- --
Provision for doubtful accounts 32,286 2,551 2,373 1,096 --
Restructuring charges 13,564 -- -- -- --
-------- -------- -------- -------- --------
Operating income (loss) (32,371) 20,561 16,214 6,517 3,500
Interest expense 1,077 1,252 1,104 1,143 1,151
Interest income (2,334) (1,966) -- -- --
Other (income) expense, net 2,002 (5) 27 166 9
-------- -------- -------- -------- --------
Income (loss) before income taxes (33,116) 21,280 15,083 5,208 2,340
Income tax provision (benefit) (13,856) 12,704 7,131 1,380 151
-------- -------- -------- -------- --------
Net income (loss) $(19,260) $ 8,576 $ 7,952 $ 3,828 $ 2,189
======== ======== ======== ======== ========
Net income (loss) per share:
Basic $ (0.46) $ 0.27 $ 0.32 $ 0.16 $ 0.10
======== ======== ======== ======== ========
Diluted $ (0.46) $ 0.22 $ 0.24 $ 0.15 $ 0.10
======== ======== ======== ======== ========
Weighted average number of common shares
outstanding:
Basic 41,449 30,839 22,721 22,717 22,717
======== ======== ======== ======== ========
Diluted 41,449 38,266 33,531 26,390 22,717
======== ======== ======== ======== ========
PRO FORMA INFORMATION (UNAUDITED):
Income before income taxes $ 5,208 $ 2,340
Pro forma provision for income taxes (1) 2,344 1,053
-------- --------
Pro forma net income (1) $ 2,864 $ 1,287
======== ========
Pro forma net income per share (2):
Basic $ 0.21 $ 0.24 $ 0.11 $ 0.06
======== ======== ======== ========
Diluted $ 0.20 $ 0.23 $ 0.11 $ 0.06
======== ======== ======== ========
Pro forma weighted average number of shares:
Basic 40,654 32,536 27,025 22,717
======== ======== ======== ========
Diluted 42,356 34,606 27,025 22,717
======== ======== ======== ========
AS OF DECEMBER 31,
------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(in thousands)
CONSOLIDATED BALANCE SHEET DATA:
Cash $ 75,839 $ 63,690 $ 1,158 $ 1,495 $ 2,312
Working capital 128,996 140,811 25,697 10,691 2,516
Total assets 168,515 199,001 60,379 32,309 18,212
Total debt 5,593 10,807 18,812 13,985 15,460
Total stockholders' equity (deficit) 137,969 150,481 3,715 (6,388) (4,676)
(1) Through July 23, 1998, we elected to be taxed as an S corporation under the
Internal Revenue Code of 1986. Accordingly, we did not recognize any
provision for federal income tax expense during periods prior to that
Page 9
time. The pro forma provision for income taxes and pro forma net income for
1998 and 1997 reflect the amounts we would have recorded if we had been a C
corporation during these periods.
(2) Pro forma net income per share for 2000, 1999 and 1998 assumes conversion
of redeemable convertible preferred stock at the rate of 1.77209 shares of
common stock for each share of redeemable convertible preferred stock, at
the later of the beginning of the period presented or the date of issuance
of the redeemable convertible preferred stock. For a description of the
computation of pro forma net income per share and the number of shares used
in the pro forma calculations for the years 2000 and 1999, see Note 1 of
"Notes to Consolidated Financial Statements."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are an infrastructure services company, which designs, deploys and
maintains telecommunications, electrical, life safety and other systems. We
deliver a full spectrum of services including engineering, management,
deployment and installation in local metropolitan markets. Our principal focus
is to provide the expertise and resources our customers need to design, build,
and operate their infrastructure systems. We generally offer our services 24
hours a day, seven (7) days a week.
During our most recent fiscal years, our customers included primarily
competitive local exchange carriers, internet service providers and carriers'
carriers. Given the current market conditions in the telecommunications
industry, we have taken steps to broaden our customer base to include large
enterprise customers, the real estate community and government entities and to
diversify our service offerings to include systems integration, electrical
contracting, installation of security systems, and other infrastructure
services.
We have offices in New York, Boston, Washington D.C., Philadelphia,
Miami, Long Island, White Plains and in New Jersey. For the years 2001 and 2000,
approximately 79% and 75%, respectively, of our revenues was earned from
services provided in the New York metropolitan region, including New York City,
New Jersey, Long Island and White Plains.
Our cost of revenues includes compensation and benefits of employees
working directly on projects; overhead costs including supervision and support,
vehicles, facilities expenses, tools and equipment, and other direct
project-related expenses. Labor and related benefits comprise the largest
portion of our cost of revenues because our customers generally furnish most of
the materials required for each project. However, where we provide program
management services, we may be responsible for providing the required materials
as well as any subcontracting services.
General and administrative expenses include compensation and benefits,
facilities expenses, and other expenses not related to supervision and support
of employees working directly on projects.
Depreciation and amortization expenses include depreciation of our
property and equipment and amortization related to capitalized leases of
equipment, leasehold improvements and computer software purchased for internal
use.
As of December 31, 2001, we had 601 employees working directly on
projects and 146 employees providing supervision, support, and general,
administrative and marketing functions.
Our customers for the design and deployment of telecommunications
networks include large, well-established telecommunications carriers as well as
smaller, early stage telecommunications carriers. We have derived, and believe
that we will continue to derive, a significant portion of our revenues from a
limited number of customers. For the years 2001 and 2000, we derived
approximately 23% and 25%, respectively, of our revenues from our largest
customer, and 16% and 8%, respectively, of our revenues from our second largest
customer. The volume of work performed for specific customers is likely to vary
from period to period, and a major customer in one period may require a lesser
amount of our services in a subsequent period. Several of our
telecommunications-carrier customers who provided us with significant revenues
in 1999, 2000, and/or 2001 have experienced financial difficulties and have
curtailed their capital expenditures. As a result, revenues from those customers
have declined and we do not expect to continue to derive future revenue from
those customers. We intend to derive other revenues
Page 10
by providing our services to new customers, but no assurance of our success in
replacing those revenues can be given.
On January 1, 1997, we repurchased common shares owned by a stockholder
and issued a subordinated promissory note in the amount of $10.2 million bearing
interest at 6% per year. We make quarterly payments of $0.4 million plus
interest on that note and as of December 31, 2001, a balance of $3.6 million was
outstanding.
On July 23, 1998, we converted from an S corporation to a C
corporation. Prior to becoming a C corporation, our stockholders were taxed
individually for their share of our profits. Until July 23, 1998, our financial
statements did not reflect a provision for federal income taxes. Subsequent to
that date, we have recorded federal income taxes at the standard statutory C
corporation rates based on pre-tax income. For the year 1998, our financial
statements reflect an income tax provision based on pre-tax income earned from
July 23, 1998 to December 31, 1998.
On August 2, 2000, we completed an initial public offering (IPO) of
6,900,000 shares of common stock at a price of $15.00 per share, resulting in
our receipt of net proceeds of $96.3 million.
CRITICAL ACCOUNTING POLICIES
For most of our projects, revenue and expense is recognized under the
completed contract method, in which we recognize revenue and expense when our
services have been performed and the projects have been completed. For projects
which have been completed but not yet billed to customers, we recognize revenue
based on our estimates of the amounts to be realized. When such projects are
billed, any differences between our initial estimates and the actual amounts
billed are recorded as increases or decreases to revenue.
For cost-plus projects, in each period we recognize expense as the
costs are incurred and we recognize revenue in an amount equal to the costs
incurred plus the contractual markup.
For larger projects other than cost-plus projects, generally those
whose duration is expected to exceed 90 days, we recognize revenue and expense
using the percentage-of-completion method. Under the percentage-of-completion
method, in each period we recognize expense as the costs are incurred and we
recognize revenue based on the ratio of the costs incurred for each project to
our currently estimated total costs to be incurred for the project, multiplied
by the estimated revenue to be earned for the project. Accordingly, the revenue
we recognize in a given period depends on our current estimates of the total
remaining costs to complete individual projects and the total estimated revenue
to be earned for those projects. If in any period we significantly increase our
estimate of the total remaining costs to complete a project or lower our
estimate of revenue to be earned for a project, we may recognize no additional
revenue or we may reduce previously recorded revenue with respect to that
project. As a result, our gross margin in such period and in future periods may
be significantly reduced and in some cases we may recognize a loss on individual
projects prior to their completion. Provisions for estimated losses on projects
are made in the period in which such losses are determined. The projects for
which we use the percentage-of-completion method of accounting are typically
structured with milestone events that dictate the timing of payments to us from
our customers. Accordingly, there may be a significant delay between the date we
record the revenue and the date we receive payment from our customers. Our
customers for these projects may withhold a certain percentage (usually 10%)
from each billing until after the project has been completed and final approvals
have been obtained.
Non-cash stock-based compensation expense represents amortization of
deferred stock-based compensation resulting primarily from the grant of stock
options or sale of restricted stock at exercise or sale prices subsequently
deemed, for financial reporting purposes, to be less than the fair value of the
common stock on the grant or sale date. Deferred stock-based compensation also
includes the fair value at grant date of options granted to non-employees. To
the extent that unvested options are forfeited, previously recorded deferred
stock-based compensation is reversed. Deferred stock-based compensation is
amortized to expense over the applicable vesting periods ranging from
immediately to up to four years. Deferred tax assets are recorded in connection
with amortization of stock-based compensation expense related to nonqualified
options. To the extent that vested nonqualified options for which we have
recorded deferred tax assets expire unexercised or are exercised at a time when
the fair value of the stock is lower than the deemed fair value of the stock for
financial reporting purposes on the date the options were granted ($22.80 per
share), a portion or all of such deferred tax assets would not be realized and
such portion would be charged to expense.
Page 11
Provision for doubtful accounts represents our estimates of the amounts
of our receivables which will be uncollectible. If in any period there are
adverse developments in the financial condition of our customers, we may
significantly increase our provision for doubtful accounts. The amounts of our
receivables which will ultimately be collected from each of our customers may
differ from our estimates, and accordingly, our operating results in any period
may vary significantly depending on changes in our customers' financial
condition or changes in our estimates of the uncollectible amounts of our
receivables.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
statement of operations data as a percentage of total revenues. Our results of
operations are reported as a single business segment. The percentages may not
add due to rounding.
AS OF DECEMBER 31,
----------------------------
2001 2000 1999
------ ------ ------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues 100.0% 100.0% 100.0%
Cost of revenues 81.1 75.3 79.3
General and administrative expenses 8.4 6.9 6.0
Depreciation and amortization 2.4 1.2 1.0
Non-cash stock-based compensation 2.5 8.8 1.5
Provision for doubtful accounts 13.4 0.9 1.6
Restructuring charges 5.6 0.0 0.0
------ ------ ------
Operating income (loss) (13.5) 6.9 10.7
Interest expense 0.4 0.4 0.7
Interest income (1.0) (0.7) 0.0
Other (income) expense, net 0.8 0.0 0.0
------ ------ ------
Income (loss) before income taxes (13.8) 7.2 10.0
Income tax provision (benefit) (5.8) 4.3 4.7
------ ------ ------
Net income (loss) (8.0)% 2.9% 5.3%
====== ====== ======
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
REVENUES. Our revenues decreased by 19% to $240.6 million in 2001 from
$296.0 million in 2000. The decrease in revenues was primarily a result of lower
capital expenditures by several of our large telecommunications customers due to
changing conditions in the telecommunications industry and to the filing for
bankruptcy by a number of our telecommunications customers during 2001. As a
result, we do not expect to continue to derive our historical levels of revenues
from telecommunications customers. During 1999, we entered into an engineering,
procurement and construction contract (the "EPC contract") with our largest
customer, Level 3 Communications, under which we recorded approximately $47.3
million and $69.2 million of revenues for 2001 and 2000, respectively. The EPC
contract was completed for all markets except New York and Boston during 2001,
and is expected to be fully completed during 2002, and accordingly, revenues
from the EPC contract will be lower in 2002 than in 2001.
COST OF REVENUES. Our cost of revenues represented 81% of revenues in
2001 compared to 75% of revenues in 2000. The increased percentage was due in
part to fixed overhead costs which represented a higher percentage of a lower
level of revenues, and in part to pricing pressure. We anticipate that pricing
pressure will continue during 2002. Costs of approximately $41.3 million and
$60.7 million were incurred in 2001 and 2000, respectively, in connection with
the EPC contract.
GENERAL AND ADMINISTRATIVE EXPENSES. Our total general and
administrative expenses were approximately the same in 2001 and 2000. Expenses
for salaries were higher in 2001 because of a higher average number of general
and administrative personnel and rent expense was higher because of additional
office premises occupied in mid 2000 and early 2001, but those higher expenses
were offset by a lower provision for incentive compensation in 2001.
Page 12
DEPRECIATION AND AMORTIZATION. Our depreciation and amortization
expense increased to $5.8 million in 2001 from $3.6 million in 2000. The
increase reflects additional equipment acquired and leasehold improvements
installed in newly occupied premises primarily in the last half of 2000 and the
first quarter of 2001.
NON-CASH STOCK-BASED COMPENSATION. Amortization of deferred stock-based
compensation declined to $6.1 million in 2001 from $26.2 million in 2000,
primarily because amortization in 2000 reflected up-front vesting of options
granted to certain executives in the first quarter of 2000. The decrease in 2001
was also due in part to the reversals of $1.3 million of deferred stock-based
compensation for unvested options which were forfeited, and $7.6 million with
respect to an optionee whose status was changed from employee to consultant on
April 1, 2001. The latter's unvested options were remeasured at their current
fair value of $1.3 million on April 1, 2001, which was charged to deferred
compensation and is being amortized to expense over the remaining vesting
period.
PROVISION FOR DOUBTFUL ACCOUNTS. Our provision for doubtful accounts
increased to $32.3 million in 2001 from $2.6 million in 2000. The increase in
2001 was due to adverse developments in the financial condition of several of
our customers during 2001, primarily telecommunications carriers which
experienced adverse changes in their financial condition during 2001, and
accordingly, we increased our estimates of the amount of receivables which will
not be collectible from those customers.
RESTRUCTURING CHARGES. In 2001, we recorded $13.6 million in
restructuring charges, primarily in connection with the closing of seven offices
and reduction in our workforce. The restructuring charges are comprised
primarily of $9.1 million for obligations under leases for premises which the
Company has vacated, $3.3 million for severance and related contractual
obligations for approximately 115 non-unionized personnel and executives in
areas being closed or scaled back, and $1.2 million for writeoffs of property
and equipment. During the year we scaled back our expansion plans and closed a
number of offices, and changed our business plans to focus primarily on our
traditional markets, including the New York metropolitan region, Washington
D.C., Philadelphia and Boston, among others.
We expect the implementation of our restructuring plan to reduce our
pretax operating expenses by $10.7 million in the year 2002, of which $5.3
million would represent cash savings. These anticipated cash savings result
primarily from reduced headcount, fewer vehicles, and sublease income from
vacated premises.
Total cash outlays under the restructuring program are expected to be
approximately $12.4 million, of which approximately $3.0 million was paid during
2001. Of the balance of $9.3 million, severance and related contractual
obligations of $1.8 million are expected to be paid by the end of 2002 and
obligations under leases of $7.6 million are expected to be paid over the
remaining terms of the leases up to nine years. We expect to complete the
restructuring plan by the end of 2002.
INTEREST EXPENSE. Interest expense decreased to $1.1 million in 2001
from $1.3 million in 2000. The decrease was primarily due to a lower average
level of debt outstanding in 2001. On August 1, 2001, we repaid the loan of $2.0
million outstanding under our revolving credit facility, and during 2001 we
repaid $1.5 million of our subordinated note payable to a stockholder.
INTEREST INCOME. Interest income increased to $2.3 million in 2001 from
$2.0 in 2000. Interest income is earned on our interest-bearing cash
equivalents. The increased income in 2001 was due to a higher average amount of
cash equivalents, partially offset by lower prevailing interest rates.
OTHER (INCOME) EXPENSE, NET. Other (income) expense, net, was $2.0
million of expense, comprised primarily of a writeoff of an investment in
securities of $1.6 million and costs of $0.3 million related to a potential
acquisition not consummated.
INCOME TAX PROVISION (BENEFITS). Excluding tax benefits related to
amortization of deferred stock-based compensation, our effective tax rate in
2001 was approximately 46% because a significant portion of our operations is
concentrated in New York City, which subjects us to a local tax on income
derived in that jurisdiction. Amortization of deferred stock-based compensation
relates to both incentive stock options and nonqualified options, however tax
benefits are not available for incentive stock options. Therefore, tax benefits
recorded in connection with amortization of deferred stock-based compensation
represent a lower effective rate compared with the effective rate for all other
income (loss). As a result, our total effective tax rate for financial reporting
purposes was 42% and 60% for 2001 and 2000, respectively.
Page 13
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
REVENUES. Our revenues increased by 96% to $296.0 million in 2000 from
$150.9 million in 1999. The increase in revenues was a result of expanded
business from existing key customers, revenue generation from a growing customer
base and expansion into new markets. During 1999, we entered into an
engineering, procurement and construction contract with a customer, or the EPC
contract, under which we recorded approximately $69.2 million and $34.6 million
of revenues for 2000 and 1999, respectively.
COST OF REVENUES. Our cost of revenues increased by 86% to $222.8
million in 2000 from $119.6 million in 1999. The increase was due in part to
increased technical personnel in support of additional demand from customers for
our services, an increase in rent expense for additional premises and equipment,
and an increase in our fleet of vehicles. In addition, we expanded our
operations into new geographic markets in 2000, where we incurred costs for new
supervisory and support personnel, tools and equipment, vehicles and leasehold
improvements. Cost of revenues declined to 75.3% of total revenues in 2000 from
79.3% in the same period of 1999, because the rate of increase in our revenues
was higher than the rate of increase in our expenses. Costs of approximately
$60.7 million and $31.0 million were incurred in 2000 and 1999, respectively, in
connection with the EPC contract.
GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative
expenses increased 126% to $20.3 million in 2000 from $9.0 million in 1999. The
increase was primarily due to additional compensation and related benefits for
new executive and administrative personnel required to support our increased
revenues.
DEPRECIATION AND AMORTIZATION. Our depreciation and amortization
expense increased 143% to $3.6 million in 2000 from $1.5 million in 1999. The
increase reflects the depreciation of additional equipment acquired during 2000.
NON-CASH STOCK-BASED COMPENSATION. We recorded amortization of non-cash
stock-based compensation of $26.2 million in 2000, compared with $2.2 million in
1999, related to options and restricted stock granted at exercise prices
determined by our Board of Directors at dates of grant to be equal to the fair
value of the underlying stock, but with respect to which, for financial
reporting purposes, the exercise or sales prices were subsequently determined to
be lower than the deemed fair values of the underlying common stock at dates of
grant.
INTEREST EXPENSE. Interest expense increased to $1.3 million in 2000
from $1.1 million in 1999. The increase was due to higher interest rates on our
revolving line of credit and increases in equipment and capital lease
obligations, offset by lower interest expense on subordinated notes payable
because of a lower average level of such subordinated notes outstanding as a
result of repayments of $2.0 million during 2000.
INTEREST INCOME. Interest income was $2.0 million for the year 2000,
representing interest earned on our interest-bearing cash equivalents acquired
in August 2000 with the proceeds from the Company's initial public offering.
INCOME TAX PROVISION (BENEFITS). Excluding the effect of amortization
of deferred stock-based compensation, our effective tax rate for 2000 was
approximately 43% because a significant portion of our operations is
concentrated in New York City, which subjects us to a local tax on income
derived in that jurisdiction. Amortization of deferred stock-based compensation
relates to both incentive stock options and nonqualified stock options, however,
tax benefits are not available for incentive stock options. Therefore, tax
benefits recorded in connection with amortization of deferred stock-based
compensation represent a lower effective rate compared with the effective rate
for all other income. As a result, our total effective tax rate for financial
reporting purposes was 60% and 47% for the years 2000 and 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity needs are for working capital and capital
expenditures. Our primary sources of liquidity are cash flows from operations
and the net proceeds from our IPO. As of December 31, 2001, we had cash and cash
equivalents of $75.8 million.
On August 2, 2000, we completed an IPO of 6,900,000 shares of common
stock at a price of $15.00 per share. We received net proceeds of $96.3 million
after underwriting discounts and before expenses of the offering. We used
approximately $10.1 million of the net proceeds to pay a portion of the
borrowings outstanding under our
Page 14
revolving credit facility. We also used $1.1 million of the net proceeds to pay
dividends accrued after December 31, 1998 on redeemable convertible preferred
stock which was converted to common stock upon consummation of our IPO, and $0.4
million to repay subordinated notes payable to our two principal common
stockholders. The remaining net proceeds of the IPO, after expenses of the
offering, were invested in interest-bearing cash equivalents.
In June 1999, we obtained a $10 million revolving credit facility from
two banks, which was subsequently increased to $12.5 million in December 1999,
and to $20 million in March 2000. In November 2000, we completed a $50 million
bank credit facility with five banks, which was to be used for general corporate
purposes including working capital and potential acquisitions. In August 2001,
we repaid the $2.0 million loan outstanding under the credit facility, and in
December 2001 we terminated the credit facility as we do not currently
anticipate that borrowings under the credit facility would be required in order
to meet our projected needs for liquidity for the foreseeable future.
Cash used in operations is required primarily to carry accounts
receivable and to fund projects in process and other working capital
requirements. To the extent that our customers suffer adverse developments in
their financial condition, they may be unable to provide us with additional
revenues and they also may be unable to repay some or all of our receivables,
and as a result our cash receipts would be adversely impacted. In 2001, we
recorded a provision for uncollectible receivables of $32.3 million representing
our estimate of the portion of our receivables which will be uncollectible
because of adverse developments in the financial condition of several of our
customers. Net cash provided by operations was $25.1 million for 2001, resulting
from net collections of receivables offset by payments made for accounts payable
and income taxes. Net cash used in operations was $15.1 million in 2000, and
$0.0 million in 1999.
We invoice our customers for large projects on a monthly basis as work
is performed and/or when milestones are achieved. Unattained milestones would
result in a delay in billing the customers, which would in turn result in a
delay in cash receipts. For certain projects, customers hold back a certain
percentage (usually 10%) until the project is completed. As of December 31,
2001, these hold-backs aggregated $0.7 million.
If revenues increase in future years, we would likely be required to
finance an increased level of working capital, primarily comprised of higher
levels of accounts receivable and projects in process. Alternatively, to the
extent we are not successful in replacing revenues previously derived from
several of our large telecommunications-carrier customers with other revenues
from existing or new customers, our liquidity position would be adversely
impacted if we are unable to reduce our costs at a rate commensurate with the
reduction in revenues, and we could incur a net loss.
Cash used in investing activities, primarily capital expenditures, was
$7.9 million for 2001, $11.3 million for 2000, and $2.9 million for 1999.
Net cash used in financing activities for 2001 was $5.0 million,
primarily for debt repayments. Net cash provided by financing activities for
2000 was $88.9 million, comprised of $96.3 million in proceeds from our IPO and
$6.6 million proceeds from exercises of stock options and sales of restricted
stock, offset by costs of the IPO of $2.3 million, preferred dividends of $1.1
million, and net debt repayments. Net cash provided from financing activities in
1999 was $2.6 million, representing net borrowings.
We have no material commitments other than installment obligations
related to equipment purchases, leases for facilities, computer equipment and
vehicles, and a subordinated note payable to a stockholder. We anticipate that
available cash and cash equivalents and cash flows from operations will be
sufficient to satisfy our working capital requirements for the foreseeable
future. Our future working capital requirements and liquidity will depend upon
many factors, including our customers' financial condition and their ability to
pay amounts owing to us, our ability to replace the revenues previously derived
from several of our large telecommunications-carrier customers with revenue from
other customers, and our ability to reduce costs at a rate commensurate with any
reduction in revenues which we are unable to replace with new revenues.
A summary of our contractual cash obligations as of December 31, 2001
is as follows:
Page 15
- --------------------------------------------------------------------------------
Payments Due By Period
- --------------------------------------------------------------------------------
2005 and
Total 2002 2003 2004 beyond
- ------------------------ ----------- ----------- ---------- ---------- ---------
(in thousands)
- ------------------------ ----------- ----------- ---------- ---------- ---------
Long-term debt $ 4,586 $ 2,215 $1,880 $ 491 $ --
- ------------------------ ----------- ----------- ---------- ---------- ---------
Capital leases 1,007 717 280 10 --
- ------------------------ ----------- ----------- ---------- ---------- ---------
Operating leases 27,972 7,832 5,793 3,882 10,465
- ------------------------ ----------- ----------- ---------- ---------- ---------
Total contractual
cash obligations $33,565 $10,764 $7,953 $4,383 $10,465
- --------------------------------------------------------------------------------
On October 2, 2001 we received publicly traded shares of common stock of
Metromedia Fiber Network Inc. ("MFN") with a value of $4.8 million at that date,
in partial settlement of a receivable. As of December 31, 2001 the MFN common
stock had a market value of $4.9 million. The MFN common stock is classified as
an "available for sale" security and is included in current assets on our
balance sheet. Realization of the recorded value of the MFN common stock depends
on the market price on the date the shares are sold. One half of such shares may
be sold on or after January 2, 2002 and the other half may be sold on or after
April 2, 2002. During January 2002 we sold half of such shares for total
proceeds of $3.0 million.
EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued SFAS 141
"Business Combinations" and SFAS 142 "Goodwill and Other Intangible Assets,"
which are effective for us beginning January 1, 2002. SFAS 141 requires that all
business combinations initiated after June 30, 2001 be accounted for under the
purchase method of accounting. SFAS 142 provides that intangible assets with
finite lives must be amortized over their estimated useful life, and intangible
assets with indefinite lives will not be amortized but will be evaluated
annually for impairment.
In October 2001, the Financial Accounting Standards Board issued SFAS
144 "Accounting for the Impairment or Disposal of Long-Lived Assets." This
statement defines the accounting and reporting for the impairment and disposal
of long-lived assets and is effective for us on January 1, 2002. We do not
expect this statement to have a material effect on our results of operations or
financial position.
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K, including the Notes to the
Consolidated Financial Statements and this Management's Discussion and Analysis
of Financial Condition and Results of Operations, contains both historical and
forward-looking statements. All statements other than statements of historical
fact are, or may be deemed to be, forward-looking statements within the meaning
of section 27A of the Securities Act of 1933 and section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are only predictions and
generally can be identified by use of statements that include phrases such as
"believe," "expect," "anticipate," "intend," "plan," "foresee" or other words or
phrases of similar import. Similarly, statements that describe the Company's
objectives, plans or goals also are forward-looking statements. The Company's
operations are subject to certain risks and uncertainties that could cause
actual results to differ materially from those contemplated by the relevant
forward-looking statement. The forward-looking statements included herein are
made only as of the date of this Annual Report on Form 10-K and the Company
undertakes no obligation to publicly update such forward-looking statements to
reflect subsequent events or circumstances. No assurances can be given that
projected results or events will be achieved.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discusses our exposure to market risk related to changes
in interest rates, equity prices and foreign currency exchange rates.
At December 31, 2001, we had cash and cash equivalents of $75.8
million. Cash equivalents are interest-bearing investment grade securities,
primarily short-term, highly liquid investments with maturities at the date of
purchase of less than 90 days. These investments are subject to interest rate
risk and will decrease in value if market interest rates increase. A
hypothetical increase in the market interest rates by 10 basis points over the
rates in effect on December 31, 2001 would cause the fair value of these
short-term investments to decline by an insignificant amount. We have the
ability to hold these investments until maturity, and therefore we do not expect
the value of these investments to be affected to any significant degree by the
effect of a sudden change in market interest rates. Declines in interest rates
over time will, however, reduce our interest income.
At December 31, 2001, we owned common shares of MFN with a market value
of $4.9 million. The shares are traded on NASDAQ, and we are subject to market
price risk with respect to the shares. During January 2002 we sold half of such
shares for total proceeds of $3.0 million. We are restricted from selling the
remaining shares until April 2, 2002.
We currently do not have any international operations, and we currently
do not enter into forward exchange contracts or other financial instruments with
respect to foreign currency. Accordingly, we currently do not have any foreign
currency exchange rate risk.
Page 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 and the index therein for a listing of the Financial
Statements included as a part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors and officers
required by Item 10 is incorporated by reference to the information set forth in
Lexent's Definitive Proxy Statement for the 2002 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning the Company's directors and officers
required by Item 11 is incorporated by reference to the information set forth in
Lexent's Proxy Statement for the 2002 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning the Company's directors and officers
required by Item 12 is incorporated by reference to the information set forth in
Lexent's Definitive Proxy Statement for the 2002 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning the Company's directors and officers
required by Item 13 is incorporated by reference to the information set forth in
Lexent's Definitive Proxy Statement for the 2002 Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The information concerning the Company's directors and officers
required by Item 14 is incorporated by reference to the information set forth in
Lexent's Definitive Proxy Statement for the 2002 Annual Meeting of Stockholders.
Page 17
(a) The following financial statements, schedules and exhibits are
filed as part of this Report:
(1) Financial Statements. Reference is made to the Financial
Statements commencing on page 21 of this Report.
(2) All schedules are omitted because they are not applicable
or the required information is shown in the financial statements or the notes to
the financial statements.
(3) Exhibits:
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Second Amended and Restated Certificate of Incorporation
(incorporated herein by reference to Exhibit 3.6 to the
Company's Registration Statement on Form S-1 (File No.
333-30660))
3.2 Amended and Restated By-Laws
4.1 Specimen certificate for shares of Common Stock (incorporated
herein by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-1 (File No. 333-30660))
4.2 Registration Rights Agreement, dated as of July 23, 1998, among
Lexent Inc. and the investors named therein (incorporated herein
by reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-1 (File No. 333-30660))
4.3 Agreement, dated July 20, 1998, by and among Lexent Inc., Hugh
O'Kane Electric Co., Inc. and Denis J. O'Kane (incorporated
herein by reference to Exhibit 4.4 to the Company's Registration
Statement on Form S-1 (File No. 333-30660))
4.4 Voting Agreement, dated February 11, 2000, by and among Lexent
Inc., Hugh J. O'Kane, Jr. and Kevin M. O'Kane (incorporated
herein by reference to Exhibit 4.5 to the Company's Registration
Statement on Form S-1 (File No. 333-30660))
10.1* Lexent Inc. and Its Subsidiaries Amended and Restated Stock
Option and Restricted Stock Purchase Plan (incorporated herein
by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-8 (File No. 333-61958))
10.2* Form of Stock Option Agreement pursuant to the Stock Option and
Restricted Stock Purchase Plan (incorporated herein by reference
to Exhibit 10.2 to the Company's Registration Statement on Form
S-1 (File No. 333-30660))
10.3 Amended and Restated Promissory Note, dated July 23, 1998,
between Lexent Inc. and Denis J. O'Kane (incorporated herein by
reference to Exhibit 10.4 to the Company's Registration
Statement on Form S-1 (File No. 333-30660))
10.4 Form of Indemnification Agreement between Lexent Inc. and the
executive officers and directors thereof (incorporated herein by
reference to Exhibit 10.5 to the Company's Registration
Statement on Form S-1 (File No. 333-30660))
10.5* Employment Agreement, dated July 23, 1998, as amended February
14, 2000, between Hugh O'Kane Jr. and Lexent Inc. (incorporated
herein by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (File No. 333-30660))
10.6* Employment Agreement, dated July 23, 1998, as amended February
14, 2000, between Kevin O'Kane and Lexent Inc. (incorporated
herein by reference to Exhibit 10.7 to the Company's
Registration Statement on Form S-1 (File No. 333-30660))
10.7* Employment Agreement, dated August 20, 1998, as amended February
14, 2000, between Jonathan H. Stern and Lexent Inc.
(incorporated herein by reference to Exhibit 10.8 to the
Company's Registration Statement on Form S-1 (File No.
333-30660))
10.8* Employment Agreement, dated December 23, 1999, between Victor P.
DeJoy, Sr. and Lexent Inc. (incorporated herein by reference to
Exhibit 10.11 to the Company's Registration Statement on Form
S-1 (File No. 333-30660))
10.9* Lexent Inc. Employee Stock Purchase Plan (incorporated herein by
reference to Exhibit 4.2 to the Company's Registration Statement
on Form S-8 (File No. 333-61958))
10.10+ Engineer, Procure and Construct Contract, dated December 28,
1998, between Level 3 Communications, LLC and Lexent Inc.
(incorporated herein by reference to Exhibit 10.14 to the
Company's Registration Statement on Form S-1 (File No.
333-30660))
11.1** Statement Regarding Computation of Per Share Earnings
21.1 Subsidiaries of Lexent Inc.
23.1 Consent of independent accountants, PriceWaterhouseCoopers LLP
Page 18
- ----------
* Constitutes a management contract or compensatory plan or arrangement.
** Information is provided in Note 1 of Notes to Consolidated Financial
Statements
+ Portions of this exhibit have been filed confidentially with the Commission
pursuant to a confidential treatment request filed by the Company
(b) Reports on Form 8 - K:
(1) Lexent filed a Form 8-K on October 1, 2001 in which it
announced the appointment of Kathleen Perone to the Board of Directors,
effective October 1, 2001
Page 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Lexent Inc. has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, New York, on March 19, 2002.
LEXENT INC.
By:
----------------------------------
Hugh J. O'Kane, Jr.
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Act of 1934, this
Registration Statement has been signed by the following persons in the
capacities held on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
Vice Chairman, President March 19, 2002
and Chief Executive
- -------------------------------- Officer (Principal
Kevin M. O'Kane Executive Officer);
Director
Chairman of the Board of March 19, 2002
- -------------------------------- Directors
Hugh J. O'Kane, Jr.
Executive Vice President March 19, 2002
- -------------------------------- and Chief Financial Officer
Jonathan H. Stern (Principal Financial and
Accounting Officer)
Director March 19, 2002
- --------------------------------
L. White Matthews III
Director March 19, 2002
- --------------------------------
Kathleen Perone
Director March 19, 2002
- --------------------------------
Richard L. Schwob
Director March 19, 2002
- --------------------------------
Richard W. Smith
Director and Executive March 19, 2002
- -------------------------------- Vice President
Walter C. Teagle III
Page 20
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
PAGE NO.
--------
Report of Independent Accountants 22
Consolidated Balance Sheets as of December 31, 2001 and 2000 23
Consolidated Statements of Operations for the Years Ended 24
December 31, 2001, 2000 and 1999
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the Years Ended December 31, 2001, 2000, and 1999 25
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000, and 1999 26
Notes to Consolidated Financial Statements 27
Page 21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Lexent Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, changes in stockholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of Lexent Inc. and Subsidiaries at December 31, 2001 and
2000, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/S/ PRICEWATERHOUSECOOPERS LLP
New York, New York
February 7, 2002
Page 22
LEXENT INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31,
2001 2000
-------- --------
ASSETS:
Current Assets:
Cash and cash equivalents $ 75,839 $ 63,690
Available-for-sale securities 4,932 --
Receivables, net 41,171 105,253
Prepaid expenses and other current assets 5,220 400
Deferred tax asset, net 25,627 12,359
-------- --------
Total current assets 152,789 181,702
Property and equipment, net 12,896 14,614
Other assets 2,830 2,685
-------- --------
Total assets $168,515 $199,001
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 6,751 $ 11,124
Accrued liabilities 13,635 17,881
Income taxes payable -- 3,628
Billings in excess of costs and estimated
earnings on uncompleted projects 474 5,080
Subordinated note payable to stockholder 1,582 1,582
Equipment and capital lease obligations 1,351 1,596
-------- --------
Total current liabilities 23,793 40,891
Subordinated note payable to stockholder 1,978 3,561
Accrued liabilities - noncurrent 4,093 --
Note payable to banks -- 2,000
Equipment and capital lease obligations 682 2,068
-------- --------
Total liabilities 30,546 48,520
-------- --------
Commitments and Contingencies
Stockholders' equity:
Common stock, $.001 par value, 120,000,000
shares authorized, 41,612,372 and 41,084,300
shares outstanding at 2001 and 2000,
respectively 42 41
Additional paid-in capital 158,986 165,919
Deferred stock-based compensation (9,085) (22,705)
Accumulated other comprehensive income 60 --
Retained earnings (accumulated deficit) (12,034) 7,226
-------- --------
Total stockholders' equity 137,969 150,481
-------- --------
Total liabilities and stockholders' equity $168,515 $199,001
======== ========
See accompanying notes to consolidated financial statements.
Page 23
LEXENT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
2001 2000 1999
-------- -------- --------
Revenues $240,578 $295,993 $150,862
Cost of revenues 195,001 222,754 119,577
General and administrative expenses 20,237 20,340 9,012
Depreciation and amortization 5,803 3,628 1,495
Non-cash stock-based compensation* 6,058 26,159 2,191
Provision for doubtful accounts* 32,286 2,551 2,373
Restructuring charges 13,564 -- --
-------- -------- --------
Operating income (loss) (32,371) 20,561 16,214
Interest expense 1,077 1,252 1,104
Interest income (2,334) (1,966) --
Other (income) expense, net 2,002 (5) 27
-------- -------- --------
Income (loss) before income taxes (33,116) 21,280 15,083
Income tax provision (benefit) (13,856) 12,704 7,131
-------- -------- --------
Net income (loss) $(19,260) $ 8,576 $ 7,952
======== ======== ========
Net income (loss) per share:
Basic $ (0.46) $ 0.27 $ 0.32
======== ======== ========
Diluted $ (0.46) $ 0.22 $ 0.24
======== ======== ========
Weighted average number of common
shares outstanding:
Basic 41,449 30,839 22,721
======== ======== ========
Diluted 41,449 38,266 33,531
======== ======== ========
Pro forma net income per share:
Basic $ 0.21 $ 0.24
======== ========
Diluted $ 0.20 $ 0.23
======== ========
Pro forma weighted average number of shares:
Basic 40,654 32,536
======== ========
Diluted 42,356 34,606
======== ========
* Substantially all of these amounts would have been classified as general and
administrative expenses
See accompanying notes to consolidated financial statements.
Page 24
LEXENT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
STOCKHOLDERS' EQUITY
-------------------------------------------------------------------------------
ACCUMULATED
REDEEMABLE OTHER RETAINED STOCK-
CONVERTIBLE ADDITIONAL DEFERRED COMPRE- EARNINGS COMPRE- HOLDERS
PREFERRED COMMON PAID-IN STOCK-BASED HENSIVE (ACCUMULATED HENSIVE EQUITY
STOCK STOCK CAPITAL COMPENSATION INCOME DEFICIT) LOSS (DEFICIT)
----------- -------- ---------- ------------ ---------- ----------- -------- ---------
Balance at January 1, 1999 ............ $ 11,801 $ 23 $ 1,804 $ -- $ -- $ (8,215) $ -- (6,388)
Net income ............................ -- -- -- -- -- 7,952 -- 7,952
Issuance of 202,500 common shares ..... -- -- 68 -- -- -- -- 68
Tax benefit from exercise of
nonqualified stock options .......... -- -- 582 -- -- -- -- 582
Deferred stock-based compensation ..... -- -- 9,333 (9,333) -- -- -- --
Amortization of deferred
stock-based compensation ............ -- -- -- 2,191 -- -- -- 2,191
Dividends accrued on preferred
shares .............................. 690 -- -- -- -- (690) -- (690)
-------- -------- --------- -------- -------- -------- -------- ---------
Balance at December 31, 1999 .......... $ 12,491 $ 23 $ 11,787 $ (7,142) $ -- $ (953) $ -- $ 3,715
Net income ............................ -- -- -- -- -- 8,576 -- 8,576
Issuance of 1,450,576 common
shares .............................. -- 1 6,576 -- -- -- -- 6,577
Issuance of 6,900,000 common shares
in initial public offering .......... -- 7 96,248 -- -- -- -- 96,255
Conversion of 5,538,458 preferred
shares to 9,814,624 common upon
initial public offering ............. (11,801) 10 11,791 -- -- -- -- 11,801
Costs of initial public offering ...... -- -- (2,309) -- -- -- -- (2,309)
Tax benefit from exercise of
nonqualified stock options .......... -- -- 104 -- -- -- -- 104
Deferred stock-based compensation ..... -- -- 41,722 (41,722) -- -- -- --
Amortization of deferred
stock-based compensation ............ -- -- -- 26,159 -- -- -- 26,159
Dividends accrued on preferred
shares .............................. 397 -- -- -- -- (397) -- (397)
Dividends paid on preferred shares .... (1,087) -- -- -- -- -- -- --
-------- -------- --------- -------- -------- -------- -------- ---------
Balance at December 31, 2000 .......... $ -- $ 41 $ 165,919 $(22,705) $ -- $ 7,226 $ -- $ 150,481
Comprehensive income (loss), year
ended December 31, 2001:
Net loss .............................. -- (19,260) (19,260) (19,260)
Other comprehensive income, net
of tax: .............................
Unrealized gain on available-
for-sale securities, net of
income tax provision .............. -- -- -- -- 60 -- 60 60
---------
Comprehensive loss .................... -- -- -- -- -- -- $(19,200) --
=========
Reversal of unvested deferred stock
based compensation .................. -- -- (8,860) 8,860 -- -- --
Tax benefit from exercise of
nonqualified stock options .......... -- -- 376 -- -- -- 376
Deferred stock-based compensation ..... -- -- 1,298 (1,298) -- -- --
Amortization of deferred stock-
based compensation .................. -- -- -- 6,058 -- -- 6,058
Issuance of 528,072 common shares ..... -- 1 253 -- -- -- 254
-------- -------- --------- -------- --- -------- --------
Balance at December 31, 2001 .......... $ -- $ 42 $ 158,986 $ (9,085) $60 $(12,034) $137,969
======== ======== ========= ======== === ======== ========
See accompanying notes to consolidated financial statements.
Page 25
LEXENT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
2001 2000 1999
-------- ------- -------
Cash flows from operating activities:
Net income (loss) $(19,260) $ 8,576 $ 7,952
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Provision for uncollectible amounts, net 32,286 2,551 2,373
Restructuring charges 13,564 -- --
Depreciation and amortization 5,803 3,628 1,495
Loss on impairment/disposal of assets 1,662 21 71
Non-cash stock-based compensation 6,058 26,159 2,191
Provision for deferred tax benefits (12,944) (8,767) (1,896)
Changes in working capital items:
Receivables 26,596 (59,056) (24,779)
Prepaid expenses and other current
assets (287) (244) 379
Other assets (308) (784) (391)
Accounts payable (4,373) 2,690 3,065
Accrued liabilities (11,315) 8,244 5,464
Income taxes payable and prepaid taxes (7,781) (2,066) 3,304
Billings in excess of costs and
estimated earnings on uncompleted
projects (4,606) 3,996 778
-------- ------- -------
Net cash provided by (used in)
operating activities 25,095 (15,052) 6
-------- ------- -------
Cash flows from investing activities:
Capital expenditures and acquisitions, net
of equipment loans and capital leases (6,256) (11,294) (2,908)
Investments in securities (1,655) -- --
-------- ------- -------
Net cash used in investing
activities (7,911) (11,294) (2,908)
-------- ------- -------
Cash flows from financing activities:
Proceeds from exercise of stock options
and sales of restricted stock 254 6,576 68
Preferred dividends paid -- (1,087) --
Proceeds from initial public offering of
common stock -- 96,255 --
Costs of initial public offering -- (2,309) --
Repayment of subordinated notes payable
to stockholders (1,583) (1,972) (1,581)
Net (repayments to) borrowings from banks (2,000) (6,841) 4,341
Net (payments) borrowings (to) from
related parties -- (408) 421
Repayment of equipment loans and
capital leases (1,706) (1,336) (684)
-------- ------- -------
Net cash (used in) provided by
financing activities (5,035) 88,878 2,565
-------- ------- -------
Net increase (decrease) in cash and cash
equivalents 12,149 62,532 (337)
Cash and cash equivalents at beginning
of period 63,690 1,158 1,495
-------- ------- -------
Cash and cash equivalents at end of period $ 75,839 $63,690 $ 1,158
======== ======= =======
Supplemental cash flow information:
Cash paid for:
Interest $ 854 $ 1,307 $ 1,009
Income taxes 7,756 23,541 3,532
Supplemental disclosures of noncash investing
and financing activities:
Property and equipment additions financed
by equipment loans and capital leases $ 74 $ 2,143 $ 2,751
Accrued dividends on preferred shares -- -- 690
Tax benefit from exercise of nonqualified
stock options 376 104 582
Common stock received in settlement of
accounts receivable 4,820 -- --
See accompanying notes to consolidated financial statements.
Page 26
LEXENT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FORMATION OF COMPANY
Lexent Inc. ("Lexent") was incorporated in Delaware in January 1998.
Lexent's wholly owned subsidiaries, Hugh O'Kane Electric Co., LLC ("HOK"),
National Network Technologies LLC ("NNT"), Lexent Services, Inc. ("LSI"), HOK
Datacom, Inc. ("HOK Datacom"), and Lexent Capital, Inc. ("LCI") were formed in
June 1998, August 1998, May 2000, November 2000 and July 2001, respectively.
Lexent and its subsidiaries are together referred to herein as "the Company."
DESCRIPTION OF BUSINESS
The Company is an infrastructure services company, which designs,
deploys and maintains telecommunications, electrical, life safety and other
systems. The Company delivers a full spectrum of services including engineering,
management, deployment and installation in local metropolitan markets. The
Company's key customers include AT&T Local Services, Cablevision, WorldCom and
Level 3 Communications.
The Company has offices in New York, Boston, Washington D.C.,
Philadelphia, Miami, Long Island, White Plains and in New Jersey. For the years
2001, 2000, and 1999, 79%, 75% and 80% of revenues, respectively, were earned
from services provided in the New York metropolitan region, including New York
City, New Jersey, Long Island and Westchester County.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Lexent
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
REVENUE AND COST RECOGNITION
Design and engineering services are generally performed on a unit price
basis or on a time and materials basis. Program management services are
generally performed on a cost-plus-fee basis. Network deployment services are
generally performed on a unit price or fixed price basis. Network upgrade and
maintenance services are generally performed on a unit price basis or on a time
and materials basis.
For projects whose duration is generally expected to be 90 days or
less, revenues and related expenses are recognized using the completed contract
method. Under this method, revenues and expenses are recognized when services
have been performed and the projects have been completed. For projects which
have been completed but not yet billed to customers, revenue is recognized based
on management's estimates of the amounts to be realized. When such projects are
billed, any differences between the initial estimates and the actual amounts
billed are recorded as increases or decreases to revenue.
For cost-plus projects, in each period expense is recognized as the
costs are incurred and revenue is recognized in an amount equal to the costs
incurred plus the contractual markup.
For larger projects other than cost-plus projects, generally those
whose duration is expected to exceed 90 days, revenues and expenses are
recognized using the percentage-of-completion method. Under the
percentage-of-completion method, in each period expenses are recognized as costs
are incurred, and revenues are recognized based on the ratio of the costs
incurred for each project to the currently estimated total costs to be incurred
for the project, multiplied by the estimated revenue to be earned for the
project. Accordingly, the revenue recognized in a given period depends on
management's current estimates of the total remaining costs to complete
individual projects and the total estimated revenue to be earned for those
projects. If in any period management significantly increases its estimate of
the total remaining costs to complete a project or lowers its estimate of
revenue to be earned for a project, the Company may recognize no additional
revenue or the Company may reduce previously recognized revenue with respect to
that project. As a result, in some cases the Company may recognize a loss on
individual projects prior to their completion. Provisions for estimated losses
on projects are made in the period in which such
Page 27
LEXENT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
losses are determined. Project costs include all direct material, equipment, and
labor costs and allocated indirect costs, such as fringe benefits, payroll
taxes, supervision and support, depreciation, maintenance, supplies, and small
tools. Certain projects whose duration is expected to exceed 90 days may be
structured with milestone events that dictate the timing of payments, and
customers for these projects may withhold a certain percentage (usually 10%)
from each billing until after the project has been completed and satisfactorily
accepted.
General and administrative costs are charged to expense as incurred.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of interest-bearing investment grade
securities that are readily convertible into cash and have original maturities
of 3 months or less.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization of property and equipment is
calculated on a straight-line basis over the estimated useful lives of the
assets. Useful lives of property and equipment are as follows: motor vehicles -
5 years, tools and equipment - 4-7 years, furniture, office and computer
equipment - 3-5 years, leasehold improvements - term of lease. Expenditures for
repairs and maintenance are expensed as incurred; expenditures for major
renewals and betterments are capitalized. When assets are sold or otherwise
disposed of, any gain or loss on disposition is reflected in current operations.
Property and equipment is reviewed for impairment whenever events or changes in
circumstances indicate that the related carrying amount may not be recoverable.
If such assets are considered to be impaired, the impairment is recognized as
the amount by which the carrying amount of the assets exceeds their fair value.
Fair value is determined using current market prices or anticipated cash flows
discounted at a rate commensurate with the risks involved. The Company
capitalizes the costs of purchased software and related implementation, and
amortizes such costs over three years. Management does not believe there are any
impairments in property and equipment at December 31, 2001.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements, and the reported amounts of
revenues and expenses during the reporting period. Significant estimates include
estimated revenues to be earned on uncompleted projects, realizability of
accounts receivable including unbilled receivables and costs of uncompleted
projects, percentages of completion of projects in progress, contracts,
realizability of property and equipment and deferred tax assets, accrued
expenses, and the ultimate outcome of contingent liabilities. Actual results
could differ from those estimates.
DEFERRED INCOME TAXES
The Company recognizes deferred income taxes for the tax consequences
in future years of differences between the tax basis of assets and liabilities
and their financial reporting amounts at each year-end based on enacted tax laws
and statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established in
accordance with and as permitted under specific rules within generally accepted
accounting principles to reduce deferred tax assets to the amount estimated to
be realized.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with
SFAS 123, "Accounting for Stock-Based Compensation." Under SFAS 123 the fair
value at grant date of all stock-based awards is recognized
Page 28
LEXENT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
as expense over the vesting period, except that options granted to employees and
directors may be accounted for under the provisions of Accounting Principles
Board Opinion 25, "Accounting for Stock Issued to Employees" ("APB 25"). Under
APB 25, no compensation expense is recorded for options granted to employees or
directors unless the exercise price is lower than the market value of the
underlying stock at grant date. The Company has elected to apply APB 25, and to
provide disclosures of pro forma net income as if the fair value method in SFAS
123 had been applied.
For certain options and restricted stock granted to employees or
directors in 2000 and 1999, the exercise or sale prices were determined by the
Board of Directors at dates of grant to be equal to the fair value of the
underlying stock; however such exercise or sale prices were subsequently
determined to be lower than the deemed fair values for financial reporting
purposes of the underlying common stock on the date of grant. Deferred
stock-based compensation also includes the fair value at grant dates of options
granted to non-employees. Accordingly, for those options and restricted stock
grants, the Company has recorded deferred stock-based compensation, which is
amortized over the applicable vesting periods ranging from immediately to up to
four years. To the extent that unvested options are forfeited, previously
recorded deferred stock-based compensation is reversed. Deferred tax assets are
recorded in connection with amortization of deferred stock-based compensation
related to nonqualified options. See Note 13.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, receivables,
accounts payable, and accrued expenses approximate fair value because of the
short-term nature of these instruments. The carrying amounts of equipment
obligations approximate fair value because the underlying instruments bear
interest at rates comparable to current terms offered to the Company for
instruments of similar risk. The fair values of subordinated notes payable to
stockholders are not estimable due to their related party nature.
SEGMENT REPORTING
All of the Company's business activities are aggregated into one
reportable segment given the similarities of economic characteristics between
the activities and the common nature of the Company's services and customers.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued SFAS 141
"Business Combinations" and SFAS 142 "Goodwill and Other Intangible Assets,"
which are effective for the Company beginning January 1, 2002. SFAS 141 requires
that all business combinations initiated after June 30, 2001 be accounted for
under the purchase method of accounting. SFAS 142 provides that intangible
assets with finite lives must be amortized over their estimated useful life, and
intangible assets with indefinite lives will not be amortized but will be
evaluated annually for impairment.
Amortization of goodwill, calculated using the straight-line method
over its estimated life of 10 years was $0.2 million and $0.1 million in 2001
and 2000, respectively. Adoption of SFAS 142 will not have a material effect on
the Company's results of operations or financial position.
In October 2001, the Financial Accounting Standards Board issued SFAS
144 "Accounting for the Impairment or Disposal of Long-Lived Assets." This
statement defines the accounting and reporting for the impairment and disposal
of long-lived assets and is effective for the Company on January 1, 2002. The
Company does not expect this statement to have a material effect on its results
of operations or financial position.
Page 29
LEXENT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income
(loss) (after deducting dividends on preferred stock) by the weighted average
number of common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution of other securities by assuming the redeemable
convertible preferred stock had been converted into common stock as of the
beginning of the fiscal period presented (and without deducting from net income
(loss) dividends on preferred stock), and by including in the weighted average
number of common shares the dilutive effect of stock options and shares issuable
under the employee stock purchase plan. Details of the calculations are as
follows:
YEAR ENDED DECEMBER 31,
2001 2000 1999
-------- -------- --------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
NET INCOME (LOSS) PER SHARE-BASIC:
Net income (loss) .......................... $(19,260) $ 8,576 $ 7,952
Less: preferred dividends .................. -- (397) (690)
-------- -------- --------
Net income (loss) available to
common stockholders ...................... $(19,260) $ 8,179 $ 7,262
======== ======== ========
Weighted average shares-basic .............. 41,449 30,839 22,721
======== ======== ========
Net income (loss) per share-basic .......... $ (0.46) $ 0.27 $ 0.32
======== ======== ========
NET INCOME (LOSS) PER SHARE-DILUTED:
Net income (loss) .......................... $(19,260) $ 8,576 $ 7,952
======== ======== ========
Weighted average shares outstanding-basic .. 41,449 30,839 22,721
Assumed conversion of preferred stock ...... -- 5,725 8,740
Dilutive effect of stock options ........... 1,214 1,702 2,070
Dilutive effect of employee stock
purchase plan ............................ 7 -- --
-------- -------- --------
Weighted average shares-diluted ............ 42,670 38,266 33,531
======== ======== ========
Net income per share-diluted ............... * $ 0.22 $ 0.24
======== ========
* Inclusion of common stock equivalent shares would result in an anti-dilutive
net loss per share. As a result, the diluted loss per share is the same as
basic loss per share.
PRO FORMA INFORMATION FOR INITIAL PUBLIC OFFERING ("IPO") - (UNAUDITED)
Pro forma information for the IPO reflects the pro forma effect of the
conversion of redeemable convertible preferred stock into common stock at the
rate of 1.77209 shares of common stock for each share of preferred stock at the
beginning of the period presented. The calculation of pro forma basic and
diluted income per share after giving effect to the foregoing assumption is as
follows:
Page 30
LEXENT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31,
2000 1999
------- -------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
PRO FORMA NET INCOME PER SHARE - BASIC:
Net income ........................................... $ 8,576 $ 7,952
======= =======
Weighted average shares - actual ..................... 30,839 22,721
Assumed conversion of preferred stock ................ 9,815 9,815
------- -------
Pro forma weighted average shares - basic ............ 40,654 32,536
======= =======
Pro forma net income per share - basic ............... $ 0.21 $ 0.24
======= =======
PRO FORMA NET INCOME PER SHARE - DILUTED:
Dilutive effect of stock options ..................... 1,702 2,070
------- -------
Pro forma weighted average shares - diluted .......... 42,356 34,606
======= =======
Pro forma net income per share - diluted ............. $ 0.20 $ 0.23
======= =======
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current year presentation.
ACCUMULATED OTHER COMPREHENSIVE INCOME
Statement of Financial Accounting Standards (SFAS) 130, "Reporting
Comprehensive Income," requires that financial statements report comprehensive
income and its components. Comprehensive income includes, among other things,
net income (loss) and unrealized gains and losses from investments in
available-for-sale securities, net of income tax effect. The Company has chosen
to present Comprehensive Income (Loss) in the Consolidated Statements of Changes
in Stockholders' Equity (Deficit).
Changes in the components of accumulated other comprehensive income for
2001 were as follows:
UNREALIZED GAIN ON
AVAILABLE-FOR-SALE ACCUMULATED OTHER
SECURITIES COMPREHENSIVE INCOME
------------------ --------------------
(IN THOUSANDS)
Balance, December 31, 2000 ... $ -- $ --
Change for 2001 .............. 60 60
------ ------
Balance, December 31, 2001 ... $ 60 $ 60
====== ======
2. ACQUISITIONS
In September 2000, the Company purchased certain assets of
Communications Planning and Services, Inc., which provides certain design and
implementation services for communications systems. The acquisition was
accounted for under the purchase method of accounting. The purchase price was
$0.7 million, of which $0.4 million was allocated to goodwill and is being
amortized over ten years.
In October 2000, the Company purchased certain assets of Magnetic
Electric Construction Corp., which provides certain electrical services. The
purchase price was $1.3 million, comprised of $0.7 million in cash and 23,077
common shares of the Company valued at approximately $0.6 million on date of
closing. The acquisition was accounted for under the purchase method of
accounting, and $1.2 million of the purchase price was allocated to goodwill and
is being amortized over ten years.
Page 31
LEXENT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Beginning January 1, 2002, in accordance with SFAS 142, goodwill
associated with acquisitions will no longer be amortized to expense, but will be
evaluated at least annually for impairment.
3. RECEIVABLES, NET
DECEMBER 31, DECEMBER 31,
2001 2000
-------- --------
(IN THOUSANDS)
Accounts receivable - billed to customers ............ $ 42,237 $ 73,009
Unbilled receivables on completed projects accounted
for under the completed contract method ............ 3,734 16,839
Costs and estimated earnings in excess of billings
on projects accounted for under the percentage-
of-completion method ............................... 2,852 4,238
Unbilled receivables on cost-plus contracts .......... 4,793 5,426
Costs of uncompleted projects accounted for under
the completed contract method ...................... 2,457 10,572
Retainage ............................................ 736 2,446
-------- --------
56,809 112,530
Less: allowance for uncollectible amounts ............ (15,638) (7,277)
-------- --------
$ 41,171 $105,253
======== ========
For 2001, 2000, and 1999, the provision for uncollectible amounts was
$32.3 million, $2.6 million, and $2.4 million, respectively. Amounts written off
against the allowance for 2001, 2000, and 1999 were $24.0 million, $2.1 million,
and $0.6 million, respectively.
Amounts retained by customers related to projects that are
progress-billed may be outstanding for periods that exceed one year.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31, DECEMBER 31,
2001 2000
-------- --------
(IN THOUSANDS)
Motor vehicles ....................................... $ 4,000 $ 4,765
Tools and equipment .................................. 9,489 7,749
Office equipment and furniture ....................... 1,224 1,015
Computer equipment ................................... 5,896 4,465
Leasehold improvements ............................... 1,418 1,017
Purchased software ................................... 933 1,109
-------- --------
Property and equipment ........................... 22,960 20,120
Less: accumulated depreciation and amortization ...... (10,064) (5,506)
-------- --------
Property and equipment, net ...................... $ 12,896 $ 14,614
======== ========
Depreciation and amortization expense for 2001, 2000, and 1999 was $5.8
million, $3.6 million, and $1.5 million, respectively. The above table includes
assets and related amortization in connection with capitalized leases - see Note
16 for additional information.
Page 32
LEXENT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS
In February 2001, the Company purchased 1,000,000 shares of Series C
Preferred Stock of Telseon Inc. for an aggregate cost of $1.6 million. In
January 2002, Telseon consummated a financial restructuring in which the Company
did not participate. As a result of Telseon's restructuring, the Company's
preferred shares were converted into common stock, and its interest in Telseon
was substantially diluted. The Company determined that the value of its
investment was permanently impaired and recorded a charge to other expense of
$1.6 million in 2001.
Available-for-sale securities at December 31, 2001 represented the
market value at that date of publicly traded shares of common stock received
from a customer in October 2001 in partial settlement of a receivable.
Realization of the carrying value of such shares depends on the market price on
the date the shares are sold. The Company is exposed to the risk of market loss
with respect to such shares. One half of such shares may be sold on or after
January 2, 2002 and the other half may be sold on or after April 2, 2002. Net
realized gains and losses will be included in "Other income (expense), net."
6. ACCRUED LIABILITIES
Accrued liabilities (including noncurrent portion) are comprised of:
DECEMBER 31,
2001 2000
------- -------
(IN THOUSANDS)
Accrued payroll and related benefits $ 3,155 $13,016
Accrued project costs 1,674 1,270
Restructuring charges 9,342 --
Other 3,557 3,595
------- -------
Total $17,728 $17,881
======= =======
7. PROVISION FOR RESTRUCTURING CHARGES
During 2001, the Company recorded $13.6 million in restructuring
charges primarily in connection with the closing of seven offices and a
reduction of the workforce. The restructuring charges are comprised of $9.1
million of obligations under leases for premises which the Company has vacated
to be paid over the various lease terms up to nine years, $3.3 million of
severance and related contractual obligations to be paid over various periods up
to one year for approximately 115 non-unionized personnel and executives in
areas being closed or scaled back, and $1.2 million for writeoffs of property
and equipment, which will not require future cash outlays. A summary of the
restructuring reserve at December 31, 2001, is as follows:
RESERVE
BALANCE AT
DECEMBER 31, 2001
INITIAL AMOUNTS (INCLUDING
RESERVE CHARGED TO NONCURRENT
BALANCE THE RESERVE PORTION)
------- ----------- -----------------
(IN THOUSANDS)
Severance and related contractual
obligations ................... $ 3,304 (1,553) $1,751
Lease obligations ................. 9,070 (1,479) 7,591
Property and equipment ............ 1,190 (1,190) --
------- ------ ------
Total ......................... $13,564 (4,222) $9,342
======= ====== ======
The Company estimates that $5.2 million of the remaining reserve at December 31,
2001 will be paid during 2002, and the balance of $4.1 million will be paid in
future years.
Page 33
LEXENT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. NOTES PAYABLE AND OTHER FINANCING ARRANGEMENTS
In November 2000, the Company completed a $50 million bank credit
facility with five banks to be used for general corporate purposes including
working capital and potential acquisitions. During 2001, the $2.0 million loan
outstanding was repaid and the credit facility was terminated.
At December 31, 2001 and 2000, the Company had $1.0 million and $2.4
million, respectively, of installment loans payable, primarily related to its
fleet of vehicles. Of those amounts, $0.6 million and $1.0 million,
respectively, were classified as current, with the balance classified as
noncurrent. The loans bear interest at rates ranging between 0.9% and 11.3%,
have terms averaging three years, and are collateralized by the vehicles.
At December 31, 2001 and 2000, the balance of a subordinated note
payable to a stockholder was $3.6 million and $5.1 million, respectively - see
Note 9.
The following are the maturities of long-term debt (excluding
capitalized lease obligations - see Note 16) for the next five years:
MATURITY AMOUNT
-------- ------
(IN THOUSANDS)
2002 ................................................ $2,215
2003 ................................................ 1,880
2004 ................................................ 491
------
Total ............................................... $4,586
======
9. RELATED PARTY TRANSACTIONS
On January 1, 1997, the Company repurchased common shares owned by a
stockholder and issued a subordinated promissory note in the amount of $10.2
million. The note bears interest at the rate of 6%. As of December 31, 2001 and
2000, the outstanding principal balance of the note was $3.6 million and $5.1
million, respectively, of which $1.6 million is classified as current at both
dates, and the balance is classified as noncurrent. The note is subordinated to
all senior debt. The note is payable in quarterly installments of $0.4 million
plus accrued interest starting October 1, 1998, with the final payment due on
January 1, 2004.
As of December 31, 1999, the Company had outstanding subordinated
promissory notes payable to its two principal common stockholders in the
aggregate amount of $0.4 million, which were classified as noncurrent. The notes
bore interest at 6% and were subordinated to all senior debt. On August 31,
2000, the Company repaid those notes to its two principal common stockholders.
From time to time prior to 2000, the Company's two principal common
stockholders advanced money to the Company for its operating needs, and the
Company made repayments of such advances. At December 31, 1999, the amount owed
by the Company to its two principal common stockholders for such advances
aggregated $0.2 million, which was repaid in November 2000. The advances bore
interest at the rate of 6%, were not subordinated, and were classified as
current because there were no formal repayment terms.
The Company leases a building for office and warehouse purposes in New
York City and a warehouse building in South Plainfield, NJ from entities owned
by its two principal common stockholders and another common stockholder. Annual
rentals for office and warehouse premises in New York City are $0.3 million for
calendar years 1998 through 2001, and $0.4 million for calendar year 2002.
Annual rentals for office and warehouse premises in South Plainfield, NJ are
$0.1 million for the twelve-month periods April through March, commencing April
1998 through March 2008.
Page 34
LEXENT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On May 1, 2000, the Company entered into a ten-year lease for a garage
and warehouse facility in Long Island City, New York. The lease payments are
$0.6 million per year commencing May 1, 2000 through April 2010. The facility is
leased from an entity that is owned by the Company's two principal common
stockholders.
During 1999, the Company purchased services for total costs of $1.4
million from Metro Design Systems, Inc. ("MDS"), an entity which was owned by
three of the Company's then principal common stockholders and a director of the
Company. In September 1999, the Company acquired the property and equipment,
trade name, and goodwill of MDS for a purchase price of $0.2 million, which was
paid in cash. As of December 31 1999, amounts payable by the Company to MDS
amounted to $0.2 million, which was paid in 2000.
On July 20, 1998, the Company agreed to provide a former officer, who
is currently a common stockholder with lifetime medical, dental and life
insurance benefits, and also, while he remains a common stockholder, a new
automobile every three years and an office at his primary residence. Costs for
such benefits are charged to expense as incurred, and amounted to $34,000,
$33,000 and $45,000 for 2001, 2000 and 1999, respectively. In addition, such
former officer provided consulting services pursuant to an agreement with the
Company for the period December 1, 2000 through November 30, 2001 for a fee of
$83,000.
Walter C. Teagle III, a director and currently Executive Vice
President, was on leave from his employment duties during the period February
2001 through December 2001. He performed various services for the Company while
on leave. He received $183,500 during 2001.
The Company has agreed to pay its founder an annual pension for life,
which amounted to $75,000 for 2001, 2000 and 1999, respectively. The annual
pension amount has been increased to $100,000 effective March 1, 2002.
Interest expense incurred by the Company to related parties during the
years 2001, 2000, and 1999 amounted to $0.2 million, $0.4 million, $0.5 million,
respectively. Accrued interest payable to related parties as of December 31,
2001, 2000 and 1999 was $0.1 million for all three years, respectively.
10. REDEEMABLE CONVERTIBLE PREFERRED STOCK
On July 23, 1998, the Company sold 5,538,458 shares of redeemable
convertible preferred stock for proceeds of $11.5 million. The preferred stock
was entitled to cumulative dividends at the rate of 6% per annum. At the option
of the holders, dividends may be paid in the form of additional preferred stock
or in cash. For 2000 and 1999, dividends were accrued as additional preferred
stock in the amounts of $0.4 million and $0.7 million, respectively, offset by a
charge to retained earnings (accumulated deficit). Upon completion of the
Company's public offering of common stock on August 2, 2000, preferred dividends
accrued from January 1, 1999 through August 2, 2000 of $1.1 million were paid in
cash. On August 2, 2000, all outstanding shares of preferred stock were
converted into 9,814,624 shares of common stock.
11. STOCKHOLDERS' EQUITY
On July 31, 2000, the Company filed a Second Amended and Restated
Certificate of Incorporation which increased the shares of authorized common
stock from 50,000,000 to 120,000,000 shares and authorized the issuance of up to
5,000,000 shares of preferred stock, the terms of which are set at the
discretion of the Board of Directors.
On August 2, 2000, the Company completed an initial public offering of
6,900,000 shares of its common stock at a price of $15.00 per share. The Company
received net proceeds of $96.3 million after underwriting discounts and before
expenses of the offering.
Page 35
LEXENT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK-BASED COMPENSATION PLANS
STOCK OPTIONS AND AWARDS
In 2000, the Company adopted a Stock Option and Restricted Stock
Purchase Plan, pursuant to which up to 8,700,000 common shares are available for
option grants. In May 2001, at the annual stockholders meeting, the number of
shares allocated to the stock option plan was increased to 9,900,000 common
shares. Stock options granted under the plan may be incentive stock options or
nonqualified stock options and are exercisable for up to ten years following the
date of grant. Vesting provisions are determined by the Board of Directors on a
case by case basis. Options granted become exercisable over periods ranging from
immediately to up to four years after the date of grant.
On September 24, 2001, pursuant to an offer by the Company to exchange
outstanding options with exercise prices of $13.50 or higher for new options, a
total of 1,743,700 options were tendered and were canceled. On March 25, 2002,
the Company will grant new options to optionees still employed at that date
equal to the number of options previously tendered by each optionee. The
exercise price of the new options will be the closing market price on March 25,
2002, and the new options will vest as if the tendered options had not been
canceled.
Stock option transactions are summarized in the following table:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- ------
Outstanding at December 31, 1999 .... 3,572,250 $ 2.35
Granted ........................... 4,758,850 $12.53
Exercised ......................... (1,075,000) $ 3.38
Canceled or expired ............... (194,125) $ 9.52
----------
Outstanding at December 31, 2000 .... 7,061,975 $ 8.87
Granted ........................... 539,850 $13.53
Exercised ......................... (528,070) $ 0.48
Canceled or expired ............... (3,155,194) $15.82
----------
Outstanding at December 31, 2001 .... 3,918,561 $ 5.55
==========
The following table summarizes options outstanding and exercisable at
December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------- ---------- --------- ------- ----------- --------
$ 0.33 - $ 0.49 1,107,587 7.0 $ 0.47 628,374 $ 0.47
$ 1.01 163,218 7.7 $ 1.01 79,957 $ 1.01
$ 2.60 - $ 3.71 77,467 9.1 $ 3.39 11,667 $ 3.00
$ 5.00 - $ 7.33 2,244,500 8.1 $ 6.70 1,107,194 $ 6.69
$ 7.60 - $10.00 75,000 9.0 $ 8.80 25,782 $10.00
$15.00 - $16.38 94,289 8.5 $15.17 32,107 $15.11
$23.25 - $30.00 156,500 9.0 $23.49 61,335 $23.70
--------- ---------
3,918,561 $ 5.55 1,946,416 $ 5.15
========= =========
The following table summarizes options outstanding and exercisable at
December 31, 2000:
Page 36
LEXENT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------- ---------- --------- ------- ----------- --------
$ 0.33 - $ 1.01 1,853,875 8.1 $ 0.53 664,902 $ 0.50
$ 6.67 - $10.00 2,274,000 9.0 $ 6.76 488,649 $ 6.85
$12.00 - $17.13 2,654,100 9.5 $14.62 279,177 $13.99
$19.38 - $28.38 159,100 9.8 $24.85 -- --
$29.13 - $30.00 120,900 9.7 $29.20 2,334 $30.00
--------- ---------
7,061,975 $ 8.87 1,435,062 $ 5.34
========= =========
The following table summarizes options outstanding and exercisable at
December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------- ---------- --------- ------- ----------- --------
$0.33 - $1.01 2,522,250 9.1 $ 0.56 565,625 $ 0.50
$ 6.67 1,050,000 10.0 $ 6.67 300,000 $ 6.67
--------- -------
3,572,250 $ 2.36 865,625 $ 2.64
========= =======
During 2000, the Company issued rights to purchase 352,500 shares of
restricted stock at $6.67 per share, all of which were exercised.
For certain options and restricted stock granted in 1999 and the first
quarter of 2000, the exercise or sale prices were determined by the Board of
Directors at dates of grant to be equal to the fair value of the underlying
stock, however, such exercise or sale prices were subsequently determined to be
lower than the deemed fair values for financial reporting purposes of the
underlying common stock on the date of grant. Deferred stock-based compensation
also includes the fair value at grant date of options granted to non-employees.
Deferred stock-based compensation of $1.3 million, $41.7 million, and $9.3
million was recorded in 2001, 2000 and 1999, respectively, in connection with
stock options granted and restricted stock issued during those periods. To the
extent that unvested options are forfeited, previously recorded deferred
stock-based compensation is reversed. In 2001, $1.3 million was reversed for
unvested options which were forfeited, and $7.6 million was reversed with
respect to an optionee whose status was changed from employee to consultant on
April 1, 2001. The latter's unvested options were remeasured at their current
fair value of $1.3 million on April 1, 2001, and that amount was charged to
deferred stock-based compensation. Amortization of deferred stock-based
compensation was $6.1 million, $26.2 million, and $2.2 million for 2001, 2000,
and 1999, respectively. Deferred tax assets were recorded in connection with
amortization of stock-based compensation expense related to nonqualified options
in the amounts of $1.4 million, $8.1 million, and $0.8 million in 2001, 2000,
and 1999, respectively. See Note 13.
EMPLOYEE STOCK PURCHASE PLAN
On August 1, 2001, the Company established an employee stock purchase
plan ("ESPP") through which employees may purchase shares of common stock
through payroll deductions. The price paid by an employee is 85% of the lesser
of the market value on the offering date or the last day of the purchase period.
There are two 6-month purchase periods in each year, commencing August 1, 2001.
The market value on the first offering date (August 1, 2001) was $5.38 per
share. Employees may purchase up to 1,000 shares in each purchase period. Under
Page 37
LEXENT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the ESPP, 2,500,000 shares were authorized and available for issuance. At
December 31, 2001, 53,771 shares were issuable to employees based on payroll
deductions of $0.2 million through that date.
PRO FORMA DISCLOSURE
In accordance with APB 25, compensation expense is not recorded for
options granted to employees or directors unless the exercise price is lower
than the market value of the underlying stock at grant date, and compensation
expense is not recognized in connection with the ESPP. Had compensation expense
been recognized based on the fair value of options at grant dates as determined
under the Black-Scholes option pricing model, pro forma net loss for 2001 would
have increased, and pro forma net income for 2000 and 1999 would have decreased
by approximately $1.3 million, $2.4 million and $0.2 million, respectively. In
making that calculation, the following assumptions were used:
STOCK OPTIONS
2001 2000 1999
------ ------ ------
Expected volatility factor:
Pre IPO ..................... n/a 0% 0%
Post IPO .................... 66% 66%
Risk free interest rate ........ 4.6% 6.27% 6.04%
Expected life .................. 4 years 4 years 4 years
Expected dividend rate ......... 0% 0% 0%
Weighted average fair value:
Pre IPO ..................... $ 2.10 $ 0.55
Post IPO .................... $ 9.19
Average ..................... $ 7.29 $ 5.20 $ 0.55
Weighted average grant price:
Pre IPO ..................... $ 9.32 $ 2.60
Post IPO .................... $16.66
Average ..................... $13.53 $12.53 $ 2.60
ESPP
2001
------
Expected volatility factor ..... 66%
Weighted average fair value .... $ 5.38
Weighted average grant price ... $ 4.57
For purposes of pro forma disclosures, the estimated fair value of
stock options at grant date is amortized to pro forma expense over the vesting
period. Pro forma information for the years 2001, 2000 and 1999 is as follows:
Page 38
LEXENT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2001 2000 1999
-------- ------ ------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Net income (loss):
As reported .................... $(19,260) $8,576 $7,952
Pro forma ...................... (20,598) $6,138 $7,759
Basic and diluted net income
per share as reported:
Basic .......................... $ (0.46) $ 0.27 $ 0.32
Diluted ........................ $ (0.46) $ 0.22 $ 0.24
Basic and diluted pro forma net
income per share:
Basic .......................... $ (0.50) $ 0.19 $ 0.24
Diluted ........................ $ (0.50) $ 0.16 $ 0.23
13. INCOME TAXES
The Company files a consolidated federal income tax return with its
subsidiaries. The income tax provision (benefit) consists of:
DECEMBER 31,
2001 2000 1999
-------- ------ ------
(IN THOUSANDS)
Current:
Federal ........................ $ -- $17,345 $7,950
State and local ................ -- 4,327 2,360
Deferred provision (benefit) ...... (13,856) (8,968) (3,179)
-------- ------- ------
Income tax provision (benefit) .... $(13,856) $12,704 $7,131
======== ======= ======
The components of deferred tax assets and liabilities are as follows:
DECEMBER 31,
2001 2000
------- -------
(IN THOUSANDS)
Deferred tax assets related to:
Net operating loss ....................... $ 8,061 $ --
Allowance for uncollectible amounts ...... 6,929 2,742
Amortization of deferred stock-based
compensation related to nonqualified
options ................................ 9,794 8,387
Deferred costs on uncompleted projects ... 185 1,076
Other reserves ........................... 1,595 527
Accrued liabilities ...................... 33 48
------- -------
Total deferred tax assets ............ 26,597 12,780
Deferred tax liability:
Depreciation and amortization ............ 970 421
------- -------
Net deferred tax asset ..................... $25,627 $12,359
======= =======
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that a portion or all of the
deferred tax assets will not be realized. Generally accepted accounting
principles provide that for a deferred tax asset recognized in connection with
stock-based compensation, a valuation allowance may not
Page 39
LEXENT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
be established solely based on a subsequent decline in the market price of the
stock. Therefore, the Company's assessment of realizability is based on the
level of historical taxable income (loss) and projections of future taxable
income. Accordingly, management believes it is more likely than not that the
deferred tax assets will be realized and no valuation allowance was established
during 2001 and 2000. Realization of $9.8 million of deferred tax assets depends
upon the market price of the Company's common stock at the time certain
nonqualified stock options are exercised. To the extent that such options expire
unexercised or are exercised at a time when the fair value of the stock is lower
than the deemed fair value of the stock for financial reporting purposes on the
date the options were granted ($22.80 per share), a portion or all of such
deferred tax assets would not be realized and such portion would be charged to
expense
A reconciliation of the statutory federal income tax provision
(benefit) rate to the Company's tax provision (benefit) is as follows:
2001 2000 1999
------ ------ ------
Federal statutory rate applied to pre-tax income ... (35.0)% 35.0% 35.0%
State and local taxes, net of federal benefit ...... (9.3) 9.5 10.4
Tax effect of non-deductible items ................. 2.3 15.2 1.9
------ ------ ------
Total tax provision (benefit) ...................... (42.0)% 59.7% 47.3%
====== ====== ======
14. RETIREMENT PLANS AND 401K SAVINGS PLAN
Effective January 1, 1999, the Company adopted a 401(k) savings plan
covering all employees who are not subject to collective bargaining agreements.
Each covered employee is eligible to become a participant, and may contribute up
to 15% of salary on a tax-deferred basis. The Company contributes 3% of each
covered employee's salary up to the maximum annual amount permitted by IRS
regulations. The Company's contributions vest ratably over the employees' first
five years of service. For 2001, 2000 and 1999, $0.9 million, $0.6 million and
$0.2 million, respectively, was charged to expense for the 401(k) plan.
15. CONTINGENCIES
From time to time, the Company is involved in various suits and legal
proceedings which arise in the ordinary course of business. Several employment
related lawsuits or administrative complaints have been filed alleging wrongful
termination, breach of contract or employment discrimination. There was also a
class action suit filed in October 2001 against the Company, certain of its
senior executive and its underwriters, alleging violation of the Securities law
in connection with the initial public offering. The Company believes that these
claims are without merit and is vigorously defending its position. Management
currently believes that resolving these matters will not have a material adverse
impact on the Company's financial position or results of operations, although
the ultimate outcome of these matters cannot be determined at this time.
16. LEASE COMMITMENTS
The Company leases equipment, motor vehicles and real estate (including
real estate leased from related parties referred to in Note 9) under leases
accounted for as operating leases with terms ranging from one to ten years.
Total rent expense for operating leases was $7.8 million, $4.4 million, and $1.6
million for 2001, 2000 and 1999, respectively.
Future minimum lease payments under operating leases as of December 31,
2001 are as follows:
Page 40
LEXENT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNT
--------------
(IN THOUSANDS)
2002 ................................................ $ 7,832
2003 ................................................ 5,793
2004 ................................................ 3,882
2005 ................................................ 2,783
2006 ................................................ 1,703
After 2006 .......................................... 5,979
-------
Total ............................................... $27,972
=======
The Company has also leased equipment under capitalized leases. As of
December 31, 2001 and 2000, assets recorded under capitalized leases were $2.5
million and $2.4 million, respectively, accumulated amortization was $1.4
million and $0.7 million, respectively, and the total liability recorded under
such capitalized leases was $1.0 million and $1.3 million, respectively. The
weighted average interest rate for capitalized leases is 6.9% and 6.7%,
respectively. Following are minimum lease payments under capitalized leases and
the present value of the net minimum lease payments as of December 31, 2001:
AMOUNT
--------------
(IN THOUSANDS)
2002 ............................................... $ 756
2003 ............................................... 290
2004 ............................................... 10
-------
Total minimum lease payments ....................... 1,056
Less: amount representing interest ................. (49)
-------
Present value of net minimum lease payments ........ 1,007
=======
17. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to credit
risk consist primarily of cash, cash equivalents and trade receivables. Cash
balances may at times, exceed amounts covered by FDIC insurance. The Company
believes it mitigates its risk by depositing cash balances with high quality
financial institutions that it believes are financially sound. Recoverability is
dependent upon the performance of the institution. The Company's cash
equivalents are diversified and consist primarily of investment grade securities
with original maturities of three months or less. Investments are made in
obligations of high-quality financial institutions, government and government
agencies and corporations, thereby reducing credit risk concentrations. Interest
rate fluctuations impact the carrying value of the portfolio.
Trade receivables are primarily short-term receivables from
telecommunications companies and general contractor companies. To attempt to
reduce credit risk, the Company performs credit evaluations of its customers but
does not generally require collateral and, therefore, the majority of its trade
receivables are unsecured. Credit risk is affected by conditions within the
economy. The Company establishes an allowance for doubtful accounts based upon
its evaluation of factors surrounding the credit risk of specific customers,
historical trends, and other information.
For 2001, the Company had revenues from two separate customers which
comprised 23% and 16%, respectively, of the Company's total revenues. At
December 31, 2001, accounts receivable from these customers totaled $0.9 million
and $10.9 million, respectively. For 2000, the Company had revenues from one
customer, which comprised 25% of the Company's total revenues. At December 31,
2000, accounts receivable from this
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LEXENT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
customer totaled $2.1 million. For the year 1999, the Company had revenues from
two separate customers, which comprised 26% and 13%, respectively, of the
Company's total revenues. If in any period there are adverse developments in the
financial condition of customers, the provision for doubtful accounts could be
significantly increased. The amounts of the Company's receivables which will
ultimately be collected from each customer may differ from the Company's
estimates, in which event the provision for doubtful accounts could also be
significantly increased.
18. UNAUDITED QUARTERLY FINANCIAL DATA
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
2000 2000 2000 2000 2001 2001 2001 2001
-------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
Statement of Operations Data:
Revenues ............................... $ 56,210 $65,027 $82,412 $92,344 $72,105 $67,044 $49,189 $52,240
Cost of revenues ....................... 42,149 47,898 61,030 71,677 58,663 52,199 40,938 43,201
General and administrative
expenses ............................... 3,521 5,440 5,712 5,667 6,432 5,877 4,366 3,562
Depreciation and amortization .......... 658 789 892 1,289 1,311 1,440 1,527 1,525
Non-cash stock-based
compensation ........................ 19,427 2,244 2,244 2,244 2,244 1,287 1,269 1,258
Provision for doubtful accounts ........ 590 494 632 835 15,775 7,709 475 8,327
Restructuring charges .................. -- -- -- -- 5,946 -- -- 7,618
-------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss) ................ (10,135) 8,162 11,902 10,632 (18,266) (1,468) 614 (13,251)
Interest expense ....................... 391 343 283 235 284 172 253 368
Interest income ........................ -- (3) (877) (1,076) (799) (541) (575) (419)
Other expense (income), net ............ (10) 7 (6) (6) 393 126 (72) 1,555
-------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes ................................ (10,516) 7,815 12,502 11,479 (18,144) (1,225) 1,008 (14,755)
Provision for (benefit from)
income taxes ........................ (1,611) 3,605 5,762 4,948 (8,202) (117) 714 (6,251)
-------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) ...................... $ (8,905) $ 4,210 $ 6,740 $ 6,531 $(9,942) $(1,108) $ 294 $(8,504)
======== ======= ======= ======= ======= ======= ======= =======
NET INCOME (LOSS) PER SHARE:
Basic .................................. $ (0.39) $ 0.17 $ 0.19 $ 0.16 $ (0.24) $ (0.03) $ 0.01 $ (0.20)
======== ======= ======= ======= ======= ======= ======= =======
Diluted ................................ $ (0.39) $ 0.12 $ 0.16 $ 0.15 $ (0.24) $ (0.03) $ 0.01 $ (0.20)
======== ======= ======= ======= ======= ======= ======= =======
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