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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURI- TIES
EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED JUNE 30, 2002.
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURI-
TIES 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 (I.R.S. Employer Identification No.)
incorporation or organization)
Three New York Plaza
New York, New York 10004
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 212-981-0700
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common Stock, $.001 par value,
41,963,685 shares outstanding as of August 2 , 2002.
LEXENT INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
--------
PART I. Financial Information
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2002
(unaudited) and December 31, 2001 3
Condensed Consolidated Statements of Operations (unaudited)
for the Three Months and Six Months Ended June 30, 2002 and
June 30, 2001 4
Condensed Consolidated Statements of Cash Flows (unaudited)
for the the Six Months Ended June 30, 2002 and June 30, 2001 5
Notes to Condensed Consolidated Financial Statements
(unaudited) 6-10
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-14
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II. Other Information
ITEM 1. Legal Proceedings 15
ITEM 6. Exhibits and Reports on Form 8-K 15
Certification and Signatures 16
2
PART I. FINANCIAL INFORMATION
ITEM 1: Financial Statements
LEXENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
June 30, December 31,
2002 2001
---- ----
(unaudited)
Assets:
Current Assets:
Cash and cash equivalents $ 78,589 $ 75,839
Available-for-sale securities - 4,932
Receivables, net 34,474 41,171
Prepaid expenses and other current assets 9,340 5,220
Deferred tax asset, net 23,519 25,627
--------- ---------
Total current assets 145,922 152,789
Property and equipment, net 10,387 12,896
Other assets 2,398 2,830
--------- ---------
Total assets $ 158,707 $ 168,515
========= =========
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable $ 9,110 $ 6,751
Accrued liabilities 9,009 13,635
Billings in excess of costs and estimated
earnings on uncompleted projects 1,536 474
Subordinated note payable to stockholder 1,582 1,582
Equipment and capital lease obligations 882 1,351
--------- ---------
Total current liabilities 22,119 23,793
Subordinated note payable to stockholder 1,187 1,978
Accrued liabilities - noncurrent 4,256 4,093
Equipment and capital lease obligations 203 682
--------- ---------
Total liabilities 27,765 30,546
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value, 120,000,000 shares
authorized, 41,936,243 and 41,612,372 shares
outstanding at 2002 and 2001,
respectively 42 42
Additional paid-in capital 155,762 158,986
Deferred stock-based compensation (3,646) (9,085)
Accumulated other comprehensive income - 60
Accumulated deficit (21,216) (12,034)
--------- ----------
Total stockholders' equity 130,942 137,969
--------- ---------
Total liabilities and stockholders' equity $ 158,707 $ 168,515
========= =========
See accompanying notes to condensed consolidated financial statements.
3
LEXENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
(unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
----- ----- ----- ----
Revenues $ 33,152 $ 67,044 $ 64,465 $ 139,149
Cost of revenues 31,373 52,199 60,808 110,862
General and administrative expenses 3,896 5,877 8,091 12,309
Depreciation and amortization 1,233 1,440 2,522 2,751
Non-cash stock-based compensation* 760 1,287 1,781 3,531
Provision for doubtful accounts* 189 7,709 426 23,484
Restructuring charges - - 1,441 5,946
--------- -------- -------- ---------
Loss from operations (4,299) (1,468) (10,604) (19,734)
Interest expense 65 172 141 456
Interest income (337) (541) (696) (1,340)
Other expense, net 40 126 1,448 519
--------- ------- -------- ---------
Loss before income tax benefit (4,067) (1,225) (11,497) (19,369)
Income tax benefit (1,614) (117) (2,315) (8,319)
---------- -------- -------- ---------
Net loss (2,453) $ (1,108) $ (9,182) $ (11,050)
---------- ========== ======== =========
Net loss per share:
Basic and diluted $ (0.06) $ (0.03) $ (0.22) $ (0.27)
======== ======== ======== =========
Weighted average common shares outstanding:
Basic and diluted 41,832 41,423 41,766 41,307
======= ======== ======== =========
* Substantially all of these amounts would have been classified as general and
administrative expenses.
See accompanying notes to condensed consolidated financial statements.
4
LEXENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
For the Six Months
Ended June 30,
2002 2001
---- ----
Cash flows from operating activities:
Net loss $ (9,182) $ (11,050)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Restructuring charges 1,441 5,946
Depreciation and amortization 2,522 2,751
Provision for uncollectible accounts 426 23,484
Loss on investment/disposition of assets 1,448 109
Non-cash stock-based compensation 1,781 3,531
Provision for deferred taxes 2,160 (8,319)
Changes in working capital items:
Receivables 6,271 8,815
Prepaid expenses and other current assets (1,315) (76)
Other assets 432 245
Accounts payable 2,359 (1,591)
Accrued liabilities (5,290) (7,091)
Income taxes payable and prepaid taxes (2,805) (7,536)
Billings in excess of costs and estimated earnings on 1,062 (2,775)
uncompleted projects -------- ---------
Net cash provided by operating activities 1,310 6,443
-------- ---------
Cash flows from investing activities:
Capital expenditures, net of equip.loans and capital leases (705) (5,063)
Proceeds from sale of property and equipment 28
Proceeds from sale of (investments in) securities 3,422 (1,655)
-------- ----------
Net cash provided by (used in) investing activities 2,745 (6,718)
-------- ----------
Cash flows from financing activities:
Exercise of stock options and stock purchase plan 434 195
Repayment of subordinated note payable to stockholder (791) (792)
Repayments of equipment loans and capital leases (948) (782)
--------- ----------
Net cash used in financing activities (1,305) (1,379)
--------- ----------
Net increase (decrease) in cash and cash equivalents 2,750 (1,654)
Cash and cash equivalents at beginning of period 75,839 63,690
-------- ---------
Cash and cash equivalents at end of period $ 78,589 $ 62,036
======== =========
Supplemental cash flow information:
Cash paid for:
Interest $ 153 $ 452
Income taxes 138 7,542
Supplemental disclosures of non-cash investing and financing activities:
Property and equipment additions financed by capital leases $ - $ 74
Reduction in deferred stock-based compensation $ 3,658 $ 7,226
See accompanying notes to condensed consolidated financial statements.
5
LEXENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(unaudited)
The condensed consolidated financial statements of Lexent Inc. and
Subsidiaries (the "Company") included herein have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to SEC rules and regulations.
The condensed consolidated financial statements of the Company reflect, in the
opinion of management, all adjustments necessary to present fairly the financial
position of the Company at June 30, 2002 and the results of its operations and
cash flows for the periods ended June 30, 2002 and June 30, 2001. All
adjustments are of a normal recurring nature. These financial statements should
be read in conjunction with the annual financial statements and notes thereto
for the year ended December 31, 2001. The results of operations for the three
and six months ended June 30, 2002 are not necessarily indicative of the results
of operations to be expected for the year ending December 31, 2002.
1. Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the
weighted average number of common shares outstanding for the period. Diluted
loss per share reflects the potential dilution of other securities by including
in the weighted average number of common shares outstanding for each period the
dilutive effect of stock options and shares issuable under the employee stock
purchase plan. Details of the calculations are as follows:
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
---- ---- ---- ----
(in thousands, except per share amounts)
Net loss per share-basic:
Net loss........................................... $ (2,453) $(1,108) $ (9,182) $(11,050)
======== ======= ======== ========
Weighted average shares-basic...................... 41,832 41,423 41,766 41,307
======== ======= ======== ========
Net loss per share-basic........................... $ (0.06) $ (0.03) $ (0.22) $ (0.27)
======== ======= ======== ========
Net loss per share-diluted:
Net loss........................................... $ (2,453) $(1,108) $ (9,182) $(11,050)
======== ======= ======== ========
Weighted average shares-basic...................... 41,832 41,423 41,766 41,307
======== ======= ======== ========
Dilutive effect of stock options................... 865 1,197 990 1,248
Dilutive effect of employee stock purchase plan. 7 - 6 -
-------- ------- -------- --------
Weighted average shares-diluted................... 42,704 42,620 42,762 42,555
======== ======= ======== ========
Net loss per share-diluted......................... * * * *
* Inclusion of common stock equivalent shares would result in an anti-dilutive
net loss per share. As a result, the computation for diluted loss per share is
not presented.
6
LEXENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(unaudited)
2. RECEIVABLES, NET
June 30, December 31,
2002 2001
---- ----
(in thousands)
Accounts receivable - billed to customers................ $ 35,027 $ 42,237
Unbilled receivables on completed projects accounted
for under the completed contract method............. 1,234 3,734
Costs and estimated earnings in excess of billings on
projects accounted for under the percentage-of-
completion method................................... 5,889 2,852
Unbilled receivables on cost-plus contracts.............. 2,111 4,793
Costs of uncompleted projects accounted for under the
completed contract method........................... 897 2,457
Retainage................................................ 1,036 736
----------- ----------
46,194 56,809
Less allowance for uncollectible amounts................. (11,720) (15,638)
----------- ---------
$ 34,474 $ 41,171
=========== =========
The amounts written off against the allowance for the six months ended
June 30, 2002 and 2001 were $4.3 million and $2.8 million, respectively. For the
six months ended June 30, 2002 and 2001, the provision for uncollectible amounts
was $0.4 million and $23.5 million, respectively.
Amounts retained by customers related to projects that are
progress-billed may be outstanding for periods that exceed one year.
3. INVESTMENTS
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 depended on the market price on
the date the shares were sold. One half of such shares could have been sold on
or after January 2, 2002 and the other half on or after April 2, 2002. The
Company sold half of the shares during January 2002 for a net gain of $0.6
million. On April 2, 2002, the Company sold its remaining shares of common for a
net loss of $2.0 million. That amount was accrued as a permanent impairment as
of March 31, 2002 and recorded as a loss in "Other expense, net."
4. 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.
Changes in the components of accumulated other comprehensive income for
the six months ended June 30, 2002 is as follows:
Unrealized gain on Accumulated other
available-for-sale securities comprehensive income
(in thousands)
Balance, December 31, 2001..... $ 60 $ 60
Change for six months 2002..... (60) (60)
---------- ----------
Balance, June 30, 2002......... $ - $ -
========== ===========
7
LEXENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(unaudited)
5. EMPLOYEE STOCK PURCHASE PLAN
In August 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 each purchase period. There
are two 6-month purchase periods in each year, commencing August 1, 2001. The
market value was $5.38 per share on the first offering date (August 1, 2001) and
$5.85 per share on the second offering date (February 1, 2002). Employees may
purchase up to 1,000 shares in each purchase period. Under the ESPP, 2,500,000
shares were authorized and available for issuance. At the end of the first
purchase period (January 31, 2002), 49,791 shares were issued at a purchase
price of $4.57. At June 30, 2002, 43,500 shares are issuable to employees based
on payroll deductions of $0.1 million through that date.
6. RELATED PARTY TRANSACTIONS
During the six months ended June 30, 2002, the Company repaid $0.9
million including interest expense of $0.1 million on a subordinated note
payable to a common stockholder.
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. Rent
expense for these premises was $0.2 million for the six months ended June 30,
2002.
In May 2000, the Company entered into a ten-year lease for a garage and
warehouse facility in Long Island City, New York. Lease payments were $0.3
million for the six months ended June 30, 2002. The facility is leased from an
entity owned by the Company's two principal common stockholders.
7. CONTINGENCIES
From time to time, the Company is involved in various suits and legal
proceedings, which arise in the ordinary course of business. Included in these
proceedings are several employment related lawsuits and/or administrative
complaints that have been filed alleging wrongful termination, retaliation,
breach of contract and/or employment discrimination. On July 9, 2002, the
Company's subsidiary, Hugh O'Kane Electric Co., LLC, was served with a complaint
filed in the District of Maryland by several former employees alleging
violations of Title VII of the Civil Rights Act of 1964, as amended. Plaintiffs
seek compensatory and punitive damages. The Company intends to defend itself
vigorously against the allegations. The Company's Answer will be filed shortly.
The Company is involved in litigation in the Southern District of New
York, served upon the Company on or about March 10, 2002, brought by three
electrical contractors alleging a conspiracy among certain other contractors
(including the Company) and the International Brotherhood of Electrical Worker,
Local Union Number 3, AFL-CIO ("IBEW"). The suit alleges violations of the
federal Sherman Antitrust Act and state laws and claims that the defendants
exercise market power restricting the ability of plaintiffs, who employ workers
from the Communication Workers of America ("CWA"), from performing
telecommunications services work in the New York metropolitan area. Plaintiffs
seek treble damages. The suit is in the discovery stage. The Company believes
that this suit is part of an ongoing labor dispute between the IBEW and the CWA
and that the allegations against the Company are without merit. The Company
intends to vigorously defend its position.
On or about July 22, 2002, the Company was served with a complaint in
the Northern District of Illinois brought by several plaintiffs associated with
U.S. Electric LLC, alleging that the Company's decision not to complete the
purchase of U.S. Electric nor to employ certain of U.S Electric's principals
constitutes a breach of contract. Plaintiffs seek damages for lost profits,
salaries, etc. The Company believes that the complaint is without merit and will
vigorously defend its position. The Company's Answer will be filed shortly.
8
LEXENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(unaudited)
It is too early to assess the ultimate outcomes of the above-referenced
matters served upon the Company in 2002. Therefore, at present, it cannot be
determined whether the ultimate outcomes of those matters, individually or
cumulatively, will have a material impact on the Company's financial position or
results of operations.
The shareholder class action suit filed in October 2001 in the Southern
District of New York against the Company, certain of its senior executives and
its underwriters has continued. The complaint alleges that the registration
statement and prospectus relating to the Company's initial public offering
contained material misrepresentations and/or omissions in that those documents
did not disclose that (1) certain underwriters had solicited and received
undisclosed fees and commissions and other economic benefits from some investors
in connection with the distribution of the Company's stock in the initial public
offering; and (2) certain underwriters had entered into arrangements with some
investors that were designed to distort and/or inflate the market price for the
Company's stock in the aftermarket following the initial public offering. The
suit against the Company and its executives is part of a number of initial
public offering securities claims against multiple issuers and underwriters
presently pending before Judge Scheindlin. No discovery has occurred in the suit
involving the Company. As indicated in previous filings, the Company believes
that the claims against it and its senior executives are without merit, and the
Company intends to defend itself and its senior executives vigorously.
Management currently believes that the resolution of this litigation will not
have a material adverse impact on the Company's financial position or the
results of operations, although the ultimate outcome of this matter cannot be
determined at this time.
8. STOCK OPTIONS AND AWARDS
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 granted 1,343,425 new options to optionees who were still employed
on that date. The exercise price of the new options was $3.03 based on the
closing market price on March 25, 2002, and the new options will vest as if the
tendered options had not been canceled.
In addition to the aforementioned, during the six months ended June 30,
2002, options to purchase 713,086 common shares were granted, 908,349 options
were terminated and expired and 274,081 options were exercised. As of June 30,
2002, options to purchase 4,792,641 common shares were outstanding.
Deferred stock-based compensation is recorded for options and
restricted stock grants for which the exercise or sale prices are lower than the
deemed fair values for financial reporting purposes of the underlying common
stock on the grant date. Deferred stock-based compensation also includes the
fair value at grant date of options granted to non-employees and options which
were remeasured to fair value on the date optionees' status was changed from
employee to consultant. Deferred stock-based compensation is amortized to
expense over the vesting term of the options. To the extent that unvested
options are forfeited, the balance of unamortized deferred stock-based
compensation is reversed.
During the six months ended June 30, 2002 and 2001, $0.1 million and
$1.3 million, respectively, of deferred stock-based compensation was recorded.
Also during the six months ended June 30, 2002 and 2001, $3.8 million and $8.5
million, respectively, was reversed for unvested options which were forfeited.
Amortization of deferred stock-based compensation was $0.8 million and
$1.3 million for the three months ended June 30, 2002 and 2001, respectively and
$1.8 million and $3.5 million for the six months ended June 30, 2002 and 2001,
respectively. Deferred tax benefits were recorded in the amounts of $0.1 million
for both the three months ended June 30, 2002 and 2001, respectively, and $0.2
million and $1.0 million for the six months ended June 30, 2002 and 2001,
respectively, in connection with amortization of deferred stock-based
compensation for nonqualified options. With respect to such deferred tax
benefits, to the extent that nonqualified options are forfeited or are exercised
when the fair value of the stock is lower than the deemed fair value of the
stock for financial reporting purposes on the grant date ($22.80 per share), a
9
LEXENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(unaudited)
portion of such deferred tax benefits would not be realized and such portion may
be charged to expense. During the first six months of 2002, $2.4 million of
deferred tax assets was charged to expense in connection with forfeited options.
9. PROVISION FOR RESTRUCTURING CHARGES
During the first quarter of 2001, the Company recorded $5.9 million of
restructuring charges primarily in connection with the closing and/or scaling
back of operations in regional offices. During the first quarter of 2002, the
Company recorded $1.4 million in restructuring charges in connection with the
closing of an office and a further reduction of the workforce. The restructuring
charges in the first quarter of 2002 are comprised of $0.9 million of
obligations under leases for the vacated premises and excess vehicles to be paid
over various lease terms up to three years, $0.4 million of severance and
related contractual obligations to be paid over various periods up to one year,
and $0.2 million for writeoffs of property and equipment, which will not require
future cash outlays.
A summary of the restructuring reserve at June 30, 2002, is as
follows:
Reserve Reserve
Balance at Restructuring Balance at
January 1, 2002 Charges Amounts June 30, 2002
(including Recorded in First Charged to (including
noncurrent portion) Quarter of 2002 the Reserve noncurrent portion)
------------------ ----------------- ----------- ------------------
(in thousands)
Severance and related
contractual obligations $1,751 $ 360 $(1,000) $1,111
Lease obligations......... 7,591 896 (2,649) 5,838
Property and equipment.... - 185 (185) -
------ ------ ------- ------
Total................. $9,342 $1,441 $(3,834) $6,949
====== ====== ======= ======
10. 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 became 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. Had this pronouncement been
retroactively applied, net income would have increased approximately $0.05
million for the six months ended June 30, 2001. Adoption of SFAS 142 did 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 became 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.
10
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
The following discussion and analysis provides information that should
be read in conjunction with the historical condensed consolidated financial
statements, including the notes thereto, included elsewhere in this Form 10-Q.
OVERVIEW
Lexent Inc. is 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, 7 days a week.
During our most recent three 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 electrical
contracting, and other infrastructure services.
For the three and six months ended June 30, 2002, approximately 79% and
78% respectively, of our revenues was earned from services provided in the New
York metropolitan region, including New York City, New Jersey, Long Island and
Westchester. 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 three and six months ended June 30, 2002,
we derived approximately 44% and 48%, respectively, of our revenues from our two
largest customers. 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 the past 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 by providing our services to new customers,
but no assurance of our success in replacing those revenues can be given.
CRITICAL ACCOUNTING POLICIES
Please refer to the description of our "Critical Accounting Policies"
in the Management's Discussion and Analysis section of our Form 10-K for the
year ended December 31, 2001.
RESULTS OF OPERATIONS
SECOND QUARTER 2002 COMPARED TO SECOND QUARTER 2001
Revenues. Our revenues decreased by 51% to $33.2 million in the second
quarter of 2002 from $67.0 million in the same period last year. 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 the filing for bankruptcy by a number of our
telecommunications customers during 2001. During 1999, we entered into an
engineering, procurement and construction contract (the "EPC contract") with one
of our largest customers, Level 3 Communications, under which we recorded
approximately $5.2 million and $11.1 million of revenues for second quarter of
2002 and 2001, respectively. The EPC contract was completed for all markets
11
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 95% of revenues in
the second quarter of 2002 compared with 78% of revenues in the same period last
year. 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 $4.7 million and $9.8 million were incurred during the
second quarter of 2002 and 2001, respectively, in connection with the EPC
contract.
General and administrative expenses. Our general and administrative
expenses decreased 34% to $3.9 million in the second quarter of 2002 from $5.9
million in the same period last year. The decrease was primarily due to a
reduction in wages and related benefits as a result of a reduction in headcount,
a reduction in rent expense and a reduction in travel and related meals and
entertainment.
Non-cash stock-based compensation. Amortization of deferred stock-based
compensation declined to $0.8 million in the second quarter of 2002 from $1.3
million in the same period of last year. The decrease was due to the reversal in
the first quarter of 2002 of $3.8 million of deferred stock-based compensation
for unvested options forfeited during that period, and the reversal on March 31,
2001 of $7.6 million with respect to an optionee whose status was changed from
employee to consultant on that date.
Interest expense. Interest expense in the second quarter of 2002 was
$0.1 million compared to $0.2 million in the same period last year. The decrease
was due primarily to the repayment of our outstanding bank loan and termination
of the credit facility during the fourth quarter of 2001, and in part to a lower
average outstanding level of equipment and vehicle loans and a subordinated note
payable to a stockholder.
Interest income. Interest income in the second quarter of 2002 was $0.3
million compared to $0.5 million in the same period last year. The decrease was
due to lower average prevailing interest rates during 2002.
Provision for income taxes. Excluding tax benefits related to
amortization of deferred stock-based compensation, our effective tax rate is
approximately 46% because a significant portion of our operations is currently
concentrated in New York City, which subjects us to a local tax on income
derived in that jurisdiction. Deferred tax benefits of $0.1 million were
recorded in the second quarter of 2002 and 2001, respectively, in connection
with amortization of deferred stock-based compensation for nonqualified options.
Tax benefits are not applicable to incentive options. With respect to deferred
tax benefits recorded for nonqualified options, to the extent such options are
forfeited or are exercised when the fair value of the stock is lower than the
deemed fair value of the stock for financial reporting purposes on the grant
date ($22.80 per share), a portion of such deferred tax benefits would not be
realized and such portion may be charged to expense. Our total effective tax
rate for financial reporting purposes was 40% for the second quarter 2002,
compared with 10% for the second quarter of 2001.
FIRST SIX MONTHS 2002 COMPARED TO FIRST SIX MONTHS 2001
Revenues. Our revenues decreased by 54% to $64.5 million in the six
months ended 2002 from $139.1 million in the same period last year. 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 the filing for bankruptcy by a number of our
telecommunications customers during 2001. During 1999, we entered into an
engineering, procurement and construction contract (the "EPC contract") with one
of our largest customers, Level 3 Communications, under which we recorded
approximately $9.9 million and $19.2 million of revenues for the first six
months of 2002 and 2001, respectively. The EPC contract was completed for all
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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 94% of revenues in
the six months ended 2002 compared with 80% of revenues in the same period
last year. 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 $8.5 million and $16.8 million were incurred during
the first quarter of 2002 and 2001, respectively, in connection with the EPC
contract.
General and administrative expenses. Our general and administrative
expenses decreased 34% to $8.1 million in the six months ended 2002 from $12.3
million in the same period last year. The decrease was primarily due to a
reduction in wages and related benefits as a result of a reduction in headcount,
a reduction in rent expense and a reduction in travel and related meals and
entertainment.
Non-cash stock-based compensation. Amortization of deferred stock-based
compensation declined to $1.8 million in the six months ended 2002 from $3.5
million in the same period of last year. The decrease was due to the reversal in
the first quarter of 2002 of $3.8 million of deferred stock-based compensation
for unvested options forfeited during that period, and the reversal on March 31,
2001 of $7.6 million with respect to an optionee whose status was changed from
employee to consultant on that date.
Interest expense. Interest expense in the six months ended 2002 was
$0.1 million compared to $0.5 million in the same period last year. The decrease
was due primarily to the repayment of our outstanding bank loan and termination
of the credit facility during the last quarter of 2001, and in part to a lower
average outstanding level of equipment and vehicle loans and a subordinated note
payable to a stockholder.
Interest income. Interest income in the six months ended 2002 was $0.7
million compared to $1.3 million in the same period last year. The decrease was
due to lower average prevailing interest rates during 2002.
Provision for income taxes. Excluding tax benefits related to
amortization of deferred stock-based compensation, our effective tax rate is
approximately 46% because a significant portion of our operations is currently
concentrated in New York City, which subjects us to a local tax on income
derived in that jurisdiction. Deferred tax benefits of $0.2 million and $1.0
million were recorded in the six months ended 2002 and 2001, respectively, in
connection with amortization of deferred stock-based compensation for
nonqualified options. Tax benefits are not applicable to incentive options. With
respect to deferred tax benefits recorded for nonqualified options, to the
extent such options are forfeited or are exercised when the fair value of the
stock is lower than the deemed fair value of the stock for financial reporting
purposes on the grant date ($22.80 per share), a portion of such deferred tax
benefits would not be realized and such portion may be charged to expense.
During the six months ended 2002, $2.4 million of deferred tax benefits were
charged to expense as a result of forfeited options. That expense charge offset
the tax benefits recorded in connection with our pre-tax loss, and as a result,
our total effective tax rate for financial reporting purposes was 20% for the
six months ended 2002, compared with 43% for the six months ended 2001.
Restructuring charges. During the first quarter of 2001, we recorded
restructuring charges of $5.9 million primarily in connection with the closing
of seven offices and reduction in our workforce. During the first quarter of
2002, we recorded approximately $1.4 million of restructuring charges in
connection with the closing of an office and an additional reduction of the
workforce. The restructuring charges in the first quarter of 2002 were comprised
of $0.9 million of obligations under leases for the closed office and excess
vehicles to be paid over various lease terms up to three years, $0.4 million of
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severance and related contractual obligations to be paid over various periods up
to one year, and $0.2 million for write-offs of property and equipment, which
will not require future cash outlays. We may potentially record additional
restructuring charges in future periods depending on our ability to replace the
revenues previously derived from several of our large telecommunications-carrier
customers with revenues 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.
Liquidity and Capital Resources
Net cash provided by operations was $1.3 million for the first six
months ended June 30, 2002, representing net collections of receivables offset
by payments made for accrued liabilities. Cash provided by investing activities
was $2.7 million, representing $3.4 million of proceeds from the sale of shares
of common stock received from a customer in October 2001 in partial settlement
of a receivable, offset by $0.7 million for capital expenditures. Net cash used
in financing activities was $1.3 million, comprised of repayments of $0.9
million for equipment and capital leases and $0.8 million of repayments on a
subordinated note payable to a stockholder, offset by $0.4 million in proceeds
from exercises of stock options and the ESPP.
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.
ITEM 3. 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. We do not
believe that our exposure to market risk is material.
As of June 30, 2002, we had cash and cash equivalents of $79 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 or
decrease in the market interest rates by 10 percent from the rates in effect on
the date of this Form 10-Q 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.
We currently do not own any investments in publicly traded equity
securities. Therefore, we do not currently have any direct equity market price
risk.
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.
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q 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
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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 Quarterly Report on Form 10-Q 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.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
-----------------
See Note 7 to the unaudited interim condensed financial statements.
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
--------
None.
(b) Reports:
--------
Reports on Form 8-K
-------------------
Report on Form 8-K, dated March 6, 2002, reporting the
resignation of Joseph Haines, Executive Vice President, Operations.
Report on Form 8-K, dated May 29, 2002, reporting the
resignation of Jonanthan H. Stern, Executive Vice President and Chief
Financial Officer.
Report on Form 8-K, dated July 15, 2002, reporting the
resignation of Walter C. Teagle, III, Director and Executive Vice
President, Administration.
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CERTIFICATION
The undersigned hereby certify that this report fully complies with the
requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934
and that the information contained in this report fairly presents, in all
material aspects, the financial condition and results of operations of the
issuer.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
/s/ Kevin M. O'Kane
Dated: August 7, 2002 By: __________________________________
Kevin M. O'Kane
President and Chief Executive Officer,
on behalf of Registrant
/s/ Justine Roe
Dated: August 7, 2002 By: __________________________________
Justine Roe
Vice President & Controller
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