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 SECURITIES EXCHANGE
ACT OF 1934 for the Period Ended June 30, 2000.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(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 (I.R.S. Employer Identification No.)
incorporation or organization)
Three New York Plaza
New York, New York 10004
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(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 No X
---- ----
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,
40,850,975 shares outstanding as of August 18, 2000.
<PAGE>
LEXENT INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page No.
--------
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2000
(unaudited) and December 31, 1999 3
Condensed Consolidated Statements of Income (Loss) for the
three months ended June 30, 2000 (unaudited) and 1999
(unaudited) and the six months ended June 30, 2000
(unaudited) and 1999 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2000 (unaudited) and 1999 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 13
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 14
ITEM 2. Changes in Securities and Use of Proceeds 14
ITEM 4. Submission of Matters to a Vote of Security Holders 15
ITEM 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1: Financial Statements
--------------------
LEXENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
Assets: (unaudited)
<S> <C> <C>
Current Assets:
Cash $ 1,705 $ 1,158
Receivables, net 74,377 48,748
Prepaid expenses and other assets 394 156
Deferred tax asset, net 10,135 3,592
-------- --------
Total current assets 86,611 53,654
Property and equipment, net 8,741 6,180
Other assets 1,837 545
-------- --------
Total assets $ 97,189 $ 60,379
======== ========
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable $ 16,560 $ 8,434
Accrued liabilities 13,075 9,613
Income taxes payable 3,628 5,798
Billings in excess of costs and estimated earnings on
uncompleted projects 5,687 1,084
Subordinated note payable to stockholder 1,582 1,582
Equipment and capital lease obligations 1,300 1,014
Due to related parties 309 432
-------- --------
Total current liabilities 42,141 27,957
Subordinated notes payable to stockholders 4,741 5,533
Notes payable to banks 9,600 8,841
Equipment and capital lease obligations 2,286 1,842
-------- --------
Total liabilities 58,768 44,173
-------- --------
Redeemable convertible preferred stock at stated liquidation
preference of $2.2864 per share at June 30, 2000 and $2.2553
per share at December 31, 1999, $.001 par value, 5,538,458
shares authorized, issued and outstanding 12,836 12,491
-------- --------
Stockholders' equity:
Common stock, $.001 par value, 50,000,000 shares authorized,
and 24,080,412 and 22,919,100 shares outstanding at June
30, 2000 and December 31, 1999, respectively 24 23
Additional paid-in capital 58,747 11,787
Deferred stock-based compensation (27,193) (7,142)
Retained earnings (5,993) (953)
-------- --------
Total stockholders' equity 25,585 3,715
-------- --------
Total liabilities and stockholders' equity $ 97,189 $ 60,379
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
LEXENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME(LOSS)
(dollars in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 65,027 $ 29,357 $121,237 $ 49,522
Cost of sales 47,898 24,501 90,047 40,541
General, administrative and marketing expenses 5,934 2,462 10,045 4,373
Depreciation and amortization 789 276 1,447 474
Non-cash stock based compensation 2,244 19 21,671 19
-------- -------- -------- --------
Operating income(loss) 8,162 2,099 (1,973) 4,115
Interest expense 343 238 734 462
Other expense(income), net 4 - (6) -
-------- -------- -------- --------
Income(loss) before income taxes 7,815 1,861 (2,701) 3,653
Provision for income taxes 3,605 860 1,994 1,688
-------- -------- -------- --------
Net income(loss) $ 4,210 $ 1,001 $ (4,695) $ 1,965
======== ======== ======== ========
Net income(loss) per share:
Basic $ 0.17 $ 0.04 $ ( 0.21) $ 0.07
======== ======== ======== ========
Diluted $ 0.12 $ 0.03 $ ( 0.21) $ 0.06
======== ======== ======== ========
Weighted average common shares outstanding:
Basic 23,882 22,717 23,582 22,717
======== ======== ======== ========
Diluted 35,768 31,563 23,582 31,563
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
LEXENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (4,695) $ 1,965
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for uncollectible amounts, net 1,394 579
Depreciation and amortization 1,447 474
Non-cash stock based compensation 21,671 19
Provision for deferred taxes (6,543) 522
Changes in working capital items:
Receivables (27,023) (6,757)
Prepaid expenses and other assets (1,530) 57
Accounts payable 8,126 1,315
Accrued liabilities 3,462 896
Income taxes payable (2,170) (851)
Billings in excess of costs and estimated earnings
on uncompleted contracts 4,603 3,007
-------- --------
Net cash (used in) provided by operating
activities (1,258) 1,226
-------- --------
Cash from investing activities:
Acquisitions of property, plant and equipment, net of
equipment loans and capital leases (2,715) (1,141)
-------- --------
Net cash used in investing activities (2,715) (1,141)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options and sales of
restricted stock 5,239 --
Repayment of subordinated notes payable to stockholder (792) (791)
Net borrowings under revolving credit line 759 --
Net payments to related parties (123) 312
Repayment of equipment loans and capital leases (563) (262)
-------- --------
Net cash provided by (used in) financing
activities 4,520 (741)
-------- --------
Net increase (decrease) in cash 547 (656)
Cash at beginning of period 1,158 1,495
-------- --------
Cash at end of period $ 1,705 $ 839
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
LEXENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Supplemental cash flow information:
Cash paid for:
Interest $ 708 $ 450
Income taxes $ 10,706 $ 2,014
Supplemental disclosures of noncash investing and financing
activities:
Property, plant and equipment additions financed by
equipment loans and capital leases $ 1,293 $ 861
Accrued dividends on preferred shares $ 345 $ 345
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
LEXENT INC. AND SUBSIDIARES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(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 the
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, 2000 and the results of its operations and
cash flows for the periods ended June 30, 2000 and June 30, 1999. 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 fiscal year ended December 31, 1999 included in the Company's final
prospectus filed with the SEC on July 27, 2000. The results for the three and
six months ended June 30, 2000 are not necessarily indicative of the results for
the entire fiscal year ending December 31, 2000.
1. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income
(loss)(after deducting dividends accrued 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 later of the date of issuance of the preferred stock or the beginning of
the fiscal period presented at the conversion rates that would have been in
effect at such dates (and without deducting from net income dividends accrued on
preferred stock), and by including the dilutive effect of outstanding stock
options in the weighted average number of common shares outstanding for each
period. Details of the calculation are as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net Income (Loss) per share - basic:
Net Income (loss)................................ $ 4,210 $ 1,001 $ (4,695) $ 1,965
Less: preferred dividends........................ (173) (173) (345) (345)
-------- -------- -------- --------
Net income (loss) available to common
stockholders................................... $ 4,037 $ 828 $ (5,040) $ 1,620
======== ======== ======== ========
Weighted average shares - basic.................. 23,882 22,717 23,582 22,717
======== ======== ======== ========
Net income (loss) per share - basic.............. $ 0.17 $ 0.04 $ (0.21) $ 0.07
======== ======== ======== ========
7
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Net Income per share - diluted:
Net Income....................................... $ 4,210 $ 1,001 * $ 1,965
======== ======== ======== ========
Weighted average shares outstanding.............. 23,882 22,717 * 22,717
Assumed conversion of preferred stock as
of the later of the date of issuance
of the preferred stock or the beginning
of the fiscal period presented, at the
conversion rates that would have been
in effect at such dates........................ 9,815 8,740 * 8,740
Dilutive effect of stock options................. 2,071 106 * 106
-------- -------- -------- --------
Weighted average shares - diluted................ 35,768 31,563 * 31,563
======== ======== ======== ========
Net income per share - diluted................... $ 0.12 $ 0.03 * $ 0.06
======== ======== ======== ========
</TABLE>
* Common stock equivalent shares, such as redeemable convertible preferred
stock and stock options, have been excluded in the computation for the six
months ended June 30, 2000, as their effect is antidilutive. As a result, the
computation for diluted loss per share does not differ from basic loss per
share.
2. RECEIVABLES, NET
June 30, December 31,
2000 1999
---- ----
(in thousands)
Accounts receivable - billed to customers $ 48,258 $ 30,226
Unbilled receivables on completed projects
accounted for under the completed contract
method......................................... 9,887 4,908
Costs and estimated earnings in excess of
billings on projects accounted for under the
percentage-of-completion method................ 2,269 3,858
Unbilled receivables on cost-plus contracts...... 8,083 6,066
Costs of uncompleted projects accounted for
under the completed contract method............ 9,658 6,138
Retainage........................................ 1,218 1,154
-------- --------
79,373 52,350
Less: allowance for uncollectible amounts........ (4,996) (3,602)
-------- --------
$ 74,377 $ 48,748
======== ========
For the six months ended June 30, 2000 and the year ended December 31,
1999, the Company's provision for uncollectible amounts was $1.9 million and
$1.5 million, respectively. The amounts written off against the provision for
those periods were $1.1 million and $0.6 million, respectively.
Amounts retained by customers related to projects which are
progress-billed may be outstanding for periods that exceed one year.
8
<PAGE>
3. NOTES PAYABLE AND OTHER FINANCING ARRANGEMENTS
On March 8, 2000, the Company's revolving credit facility with banks
was increased to $20 million and its expiration date was extended to June 2003.
In addition, the amendment released the restriction on acquisition of other
businesses in excess of $250,000 in any calendar year, and also provides for the
release of the following, upon consummation of an initial public offering:
restriction on payment of cumulative dividends on preferred stock and personal
guarantees of the Company's stockholders.
4. RELATED PARTY TRANSACTIONS
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
$0.5 million per year commencing May 1, 2000. The facility is leased from an
entity which is owned by the Company's two principal common stockholders.
5. CONTINGENCIES
From time to time, the Company is involved in various lawsuits and
legal proceedings, which arise in the ordinary course of business. On or about
March 31, 2000 a former employee filed a lawsuit against the Company and certain
of the Company's employees, officers and directors in the U.S. District Court
for the Southern District of New York, seeking, among other things,
reinstatement with back and front pay, compensatory damages in excess of
$5,050,000, punitive damages, costs and attorneys' fees based upon allegations
of sexual harassment, employment discrimination and retaliation. The Company
intends to defend this claim vigorously. As this litigation is still in its
early stages, the Company is not yet able to determine whether the resolution of
this matter will have a material adverse effect on the Company's financial
condition or results of operations.
6. STOCK OPTIONS AND AWARDS
During the three and six months ended June 30, 2000, 428,500 and
2,431,000 options, respectively, were granted. As of June 30, 2000, 4,896,312
options were outstanding.
For certain options and restricted stock granted in 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. Accordingly, for those options and restricted stock
grants, the Company recorded deferred non-cash stock-based compensation of $41.7
million in the first quarter of 2000. Amortization of such deferred non-cash
stock-based compensation for the three and six months ended June 30, 2000 was
$19.4 and $21.6 million, respectively. Deferred tax benefits of $5.7 million and
$6.5 million were recorded in the three and six months ended June 30, 2000,
respectively, in connection with amortization of deferred non-cash stock-based
compensation related to non-qualified options, to the extent that the Company
expects to realize such tax benefits.
7. SUBSEQUENT EVENT
On July 6, 2000, the Company effected a 1-for-2 reverse stock split
of the Company's common stock with no change in par value. Accordingly, the
stock split has been recognized by reclassifying $22,717, the par value
reduction in shares resulting from the split, from common stock to retained
9
<PAGE>
earnings. Retained earnings, common stock, per share and shares outstanding data
in the Condensed Consolidated Financial Statements and Notes to the Condensed
Consolidated Financial Statements have been retroactively restated to reflect
this stock split.
On July 6, 2000, the Company filed an amendment to its Restated
Certificate of Incorporation. This amendment decreased the shares of authorized
common stock from 94,461,542 to 50,000,000 shares.
On July 31, 2000, the Company filed a Second Amended and Restated
Certificate of Incorporation. Among other things, this restated certificate
increased the shares of authorized common stock from 50,000,000 to 120,000,000
and authorized the issuance of up to 5,000,000 shares of preferred stock, the
terms of which can be set at the discretion of the board of directors of the
Company.
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 discount and before
expenses of the offering. The Company used $10.1 million of the proceeds to
repay notes payable to banks, and $1.1 million to pay dividends on outstanding
preferred shares accrued since January 1, 1999. All outstanding shares of
redeemable convertible preferred stock were converted into 9,814,624 shares of
common stock as of August 2, 2000.
10
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ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
The following discussion and analysis provides information which
should be read in conjunction with the historical consolidated financial
statements, including the notes thereto, included elsewhere in this Form 10-Q.
OVERVIEW
We provide outsourced local telecommunications network services to
telecommunications companies by supplying the expertise and resources needed to
enable our customers to build and connect their networks to other
telecommunications companies and individual end users. For the three and six
months ended June 30, 2000, approximately 78% and 79%, respectively, of our
revenues were 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 are large,
well-established telecommunications carriers as well as smaller, early stage
telecommunications carriers. We have derived a significant portion of our
revenues from a limited number of customers. For the three and six months ended
June 30, 2000, we derived approximately 23% of our revenues from our largest
customer and 12% of our revenues from our second largest customer.
RESULTS OF OPERATIONS
FOR THE SECOND QUARTER OF 2000 COMPARED TO THE SECOND QUARTER OF 1999.
Revenues. Our revenues increased by 122% to $65.0 million for the
second quarter of 2000 from $29.4 million in the second quarter of 1999. The
increase in revenues was primarily attributable to higher demand for our
services from customers as they expanded their telecommunications networks.
Cost of revenues. Our cost of revenues increased by 96% to $48.5
million for the second quarter of 2000 from $24.8 million in the second quarter
of 1999. The increase was due in part to increased technical personnel in
support of additional demand from customers for our services and in part to an
increase in our fleet of specialty vehicles. The costs of technical personnel
are comprised of wages, related benefits and payroll-based insurance premiums.
Cost of revenues declined to 75% of total revenues in the second quarter of 2000
from 84% in the same period of 1999, because an increased portion of our
revenues was derived from higher-margin network upgrade and maintenance services
this year.
General, administrative and marketing expenses. Our general,
administrative and marketing expenses increased 147% to $6.2 million for the
second quarter of 2000 from $2.5 million in the second quarter of 1999. The
increase was primarily due to salaries and related benefits for additional
executive and administrative personnel required to support our increased
revenues and in part to an increase in rent expense for additional office space
and equipment this year.
Non-cash stock-based compensation. We recorded amortization of
non-cash stock-based compensation of $2.2 million in the second quarter of 2000
related to options and restricted stock previously 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 $0.3 million for the
second quarter of 2000 from $0.2 million in the second quarter of 1999. The
increase was due to a higher level of borrowings under our revolving credit line
and increases in equipment and capital lease obligations.
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<PAGE>
Provision for income taxes. 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.
FOR THE SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 1999.
Revenues. Our revenues increased by 145% to $121.2 million for the six
months ended June 30, 2000 from $49.5 million for the six months ended June 30,
1999. The increase in revenues was primarily attributable to higher demand for
our services from customers as they expanded their telecommunications networks.
Cost of revenues. Our cost of revenues increased by 122% to $91.1
million for the six months ended June 30, 2000 from $41.0 million for the six
months ended June 30, 1999. The increase was due in part to increased technical
personnel in support of additional demand from customers for our services and to
an increase in our fleet of specialty vehicles. Cost of revenues declined to 75%
of total revenues for the six months ended June 30, 2000 from 83% in the same
period of 1999, because an increased portion of our revenues was derived from
higher-margin network upgrade and maintenance services this year.
General, administrative and marketing expenses. Our general,
administrative and marketing expenses increased 136% to $10.4 million for the
six months ended June 30, 2000 from $4.4 million for the six months ended June
30, 1999. The increase was primarily due to $2.7 million for additional salaries
and related benefits for new executive and administrative personnel required to
support our increased revenues. In addition, the provision for unrealizable
accounts receivable increased by $0.7 million for the six months ended June 30,
2000 compared to the six months ended June 30, 1999 as a result of our increased
level of revenues.
Non-cash stock-based compensation. We recorded amortization of
non-cash stock-based compensation of $21.7 million for the six months ended June
30, 2000 related to options and restricted stock granted during that period 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.
Operating income. Operating income for the six months ended June 30,
2000 (before amortization of deferred non-cash stock-based compensation) was
$19.7 million, compared with $4.1 million for the six months ended June 30,
1999. After giving effect to amortization of deferred non-cash stock-based
compensation, operating loss for the six months ended June 30, 2000 was $2.0
million.
Interest expense. Interest expense increased to $0.7 million for the
six months ended June 30, 2000 from $0.5 million for the six months ended June
30, 1999. The increase was due to a higher level of borrowings under our
revolving credit line and increases in equipment and capital lease obligations.
Provision for income taxes. Our normal 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. However, amortization of deferred non-cash
stock-based compensation ($21.7 million for the six months ended June 30, 2000)
relates to both incentive stock options and nonqualified stock options, but tax
benefits are not available for compensation expense recorded in connection with
incentive stock options. Deferred tax benefits of $6.5 million were recorded for
the six months ended June 30, 2000 in connection with non-cash stock-based
compensation related to nonqualified stock options.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operations is primarily derived from our projects in
process and changes in working capital. Net cash used in operations was $1.3
million for the six months ended June 30, 2000. For the six months ended June
30, 2000, our primary use of cash was to finance higher receivables, which
12
<PAGE>
increased by $27.0 million as a result of our increased revenues. This use of
cash was offset in part by increases in accounts payable, accrued liabilities,
and billings in excess of costs and estimated earnings on uncompleted contracts.
Cash used in investing activities was $2.7 million for the six months
ended June 30, 2000. Investing activities consist of capital expenditures to
support our growth.
Net cash provided by financing activities for the first six months of
2000 was $4.5 million, comprised of $5.2 million in proceeds from exercises of
stock options and sales of restricted stock, and net borrowings under our
revolving credit facility of $0.8 million, offset by payments of $0.8 million on
a subordinated note payable to a stockholder, payments of $0.1 million to
related parties and $0.6 million of repayments on equipment loans and capital
leases.
As of June 30, 2000, we had cash of $1.7 million and $10.4 million of
availability under our bank credit facility.
We have no material commitments other than obligations under our bank
credit facility, installment obligations related to equipment purchases, leases
for facilities, computer equipment and vehicles, and subordinated notes payable
to stockholders.
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, 2000, we had cash of $1.7 million. As of August 2,
2000, we completed an offering of 6,900,000 shares of common stock for net
proceeds of $96.3 million. We intend to invest those net proceeds in
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 do not own any investments in publicly traded equity securities.
Therefore, we do not currently have any direct equity price risk.
We do not have any international operations, and we do not enter into
forward exchange contracts or other financial instruments with respect to
foreign currency. Accordingly, we 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
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, statement 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.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
-----------------
From time to time, we may become involved in various lawsuits and
legal proceedings which arise in the ordinary course of business. In addition,
on or about March 31, 2000 a former employee, Italia Casella, filed a lawsuit
against us in the U.S. District Court for the Southern District of New York,
naming as defendants Lexent, Hugh O'Kane Electric Co., Hugh O'Kane Electric Co.,
LLC, National Network Technologies, LLC, and certain of our employees, officers
and directors. Casella seeks, among other things, reinstatement with back and
front pay, compensatory damages in excess of $5,050,000, punitive damages, costs
and attorneys' fees based upon allegations of sexual harassment, employment
discrimination and retaliation. Our management intends to defend this claim
vigorously. As this litigation is still in its early stages, we are not yet able
to determine whether the resolution of this matter will have a material adverse
effect on our financial condition or results of operations.
ITEM 2. Changes in Securities and Use of Proceeds
-----------------------------------------
(a) As part of the consummation of our initial public offering ("IPO")
on August 2, 2000, we completed a recapitalization which included the conversion
of our Series A Convertible Preferred Stock, par value $.001 per share
("redeemable convertible preferred stock") and the accrued and unpaid dividends
through December 31, 1998 on such stock into an aggregate 9,814,624 shares of
our common stock. The conversion ratio, calculated in accordance with the terms
of the redeemable convertible preferred stock, was 1.77209 shares of common
stock per share of preferred stock. The remainder of the accrued and unpaid
dividends on the redeemable convertible preferred stock was paid in cash to the
holders thereof out of the proceeds received by us in the IPO. See Item 2 (d).
(c) During the period from April 1, 2000 to June 30, 2000, we issued
202,500 shares of common stock upon the exercise of stock options granted under
our stock option plan. The exercise price for such options was $0.49 per share.
This issuance of securities was deemed to be exempt from registration under the
Securities Act of 1933 in reliance on Rule 701 under the Securities Act or as a
private placement under Section 4(2) of the Securities Act.
(d) On August 2, 2000, we completed an IPO of 6,900,000 shares of our
common stock at a price per share of $15.00 (including 900,000 shares that were
subject to the underwriters' overallotment option, which was exercised in full).
The aggregate offering price was $103,500,000. The amount of all applicable
underwriting discounts and commissions was $7,245,000. The amount of all other
issuance costs incurred by us was approximately $1,425,000. After deducting all
underwriting discounts and commissions and other issuance costs, the total net
proceeds we received was $94,830,000.
Of the net proceeds of the IPO, approximately $10.1 million were used
to prepay a portion of the outstanding balance (including any accrued interest
thereon) under our revolving credit facility. We also used $1.1 million of the
net proceeds to pay dividends accrued after December 31, 1998 on the redeemable
convertible preferred stock converted to common stock upon consummation of our
IPO. The remaining net proceeds have been invested in cash, cash equivalents and
short-term investments. Other than the payment of dividends accrued after
December 31, 1998 on our redeemable convertible preferred stock, none of the net
proceeds from our IPO were used to pay, directly or indirectly, directors,
officers, persons owning ten percent or more of our equity securities or any of
out affiliates.
The effective date of our registration statement on Form S-1 was July
27, 2000, and the Commission file number assigned to the registration statement
was 333-30660. The IPO was completed upon the sale of all securities registered.
Credit Suisse First Boston Corporation, Chase Securities, Inc. and Raymond James
& Associates, Inc. acted as lead underwriters for the IPO.
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ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On June 30, 2000, the holders of more than a majority of each class of
our capital stock then outstanding acted by written consent to approve an
amendment to our Amended and Restated Certificate of Incorporation which
authorized a one-for-two reverse stock split of our common stock. The reverse
stock split took effect on July 6, 2000.
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
--------
The following exhibits are filed as part of this report:
Exhibit No. Description
----------- -----------
10.1 Underwriting Agreement
27.1 Financial Data Schedule
(b) Reports:
-------
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LEXENT INC.
(Registrant)
By: /s/ ALF T. HANSEN
---------------------------
Alf T. Hansen
President and
Chief Executive Officer, on
behalf of the Registrant
By: /s/ JONATHAN H. STERN
---------------------------
Jonathan H. Stern
Executive Vice President
and Chief Financial Officer
August 22, 2000
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