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 SEPTEMBER 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
--------------------------------------------------------------------------------
(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,
41,077,738 shares outstanding as of November 10, 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 September 30,
2000 (unaudited) and December 31, 1999 3
Condensed Consolidated Statements of Income for the Three
Months Ended September 30, 2000 (unaudited) and 1999
(unaudited) and the Nine Months Ended September 30, 2000
(unaudited) and 1999 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 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 10
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 12
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>
September 30, December 31,
2000 1999
---- ----
Assets: (unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 81,762 $ 1,158
Receivables, net 89,290 48,748
Prepaid expenses and other current assets 942 156
Deferred tax asset, net 10,436 3,592
--------- --------
Total current assets 182,430 53,654
Property and equipment, net 11,826 6,180
Other assets 1,550 545
--------- --------
Total assets $ 195,806 $ 60,379
========= ========
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable $ 17,583 $ 8,434
Accrued liabilities 18,602 9,613
Income taxes payable 2,199 5,798
Billings in excess of costs and estimated earnings on uncompleted projects 4,818 1,084
Subordinated note payable to stockholder 1,582 1,582
Equipment and capital lease obligations 1,479 1,014
Due to related parties 241 432
--------- --------
Total current liabilities 46,504 27,957
Subordinated notes payable to stockholders 3,956 5,533
Notes payable to banks 2,000 8,841
Equipment and capital lease obligations 2,263 1,842
--------- --------
Total liabilities 54,723 44,173
--------- --------
Redeemable convertible preferred stock at stated
liquidation preference $2.2553 per share at December
31, 1999, $0.001 par value, 5,538,458 shares - 12,491
authorized, issued and outstanding --------- --------
Stockholders' equity:
Common stock, $.001 par value, 120,000,000 shares
authorized, 40,964,286 and 22,919,100 shares
outstanding at September 30, 2000 and December
31, 1999, respectively 41 23
Additional paid-in capital 165,296 11,787
Deferred stock-based compensation (24,949) (7,142)
Retained earnings 695 (953)
--------- --------
Total stockholders' equity 141,083 3,715
--------- --------
Total liabilities and stockholders' equity $ 195,806 $ 60,379
========= ========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
3
<PAGE>
LEXENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 82,412 $ 46,020 $203,649 $ 95,542
Cost of sales 61,030 36,362 151,077 76,812
General, administrative and marketing expenses 6,344 3,220 16,389 7,684
Depreciation and amortization 892 423 2,339 897
Non-cash stock based compensation 2,244 11 23,915 30
-------- -------- -------- --------
Operating income 11,902 6,004 9,929 10,119
Interest expense 283 290 1,017 752
Other expense(income), net (883) 39 (889) 39
-------- -------- -------- --------
Income before income taxes 12,502 5,675 9,801 9,328
Provision for income taxes 5,762 2,622 7,756 4,310
-------- -------- -------- --------
Net income $ 6,740 $ 3,053 $ 2,045 $ 5,018
======== ======== ======== ========
Net income per share:
Basic $ 0.19 $ 0.13 $ 0.06 $ 0.20
======== ======== ======== ========
Diluted $ 0.16 $ 0.09 $ 0.05 $ 0.16
======== ======== ======== ========
Weighted average common shares outstanding:
Basic 35,124 22,717 27,429 22,717
======== ======== ======== ========
Diluted 40,854 32,477 37,339 31,868
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
LEXENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,045 $ 5,018
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Loss on disposition of assets 18 -
Provision for uncollectible amounts, net 3,134 1,212
Depreciation and amortization 2,339 897
Non-cash stock based compensation 23,915 30
Provision for deferred taxes (6,844) 522
Changes in working capital items:
Receivables (43,676) (16,245)
Prepaid expenses and other current assets (786) 161
Other assets (376) (339)
Accounts payable 9,149 4,631
Accrued liabilities 8,989 3,271
Income taxes payable (3,495) (99)
Billings in excess of costs and estimated
earnings on uncompleted contracts 3,734 1,446
-------- --------
Net cash (used in) provided by operating
activities (1,854) 505
Cash from investing activities:
Capital expenditures and acquisitions (6,819) (1,975)
Proceeds from sale of fixed assets 13 -
-------- --------
Net cash used in investing activities (6,806) (1,975)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options and
sales of restricted stock 5,905 -
Preferred dividends paid (1,087) -
Proceeds from initial public offering of common stock 96,255 -
Payments of equity issuance costs (2,260) -
Repayment of subordinated notes payable to stockholders (1,577) (1,582)
Net (repayments)borrowings under revolving credit line (6,841) 2,855
Net (payments)borrowings (to)from related parties (191) 236
Repayment of equipment loans and capital leases (940) (399)
-------- --------
Net cash provided by financing activities 89,264 1,110
-------- --------
Net increase (decrease) in cash 80,604 (360)
Cash and cash equivalents at beginning of period 1,158 1,495
-------- --------
Cash and cash equivalents at end of period $ 81,762 $ 1,135
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
LEXENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(dollars in thousands)
(unaudited)
2000 1999
---- ----
Supplemental cash flow information:
Cash paid for:
Interest $ 1,093 $ 683
Income taxes $ 18,094 $ 3,902
Supplemental disclosures of noncash investing
and financing activities:
Property, plant and equipment additions
financed by equipment loans and capital leases $ 1,826 1,442
Accrued dividends on preferred shares $ 104 $ 516
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
LEXENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 30, 2000 and the results of its operations
and cash flows for the periods ended September 30, 2000 and September 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 nine months ended September 30, 2000 are not necessarily indicative of the
results for the entire fiscal year ending December 31, 2000.
1. NET INCOME PER SHARE
Basic net income per share is computed by dividing net income (after
deducting dividends declared 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 declared 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 calculations are as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net Income per share - basic:
Net income ................................ $ 6,740 $ 3,053 $ 2,045 $ 5,018
Less: preferred dividends ................. (53) (171) (397) (516)
-------- -------- -------- --------
Net income available to
common stockholders ...................... $ 6,687 $ 2,882 $ 1,648 $ 4,502
======== ======== ======== ========
Weighted average shares - basic ........... 35,124 22,717 27,429 22,717
======== ======== ======== ========
Net income per share - basic .............. $ 0.19 $ 0.13 $ 0.06 $ 0.20
======== ======== ======== ========
Net Income per share - diluted:
Net income ................................ $ 6,740 $ 3,053 $ 2,045 $ 5,018
======== ======== ======== ========
Weighted average shares - basic ........... 35,124 22,717 27,429 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 .................... 3,272 8,740 7,634 8,740
Dilutive effect of stock options .......... 2,458 1,020 2,276 411
-------- -------- -------- --------
Weighted average shares - diluted ......... 40,854 32,477 37,339 31,868
======== ======== ======== ========
Net income per share - diluted ............ $ 0.16 $ 0.09 $ 0.05 $ 0.16
======== ======== ======== ========
</TABLE>
7
<PAGE>
LEXENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(unaudited)
2. RECEIVABLES, NET
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
(in thousands)
<S> <C> <C>
Accounts receivable - billed to customers .......... $ 57,605 $ 30,226
Unbilled receivables on completed projects
accounted for under the completed contract
method ........................................... 11,614 4,908
Costs and estimated earnings in excess of
billings on projects accounted for under
the percentage-of-completion method .............. 3,617 3,858
Unbilled receivables on cost-plus contracts ........ 7,357 6,066
Costs of uncompleted projects accounted for
under the completed contract method .............. 13,497 6,138
Retainage .......................................... 2,336 1,154
-------- --------
96,026 52,350
Less: allowance for uncollectible amounts .......... (6,736) (3,602)
-------- --------
$ 89,290 $ 48,748
======== ========
</TABLE>
For the nine months ended September 30, 2000 and 1999, the Company's
provision for uncollectible amounts was $4.6 million and $1.5 million,
respectively. The amounts written off against the allowance for those periods
were $1.5 million and $0.3 million, respectively.
Amounts retained by customers related to projects that are progress-billed
may be outstanding for periods that exceed one year.
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 September 2003.
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
that is owned by the Company's two principal common stockholders.
On August 31, 2000, the Company repaid $0.4 million of subordinated notes
payable to its 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 $5,000,000, 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 the discovery phase, 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. STOCKHOLDERS' EQUITY
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 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.
8
<PAGE>
LEXENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(unaudited)
On July 31, 2000, the Company filed a Second Amended and Restated
Certificate of Incorporation. Among other things, the restated certificate
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 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 from January 1, 1999. All outstanding shares of
redeemable convertible preferred stock were converted into 9,814,624 shares of
common stock on August 2, 2000.
7. STOCK OPTIONS AND AWARDS
During the three and nine months ended September 30, 2000, 2,172,100 and
4,603,100 options, respectively, were granted. As of September 30, 2000,
6,896,450 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 stock-based compensation of $41.7 million
in the first quarter of 2000. Amortization of such deferred stock-based
compensation for the three and nine months ended September 30, 2000 was $2.2 and
$23.9 million, respectively. Deferred tax benefits of $0.9 million and $7.4
million were recorded in the three and nine months ended September 30, 2000,
respectively, in connection with amortization of deferred stock-based
compensation related to non-qualified options, to the extent that the Company
expects to realize such tax benefits.
8. ACQUISITION
On September 15, 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.
9. SUBSEQUENT EVENT
On October 2, 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 October 2,
2000. The acquisition was accounted for under the purchase method of accounting,
and approximately $1.2 million of the purchase price was allocated to goodwill
and is being amortized over ten years.
9
<PAGE>
LEXENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(unaudited)
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
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 nine
months ended September 30, 2000, approximately 70% and 75%, 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 nine months ended
September 30, 2000, we derived approximately 28% and 25%, respectively, of our
revenues from our largest customer and 10% of our revenues from our second
largest customer.
RESULTS OF OPERATIONS
THIRD QUARTER OF 2000 COMPARED TO THIRD QUARTER OF 1999.
Revenues. Our revenues increased by 79% to $82.4 million for the third
quarter of 2000 from $46.0 million in the third 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 68% to $61.0 million
for the third quarter of 2000 from $36.4 million in the third 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
rent expense for additional space and 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 74%
of total revenues in the third quarter of 2000 from 79% in the same period of
1999, because the rate of increase in our revenues was higher than the rate of
increase in our overhead expenses.
General, administrative and marketing expenses. Our general, administrative
and marketing expenses increased 97% to $6.3 million for the third quarter of
2000 from $3.2 million in the third 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.
Non-cash stock-based compensation. We recorded amortization of non-cash
stock-based compensation of $2.2 million in the third quarter of 2000
10
<PAGE>
LEXENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(unaudited)
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.
Provision for income taxes. Our effective tax rate is approximately 45%
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.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999.
Revenues. Our revenues increased by 113% to $203.6 million for the nine
months ended September 30, 2000 from $95.5 million for the nine months ended
September 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 97% to $151.1 million
for the nine months ended September 30, 2000 from $76.8 million for the nine
months ended September 30, 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 office space and equipment
and to an increase in our fleet of specialty vehicles. Cost of revenues declined
to 74% of total revenues for the nine months ended September 30, 2000 from 80%
in the same period of 1999, because the rate of increase in our revenues was
higher than the rate of increase in our overhead expenses.
General, administrative and marketing expenses. Our general, administrative
and marketing expenses increased 113% to $16.4 million for the nine months ended
September 30, 2000 from $7.7 million for the nine months ended September 30,
1999. The increase was primarily due to $4.3 million for additional salaries and
related benefits for new executive and administrative personnel required to
support our increased revenues.
Non-cash stock-based compensation. We recorded amortization of non-cash
stock-based compensation of $23.9 million for the nine months ended September
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 nine months ended September 30,
2000 (before amortization of deferred non-cash stock-based compensation) was
$33.8 million, compared with $10.1 million for the nine months ended September
30, 1999. After giving effect to amortization of deferred non-cash stock-based
compensation, operating income for the nine months ended September 30, 2000 was
$9.9 million.
11
<PAGE>
LEXENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(unaudited)
Interest expense. Interest expense increased to $1.0 million for the nine
months ended September 30, 2000 from $0.8 million for the nine months ended
September 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
45% 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 ($23.9 million for the nine months ended September 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 $7.4 million were recorded for
the nine months ended September 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 $1.9 million for
the nine months ended September 30, 2000. For the nine months ended September
30, 2000, our primary use of cash was to finance higher receivables, which
increased by $43.7 million primarily 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 $6.8 million for the nine months
ended September 30, 2000. Investing activities consist of capital expenditures
and acquisitions to support our growth.
Net cash provided by financing activities for the first nine months of 2000
was $89.3 million, comprised of $96.3 million in proceeds from the initial
public offering of common stock and $5.9 million in proceeds from exercises of
stock options and sales of restricted stock, offset by payments of equity
issuance costs of $2.3 million, net repayments under our revolving credit
facility of $6.8 million, payments of $1.6 million on subordinated notes payable
to stockholders and payments of preferred dividends of $1.1 million.
As of September 30, 2000, we had cash and cash equivalents of $81.8 million
and we had $18.0 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 note payable
to stockholder.
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.
12
<PAGE>
LEXENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(unaudited)
As of September 30, 2000, we had cash and cash equivalents of $81.8
million. Cash and 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 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, 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.
13
<PAGE>
LEXENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(unaudited)
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 $5,000,000, 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 the discovery phase, 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 July 1, 2000 to September 30, 2000, we issued an
aggregate 169,562 shares of common stock upon the exercise of stock options
granted under our stock option plan. The weighted average exercise price for
such options was $3.93 per share. These issuances of securities were 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 $2,260,000. After deducting all
underwriting discounts and commissions and other issuance costs, the total net
proceeds we received was $93,995,000.
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
14
<PAGE>
LEXENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(unaudited)
stock upon consummation of our IPO. In addition, the Company has used $0.4
million to repay subordinated notes payable to our two principal common
stockholders and an aggregate $1.4 million to make strategic acquisitions. 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 and the
repayment of the subordinated notes payable to our principal common
stockholders, 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 our affiliates. The foregoing use of net proceeds
does not represent a material change in the use of net proceeds described in the
prospectus relating to our IPO.
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.
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
----------- -----------
27.1 Financial Data Schedule
(b) Reports:
None.
15
<PAGE>
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
November 13, 2000
16
