-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BZAjJai6OzMpbijZSXmxBK3yB25qi4Xoy3JCFtFULQ0RIeJtPcrewmPh7ACMgbQZ 87cmYqf2aOyGLb1h1PkGlw== 0000950123-00-001413.txt : 20000221 0000950123-00-001413.hdr.sgml : 20000221 ACCESSION NUMBER: 0000950123-00-001413 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 21 FILED AS OF DATE: 20000218 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEXENT INC CENTRAL INDEX KEY: 0001105503 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-30660 FILM NUMBER: 548856 BUSINESS ADDRESS: STREET 1: 3 NEW YORK PLAZA CITY: NEW YORK STATE: NY ZIP: 10004 BUSINESS PHONE: 2129810700 MAIL ADDRESS: STREET 1: 3 NEW YORK PLAZA CITY: NEW YORK STATE: NY ZIP: 10004 S-1 1 LEXENT INC. 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 18, 2000. REGISTRATION NO. 333 - - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ LEXENT INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 7385 13-3990223 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
THREE NEW YORK PLAZA NEW YORK, NEW YORK 10004 (212) 981-0700 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ KEVIN M. O'KANE VICE CHAIRMAN AND CHIEF OPERATING OFFICER LEXENT INC. THREE NEW YORK PLAZA NEW YORK, NEW YORK 10004 (212) 981-0700 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: JOSHUA A. LEUCHTENBURG, ESQ. VINCENT PAGANO, JR., ESQ. REBOUL, MACMURRAY, HEWITT, SIMPSON THACHER & BARTLETT MAYNARD & KRISTOL 425 LEXINGTON AVENUE 45 ROCKEFELLER PLAZA NEW YORK, NEW YORK 10017 NEW YORK, NEW YORK 10111 (212) 455-2000 (212) 841-5700
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------ CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING SECURITIES TO BE REGISTERED REGISTERED(1) SHARE PRICE(2) - -------------------------------------------------------------------------------------------------------------- Common stock, $.001 par value.......... shares $ $86,250,000 - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- - --------------------------------------- ---------------------- - --------------------------------------- ---------------------- TITLE OF EACH CLASS OF AMOUNT OF SECURITIES TO BE REGISTERED REGISTRATION FEE - --------------------------------------- ---------------------- Common stock, $.001 par value.......... $22,770 - -------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------
(1) Includes shares of common stock that may be sold pursuant to the Underwriters' over-allotment option. See "Underwriting." (2) Estimated solely for purposes of calculating the amount of the registration fee paid pursuant to Rule 457(a) under the Securities Act of 1933, as amended. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED FEBRUARY 18, 2000 Shares LEXENT INC. [LOGO] Common Stock ----------------- Prior to this offering, there has been no public market for our common stock. The initial public offering price of the common stock is expected to be between $ and $ per share. We have applied to list our common stock on the Nasdaq National Market under the symbol "LXNT." The underwriters have an option to purchase a maximum of additional shares to cover over-allotments of shares. INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 7.
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS LEXENT INC. ------------------- ------------------- ------------------- Per Share............................................ $ $ $ Total................................................ $ $ $
Delivery of the shares of common stock will be made on or about , 2000. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. CREDIT SUISSE FIRST BOSTON CHASE H&Q RAYMOND JAMES & ASSOCIATES, INC. The date of this prospectus is , 2000. 3 (THIS PAGE INTENTIONALLY LEFT BLANK) 4 ----------------- TABLE OF CONTENTS
PAGE ---- PROSPECTUS SUMMARY.................... 3 RISK FACTORS.......................... 7 SPECIAL NOTE REGARDING FORWARD- LOOKING STATEMENTS.................. 15 USE OF PROCEEDS....................... 16 DIVIDEND POLICY....................... 16 CAPITALIZATION........................ 17 DILUTION.............................. 18 SELECTED CONSOLIDATED FINANCIAL DATA................................ 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................... 21 BUSINESS.............................. 28 MANAGEMENT............................ 35
PAGE ---- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................ 43 PRINCIPAL STOCKHOLDERS................ 45 DESCRIPTION OF CAPITAL STOCK.......... 47 SHARES ELIGIBLE FOR FUTURE SALE....... 50 UNDERWRITING.......................... 52 NOTICE TO CANADIAN RESIDENTS.......... 54 LEGAL MATTERS......................... 55 EXPERTS............................... 55 WHERE YOU CAN FIND ADDITIONAL INFORMATION ABOUT US................ 55 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.......................... F-1
----------------- YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY BE USED ONLY WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT. "Lexent Inc.," "Lexent" and the Lexent logo are our trademarks. All other trademarks or service marks appearing in this prospectus are trademarks or service marks of the respective companies that own them. DEALER PROSPECTUS DELIVERY OBLIGATION UNTIL , 2000, 25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 5 (THIS PAGE INTENTIONALLY LEFT BLANK) 6 PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before buying shares in this offering. You should read the entire prospectus carefully. Unless otherwise indicated, all references to "Lexent," "we," "us" and "our" refer to Lexent Inc., its predecessor and its subsidiaries. LEXENT INC. Lexent Inc. is a leading provider of outsourced local telecommunications network services for established and emerging communications companies, including competitive local exchange carriers, Internet service providers and carriers' carriers. Our principal focus is to provide the expertise and resources our customers need to build and connect their networks to other local and long distance carriers and to individual end users. Our complete, local solution allows our customers to outsource all or a portion of the design, deployment, upgrading and maintenance of their networks. To ensure the reliability of these networks, we provide services 24 hours a day, seven days a week. Our largest customers include AT&T, Level 3 Communications, MCI Worldcom, Metromedia Fiber Network, Network Access Solutions, Network Plus, Nextlink Communications, Teligent and Winstar Communications. Our revenues have grown to $150.9 million in 1999 from $53.7 million in 1997, representing a compound annual growth rate of 68%. In our customers' competitive environment where speed to market is key, our outsourced solution provides the mission-critical, often scarce resources that our customers need. We have the technical expertise, local knowledge and highly skilled workforce that enable us to design, deploy and upgrade local wireless and wireline networks more quickly and efficiently than many of our customers could themselves. We currently employ over 755 network engineers and technicians. Our senior management team averages 15 years of telecommunications industry experience. We are technology and vendor independent, enabling us to install, upgrade and maintain equipment from any major telecommunications equipment manufacturer. Over the past three years, we have successfully expanded our operations from the New York City metropolitan area to other cities, including Baltimore, Boston, Newark, Philadelphia, Stamford and Washington, D.C. We plan to continue expanding with our customers into other metropolitan areas. We believe that we have a substantial business opportunity for the following reasons: - The telecommunications industry is growing rapidly and our customers are making large capital investments to build and expand their networks. - The increasing demand for broadband Internet access, wireless communications and enhanced data and voice services is fueling this growth. - Broadband capacity is inadequate in the last mile. - Our customers increasingly outsource the services we provide so that they can focus on their core businesses. We believe our extensive experience and knowledge of local telecommunications networks will encourage our existing and new customers to use our services as they expand their businesses in existing and new markets. In 1999, we provided services to 74 telecommunications companies, more than double the 36 we serviced in 1998. We deliver integrated services to our customers, enabling them to use Lexent instead of multiple vendors. Our services are designed to improve our customers' competitive position through efficient design, deployment, upgrading and maintenance of their networks. We develop long term relationships with our customers by providing responsive, reliable and high quality service, which we believe results in repeat 3 7 revenues from our customers. In 1999, over 80% of our revenues were generated from customers who used our services in 1998. Our outsourced solution includes the following services: Design, Engineering and Program Management Services. We design and engineer entire local telecommunications networks. This includes fiber and fixed wireless backbones and interconnections to other carriers that enable our customers to connect end users to their networks. We coordinate the entire process, from planning, designing, permitting, accessing buildings and rights-of-way, to supervising the installation of a customer's network. Network Deployment Services. We deploy local telecommunications networks and Internet infrastructure, including fiber optic backbones, local SONET fiber rings, fixed wireless and digital subscriber line systems. We deploy and test equipment inside central office facilities and end user locations. For our fiber optic network customers, we install and test fiber optic cable over the last mile, from fiber backbone to end users. For our fixed wireless customers, we install line-of-sight antennas, radios and equipment connecting the radios to wireline networks. For digital subscriber line customers, we install DSL equipment inside incumbent local exchange carrier co-location facilities. Network Upgrade and Maintenance Services. We provide ongoing services to our customers, which include daily maintenance, upgrading and adding equipment, installing new access lines, testing fiber splices and telecommunications equipment and laying additional fiber to increase network capacity. Our maintenance and emergency restoration services are provided 24 hours a day, seven days a week. Our objective is to be the leading provider of outsourced local telecommunications network services in major metropolitan markets for competitive local exchange carriers, or CLECs, Internet service providers and carriers' carriers. The key elements of our strategy are to: - Exploit the rapidly growing demand for broadband Internet access and wireless communications; - Grow our base of leading customers by focusing on customer satisfaction and increasing their speed to market; - Pursue client-driven geographic expansion in major metropolitan areas; - Create new revenue streams by expanding our services and pursuing cross-selling opportunities; and - Attract, motivate and retain a highly specialized workforce capable of remaining at the forefront of emerging technologies. Our principal executive offices are located at Three New York Plaza, New York, New York 10004. Our telephone number is (212) 981-0700. 4 8 THE OFFERING Common stock offered.................. shares Common stock to be outstanding after this offering......................... shares Use of proceeds....................... The net proceeds from this offering will be used to reduce outstanding borrowings under our revolving credit facility, to pay dividends accrued after December 31, 1998 on the redeemable convertible preferred stock to be converted into common stock upon the closing of this offering, and for working capital, general corporate purposes and potential strategic acquisitions. See "Use of Proceeds." Proposed Nasdaq National Market symbol................................ LXNT The number of shares of common stock to be outstanding after this offering is based on the number of shares of common stock outstanding as of , 2000 and gives effect to the automatic conversion of all outstanding shares of redeemable convertible preferred stock into 6,543,083 shares of common stock. This number excludes: - shares subject to options outstanding as of , 2000, at a weighted average exercise price of $ per share; and - shares that may be purchased by the underwriters to cover over-allotments, if any. Except as otherwise indicated, all information in this prospectus assumes no exercise of the underwriters' over-allotment option. 5 9 SUMMARY CONSOLIDATED FINANCIAL DATA
YEAR ENDED DECEMBER 31, ------------------------------------- 1997 1998 1999 -------- -------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF INCOME DATA: Revenues................................................. $53,718 $70,959 $150,862 Operating income......................................... 3,500 6,517 18,362 Net income............................................... $ 2,189 $ 3,828 $ 9,256 ======= ======= ======== Net income per share: Basic.................................................. $ 0.14 $ 0.23 $ 0.57 ======= ======= ======== Diluted................................................ $ 0.14 $ 0.22 $ 0.42 ======= ======= ======== Weighted average shares: Basic.................................................. 15,144 15,144 15,147 ======= ======= ======== Diluted................................................ 15,144 17,593 21,862 ======= ======= ======== PRO FORMA INFORMATION (UNAUDITED): Pro forma net income(1).................................. $ 1,287 $ 2,864 ======= ======= Pro forma net income per share(2): Basic.................................................. $ 0.08 $ 0.16 $ 0.43 ======= ======= ======== Diluted................................................ $ 0.08 $ 0.16 $ 0.41 ======= ======= ======== Pro forma weighted average shares: Basic.................................................. 15,144 18,016 21,690 ======= ======= ======== Diluted................................................ 15,144 18,016 22,578 ======= ======= ========
AS OF DECEMBER 31, 1999 ---------------------------------- ACTUAL AS ADJUSTED(3) --------------- --------------- CONSOLIDATED BALANCE SHEET DATA: Cash........................................................ $ 1,158 $ Working capital............................................. 24,853 Total assets................................................ 59,535 Total debt.................................................. 18,812 Total stockholders' equity.................................. 2,871
- --------------- (1) Pro forma net income gives effect to the adjustment for federal income taxes that we would have recorded if we had been a C corporation during these periods. (2) Pro forma net income per share for 1998 and 1999 assumes conversion of the redeemable convertible preferred stock at the rate of 1.1814 shares of common stock for each share of redeemable convertible preferred stock, at the later of the date of issuance of the redeemable convertible preferred stock or the beginning of the period presented. For a description of the computation of the pro forma net income per share and the number of shares used in the pro forma calculations, see Note 1 of Notes to Consolidated Financial Statements. (3) The As Adjusted column reflects conversion of all outstanding redeemable convertible preferred stock, our receipt of the net proceeds from the offering (assuming an initial public offering price of $ per share), after deducting estimated underwriting discounts and commissions and estimated offering expenses and application of a portion of such proceeds to repay approximately $6.8 million of bank debt. See "Capitalization" and "Use of Proceeds." 6 10 RISK FACTORS You should carefully consider the following risk factors and all other information contained in this prospectus before purchasing our common stock. Investing in our common stock involves a high degree of risk. Risks and uncertainties, in addition to those we describe below, that are not presently known to us or that we currently believe are immaterial may also impair our business operations. If any of the following risks occur, our business could be harmed, the price of our common stock could decline and you may lose all or part of your investment. See "Special Note Regarding Forward-Looking Statements." WE MAY NOT BE ABLE TO HIRE OR RETAIN A SUFFICIENT NUMBER OF QUALIFIED ENGINEERS, MANAGERS, TECHNICIANS AND OTHER EMPLOYEES TO SUSTAIN OUR GROWTH, MEET OUR CONTRACTUAL COMMITMENTS OR MAINTAIN THE QUALITY OF OUR SERVICES. Our future success will depend on our ability to attract and retain additional highly skilled engineering, managerial and technical personnel. Competition for such personnel is intense, especially for engineers and qualified technicians with expertise designing and building local telecommunications networks, and some major markets, particularly the New York metropolitan area, are experiencing labor shortages. We may be unable to attract sufficiently qualified personnel in adequate numbers to meet the demand for our services. OUR BUSINESS WILL NOT OPERATE EFFICIENTLY AND OUR RESULTS OF OPERATIONS WILL BE NEGATIVELY AFFECTED IF WE ARE UNABLE TO MANAGE OUR GROWTH EFFECTIVELY. We are experiencing a period of significant expansion and anticipate that further expansion will be required to address potential growth in the demand for our new and existing services. From December 31, 1998 to December 31, 1999, we increased our number of employees from 415 to 841. In order to increase our revenues significantly, we need to hire a substantial number of personnel in the near future, including program management, engineering and technical personnel. The actual number of employees we will need to hire is not determinable and may fluctuate significantly depending on the size and number of new contracts we receive and any changes to the scope of our existing projects. We expect this expansion to continue to place a significant strain on our managerial, operational and financial resources. To manage the expected growth of our operations and personnel, we will be required to: - improve existing and implement new operational, financial and management controls, reporting systems and procedures; and - hire, integrate, train, motivate and manage employees. If we fail to address these issues our business may be harmed. WE EXPECT OUR QUARTERLY RESULTS TO FLUCTUATE. IF WE FAIL TO MEET REVENUE AND EARNINGS ESTIMATES, OUR STOCK PRICE COULD DECLINE. Our quarterly and annual operating results have fluctuated in the past and will vary in the future due to a variety of factors, many of which are outside of our control. The factors outside of our control include: - the timing and size of network deployment by our customers; - product mix; - fluctuations in demand for our services; - reductions in the prices of services offered by our competitors; - costs of integrating acquired technologies or businesses; and - telecommunications market conditions and economic conditions generally. 7 11 The factors within our control include: - changes in the actual and estimated costs and timing to complete unit-price, time-certain projects; - the timing of expansion into new markets; and - the identification, timing and payments associated with possible acquisitions. Due to these factors, quarterly revenues, expenses and results of operations could vary significantly in the future. You should take these factors into account when evaluating past periods, and, because of the potential variability due to these factors, you should not rely upon results of past periods as an indication of our future performance. In addition, the long-term viability of our business could be negatively impacted if there were a downward trend in these factors. Because our operating results may vary significantly from quarter to quarter based upon the factors described above, results may not meet the expectations of securities analysts and investors, and this could cause the price of our common stock to decline significantly. OUR BUSINESS IS SEASONAL, EXPOSING US TO REDUCED REVENUE IN THE FIRST QUARTER OF EACH YEAR. We experience reduced revenue in the first quarter of each year relative to other quarters. We believe these variations are partly due to the fact that the budgetary years of our customers end in December and their new budgets may not be in place until well into the first quarter. We believe our customers sometimes delay their work orders until their budgets are in place. The onset of winter also affects our ability to render certain network services that must be performed outdoors. OUR SUCCESS IS DEPENDENT ON THE CONTINUED TREND TOWARD OUTSOURCING TELECOMMUNICATIONS NETWORK SERVICES. Our success is dependent on the continued trend by CLECs, Internet service providers, and carriers' carriers to outsource their network design, deployment, upgrading and maintenance needs. If these companies elect to perform more network deployment services themselves, our revenues may decline and our business would be harmed. OUR SUCCESS IS DEPENDENT ON THE CONTINUED GROWTH IN THE DEPLOYMENT OF TELECOMMUNICATIONS NETWORKS, WIRELESS SYSTEMS AND INTERNET GROWTH. The telecommunications, Internet and wireless communications industries have experienced a dramatic rate of growth both in the United States and internationally. If the rate of growth slows in any of these industries and our customers reduce their capital investments in infrastructure or technology or fail to expand into new geographic areas, our business may be harmed. IF OUR CUSTOMERS DO NOT RECEIVE SUFFICIENT FINANCING, THE DEPLOYMENT OF NEW TELECOMMUNICATIONS NETWORKS WILL BE DELAYED AND OUR REVENUES WILL BE NEGATIVELY IMPACTED. A significant portion of our revenue is generated from communications companies seeking to deploy and expand their networks. Some of these customers and other potential customers are new companies with limited or no operating histories and limited financial resources. These customers must obtain significant financing to fund operations and deploy their networks. If these companies fail to receive adequate financing, particularly after we have begun working with them, our results of operations may be harmed. 8 12 MANY OF OUR SERVICE AGREEMENTS MAY BE CANCELED ON SHORT NOTICE, AND WE MAY BE UNSUCCESSFUL IN REPLACING OUR SERVICE AGREEMENTS WHEN THEY EXPIRE. We could experience a material adverse effect on our revenue, net income and liquidity if: - our customers cancel a significant number of service agreements; - we fail to renew a significant number of our existing service agreements upon their expiration; or - we complete the required work under a significant number of our non-recurring projects and cannot replace them with similar projects. Many of our customers may cancel our service agreements with them on short notice, typically less than seven days, even if we are not in default under the agreement. OUR MASTER SERVICE AGREEMENTS DO NOT ASSURE US REVENUE. We currently derive a significant portion of our revenue under our master service agreements, which primarily serve as pricing arrangements with no revenue guarantees. A significant decline in the work our customers assign us under our master service agreements could materially and adversely affect our revenue and net income. Under our master service agreements, we may be one of several companies that perform services for the customer, and our customers have no obligations under our master service agreements to undertake any work with us. OUR BUSINESS MAY BE HARMED BY INCREASED REGULATION OF THE TELECOMMUNICATIONS INDUSTRY. Regulation of the telecommunications industry is changing rapidly, with ongoing effects on our opportunities, competition and other aspects of our business. The regulatory environment varies substantially from state to state. Generally, we must obtain and maintain certificates of authority from regulatory bodies in most states where we offer services. In addition, some of our customers are subject to extensive regulation, which could adversely affect the expected benefits of our arrangements with them. We cannot assure you that future regulatory, judicial or legislative activities will not have a material adverse effect on us. Our operations are also subject to a variety of federal, state and local and foreign environmental, safety and health laws and governmental regulations. Although we monitor compliance with such laws and regulations, we cannot assure you that we have been or will be in complete compliance with these laws and regulations or that we will not be exposed to claims or actions that could have a material adverse effect on our company. Although we are not aware of any liabilities relating to contamination at the numerous sites leased by us in connection with our operations, we cannot assure you that we will not be liable for any contamination at these sites or that any liabilities in connection with any such contamination will not have a material adverse effect on our company. A LOSS OF ONE OR MORE OF OUR KEY CUSTOMERS OR DELAYS IN PROJECT TIMING FOR SUCH CUSTOMERS COULD CAUSE A SIGNIFICANT DECREASE IN OUR REVENUES. We have derived, and believe that we will continue to derive, a significant portion of our revenues from a limited number of customers. For example, for the year ended December 31, 1999, we derived approximately 26% of our revenues from our largest customer, approximately 13% of our revenues from another customer and approximately 8% of our revenues from each of two additional customers. The services required by any one customer can be limited by a number of factors, including industry consolidation, technological developments, economic slowdown and internal budget constraints. As a result of these factors, the volume of work performed for specific customers is likely to vary from period to period, and a major customer in one period may not require our services in a subsequent period. Accordingly, we cannot be certain that present or future customers will not terminate their network service arrangements with us or significantly reduce or delay their contracts. Any termination, change, reduction or delay in our projects could seriously harm our business. 9 13 OUR OPERATING RESULTS MAY SUFFER BECAUSE OF COMPETITION IN THE NETWORK SERVICES INDUSTRY. The network services market is highly competitive and fragmented and is served by numerous companies. Many of these competitors have significantly greater financial, technical and marketing resources, generate greater revenues and have greater name recognition and experience than us. We believe that the principal competitive factors in our market include quality and responsiveness of service, industry experience, reputation, the ability to deliver results on time and competitive pricing. In addition, expertise in new and evolving technologies has become increasingly important. We also believe our ability to compete depends on a number of factors outside of our control, including: - the prices at which others offer competitive services; - the ability and willingness of our competitors to finance customers' projects on favorable terms; - the ability of our customers to perform the services themselves; and - the extent of our competitors' responsiveness to customer needs. We may not be able to compete effectively on these or other bases, and, as a result, our revenues or income may decline and harm our business. OUR BUSINESS MAY BE HARMED IF OUR NEW SERVICE OFFERINGS DO NOT GAIN CUSTOMER ACCEPTANCE. Part of our strategy is to generate increased revenues by developing new service offerings for our customers. These new services may not be favorably received by customers, may not generate significant revenues or may not be offered in a cost-effective or timely manner. If we are unable to successfully expand our service offerings, our business may be harmed. WE MUST KEEP PACE WITH RAPID TECHNOLOGICAL CHANGE, MARKET CONDITIONS AND INDUSTRY DEVELOPMENTS TO MAINTAIN OR GROW OUR REVENUES. The market for network system design, deployment, upgrading and maintenance services is characterized by rapid change and technological improvements. Our future success will depend in part on our ability to enhance our current service offerings to keep pace with technological developments and to address increasingly sophisticated customer needs. We may not be successful in developing and marketing in a timely manner service offerings that respond to the technological advances by others and our services may not adequately or competitively address the needs of the changing marketplace. If we are not successful in responding in a timely manner to technological change, market conditions and industry developments, our revenues may decline and our business may be harmed. OUR BUSINESS OPERATIONS COULD BE SIGNIFICANTLY DISRUPTED IF WE LOSE MEMBERS OF OUR MANAGEMENT TEAM. Our success depends to a significant degree upon the continued contributions of our executive officers, both individually and as a group. See "Management -- Directors and Executive Officers" for a listing of our executive officers. Our future performance will be substantially dependent on our ability to retain and motivate them. The loss of the services of any of our executive officers, particularly Hugh O'Kane, our Chairman, Alf Hansen, our President and Chief Executive Officer, or Kevin O'Kane, our Vice Chairman and Chief Operating Officer, could prevent us from executing our business strategy. OUR SUCCESS IS DEPENDENT ON THE ABILITY OF OUR NEW MANAGEMENT TEAM TO WORK TOGETHER. A number of the members of our senior management team, including Alf Hansen, our President and Chief Executive Officer, Joseph Haines, our Executive Vice President in charge of network deployment, upgrade and maintenance services, Victor DeJoy, our Executive Vice President in charge of design, engineering and program management services, and Rif Haffar, our Executive Vice President in charge of marketing and business development, have been with our company for only a few months. Given their limited experience with our company and working with other members of our management team, it is 10 14 possible that these officers will not integrate well into our business. Their failure to integrate well would have a significant effect on our future success. STRIKES, WORK STOPPAGES AND SLOWDOWNS BY OUR EMPLOYEES WOULD NEGATIVELY AFFECT OUR RESULTS OF OPERATIONS. We currently have collective bargaining agreements in place with several local chapters of the International Brotherhood of Electrical Workers, most of which expire within one year. These agreements cover approximately 77% of our 841 employees. We cannot assure you that our relations with our unionized workforce will remain positive or that our workforce will not initiate a strike, work stoppage or slowdown in the future. In the event of such a job action, our business would be negatively affected and we cannot be sure that we would be able to adequately meet the needs of our customers. OUR BUSINESS MAY BE HARMED IF WE INCREASE OUR PERSONNEL IN ANTICIPATION OF A PROJECT AND UNDERUTILIZE OUR PERSONNEL BECAUSE SUCH PROJECT IS DELAYED, REDUCED OR TERMINATED. If we increase our personnel in anticipation of a project and such project is delayed, reduced or terminated, we may underutilize this additional personnel, which would increase our general and administrative expenses and could harm our business. WE MAY NOT BE SUCCESSFUL IN OUR EFFORTS TO IDENTIFY, COMPLETE OR INTEGRATE ACQUISITIONS. Our failure to manage risks associated with acquisitions could harm our business. A component of our business strategy is to expand our presence in new or existing markets. One way we may choose to accomplish this task is to acquire additional businesses. We may not be able to identify, acquire or profitably manage additional businesses or integrate successfully any acquired businesses without substantial expense, delay or other operational or financial problems. Acquisitions involve a number of risks, including: - diversion of management's attention; - difficulty in integrating and absorbing the acquired business, its employees, corporate culture, managerial systems and processes and services; - failure to retain key personnel and employee turnover; - customer dissatisfaction or performance problems with an acquired firm; - assumption of unknown liabilities; and - other unanticipated events or circumstances. WE MAY ENCOUNTER POTENTIAL COSTS OR CLAIMS RESULTING FROM PROJECT PERFORMANCE. Many of our engagements involve projects that are significant to the operations of our customers' businesses. Our failure to meet a customer's expectations in the planning or implementation of a project or the failure of unrelated third party vendors to meet project completion deadlines could damage our reputation and adversely affect our ability to attract new business. We frequently undertake projects in which we guarantee performance based upon defined operating specifications or guaranteed delivery dates. Unsatisfactory performance or unanticipated difficulties or delays in completing such projects may result in a direct reduction in payments to us, or payment of damages by us, which could harm our business. THE CONSOLIDATION OF CLECS AND INTERNET SERVICE PROVIDERS COULD IMPACT OUR BUSINESS. Recently, the telecommunications industry has been characterized by significant consolidation activity. This consolidation may lead to a greater ability among CLECs and Internet service providers to provide a full suite of network services, and could simplify integration and installation, which may lead to a reduction in demand for our services. Moreover, the consolidation of CLECs and Internet service providers 11 15 could have the effect of reducing the number of our current or potential customers which could result in increased bargaining power for CLECs and Internet service providers. This potential increase in bargaining power could create competitive pressures whereby a particular customer may request our exclusivity with them in a particular market. Accordingly, we may not be able to represent those customers who wish to retain our services on an exclusive basis. A PORTION OF OUR REVENUE IS ACCOUNTED FOR ON A PERCENTAGE-OF-COMPLETION BASIS WHICH COULD CAUSE OUR QUARTERLY RESULTS TO FLUCTUATE. A portion of our revenue is derived from fixed-price contracts which are accounted for on a percentage-of-completion basis. Under the percentage-of-completion method, in each period we recognize expenses as they are incurred and we recognize revenue based on a comparison of the costs incurred for each project to our currently estimated total costs to be incurred for the project. Accordingly, the revenue we recognize in a given quarter depends on the costs we have incurred for individual projects and our current estimate of the total remaining costs to complete individual projects. If in any period we significantly increase our estimate of the total costs to complete a project, we may recognize very little or no additional revenue with respect to that project. As a result, our gross margin in such period and in future periods may be significantly reduced and in some cases we may recognize a loss on individual projects prior to their completion. To the extent that our estimates fluctuate over time or differ from actual requirements, gross margins in subsequent quarters may vary significantly from our estimates and could harm our business. OUR EXECUTIVE OFFICERS AND DIRECTORS AND THEIR AFFILIATES WILL CONTROL % OF OUR COMMON STOCK AFTER THIS OFFERING AND, AS A RESULT, WILL BE ABLE TO EXERCISE CONTROL OVER ALL MATTERS REQUIRING STOCKHOLDER APPROVAL. On completion of this offering, our executive officers and directors and their affiliates will beneficially own, in the aggregate, approximately % of our outstanding common stock. In particular, Hugh O'Kane, the Chairman of the Board of Directors, and Kevin O'Kane, the Vice Chairman of the Board of Directors and Chief Operating Officer, will beneficially own, in the aggregate, approximately % of our outstanding common stock. As a result, these stockholders will be able to exercise control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, which may have the effect of delaying or preventing a third party from acquiring control over us. These transactions may include those that other stockholders deem to be in their best interests and in which those other stockholders might otherwise receive a premium for their shares over their current prices. For additional information regarding our stock ownership see "Principal Stockholders." OUR STOCK PRICE MAY BE PARTICULARLY VOLATILE BECAUSE OF THE INDUSTRY WE ARE IN. The stock market in general has recently experienced extreme price and volume fluctuations. In addition, the market prices of securities of technology and telecommunications companies have been extremely volatile, and have experienced fluctuations that have often been unrelated to or disproportionate to the operating performance of such companies. These broad market fluctuations could adversely affect the price of our common stock. WE HAVE BROAD DISCRETION TO USE THE OFFERING PROCEEDS AND OUR INVESTMENT OF THOSE PROCEEDS MAY NOT YIELD A FAVORABLE RETURN. Most of the net proceeds of this offering are not allocated for specific uses. Our management has broad discretion to spend the proceeds from this offering in ways with which you may not agree. The failure of our management to apply these funds effectively could result in unfavorable returns. This could harm our business and could cause the price of our common stock to decline. 12 16 PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY MAKE IT DIFFICULT FOR A THIRD PARTY TO ACQUIRE OUR COMPANY AND COULD DEPRESS THE PRICE OF OUR COMMON STOCK. Upon the closing of the offering, Delaware corporate law and our second restated certificate of incorporation and bylaws will contain provisions that could delay, defer or prevent a change in control of our company or our management. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors and take other corporate actions. As a result, these provisions could limit the price that investors are willing to pay in the future for shares of our common stock. These provisions include: - creating a classified board of directors; - authorizing the board of directors to issue additional preferred stock; - prohibiting cumulative voting in the election of directors; - limiting the persons who may call special meetings of stockholders; - prohibiting stockholder action by written consent; and - establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings. We are also subject to certain provisions of Delaware law which could delay, deter or prevent us from entering into an acquisition, including Section 203 of the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in a business combination with an interested stockholder unless specific conditions are met. See "Description of Capital Stock -- Preferred Stock and Anti-Takeover Provisions." OUR SECURITIES HAVE NO PRIOR MARKET AND WE CANNOT ASSURE YOU THAT OUR STOCK PRICE WILL NOT DECLINE AFTER THIS OFFERING. Before this offering, there has not been a public market for our common stock and the trading market price of our common stock may decline below the initial public offering price. The initial public offering price has been determined by negotiations between us and the representatives of the underwriters. See "Underwriting" for a discussion of the factors considered in determining the initial public offering price. In addition, an active public market for our common stock may not develop or be sustained after this offering. YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION BY INVESTING IN OUR COMMON STOCK. The initial public offering price is substantially higher than the net tangible book value of each outstanding share of common stock immediately after the offering. Purchasers of common stock in this offering will suffer immediate and substantial dilution. This dilution will reduce the net tangible book value of their shares, since these investments will be at a substantially higher per share price than paid by our existing stockholders. The dilution will be $ per share in the net tangible book value of the common stock from the initial public offering price. If additional shares are sold by the underwriters following exercise of their over-allotment option, or if outstanding options or warrants to purchase shares of common stock are exercised, you will incur further dilution. FUTURE SALES OF OUR COMMON STOCK HELD BY CURRENT STOCKHOLDERS MAY DEPRESS OUR STOCK PRICE. Sales of a substantial number of shares of common stock by current stockholders in the public market following this offering could cause the market price of our common stock to decline. All the shares sold in this offering will be freely tradable. After this offering, we will have outstanding shares of 13 17 common stock. Of these shares, shares will be eligible for sale in the public market beginning 180 days after the date of this prospectus. After this offering we also intend to register up to approximately additional shares of our common stock for sale upon the exercise of outstanding stock options issued pursuant to compensatory benefit plans or reserved for future issuance pursuant to our stock option and restricted stock purchase plan. 14 18 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that involve risks and uncertainties. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "except," "plan," "anticipate," "believe," "estimate," "predict," "potential" or "continue," the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks described above and in other parts of this prospectus. These factors may cause our actual results to differ materially from any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. 15 19 USE OF PROCEEDS We expect to receive net proceeds of approximately $ million from the sale of the shares of common stock, or approximately $ million if the underwriters' exercise their over-allotment option in full, assuming an initial public offering price of $ per share and after deducting the estimated underwriting discounts and commissions and offering expenses payable by us. We plan to use approximately $ million of the net proceeds of this offering to reduce outstanding borrowings under our revolving credit facility. Indebtedness under our revolving line of credit bears interest at the prime rate plus 0.25% and has a maturity date of June 28, 2002. The prime rate was 8.5% as of December 31, 1999. We also intend to use approximately $0.9 million of the net proceeds of this offering to pay dividends accrued after December 31, 1998 on the redeemable convertible preferred stock to be converted to common stock upon the closing of this offering. The remaining net proceeds from this offering will be used for working capital and general corporate purposes. In addition, we may use a portion of the net proceeds to acquire businesses; however, we currently have no commitments or agreements and are not involved in any negotiations to do so. Pending the uses described above, we intend to invest the net proceeds in interest-bearing, investment-grade securities. DIVIDEND POLICY Covenants in our credit facility prohibit us from paying cash dividends, other than those on our redeemable convertible preferred stock. We currently intend to retain any future earnings to finance the growth and development of our business and therefore do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of the board of directors and will be dependent upon our financial condition, results of operations, capital requirements, general business conditions and other factors that the board of directors may deem relevant. While we were an S corporation, we made cash distributions to stockholders of approximately $0.2 million in 1997 and $5.1 million in 1998. See "Certain Relationships and Related Transactions." 16 20 CAPITALIZATION The following table sets forth our capitalization as of December 31, 1999: - On an actual basis; - On a pro forma basis after giving effect to the conversion of all outstanding redeemable convertible preferred stock into 6,543,083 shares of common stock and the cash payment of preferred dividends accrued from January 1, 1999 through December 31, 1999; and - On a pro forma as adjusted basis, giving effect to the conversion of all outstanding redeemable convertible preferred stock, our sale of the common stock in this offering at an assumed offering price of $ per share, and the application of the net proceeds as described under "Use of Proceeds." This information should be read together with our consolidated financial statements and related notes thereto included elsewhere in this prospectus.
AS OF DECEMBER 31, 1999 ----------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- --------- ----------- (IN THOUSANDS) Cash....................................................... $ 1,158 $ 468 $ ======= ======= ======= Long-term debt, including current portion(1): Revolving credit facility................................ $ 8,841 $ 8,841 $ Subordinated notes payable to stockholders............... 7,115 7,115 Other debt............................................... 2,856 2,856 ------- ------- ------- Total long-term debt, including current portion:...... 18,812 18,812 ------- ------- ------- Redeemable convertible preferred stock at stated liquidation preference of $2.2553 per share, $.001 par value, 5,538,458 shares authorized, issued and outstanding(2)........................................... 12,491 -- -- ------- ------- ------- Stockholders' Equity: Common stock, $.001 par value, 44,461,542 shares authorized, 15,279,400 shares outstanding(3).......... 16 23 Additional paid-in capital............................... 2,496 14,290 Retained earnings........................................ 359 359 ------- ------- ------- Total stockholders' equity............................ 2,871 14,672 ------- ------- ------- Total capitalization....................................... $34,174 $33,484 $ ======= ======= =======
- --------------- (1) See Notes 4 and 5 of Notes to Consolidated Financial Statements. (2) Redeemable convertible preferred stock is presented at its stated liquidation preference in accordance with generally accepted accounting principles. We have agreed with the holders of our redeemable convertible preferred stock that preferred dividends accrued from July 23, 1998 through December 31, 1998 will be paid in the form of additional common stock, and dividends accrued from January 1, 1999 through the date of conversion will be paid in cash. The conversion ratio of 1.1814 shares of common stock for each share of redeemable convertible preferred stock gives effect to preferred dividends accrued from July 23, 1998 through December 31, 1998. (3) Does not include 2,361,500 shares subject to options outstanding as of December 31, 1999 at a weighted average exercise price of $3.54 per share and does not include 1,185,000 options to purchase common stock granted since December 31, 1999 at a weighted average exercise price of $10.07 per share. 17 21 DILUTION If you invest in our common stock, your interest will be diluted by the difference between the public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. Our pro forma net tangible book value at December 31, 1999 was approximately $15.1 million, or $0.69 per share of common stock. Pro forma net tangible book value represents the amount of total tangible assets less total liabilities, divided by the pro forma number of shares of common stock outstanding at December 31, 1999, and gives effect to the conversion of our currently outstanding shares of our redeemable convertible preferred stock into 6,543,083 shares of common stock upon the closing of this offering. After giving effect to our sale of common stock in this offering at an assumed initial public offering price of $ per share, and our receipt of the estimated net proceeds from the sale, our pro forma net tangible book value as of December 31, 1999 would have been approximately $ million, or $ per share. This represents an immediate increase in pro forma net tangible book value of $ per share to existing stockholders and an immediate dilution of $ per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price per share............. $ Pro forma net tangible book value per share at December 31, 1999.............................................. $0.69 Increase per share attributable to new investors....... ----- Pro forma net tangible book value per share after this offering.................................................. ----- Dilution per share to new investors......................... $ =====
The following table summarizes, on a pro forma basis as of December 31, 1999, the differences between existing stockholders and the new investors with respect to the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by existing stockholders and by new investors purchasing common stock in this offering, after adjustment for: - the conversion of our currently outstanding shares of redeemable convertible preferred stock into common stock; and - our sale of shares of common stock at an assumed initial public offering price of $ per share, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ------------------ ------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ------- ------- -------- ------- --------- Existing stockholders...................... % $ % $ New investors.............................. % $ % $ ------- ------ ------- ------ Total...................................... 100.0% $ 100.0% ======= ====== ======= ======
The discussion and tables above assume no exercise of stock options outstanding as of December 31, 1999. As of December 31, 1999, there were options outstanding to purchase a total of 2,361,500 shares of common stock, with a weighted average exercise price of $3.54 per share. If holders exercise these outstanding options there will be further dilution. An additional 1,185,000 options to purchase shares of common stock were granted at a weighted average exercise price of $10.07 per share since December 31, 1999. See "Description of Capital Stock" and Note 11 of Notes to Consolidated Financial Statements. 18 22 SELECTED CONSOLIDATED FINANCIAL DATA The selected data presented below under the captions "Consolidated Statement of Income Data" and "Consolidated Balance Sheet Data" for, and as of the end of, each of the years in the five-year period ended December 31, 1999, are derived from our consolidated financial statements. The audited consolidated financial statements as of December 31, 1998 and 1999 and for each of the years in the three-year period ended December 31, 1999, and report thereon, are included elsewhere in this prospectus. When you read this selected historical financial data, it is important that you read along with it the historical financial statements and related notes as well as the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. Historical results are not necessarily indicative of future results.
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 1995 1996 1997 1998 1999 ------- ------- ------- ------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF INCOME DATA: Revenues................................ $26,713 $49,473 $53,718 $70,959 $150,862 Cost of revenues........................ 18,240 38,321 43,226 56,497 120,750 General, administrative and marketing expenses.............................. 6,159 6,976 6,992 7,945 11,750 ------- ------- ------- ------- -------- Operating income........................ 2,314 4,176 3,500 6,517 18,362 Interest expense........................ -- -- 1,151 1,143 1,104 Other expense (income), net............. (24) (8) 9 166 27 ------- ------- ------- ------- -------- Income before income taxes.............. 2,338 4,184 2,340 5,208 17,231 Provision for income taxes.............. 265 394 151 1,380 7,975 ------- ------- ------- ------- -------- Net income.............................. $ 2,073 $ 3,790 $ 2,189 $ 3,828 $ 9,256 ======= ======= ======= ======= ======== Net income per share: Basic................................. $ 0.14 $ 0.25 $ 0.14 $ 0.23 $ 0.57 ======= ======= ======= ======= ======== Diluted............................... $ 0.14 $ 0.25 $ 0.14 $ 0.22 $ 0.42 ======= ======= ======= ======= ======== Weighted average shares: Basic................................. 15,144 15,144 15,144 15,144 15,147 ======= ======= ======= ======= ======== Diluted............................... 15,144 15,144 15,144 17,593 21,862 ======= ======= ======= ======= ======== PRO FORMA INFORMATION (UNAUDITED): Income before income taxes.............. $ 2,338 $ 4,184 $ 2,340 $ 5,208 Pro forma provision for income taxes(1).............................. 1,052 1,883 1,053 2,344 ------- ------- ------- ------- Pro forma net income(2)................. $ 1,286 $ 2,301 $ 1,287 $ 2,864 ======= ======= ======= ======= Pro forma net income per share(3): Basic................................. $ 0.08 $ 0.15 $ 0.08 $ 0.16 $ 0.43 ======= ======= ======= ======= ======== Diluted............................... $ 0.08 $ 0.15 $ 0.08 $ 0.16 $ 0.41 ======= ======= ======= ======= ======== Pro forma weighted average shares: Basic................................. 15,144 15,144 15,144 18,016 21,690 ======= ======= ======= ======= ======== Diluted............................... 15,144 15,144 15,144 18,016 22,578 ======= ======= ======= ======= ========
19 23
AS OF DECEMBER 31, --------------------------------------------------- 1995 1996 1997 1998 1999 ------- ------- ------- ------- ------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash..................................... $ 1,270 $ 1,525 $ 2,312 $ 1,495 $ 1,158 Working capital.......................... 2,168 4,664 2,516 10,691 24,853 Total assets............................. 12,739 20,044 18,432 32,309 59,535 Total debt............................... 6,976 8,607 22,922 13,985 18,812 Total stockholders' equity (deficit)..... 2,762 5,652 (4,024) (6,388) 2,871
- --------------- (1) Through July 23, 1998, we elected to be taxed as an S corporation under the Internal Revenue Code of 1986. Accordingly, we did not recognize any provision for federal income tax expense during periods prior to that time. The pro forma adjustment for income taxes reflects the pro forma provision for federal income taxes which we would have recorded if we had been a C corporation during these periods. (2) Pro forma net income for 1995 through 1998 gives effect to the pro forma provision for federal income taxes that we would have recorded if we had been a C corporation during these periods. (3) Pro forma earnings per share for 1998 and 1999 assumes conversion of the redeemable convertible preferred stock at the rate of 1.1814 shares of common stock for each share of redeemable convertible preferred stock, at the later of the beginning of the period presented or the date of issuance of the redeemable convertible preferred stock. For a description of the computation of the pro forma net income per share and the number of shares used in the pro forma calculations for the years 1997 through 1999, see Note 1 of Notes to Consolidated Financial Statements. 20 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our consolidated financial statements and the related notes and the other financial information appearing elsewhere in this prospectus. See also "Special Note Regarding Forward-Looking Statements" on page 15. 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. We provide services 24 hours a day, seven days a week. For most of our services, revenues are recognized under the completed contract method, in which we recognize revenues when our services have been performed and the projects have been completed. For projects whose duration is expected to exceed 90 days, we recognize revenues using the percentage-of- completion method. Under the percentage-of-completion method, in each period we recognize expenses as they are incurred and we recognize revenue based on a comparison of the costs incurred for each project to our currently estimated total costs to be incurred for the project. Accordingly, the revenue we recognize in a given quarter depends on the costs we have incurred for individual projects and our current estimate of the total remaining costs to complete individual projects. If in any period we significantly increase our estimate of the total remaining costs to complete a project, we may recognize very little or no additional revenue with respect to that project. As a result, our gross margin in such period and in future periods may be significantly reduced and in some cases we may recognize a loss on individual projects prior to their completion. The projects for which we use the percentage-of-completion method of accounting are typically structured with milestone events that dictate the timing of payments to us from our customers. Accordingly, there may be a significant delay between the date we record the revenue and the date we receive payment from our customers. Our customers for these projects may withhold 10% from each billing until after the project has been completed. We operate in cities in the Northeast and MidAtlantic regions, including Baltimore, Boston, Newark, New York, Philadelphia, Stamford and Washington, D.C. For the year 1999, approximately 80% of our revenues were earned from services provided in the New York metropolitan region, including New York City, New Jersey, Long Island and Westchester County. 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, and believe that we will continue to derive, a significant portion of our revenues from a limited number of customers. For the year 1999, we derived approximately 26% of our revenues from our largest customer and 13% of our revenues from our second largest customer. The volume of work performed for specific customers is likely to vary from period to period, and a major customer in one period may require a lesser amount of our services in a subsequent period. Our cost of sales includes direct compensation and benefits, allocation of overhead including vehicles, facilities expenses, small tools and equipment, and other direct project-related expenses. As of December 31, 1999, we had approximately 756 employees working directly on projects and approximately 47 employees providing supervision and support to employees working directly on projects. Labor and related benefits comprise the largest portion of our cost of sales because our customers generally furnish most of the materials required for each project, except where we provide program management services, in which case we are responsible for providing the required materials as well as any subcontracting services. General, administrative and marketing expenses include compensation and benefits, facilities expenses, provision for unrealizable accounts receivable, incentive compensation and other related expenses not chargeable directly to projects. As of December 31, 1999, we had approximately 38 employees performing general and administrative work. Prior to December 31, 1999 we did not have any employees devoted full 21 25 time to sales and marketing, and our advertising and marketing expenses were not significant. We expect to increase our marketing expenses in the future. Depreciation and amortization expenses include depreciation of our property and equipment, primarily vehicles, and amortization related to leasehold improvements and computer software purchased for internal use. Interest expense is related to interest on notes payable to banks, subordinated notes payable to stockholders, and installment note and capitalized lease obligations related to equipment purchases. We currently have a $12.5 million revolving credit line with banks, under which we had $8.8 million outstanding at December 31, 1999. Borrowings bear interest at the prime rate plus 0.25%, and the credit facility expires in June 2002. We may borrow additional funds in the future for general corporate purposes and possible acquisitions, and we may incur additional interest expense as a result. On January 1, 1997, we repurchased common shares owned by a stockholder and issued a subordinated promissory note in the amount of $10.2 million bearing interest at 6% per year. We make quarterly payments on that note, and as of December 31, 1999, a balance of $6.7 million was outstanding. We also have $0.4 million in subordinated notes payable to our two principal common stockholders bearing interest at 6% per year, and our bank credit facility currently does not permit any payments on these notes. We also have installment note obligations, which arise when we obtain financing from dealers or banks for equipment or vehicles which we purchase for use by our technical field employees and capitalized lease obligations which may arise when we lease equipment. On July 23, 1998, we converted from an S corporation to a C corporation. Prior to becoming a C corporation, our stockholders were taxed individually for their share of our profits. Until July 23, 1998, our financial statements did not reflect a provision for federal income taxes. Subsequent to that date, we have recorded federal income taxes at the standard statutory C corporation rates based on pre-tax income. For the year 1998, our financial statements reflect an income tax provision based on pre-tax income earned from July 23, 1998 to December 31, 1998. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, selected statement of income data as a percentage of total revenues. Our results of operations are reported as a single business segment. The percentages may not add due to rounding.
YEAR ENDED DECEMBER 31, ----------------------- 1997 1998 1999 ----- ----- ----- CONSOLIDATED STATEMENT OF INCOME DATA: Revenues.................................................... 100.0% 100.0% 100.0% Cost of revenues............................................ 80.5 79.6 80.0 General, administrative and marketing expenses.............. 13.0 11.2 7.8 ----- ----- ----- Operating income............................................ 6.5 9.2 12.2 Interest expense............................................ 2.1 1.6 0.7 Other expense, net.......................................... -- 0.2 -- ----- ----- ----- Income before income taxes.................................. 4.4 7.3 11.4 Provision for income taxes.................................. 0.3 1.9 5.3 ----- ----- ----- Net income.................................................. 4.1% 5.4% 6.1% ===== ===== =====
YEAR ENDED 1999 COMPARED TO YEAR ENDED 1998 Revenues. Our revenues increased 113% to $150.8 million in 1999 from $71.0 million in 1998. The increase was attributable to higher demand from our customers for our services, as they expanded their telecommunications networks primarily in the New York metropolitan area. During 1999, we entered into 22 26 an engineering, procurement and construction contract with a customer, or the EPC contract, under which we recorded approximately $34.0 million of revenues for the year. We also expanded our operations to the New England area during 1999. Cost of revenues. Our cost of revenues increased 114% to $120.8 million in 1999 from $56.5 million in 1998, primarily due to an increase in technical personnel in support of additional demand from customers for our services. Costs of approximately $30.0 million were incurred in connection with the EPC contract. General, administrative and marketing expenses. Our general, administrative and marketing expenses increased 48% to $11.8 million in 1999 from $7.9 million in 1998. The increase was primarily due to additional administrative personnel required to support our increased level of revenues, as well as a higher provision for unrealizable accounts receivable, which increased by $1.4 million in 1999 compared with 1998 as a result of our increased level of revenues. Net income. Our net income increased 142% to $9.3 million in 1999 from $3.8 million in 1998. This increase was due to significantly higher revenues offset by increased cost of sales and increased general, administrative and marketing expenses and further offset by an increase in the provision for income taxes as a result of our change from an S corporation to a C corporation on July 23, 1998. That change resulted in an increase in our effective tax rate to 45% in 1999 from 27% in 1998. Our financial statements for 1998 reflected an income tax provision based on pre-tax income earned from July 23, 1998 to December 31, 1998. Our effective tax rate in 1999 was approximately 45% because a significant portion of our operations are currently concentrated in New York City, which subjects us to a local tax on income derived in that jurisdiction. YEAR ENDED 1998 COMPARED TO YEAR ENDED 1997 Revenues. Our revenues increased by 32% to $71.0 million in 1998 from $53.7 million in 1997. The increase was primarily attributable to higher demand for our services from our customers as they expanded their telecommunications networks primarily in the greater New York metropolitan area, and partially as a result of the expansion of our operations in 1998 into the Philadelphia and Washington, D.C. areas. Cost of revenues. Our cost of revenues increased by 31% to $56.5 million in 1998 from $43.2 million in 1997, primarily due to increased technical personnel in support of additional demand from customers for our services. General, administrative and marketing expenses. Our general, administrative and marketing expenses increased approximately 14% to $7.9 million in 1998 from $7.0 million in 1997. The increase was due in part to increased administrative personnel to support our higher level of revenues, and in part to an increase of $0.3 million in rent expense for our former New York City headquarters paid in 1998 to entities which are owned by our principal common stockholders. Prior to 1998, we paid rent based on an arrangement with our principal common stockholders. In 1998, we entered into a formal lease agreement providing for rentals which are based on market values of comparable properties in the local region. Other expense, net. Other expense of $0.2 million in 1998 represented certain nonrecurring consulting fees related to the change in our corporate structure. See Note 1 of Notes to Consolidated Financial Statements. Net income. Our net income increased 75% to $3.8 million in 1998 from $2.2 million in 1997. This increase was due to higher revenues offset by increased cost of sales and increased general and administrative expenses, further offset by an increase in the provision for income taxes as a result of our change from an S corporation to a C corporation on July 23, 1998, which resulted in an increase in the effective income tax rate to 27% in 1998 from 7% in 1997. 23 27 QUARTERLY OPERATING RESULTS The following table presents our unaudited quarterly results, in dollars and as a percentage of revenues, for the eight quarters ended December 31, 1999. The percentages may not add due to rounding. The information for each of these quarters has been prepared on the same basis as our audited financial statements appearing elsewhere in this prospectus. The eight quarterly periods cover each of our two most recently completed fiscal years reported in the consolidated financial statements and the notes thereto included elsewhere in this prospectus. We believe this period is sufficiently long to reflect historical trends and fluctuations in our results of operations. We believe this information reflects all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of such information in accordance with generally accepted accounting principles.
QUARTER ENDED --------------------------------------------------------------------------------------- MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, 1998 1998 1998 1998 1999 1999 1999 1999 -------- -------- --------- -------- -------- -------- --------- -------- (IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Revenues.......................... $14,729 $16,320 $16,873 $23,037 $20,165 $28,930 $46,447 $55,320 Cost of revenues.................. 11,516 14,177 14,825 15,979 15,965 24,194 37,066 43,525 General, administrative and marketing expenses.............. 1,955 1,593 1,206 3,191 1,920 2,390 2,903 4,537 ------- ------- ------- ------- ------- ------- ------- ------- Operating income.................. 1,258 550 842 3,867 2,280 2,346 6,478 7,258 Interest expense.................. 251 248 261 383 224 238 290 352 Other expense (income), net....... -- -- 166 -- -- -- 39 (12) ------- ------- ------- ------- ------- ------- ------- ------- Income before income taxes........ 1,007 302 415 3,484 2,056 2,108 6,149 6,918 Provision for income taxes........ 98 29 152 1,101 951 975 2,846 3,203 ------- ------- ------- ------- ------- ------- ------- ------- Net income........................ $ 909 $ 273 $ 263 $ 2,383 $ 1,105 $ 1,133 $ 3,303 $ 3,715 ======= ======= ======= ======= ======= ======= ======= =======
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, 1998 1998 1998 1998 1999 1999 1999 1999 -------- -------- --------- -------- -------- -------- --------- -------- AS A PERCENTAGE OF REVENUES: Revenues.......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues.................. 78.2 86.9 87.9 69.4 79.2 83.6 79.8 78.7 General, administrative and marketing expenses.............. 13.3 9.8 7.1 13.9 9.5 8.3 6.3 8.2 ------- ------- ------- ------- ------- ------- ------- ------- Operating income.................. 8.5 3.4 5.0 16.8 11.3 8.1 13.9 13.1 Interest expense.................. 1.7 1.5 1.5 1.7 1.1 0.8 0.6 0.6 Other expense (income), net....... -- -- 1.0 -- -- -- 0.1 -- ------- ------- ------- ------- ------- ------- ------- ------- Income before income taxes........ 6.8 1.9 2.5 15.1 10.2 7.3 13.2 12.5 Provision for income taxes........ 0.7 0.2 0.9 4.8 4.7 3.4 6.1 5.8 ------- ------- ------- ------- ------- ------- ------- ------- Net income........................ 6.2% 1.7% 1.6% 10.3% 5.5% 3.9% 7.1% 6.7% ======= ======= ======= ======= ======= ======= ======= =======
EIGHT QUARTERS ENDED DECEMBER 31, 1999 Revenues. Over the eight quarters ended December 31, 1999, our quarterly revenues increased from $14.7 million to $55.3 million. Our quarterly revenues have grown in each of the eight quarters ended December 31, 1999 with the exception of the quarter ended March 31, 1999. We believe that quarterly operating results may experience seasonal fluctuations in the future. For instance, quarterly results may fluctuate based on customers' calendar year budgeting cycles, which may result in a delay in their issuance of work orders. In addition, our outdoor services may be adversely affected by winter weather conditions. Our operating income margin may fluctuate significantly from quarter to quarter. We may accept low margin projects from customers as a strategy to establish relationships and subsequently obtain higher 24 28 margin projects from those customers in the future. In addition, we may experience higher than anticipated costs on fixed-price contracts, and in such event operating margins would be adversely affected. General, administrative and marketing expenses in the fourth quarter of 1998 included a provision for incentive compensation applicable to the last nine months of the year because operating margins in the second and third quarters had not achieved management's targets. LIQUIDITY AND CAPITAL RESOURCES Prior to 1998, we primarily financed our operations through cash flow from operations, borrowings of up to $4.5 million from a bank credit line and periodic advances from our principal common stockholders. In July 1998, we raised $11.5 million through a private sale of redeemable convertible preferred stock. Of these proceeds, $4.9 million was used to pay dividends to common stockholders, $2.6 million was used to pay portions of promissory notes to stockholders, and the balance of $4.0 million was used to fund our working capital requirements. As of December 31, 1999, we had cash of $1.2 million and $3.7 million of availability under our bank credit facility. Prior to June 1999, we had a $4.5 million line of credit from a bank. In June 1999, we entered into a credit agreement with two banks. The agreement provided us with a $10.0 million revolving credit facility, which was subsequently increased to $12.5 million in December 1999. This credit facility is to be used for general corporate purposes including working capital. The credit facility expires in June 2002, and bears interest at the prime rate plus 0.25%. As of December 31, 1999, the prime rate was 8.5%. The line of credit is secured by substantially all of our business assets, and is senior to $7.1 million of subordinated indebtedness to our principal common stockholders. As of December 31, 1999, $8.8 million was outstanding under the credit facility. Under the terms of the credit facility, we are required to provide the banks with periodic financial statements and other reports, and we must meet specified thresholds with respect to profitability and a debt to net worth ratio. Additionally, covenants in the credit facility limit our ability to make acquisitions of other businesses in excess of an aggregate of $250,000 in any calendar year, or sell any assets outside the ordinary course of business. The covenants also prohibit us from declaring or paying dividends, other than on the redeemable convertible preferred stock being converted into common stock upon the closing this offering, and creating liens or incurring additional indebtedness other than for equipment obtained in the ordinary course of business. The bank loans are partially guaranteed by our two principal common stockholders up to a maximum of $1.5 million each. Cash provided by and used in operations is primarily derived from our projects in process and changes in working capital. Net cash provided by operations was $0.0 million in 1999, while net cash used in operations was $3.4 million in 1998. In 1998 and 1999 the Company's primary use of cash was to finance higher receivables, which have increased as a result of our increased revenues. Cash used in investing activities was $0.4 million, $0.9 million, and $2.9 million in 1997, 1998, and 1999, respectively. Investing activities consist primarily of capital expenditures to support our growth. Cash provided by financing activities in 1999 was $2.6 million, which was primarily derived from additional bank loans, offset by payments of $1.6 million on a subordinated note payable to a stockholder. Cash provided by financing activities in 1998 was $3.5 million, which was primarily derived from the proceeds from issuance of redeemable convertible preferred stock totaling $11.5 million, partially offset by dividend payments of $5.1 million and repayments of $3.8 million on subordinated notes payable to stockholders. Cash used by financing activities in 1997 was $3.4 million, primarily consisting of payments to common stockholders while the Company was an S Corporation under the tax laws. 25 29 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. See Notes 4, 5 and 9 of Notes to Consolidated Financial Statements. Our future capital requirements will depend upon many factors, including our potential expansion to additional geographic regions, which will require that we expend funds for personnel, equipment and facilities in each region in advance of earning revenue and receiving payments from customers. The estimates for the periods for which we expect the net proceeds from this offering and our available cash balances and credit facility to be sufficient to meet our capital requirements are forward-looking statements that involve risks and uncertainties as set forth under the caption "Risk Factors" in this prospectus. Our capital requirements will depend on numerous factors, including the timing of payments from customers, our ability to accelerate billings to customers for completed and uncompleted projects, our potential expansion to additional geographic regions, the resources we dedicate to new geographic regions and demand for our services in such new regions, and possible acquisitions of complementary businesses. We may need to raise additional capital if we expand more rapidly than initially planned, to respond to customer demands or competitive pressures or to acquire complementary businesses. If additional funds are raised through the issuance of equity or convertible debt or preferred securities, the percentage ownership of our common stockholders will be reduced, our common stockholders may experience additional dilution and such securities may have rights, preferences or privileges senior to those of our common stockholders. There can be no assurance that additional financing will be available or on terms favorable to us. If adequate funds are not available or are not available on acceptable terms, our ability to fund our expansion, take advantage of unanticipated opportunities, expand our suite of services or otherwise respond to competitive pressures could be significantly limited. Our business may be harmed by such limitations. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results could vary materially as a result of a number of factors including those set forth in the "Risk Factors" section. 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 December 31, 1999, we had cash of $1.2 million. Pending application of the proceeds of this offering, as described in "Use of Proceeds," we intend to invest the 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 prospectus 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. 26 30 RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which requires entities to capitalize certain costs related to internal-use software once certain criteria have been met. In April 1998, the same committee issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities". These standards are effective for the first quarter of the year 1999. The adoption of these standards did not have a material effect on our consolidated financial statements. 27 31 BUSINESS OVERVIEW We are a leading provider of outsourced local telecommunications network services for established and emerging communications companies, including competitive local exchange carriers, Internet service providers and carriers' carriers. Our principal focus is to provide the expertise and resources our customers need to build and connect their networks to other local and long distance carriers and individual end users. In our customers' competitive environment where speed to market is key, our outsourced solution provides the mission-critical, often scarce resources that our customers need. We have the technical expertise, local knowledge and highly skilled workforce that enable us to design, deploy and upgrade local telecommunications networks more quickly and efficiently than many of our customers could themselves. We provide services 24 hours a day, seven days a week, to ensure the reliability of these networks. Our largest customers include AT&T, Level 3 Communications, MCI Worldcom, Metromedia Fiber Network, Network Access Solutions, Network Plus, Nextlink Communications, Teligent and Winstar Communications. Over the past three years, we have successfully expanded our operations from the New York City metropolitan area to other cities, including Baltimore, Boston, Newark, Philadelphia, Stamford and Washington, D.C. We plan to continue expanding with our customers into other metropolitan areas. INDUSTRY BACKGROUND Growth of the Telecommunications Industry The Telecommunications Act of 1996 opened the local telephone market to competition by requiring the incumbent local exchange carriers, or ILECs, to provide competitive local exchange carriers, or CLECs, with unbundled access to their local networks. CLECs can now offer local, long distance and data services to their customers and are focused on providing the high bandwidth that businesses and consumers are demanding. The telecommunications industry is growing rapidly and our customers are making large capital investments to build and expand their networks to satisfy the increasing demand for broadband Internet access, wireless communications and enhanced data and voice services. We believe the CLECs' share of the growing local telecommunications market will increase significantly, resulting in a future CLEC market substantially larger than today. CLECs are currently racing to build out their networks as quickly as possible to capture a greater share of this expanding opportunity. By supplying the last mile connection directly to their customers, CLECs are able to provide them with the broadband access that they increasingly need. The challenges of quickly building a complex local network, particularly over the last mile, require CLECs to allocate their resources efficiently. We believe this has increasingly led them to outsource network design, deployment, upgrades and maintenance. The demand for broadband Internet access and other enhanced data services is accelerating the adoption of new technologies. High speed fiber networks are being coupled with broadband wireless technologies to deliver enhanced telecommunications capabilities and applications to new customers and markets. According to Dataquest, in February 1999, the market for broadband wireless access services in North America alone is expected to generate $7.8 billion in revenue by 2002. CLECs must continuously upgrade their networks with new technologies and expand into new geographic regions in order to remain competitive and satisfy the demand for broadband services. Additionally, new carriers are entering the market as a result of deregulation and the demand for new services, fueling the development of new networks. These carriers are deploying new networks and expanding and upgrading their existing networks and equipment. 28 32 Changes in the Telecommunications Industry As telecommunications companies, including CLECs and Internet service providers, deploy their networks, they face significant competition. In order to differentiate themselves and remain competitive in this new environment, they are seeking to: - increase coverage and capacity of their networks to gain market share; - provide connections over the last mile directly to end-users to supply high bandwidth connectivity, which enables them to bypass the ILECs, thereby avoiding the accompanying access fees and the reliance on the ILECs to provide service and install connections; - offer services in new geographic markets; and - introduce other emerging data networking and broadband technologies and other point-to-multipoint architectures for the provision of high speed data, Internet access and other broadband services. The convergence of traditional wireline, wireless and cable services is also adding complexity to the telecommunications environment as carriers deploy networks spanning traditional wireless/wireline boundaries to offer these enhanced services and new technologies. New Challenges for Telecommunications Companies Due to this increasingly competitive environment, telecommunications companies such as CLECs and Internet service providers are focused on satisfying customer demand for enhanced services, better quality, faster data transmission and lower prices. The proliferation of CLECs and new technologies has created an environment where speed to market is a critical component of a CLEC's success. CLECs are also faced with the challenge of managing increasingly complex networks and technologies. For example, the ever-increasing demand for broadband services and capacity requiring the transmission of large amounts of data creates additional new technological hurdles for companies establishing or upgrading their networks. In this dynamic environment, customer acquisition and retention are key determinants of success. We believe this has led carriers to increasingly prioritize their resources, focusing on revenue generating activities and outsourcing when they can do so effectively. We believe the changing environment is also placing significant operational challenges on CLECs. CLECs must make decisions about which geographic markets to serve and which services and technologies to offer. Personnel challenges and process implementations can present cost uncertainties and operational challenges for carriers to deploy and manage their networks. Additionally, networks are being deployed with equipment from unrelated vendors, posing system integration challenges. This situation is exacerbated by consolidation in the industry, which often entails the integration of distinct networks. The Need for Outsourcing We believe that telecommunications companies such as CLECs, Internet service providers and carriers' carriers are outsourcing network planning, deployment, upgrading and maintenance to focus on their core businesses and refine their competitive advantage. In our experience, potential customers who are seeking outsourcing are looking for service providers who: - offer responsive, reliable and high quality service; - offer turnkey solutions; - have experience designing, installing and maintaining local telecommunications networks; - offer services in numerous locations; - are technology and vendor independent; and - have sufficient numbers of highly skilled, experienced employees. 29 33 THE LEXENT ADVANTAGE We provide outsourced local telecommunications network services to CLECs, Internet service providers and carriers' carriers for the design, deployment, upgrading and maintenance of their networks. We offer turnkey solutions. We have expertise installing, upgrading and maintaining equipment from most major telecommunication equipment manufacturers, including Lucent, Nortel, Marconi, ADC, Cisco, AccessLan and Tellabs. We are able to manage large scale deployments for our customers and upgrade their growing networks as usage increases and customers are added. We also provide ongoing maintenance and emergency restoration services 24 hours a day, seven days a week to ensure the reliability of our customers' networks. Our program management process enables us to meet our customers' needs on time and without compromising quality. Experience and Reputation. Since the late 1980s, we have provided critical services to local telecommunications providers in the New York metropolitan area. We installed a significant portion of the initial fiber optic networks in New York City for MCI Worldcom. During the same period, we provided similar services to AT&T. We continue to provide services to those customers today for the daily upgrading and maintenance of their growing networks. The reputation we have developed by providing high quality services has enabled us to obtain significant additional business from other telecommunications companies. Turnkey Solutions. The end-to-end, or turnkey, approach that we offer allows our customers to engage a single responsible party who is accountable for designing, deploying, upgrading and maintaining their networks. We believe our customers value the continuity of service provided by having the same people who designed, engineered and installed their network continue to upgrade and maintain this growing network on a daily basis. We provide our customers with a primary point of accountability and reduce the inefficiencies associated with coordinating multiple vendors. By eliminating the need for our customer to assemble, train and retain network deployment and maintenance staff, we are able to speed up the deployment of the customer's network and allow the customer to focus its resources on revenue generating activities, such as customer activations and retention. Focus on Local Networks and the Last Mile. Our primary focus is to enable our customers to build and connect their networks to other local and long distance carriers and individual end users. We believe a major challenge facing our customers is providing a high bandwidth, last mile connection to end users. The operational experience of our management team, engineers and technicians has provided us with an understanding of what it takes to build and operate local telecommunications networks and complete the high bandwidth last mile. Our senior management team averages 15 years of telecommunications industry experience. Single Vendor in Multiple Markets. We strive to provide responsive, reliable and consistently high quality services in each market where we operate. We provide standard designs, installations, testing procedures and recordkeeping so that our customers can expect to receive uniformly high standards of service in all of their locations. We provide our customers with the opportunity to deal with a single vendor in multiple markets and assure them that the quality of the services provided will be consistent across all markets. We believe our single source solution is an important feature of our services as we expand to new markets. Technology and Vendor Independence. Our technology and vendor independence is an important component of our ability to meet and exceed customer expectations. We have experience in all major telecommunications network technologies, including fixed wireless, DSL and dense wavelength division multiplexing systems. We install and maintain equipment from most major telecommunications equipment manufacturers, including Lucent, Nortel, Marconi, ADC, Cisco, AccessLan and Tellabs, and we have not aligned ourselves with products of any particular vendor. Depth and Scale. Our principal asset is our workforce of over 840 people, including more than 755 engineers and highly trained technicians. Our technological expertise and industry knowledge have enabled us to form and maintain strong customer relationships with both established telecommunications 30 34 companies, such as MCI Worldcom and AT&T, and newer market entrants. In 1999, we provided services to more than 70 telecommunications companies out of our 16 facilities in cities from Boston to Washington, D.C., ranging in scope from multi-year design and deployment contracts to emergency restoration services. STRATEGY Our objective is to be the leading provider of outsourced local telecommunications network services in major metropolitan markets for CLECs, Internet service providers and carriers' carriers. The key elements of our strategy are to: Exploit the Rapidly Growing Demand for Broadband Internet Access and Wireless Communications. The demand for high bandwidth connections to the Internet is tremendous and is expected to increase dramatically in the next 10 years. According to International Data Corporation, the number of Internet users worldwide is expected to increase from 196.1 million in 1999 to 502.4 million in 2003 and the market for fixed wireless technologies for voice and data/Internet access services for U.S. businesses is expected to grow from $309.3 million in 1999 to $5.2 billion in 2003. We believe that our customers will increasingly turn to us for the design, deployment, upgrading and maintenance of their networks as these markets grow. Also, according to Vertical Systems Group, approximately 76% of businesses are within one mile of an existing fiber optic network. Our ability to design, deploy, upgrade and maintain the last mile connection has positioned us to capitalize on our customers' goal to complete and enhance these connections to end users. Grow Our Base of Leading Customers by Focusing on Customer Satisfaction and Increasing Their Speed to Market. Our customers depend on us to quickly and efficiently design, deploy, upgrade and maintain network assets critical to the success of their businesses. To justify this reliance, we must consistently provide our customers with responsive, reliable and high quality service. We are committed to meeting the needs of our customers and strive to exceed their expectations in quality and speed to market. We believe we have been successful in developing customer loyalty and trust because of our high standards and responsiveness and the fact that a majority of our customers give us repeat business. Pursue Client-Driven Geographic Expansion in Major Metropolitan Areas. We have expanded our geographic presence with some of our key customers as they have grown their networks. This has allowed us to enter new markets with a customer base already in place. We believe that the major metropolitan areas in the U.S. represent a significant opportunity for future growth for us as CLECs, Internet service providers and carriers' carriers continue to expand and upgrade their networks. We intend to expand our service area on a city by city basis to satisfy the demands of our growing customers. As we penetrate these new markets, we expect to continue to capitalize on opportunities created by new market entrants as well as the expansion and maintenance of networks for existing customers. We may also expand by pursuing acquisitions that will supplement our technical expertise, allow us to acquire additional human resources or strategic customer relationships or expand our presence in key geographic markets where we could more effectively complete a project or gain access to new contracts. Create New Revenue Streams by Expanding Our Services and Pursuing Cross-Selling Opportunities. We are constantly searching for new ways to serve our customers. For example, we have developed and are testing a web-based workflow and asset management software system which will enable us to process orders and maintain online records of all work performed at our customers' facilities. Expanding our services provides new channels for revenues and the ability to cross-sell our suite of services to existing customers and offer a broader array of services to new customers. We often utilize our design and engineering services to establish relationships with customers as soon as a project is conceived. Based on these relationships, we pursue opportunities for program management and network deployment. Once a network is deployed, we offer ongoing network upgrade and maintenance services. Our experience with emerging technologies also offers opportunities for network upgrades and deployment of a carrier's next generation network. As technologies continue to evolve and networks become more complex, we will continue to broaden our services to meet the changing needs of our customers. 31 35 Attract, Motivate and Retain a Highly Specialized Workforce Capable of Remaining at the Forefront of Emerging Technologies. We believe that our future success will depend on our continued ability to attract, retain, integrate and motivate qualified personnel, and upon the continued service of our senior management and key technical personnel. Our workforce has extensive experience working with various leading edge technologies and equipment from numerous manufacturers. We intend to continue to attract and retain highly skilled and experienced professionals by offering technical training opportunities, bonus opportunities and competitive salaries and benefits. OUR SERVICES We provide complete local telecommunications network solutions to CLECs, Internet service providers and carriers' carriers, from the design and engineering phases, through deployment and ongoing network upgrading and maintenance services on a 24 hour a day, seven day a week basis. Design, Engineering and Program Management Design and Engineering. Our engineers discuss targeted coverage areas with the customer and design route maps for fiber optic and fixed wireless backbone and fiber rings to suit their needs and minimize delays due to limited right of way or conduit access. Because of our knowledge of other projects in the areas where we operate and our familiarity with the conduits in the streets and entrances into buildings where cable may be placed, we are often able to avoid disruptions or delays in installations by designing networks to avoid known or potential problem areas. We also design layouts for facilities within central offices and other network locations, which include equipment configurations, power distribution systems and cable routes throughout building riser systems. We also develop recordkeeping and maintenance procedures. Our understanding of the underlying technologies and the equipment to be installed enables us to provide the most efficient designs for our customers. Program Management. Our program managers are responsible for managing all aspects of the relationship with our customers. Program managers oversee the total scope of services we provide, including supervising and coordinating the engineering and design process, securing building and zoning permits, managing multiple vendors and documenting the entire process upon completion. The program manager provides the customer with a single point of contact in order to ensure that the customer's needs are being met. Network Deployment Services We believe our success is largely based on our ability to be a single source provider of vertically integrated services that have traditionally been offered separately by multiple vendors coordinated by a carrier's internal deployment staff. We provide a wide range of services for the deployment of telecommunications networks that allow for broadband connectivity. We install fiber backbone, local SONET rings, dense wave division multiplexing systems, fixed wireless systems, digital subscriber line and digital loop carrier equipment, digital cross connect systems, routers, power distribution systems and telemetry monitoring systems and other technologies. We also provide daily circuit testing of DS0, DS1 and DS3 services provided by the ILECs for our customers. We have the expertise to install equipment from most major telecommunications equipment vendors. We also set up the interconnections between CLECs, long distance carriers and ILECs, which allow telecommunications traffic to be exchanged between their networks. Network Upgrade and Maintenance Services We provide day-to-day upgrade and maintenance services to our customers. As network usage increases, we install additional access lines and other telecommunications and electrical equipment to handle the additional capacity. We also upgrade equipment and reconfigure the network as the technology 32 36 changes or improves. We have technicians based at our major customers' premises to constantly monitor any service issues that may arise and perform routine maintenance. Our technicians are available 24 hours a day, seven days a week to handle any emergency repairs, such as fiber cuts or equipment problems, while preventing or minimizing any service disruptions. Our services allow our customers to maintain the reliability of their networks without building a large workforce in all of their locations to handle day-to-day problems. CUSTOMERS We provide network design, deployment, upgrade and maintenance services primarily to CLECs, Internet service providers and carriers' carriers. Set forth below is a list of our largest customers during 1999: AT&T Level 3 Communications MCI Worldcom Metromedia Fiber Network Network Access Solutions Network Plus Nextlink Communications Teligent Winstar Communications SALES AND MARKETING We market and sell our services primarily through the efforts of our senior management and the program managers responsible for a particular account. To date, we have secured most of our new sales leads and new contracts by expanding relationships with existing customers and through referrals. Our program managers serve as our customers' advocates within Lexent and are uniquely positioned to cultivate additional business opportunities. Our marketing strategy will focus on telecommunications companies, including CLECs, Internet service providers and carriers' carriers, and will reinforce to our target market that Lexent represents a complete local solution for their multi-city outsourcing needs, combining technical expertise with responsive, reliable and high quality service. We plan to implement this campaign through the use of selective advertising and promotional strategies, including the development of a web-based customer resource center. EMPLOYEES As of December 31, 1999, we had 841 employees, including 756 employees working directly on projects, 47 employees providing supervision and support to employees working directly on projects and 38 employees performing general and administrative work. Approximately 650 of our employees are represented by a labor union, the International Brotherhood of Electrical Workers or IBEW. We have not experienced any work stoppages in the past 25 years and we believe that our relationships with our employees and union representatives are excellent. Recruiting. Our primary hiring sources for our engineers include employee referrals, print advertising and direct recruiting. We attract and retain employees by offering technical training opportunities, bonus opportunities, and competitive salaries and benefits. We hire our unionized employees through local chapters of the IBEW. In certain cases, we are able to sponsor qualified technical personnel for union admission. Training and Career Development. We believe that our continuous focus on training and career development helps us to retain our employees. Employees participate in ongoing educational programs, many of which are internally developed, to enhance their technical and management skills through classroom and field training. Manufacturers of telecommunications equipment also sponsor training programs covering the installation and maintenance of their equipment, which our employees regularly 33 37 attend. We also provide opportunities for promotion and mobility within Lexent that we believe are key components of employee retention. We believe our employee training, development and advancement structure better aligns the interests of our employees with our interests and creates a cooperative, entrepreneurial atmosphere and shared vision. We are dedicated to maintaining an innovative, creative and empowering environment where we work as a team to exceed the expectations of our customers and provide our employees with personal and professional growth opportunities. COMPETITION Our market is highly competitive and fragmented and is served by numerous vendors. Our primary competitors are often the internal departments of our carrier customers as well as numerous companies which are able to provide certain components of the package of services we offer. We compete with other independent vendors and telecommunications equipment manufacturers in most of the markets in which we operate, several of which are large companies and some of which have greater financial, technical and marketing resources than we have. In addition, there are relatively few barriers to entry into the markets in which we operate and, as a result, any organization with adequate financial resources and access to technical expertise and personnel may become our competitor. We may also face competition from the in-house service organizations of our existing or prospective customers, which employ personnel who perform some of the same types of services we provide. Although a significant portion of these services is currently outsourced, there can be no assurance that our existing or prospective customers will continue to outsource their network design, deployment, upgrade and maintenance services in the future. We believe the principal competitive factors in our market include quality and responsiveness of service, industry experience, reputation, the ability to deliver results on time and competitive pricing. In addition, expertise in new and evolving technologies, such as broadband fixed wireless, has become increasingly important. We believe that we can compete effectively on the basis of our experience and reputation in the industry, our knowledge of emerging technologies, as well as equipment from multiple vendors, and our highly trained workforce. FACILITIES We lease space at 16 separate locations throughout Maryland, Massachusetts, New Jersey, New York and Pennsylvania. Of these locations, 2 are leased spaces owned by entities affiliated with certain stockholders of our company. Our principal executive offices are located in approximately 20,000 square feet of office space at Three New York Plaza in New York, New York. The lease for this office space expires in May 2004. 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, in August 1999 a former employee filed a charge of employment discrimination against us with the New York State Division of Human Rights and the Equal Employment Opportunity Commission and has been granted a right to sue in federal court. If suit is brought, our management is prepared to defend this claim vigorously and believes that resolution of this claim will not have a material adverse effect on our financial position or results of operations. However, litigation is subject to inherent uncertainties, and an adverse result in this or other matters may arise from time to time that may harm our business. 34 38 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS Our directors and executive officers are as follows:
NAME AGE POSITION - ---- --- -------- Hugh J. O'Kane, Jr.(1)............ 49 Chairman of the Board Alf T. Hansen..................... 57 President, Chief Executive Officer and Director Kevin M. O'Kane................... 47 Vice Chairman and Chief Operating Officer Jonathan H. Stern................. 55 Executive Vice President and Chief Financial Officer Joseph Haines..................... 38 Executive Vice President, Operations Victor P. DeJoy................... 31 Executive Vice President, Engineering Rif K. Haffar..................... 44 Executive Vice President, Marketing and Business Development Walter C. Teagle III.............. 50 Executive Vice President and Director Peter O. Crisp(2)................. 67 Director Thomas W. Hallagan(1)(2).......... 38 Director L. White Matthews(2).............. 54 Director Richard W. Smith(1)............... 47 Director
- --------------- (1) Member of Compensation Committee (2) Member of Audit Committee Hugh J. O'Kane, Jr. has approximately 14 years experience in the telecommunications industry and has been Chairman of the Board of Directors since inception. From inception to February 2000, he also served as our President and Chief Executive Officer. Prior to our founding, Mr. O'Kane held various positions in our predecessor company, most recently as its President, since joining his family's business in 1973. Mr. O'Kane holds a BS in finance from Boston College. Alf T. Hansen has approximately 33 years experience in the telecommunications industry and has been our President and Chief Executive Officer and a Director since February 2000. Prior to joining our company, Mr. Hansen was VP Operations at AT&T Local Services since August 1998. Before that he held various positions at Teleport Communications Group, or TCG, serving as Senior Vice President -- Transition and Network Officer responsible for TCG's merger with AT&T from January 1998 to August 1998, Senior Vice President -- Emerging Markets from October 1997 to January 1998, Senior Vice President -- National Operations from February 1993 through October 1997 and Vice President -- National Operations from March 1989 through January 1993. Prior to joining TCG, Mr. Hansen worked for AT&T for 22 years, where he had assignments in Operations, Engineering, Sales and Public Relations. Kevin M. O'Kane has approximately 14 years experience in the telecommunications industry and has been our Chief Operating Officer and a Director since our inception. In February 2000, he was appointed Vice Chairman of our Board of Directors. He also serves as Secretary and Assistant Treasurer of our company. Prior to our founding, Mr. O'Kane held various positions in our predecessor company, most recently as its Vice President, since joining his family's business in 1976. Mr. O'Kane holds a BS in accounting from Boston College. Jonathan H. Stern has approximately 18 years experience in the telecommunications industry and has been Executive Vice President and Chief Financial Officer since September 1998. Prior to joining our company, he served as Vice President and Controller of International Specialty Products Inc., a NYSE-listed chemical manufacturer since 1990. Prior to that, he was Vice President and Controller of Western Union Corp., a telecommunications provider. Mr. Stern holds a BA in economics from Brooklyn College and an MBA in finance from New York University, and he is also a CPA. 35 39 Joseph Haines has approximately 17 years experience in the telecommunications industry and has been the Executive Vice President of our company in charge of network deployment, upgrading and maintenance services since December 1999. Prior to joining our company, he served as Senior Vice President of Engineering and Design at Network Plus Corp. since July 1998. From 1992 through July 1998, Mr. Haines held various positions with TCG, most recently as its Regional Vice President of Operations. Victor P. DeJoy has approximately nine years experience in the telecommunications industry and has been the Executive Vice President of our company in charge of design, engineering and program management services, since December 1999. Prior to joining our company, he served as the Northeastern Regional Vice President of Engineering and Operations at Nextlink Communications since March 1998. From May 1992 through March 1998, Mr. DeJoy held various positions with TCG, most recently as its Vice President of National Provisioning Center. Mr. DeJoy holds a BS in Electrical Engineering from Rutgers College of Engineering. Rif K. Haffar has approximately 10 years experience in the telecommunications industry and has been the Executive Vice President for Marketing and Business Development of our company since January 2000. Prior to joining our company, he served as Winstar Communications Inc.'s Senior Vice President of the Partnership Management Organization since October 1998 and Senior Vice President of Engineering and Operations from June 1996 to September 1998. Prior to joining Winstar, Mr. Haffar was Senior Vice President of Product Development and Vice President of Operations with GST Telecom. Mr. Haffar holds a BS and an MBA from Portland State University. Walter C. Teagle III has approximately four years experience in the telecommunications industry and has been a Director since September 1998 and has served as an Executive Vice President since February 2000. From June 1999 through January 2000, Mr. Teagle was the President of our subsidiary National Network Technologies, LLC. Prior to joining our company, Mr. Teagle was the President and Chief Executive Officer of Metro Design Systems Inc., an engineering and design firm which was acquired by us in September 1999. Mr. Teagle also serves as a Director of the First of Long Island Corporation. Mr. Teagle holds a BS in economics from the University of Maryland and an MBA in finance from the University of Pennsylvania Wharton School. Peter O. Crisp has been a Director since February 2000. Mr. Crisp was a general partner of Venrock Associates, a venture capital investment firm, for more than five years until his retirement in September 1997. He has been vice chairman of Rockefeller Financial Services, Inc. since December 1997. Mr. Crisp is also a director of American Superconductor Corporation, Evans & Sutherland Computer Corporation, United States Trust Corporation, Thermo Electron Corporation and several private companies. Mr. Crisp holds a BA from Yale University and an MBA from the Harvard Graduate School of Business. Thomas W. Hallagan has been a Director since July 1998. Since 1996, he has served as a Managing Director of Abbott Capital Management and a general partner of Abbott Capital 1330 Investors I, L.P. and Abbott Capital 1330 Investors II, L.P., private equity limited partnerships. From 1991 to 1996, Mr. Hallagan was employed by Aetna Investments. Prior to that, he was employed at Prudential Capital Corporation and he worked for Deloitte Haskins & Sells. Mr. Hallagan is a director of several private companies. He holds a BA in mathematics from Colgate University, an MBA in finance and an MS in accounting from New York University. L. White Matthews has been a Director since September 1998. He has served as Executive Vice President and Chief Financial Officer of Ecolab Inc., a global developer of cleaning and sanitation products and services, since June 1999. Prior to that, he held various positions with Union Pacific Corporation, most recently, as its Chief Financial Officer. Mr. Matthews holds a BS from Hampton-Sydney College and an MBA from the University of Virginia Darden School of Business and General Management. Richard W. Smith has been a Director since July 1998. He is an individual general partner of the general partners of Allegra Capital Partners IV, L.P., Allegra Capital Partners III L.P., Lawrence, Tyrrell, 36 40 Ortale & Smith II, L.P. and Lawrence, Tyrrell, Ortale & Smith, L.P., each a venture capital investment firm. He is also Chairman of both Ixnet, Inc. and IPC Communications, Inc. He is also a director of several private companies. Mr. Smith co-authored the book Treasury Management: A Practitioner's Hand-Book. He holds a BA from Harvard University. Hugh J. O'Kane, Jr., the Chairman of our Board, and Kevin M. O'Kane, the Vice Chairman of our Board and our Chief Operating Officer, are brothers. COMMITTEES OF THE BOARD OF DIRECTORS Our board of directors established an audit committee in January 1999. This committee currently consists of Messrs. Matthews, Crisp and Hallagan. The audit committee makes recommendations to the board of directors regarding the selection of independent auditors, reviews the results and scope of the audit and other services provided by our independent auditors and reviews and evaluates our audit and control functions. Our board of directors established a compensation committee in January 1999. This committee currently consists of Messrs. Hugh O'Kane, Hallagan and Smith. The compensation committee reviews and recommends to the board of directors the salaries, incentive compensation and benefits of our officers and employees and administers our stock option plan and employee benefit plans. COMPENSATION OF DIRECTORS Prior to February 2000, each director who was not also an employee or an affiliate of a principal stockholder of our company, was eligible to receive options to purchase shares of our common stock under our stock option plan and cash remuneration for specific actions they performed on our behalf. Each such director received a fee of $1,500 per quarter for each quarter such director was a member of the board. In addition, each such member received $750 for each board meeting such member attended in person and $500 for each attended meeting of a committee on which such member served. We also agreed to provide these members a $1,000 per day fee in the event we imposed upon these members specific advisory responsibilities outside the scope of the normal responsibilities of a member of the board of directors and $500 for each board meeting attended telephonically. After February 2000, in addition to the cash remuneration described above, these directors will receive options to purchase shares of common stock under our stock option plan for each year such director is a member of our board and options to purchase shares upon such director's initial election to our board. The amount of each of these grants will be determined by the board or appointed committee or committees on the date of grant. See "Employee Benefits Plans -- Stock Option Plan -- Grants to Outside Directors." During the fiscal year ended December 31, 1999, Messrs. Matthews and Teagle were the only members of the board of directors eligible for any compensation from our company. Effective June 1999, Mr. Teagle became an employee of our company and is no longer eligible to receive compensation as a director. Upon joining the board, Mr. Matthews received options to purchase 50,000 shares of our common stock under our stock option plan. In total, Messrs. Matthews and Teagle received cash fees of $10,000 and $8,250 from our company during fiscal 1999, respectively. None of this amount was in exchange for any advisory responsibilities outside the scope of the normal responsibilities of a member of the board of directors. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Prior to January 1999, all compensation decisions relating to our executive officers were made solely by our board of directors. Upon formation of our compensation committee and through December 31, 1999, the compensation committee made recommendations regarding the compensation of our executive officers. Mr. Hugh O'Kane, our Chairman and former President and Chief Executive Officer, has been a member of the compensation committee since its formation. In addition, Mr. Smith is a general partner of the general partner of each of the funds affiliated with Allegra Capital Partners and Mr. Hallagan is a general partner of Abbott Capital 1330 Investors I, L.P., and each may be deemed to have a material interest in the matters described under "Certain Relationships and Related Transactions." 37 41 EXECUTIVE COMPENSATION The following table summarizes the compensation for services rendered to us during 1999 by our Chief Executive Officer and each of our other executive officers who earned more than $100,000 in salary and bonus during the last fiscal year. These individuals are referred to as the named executive officers. The compensation described in this table does not include medical or other benefits that are available generally to all of our salaried employees or certain perquisites or other personal benefits received that do not exceed the lesser of $50,000 or 10% of any such officer's salary and bonus. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION -------------------------------------------------- LONG-TERM COMPENSATION AWARDS OTHER ANNUAL SECURITIES ALL OTHER COMPENSATION UNDERLYING COMPENSATION NAME AND PRINCIPAL POSITION SALARY($) BONUS($) ($)(1) OPTIONS(#) ($) - --------------------------- --------- -------- ------------ ------------ ------------ Hugh J. O'Kane, Jr..................... 265,000 400,000 4,800 -- -- Chairman, President and Chief Executive Officer Kevin M. O'Kane........................ 265,000 400,000 4,800 -- -- Chief Operating Officer Jonathan H. Stern...................... 205,100 50,000 4,800 -- -- Executive Vice President and Chief Financial Officer
- --------------- (1) Compensation in this column reflects contributions made by us to our 401(k) plan on behalf of each of the named executive officers. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth, with respect to each of the named executive officers, information regarding the number and value of securities underlying unexercised options held by the named executive officers as of December 31, 1999. None of our named executive officers exercised options in 1999.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT AT FISCAL YEAR-END(#) FISCAL YEAR-END($) ------------------------------ ------------------------------ NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ----------- ------------- ----------- ------------- Hugh J. O'Kane, Jr................... -- -- -- -- Kevin M. O'Kane...................... -- -- -- -- Jonathan H. Stern.................... 73,333 146,667
In the table above, the value of unexercised in-the-money options is based on the difference between the initial public offering price per share of $ and the exercise price. The options granted to Mr. Stern were granted under our stock option plan. These options vested as to the first 25% on the first anniversary of the grant date and, as to the remaining portion, will vest in equal monthly installments for the 36 months thereafter. Mr. Stern's options were granted at an exercise price equal to the fair market value of our common stock, as determined by the board of directors on the date of grant. EMPLOYMENT ARRANGEMENTS In July 1998, we entered into substantially similar employment agreements with Hugh O'Kane and Kevin O'Kane. Under such agreements, Hugh O'Kane agreed to initially serve as our President and Chief Operating Officer and Kevin O'Kane agreed to initially serve as our Executive Vice President, and, in each 38 42 such case in such other capacity as requested by the board of directors through July 2003. Each agreement shall be automatically renewed for successive one year periods until terminated by either party. Pursuant to the agreements, both employees are entitled to receive such salary and bonus as determined by the board of directors which were initially set at $265,000 and $250,000, for each respectively. In February 2000, these agreements were amended to provide each individual an annual salary of $265,000 and an annual bonus of $300,000. In connection with these amendments, each individual was granted options to purchase 40,000 shares of common stock at an exercise price of $11.00 per share. In the event either individual is terminated without cause, such individual is entitled to receive severance payments equal to 100% of his base salary through the end of his employment term. In August 1998, we entered into an employment agreement with Mr. Stern to which he agreed to serve as our Chief Financial Officer. Under this agreement, Mr. Stern is paid base compensation in an amount not less than $205,100 per year and a bonus of at least $50,000, subject to the achievement of targeted objectives. In February 2000, the agreement was amended to provide Mr. Stern a bonus of at least 40% of base salary in the event we achieve targeted performance standards. Under his employment agreement, Mr. Stern received options to purchase 220,000 shares of our common stock. If Mr. Stern's employment is terminated without cause following a change of control of our company, 100% of Mr. Stern's options are to become exercisable. In the event Mr. Stern is terminated without cause, he is entitled to receive severance payments equal to 100% of his base salary and continuation of benefits for six months. In December 1999, we entered into substantially similar employment agreements with each of Messrs. Haines, DeJoy and Haffar in which each agreed to serve as an Executive Vice President through December 2003, December 2003 and January 2004, respectively. In addition, under each of their agreements, Messrs. Haines and DeJoy agreed to serve as presidents of our two subsidiaries. All such agreements may be extended according to their terms. Under these agreements, Messrs. Haines, DeJoy and Haffar are each paid compensation in amounts not less than $240,000 per year and, in the event we achieve targeted performance standards, are each entitled to receive bonuses of at least 40% of their base salary. In addition, Messrs. Haines, DeJoy and Haffar received options to purchase 350,000, 350,000 and 250,000 shares, respectively, of our common stock at an exercise price of $10.00 per share upon execution of their respective agreements. These options vested as to the first 100,000, 100,000 and 62,500 shares, respectively, on the date of grant to each employee and as to the balance in equal monthly installments over the 36 months after the first anniversary of the date of grant. Also, these individuals are eligible to receive options to purchase at least 15,000, 15,000 and 10,000 shares, respectively, of common stock each year at an exercise price equal to the fair market value of our common stock on the date of grant. In the event any of these employees are terminated without cause or terminates his employment for good reason under the agreements, such employee is entitled to severance payments equal to 100% of his base salary for varying periods up to but not exceeding 18 months. In January 2000, we entered into an employment agreement with Mr. Hansen to which Mr. Hansen agreed to serve as our President and Chief Executive Officer through February 2003. Such agreement may be extended according to its terms. Under the agreement, Mr. Hansen is paid compensation in an amount not less than $300,000 per year and, in the event we achieve targeted performance standards, is entitled to receive a bonus up to 100% of his base salary. In addition, upon signing his employment agreement Mr. Hansen received options to purchase 830,000 shares of common stock at an exercise price of $10.00 per share. These options vested as to the first 315,416 on the date of grant, and as to the balance in equal monthly installments for the 24 months after the first anniversary of the date of grant. Also, in the event the price of our common stock reaches certain threshold levels, he is eligible to receive options to purchase at least 200,000 shares of common stock at the fair market value of our common stock on the date of grant each year for the first two years of his employment term. Further, Mr. Hansen, in the first 90 days of his employment with our company, can elect to purchase up to 215,000 shares of our common stock at $10.00 per share. In the event Mr. Hansen is terminated without cause or terminates his employment for good reason under this agreement, he is entitled to receive severance payments equal to 100% of his base salary for one year and continuation of benefits for up to six months. In the event there is a change of 39 43 control of our company, we have agreed to accelerate the vesting of 100% of Mr. Hansen's options and give Mr. Hansen the opportunity to resign from our company, and have such resignation be for good reason. If any excise tax is imposed on Mr. Hansen by reason of any of the payments or vesting made on a change of control, we have agreed to gross up such payments to make Mr. Hansen whole. EMPLOYEE BENEFIT PLANS Stock Option Plan In July 1998, our board of directors and stockholders approved our Stock Option and Restricted Stock Purchase Plan. This plan was subsequently amended and restated in February 2000. The purpose of the stock option plan is to promote the interests of our company and our subsidiaries and the interests of our stockholders by providing an opportunity to selected employees and officers of both our company and those of our subsidiaries and to other persons providing services to us to purchase our common stock. By encouraging such stock ownership, we seek to attract, retain and motivate our employees and other persons and to encourage those employees and other persons to devote their best efforts to our business and financial success. The following summary describes the principal features of the stock option plan as this plan has been amended and restated and is qualified in its entirety by reference to the specific provisions of the amended and restated stock option plan, which is filed as an exhibit to the registration statement of which this prospectus forms a part. Shares and Options Subject to the Plan. The plan provides for the grant of options or awards to purchase an aggregate 5,800,000 shares of our common stock, either in the form of incentive stock options intended to meet the requirements of Section 422 of the Code, as amended, or non-qualified stock options or restricted stock purchase awards. The plan includes provisions for adjustment of the number of shares of common stock available for grant or award thereunder and in the number of shares of common stock underlying outstanding options in the event of any stock splits, stock dividends or other relevant changes in our capitalization. Eligibility. Under the plan, employees, including officers, are eligible to receive grants of either incentive stock options structured to qualify under Section 422 of the Code, or non-qualified stock options and restricted stock purchase awards, both of which are not intended to meet the requirements of Code Section 422. Non-employees are eligible to be granted only non-qualified options and awards. Administration. The plan has been administered by our board of directors. However, the board has the right to appoint one or more committees to administer the plan. Each administering committee must consist of at least two members of the board. To the extent that transactions under the plan are intended to qualify as exempt from Rule 16b-3 of the Exchange Act, the administering committee as to those transactions will consist of entirely "Non-Employee Directors" within the meaning of the Exchange Act. To the extent that grants under the plan are intended to qualify as "performance-based compensation" within the meaning of the Code, the administering committee as to those grants must consist of entirely "outside directors" within the meaning of the Code. All questions of interpretation or application of the stock option plan are determined by the board of directors or administering committee or committees so appointed, whose decisions are final and binding upon all participants. Terms of Options and Awards. Each option or award granted will be evidenced by a stock option or restricted stock purchase agreement. The board or appointed committee or committees will fix the term and vesting provisions of all options granted pursuant to the plan. Options granted under the plan, other than those granted to outside directors as discussed below, generally vest as to 25% on the first anniversary of the grant date, and, as to the remaining portion, in equal monthly installments for the 36 months thereafter. These options generally provide for acceleration of vesting as to at least 50% of the unexercised portion on a change in control of our company. The exercise price of incentive stock options may not be less than 100% of the fair market value of the shares of common stock, as determined by the board or appointed committee or committees, as the case may be, on the date the option is granted. In addition, the aggregate fair market value of the shares 40 44 of stock with respect to which incentive stock options are exercisable for the first time by an optionee during any calendar year shall not exceed $100,000. In addition, no incentive stock option shall be granted to an optionee who owns more than 10% of the total combined voting power of all classes of stock of our company, unless the exercise price is at least 110% of the fair market value of the shares of common stock and the exercise period does not exceed 5 years. Restricted stock purchase awards granted under the plan will be in amounts and at times as determined by the board or appointed committee or committees. The purchase price, as well as the vesting provisions, of awards will be determined by the board or committee and the purchase price may be equal to, less than or more than the fair market value of the shares of common stock to be awarded. Grants to Outside Directors. Directors who are not employees of our company or affiliates of our principal stockholders will receive options under the plan. Each eligible director will receive options to purchase shares of our common stock upon such director's initial election to the board and additional options to purchase shares for each year such director remains a member of the board of directors. The amount of each of these grants will be determined by the board or appointed committee or committees on the date of grant provided that no director may receive options to purchase more than 500,000 shares of our common stock in any calendar year. The options granted to these directors will be non-qualified stock options. Such options will have 10 year terms and will terminate three months following the date the director ceases to be a director or consultant or 12 months if the termination is due to death or disability. In the event of our dissolution or liquidation or change in control, these options will become 100% vested and exercisable in full. Term of the Stock Option Plan. The plan will continue in effect until July 2008 unless terminated prior to such date by the board. 401(k) Plan We have adopted the Vanguard Prototype 401(k) Savings Plan, a defined contribution plan intended to qualify under Section 401 of the Code. All of our employees not otherwise subject to collective bargaining agreements are eligible to participate and may enter the 401(k) Plan as of the first day of any month. Employees participating in the plan may make pre-tax contributions to the 401(k) Plan of up to 15% of their eligible earnings, subject to a statutorily prescribed annual limit. We make annual contributions to the 401(k) Plan in the amount of 3% of each participant's salary up to the prescribed annual limit. Our contributions vest annually over the related employee's first five years of service. Each employee's contributions, our corresponding contributions and any investment earnings, are generally not taxable to the participants until withdrawn. Employee contributions are held in trust as required by law. Individual participants may direct the trustee to invest their accounts in authorized investment alternatives. INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION ON LIABILITY Our bylaws provide that we shall indemnify our directors, officers and their agents to the fullest extent permitted by the Delaware General Corporation Law or DGCL. We are also empowered under our bylaws to purchase insurance on behalf of any director, officer, employee or agent whether or not we would be required to indemnify this person. Pursuant to this provision, we have entered into indemnification agreements with each of our directors and executive officers. In addition, our second restated certificate of incorporation to be effective upon consummation of this offering provides that our directors will not be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duty as a director, except for liability: - for any breach of the director's duty of loyalty to us or our stockholders; - for acts or omission not in good faith or which involve intentional misconduct or a knowing violation of law; - under Section 174 of the DGCL; or 41 45 - for any transaction from which the director derives an improper personal benefit. Our second restated certificate of incorporation also provides that if, after the approval by our stockholders of our second restated certificate of incorporation, the DGCL is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of our directors shall be eliminated or limited to the fullest extent permitted by the DGCL. This provision does not affect a director's responsibilities under any other law, including the federal securities laws or state or federal environmental laws. 42 46 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The following is a description of relationships and transactions for the last three fiscal years to which we have been a party, in which amounts involved exceed $60,000 and in which any director, executive officer or holder of more than 5% of our capital stock had or will have a direct or indirect material interest, other than our compensation arrangements with our directors and named executive officers that are described under "Management." On January 1, 1997, Hugh O'Kane Electric Co., Inc., our predecessor company, repurchased common shares owned by Denis J. O'Kane, a stockholder and brother of each of Hugh J. O'Kane, Jr., our Chairman, and Kevin M. O'Kane, our Vice Chairman and Chief Operating Officer. In consideration for the repurchase, Denis O'Kane was issued a subordinated promissory note in the amount of $10.2 million. The note bears interest at the rate of 6% per year. We made the first payment on the note on July 23, 1998 in connection with the merger of Hugh O'Kane Electric Co., Inc. with and into our company. The payment was for $1.5 million plus accrued interest. The remaining balance is payable in 22 quarterly installments of $0.4 million plus accrued interest with the final payment due January 1, 2004. As of December 31, 1999, the outstanding principal balance of this note was $6.7 million. On July 20, 1998, as an inducement to his execution of the merger agreement in which Hugh O'Kane Electric Co., Inc. merged with and into our company, we executed an agreement with Hugh O'Kane Electric Co., Inc. and Denis J. O'Kane. Under this agreement, we agreed to provide Denis O'Kane with a new automobile every three years for as long as he remains a stockholder of our company and lifetime medical, dental and life insurance benefits consistent with his then-existing coverage. See Note 5 of Notes to Consolidated Financial Statements. On July 23, 1998, we sold 5,538,458 shares of Series A redeemable convertible preferred stock at a purchase price of $2.07639 per share to entities affiliated with Allegra Capital Partners and Abbott Capital Management, who each held more than 5% of our outstanding capital stock prior to this offering. Mr. Smith, a member of our board, is a general partner of the general partner of each of the funds affiliated with Allegra Capital Partners. Mr. Hallagan, also a member of our board, is a general partner of Abbott Capital 1330 Investors I, L.P. Upon the closing of this offering, each share of redeemable convertible preferred stock will automatically convert into 1.1814 shares of common stock. All securities sold or purchased in this transaction were sold or purchased at prices equal to the fair market value of the securities, as determined by our board of directors, on the date of issuance. Holders of shares of our common stock issued in connection with the conversion of the redeemable convertible preferred stock and in connection with the merger of our predecessor company with and into our company, may require us to register such shares at our expense. For a description of such registration rights, see "Description of Capital Stock -- Registration Rights." On July 23, 1998, as a finders fee in connection with our redeemable convertible preferred stock financing, we issued non-qualified options to purchase 110,000 shares of our common stock under our stock option plan to Walter C. Teagle III, an Executive Vice President and member of our board of directors. These options were immediately exercisable by Mr. Teagle. On December 22, 1999, we issued 110,000 shares of common stock to Mr. Teagle in connection with his exercise of these stock options. On September 24, 1998, we issued non-qualified options to purchase 50,000 shares of our common stock under our stock option plan to L. White Matthews, a member of our board of directors. These options vested as to 50% upon the first anniversary of the grant date and vest in equal monthly installments for the 36 months thereafter. On December 22, 1999, we issued 25,000 shares of common stock to Mr. Matthews in connection with his exercise of 50% of these stock options. On June 1, 1999, we issued incentive stock options to purchase 270,000 shares of our common stock under our stock option plan to Mr. Teagle. These options were issued to Mr. Teagle at the fair market value of our common stock, as determined by our board of directors, on the date of grant. 43 47 On January 21, 2000, we issued non-qualified options to purchase 25,000 shares of our common stock to Peter O. Crisp, a member of our board of directors. These options vested as to 50% on the date of grant. The remainder vests in equal monthly installments for the 24 months after the first anniversary of the date of grant. In addition, on February 17, 2000, Mr. Crisp purchased 20,000 shares of our common stock at a purchase price of $10.00 per share. On February 11, 2000, Hugh O'Kane, Jr. and Kevin O'Kane entered into an agreement to grant each the right to vote the shares of the other in the event of either individual's death. This agreement provides that the right to vote will remain with the surviving brother for three years or until his death or a sale of the related shares in a public offering or sale authorized by Rule 144 under the Securities Act. Mr. Teagle receives a base salary equal to $175,000 per year. In addition, Mr. Teagle received a bonus of $175,000 for 1999 and will receive a bonus of $200,000 for 2000. Mr. Hugh J. O'Kane, Sr., father of Hugh O'Kane, Jr., Kevin O'Kane and Denis O'Kane, receives $75,000 per year as a pension for his role as founder of our predecessor company. This payment will be made to Mr. O'Kane's spouse for the remainder of her life in the event of his death. Kevin O'Kane is a co-trustee of the Hugh J. O'Kane, Jr. 2000 Grantor Retained Annuity Trust which holds 1,400,000 shares for the benefit of Hugh O'Kane's family. In 1998 and 1999, we purchased services amounting to $0.5 million and $1.4 million, respectively, from Metro Design Systems, Inc., a company which was owned by Hugh O'Kane, Jr., Kevin O'Kane, Denis O'Kane and Walter Teagle. During such times, Hugh O'Kane, Jr., Kevin O'Kane and Mr. Teagle were directors of our company and Hugh O'Kane, Jr. and Kevin O'Kane held more than 5% of our outstanding capital stock. We believe the costs for the services provided by Metro Design Systems, Inc. would have been incurred regardless of whether such services had been purchased from a non-affiliated entity. In September 1999, we purchased the equipment, business name and goodwill of Metro Design Systems, Inc. for $0.2 million. The purchase price was paid in cash to Metro Design Systems, Inc. and we believe the price was equal to the fair market value of the purchased assets. From time to time prior to this offering, we have borrowed funds from Hugh O'Kane, Jr. and Kevin O'Kane to fund our working capital requirements. In connection with this, we periodically make repayment of such advances. At December 31, 1999, the amounts we owed to Hugh and Kevin O'Kane collectively amounted to $0.6 million, of which $0.4 million is subordinated to all senior debt. Such amounts bear interest at the rate of 6% but there are no formal repayment terms. We lease two of our facilities from entities owned by Hugh, Kevin and Denis O'Kane. Annual rentals for office and warehouse premises at 88-90 White Street in New York, NY are $0.3 million for calendar years 1998 through 2001, and $0.4 million for calendar year 2002. Annual rentals for office and warehouse premises in South Plainfield, NJ are $0.1 million for the twelve-month periods April through March, commencing April 1998 and ending March 2008. While we were an S corporation, we made cash distributions to stockholders of approximately $0.2 million in 1997 and $5.1 million in 1998. Between July 1998 and January 2000, our company signed various employment agreements with each member of our senior management team. For a description of such agreements, see "Management -- Employment Arrangements." 44 48 PRINCIPAL STOCKHOLDERS The following table contains information about the beneficial ownership of our common stock before and after our initial public offering for: - each person who beneficially owns more than five percent of the common stock; - each of our directors; - the named executive officers; and - all directors and executive officers as a group. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table below have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. The percentage of beneficial ownership is based on 22,173,108 shares of common stock outstanding as of February 17, 2000, as adjusted to reflect the conversion of all outstanding shares of preferred stock upon the closing of this offering and shares of common stock outstanding after completion of this offering. Fractional shares have been rounded to the nearest whole number. The table assumes no exercise of the underwriters' over-allotment option. If the underwriters' over-allotment option is exercised in full, we will sell up to an aggregate of additional shares of our common stock, and up to shares of common stock will be outstanding after the completion of this offering.
PERCENTAGE OF SHARES OUTSTANDING NUMBER OF SHARES -------------------- BENEFICIALLY BEFORE AFTER NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED OFFERING OFFERING - --------------------------------------- ---------------- -------- -------- Kevin M. O'Kane(2)........................................ 8,403,692 37.88% Hugh J. O'Kane, Jr.(3).................................... 7,003,692 31.57 Abbott Capital 1330 Investors I, L.P.(4).................. 4,551,709 20.53 1330 Avenue of the Americas, Suite 2800 New York, New York 10019 Allegra Capital Partners III, L.P.(5)..................... 2,291,373 10.33 515 Madison Avenue -- 29th Floor New York, New York 10022 Alf T. Hansen(6).......................................... 530,416 2.35 Jonathan H. Stern(7)...................................... 87,083 * Walter C. Teagle III(8)................................... 245,000 1.10 Peter O. Crisp(9)......................................... 32,500 * Thomas W. Hallagan(10).................................... 4,551,709 20.53 L. White Matthews(11)..................................... 29,167 * Richard W. Smith(12)...................................... 2,291,373 10.33 All current directors and executive officers as a group (12 persons)(13)........................................ 22,037,134 95.96
- --------------- * represents beneficial ownership of less than 1%. (1) Unless otherwise indicated, the address for each person or entity named above is c/o Lexent Inc., Three New York Plaza, New York, New York 10004. 45 49 (2) Includes 12,730 shares subject to options exercisable within 60 days of February 17, 2000, an aggregate 400,000 shares held in trust for Kevin O'Kane's children for which Mr. O'Kane is co-trustee and 1,400,000 shares held in trust for Hugh O'Kane's family for which Mr. O'Kane is co-trustee. (3) Includes 12,730 shares subject to options exercisable within 60 days of February 17, 2000, an aggregate 400,000 shares held in trust for Hugh O'Kane's children for which Mr. O'Kane is co-trustee and 1,400,000 shares held in trust for Hugh O'Kane's family for which Mr. O'Kane's wife is co-trustee. (4) Thomas Hallagan, one of our directors, is a general partner of Abbott Capital 1330 Investors I, L.P. Mr. Hallagan disclaims beneficial ownership of the shares held by this entity. (5) Includes 227,500 shares held by Allegra Capital Partners IV, L.P. Richard Smith, one of our directors, is a general partner of the general partner of each of the venture capital funds affiliated with Allegra Capital Partners. Mr. Smith disclaims beneficial ownership of the shares held by Allegra Capital Partners III, L.P. and Allegra Capital Partners IV, L.P. (6) Includes 150,416 shares subject to options exercisable within 60 days of February 17, 2000 and 215,000 shares subject to purchase by Mr. Hansen under the terms of his employment agreement. (7) All shares subject to options exercisable within 60 days of February 17, 2000. (8) Includes 135,000 shares subject to options exercisable within 60 days of February 17, 2000. (9) Includes 12,500 shares subject to options exercisable within 60 days of February 17, 2000. (10) All shares held by Abbott Capital 1330 Investors I, L.P. Mr. Hallagan is a general partner of this venture capital fund affiliated with Abbott Capital Management and disclaims beneficial ownership of the shares held by this entity. (11) Includes 4,167 shares subject to options exercisable within 60 days of February 17, 2000. (12) Includes 2,063,873 shares held by Allegra Capital Partners III, L.P. and 227,500 shares held by Allegra Capital Partners IV, L.P. Mr. Smith is a general partner of the general partner of each of the venture capital funds affiliated with Allegra Capital Partners and disclaims beneficial ownership of the shares held by these entities. (13) Includes 792,126 shares subject to options exercisable within 60 days of February 17, 2000. 46 50 DESCRIPTION OF CAPITAL STOCK Immediately prior to the closing of this offering and effective upon the filing of our second amended and restated certificate of incorporation, our authorized capital stock will consist of shares of common stock, $0.001 par value per share, and shares of preferred stock, $0.001 par value per share. As of February 17, 2000, after giving effect to the conversion of all outstanding redeemable convertible preferred stock into common stock upon the closing of this offering, there were outstanding 22,173,108 shares of common stock held of record by 20 stockholders. COMMON STOCK The holders of common stock are entitled to one vote per share on all matters to be voted on by the stockholders. Subject to preferences that may be applicable to any outstanding shares of preferred stock, holders of common stock are entitled to receive ratably such dividends as may be declared by the board of directors out of funds legally available therefor. In the event of our liquidation, dissolution or winding down, holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preferences of any outstanding shares of preferred stock. Holders of common stock have no preemptive, conversion, subscription or other rights. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are, and all shares of common stock to be outstanding upon completion of this offering will be, fully paid and nonassessable. PREFERRED STOCK Upon the closing of this offering, all outstanding shares of preferred stock will be converted into 6,543,083 shares of common stock. See Note 10 of Notes to Consolidated Financial Statements for a description of the currently outstanding redeemable convertible preferred stock. Following the conversion, our restated certificate of incorporation will be amended and restated to delete all references to these shares of redeemable convertible preferred stock. Under our second restated certificate of incorporation, the board has the authority, without further action by stockholders, to issue up to shares of preferred stock in one or more series and to fix the rights, preferences, privileges, qualifications and restrictions granted to or imposed upon such preferred stock, including dividend rights, conversion rights, voting rights, rights and terms of redemption, liquidation preference and sinking fund terms, any or all of which may be greater than the rights of the common stock. The issuance of preferred stock could adversely affect the voting power of holders of common stock and reduce the likelihood that such holders will receive dividend payments and payments upon liquidation. The issuance could have the effect of decreasing the market price of the common stock. The issuance of preferred stock could have the effect of delaying, deterring or preventing a change in control of our company. We have no present plans to issue any shares of preferred stock. REGISTRATION RIGHTS After this offering, the holders of 6,615,583 shares of common stock will be entitled to various rights with respect to the registration of such shares under the Securities Act due to the Registration Rights Agreement, dated as of July 23, 1998. Under the terms of this agreement, if we propose to register any of our securities under the Securities Act, either for our own account or for the account of other security holders exercising registration rights, the holders are entitled to notice of the registrations and are entitled, subject to limitations, to include shares in the registration. Holders representing not less than one third of the restricted shares then outstanding may require us to file a registration statement under the Securities Act with respect to their shares on two occasions, and we are required to use our best efforts to complete the registration. Further, the holders may require us to register their shares on Form S-3 when such form 47 51 becomes available to us. Generally, we are required to bear all registration expenses incurred in connection with any such registrations, other than any underwriting discounts and selling commissions. These rights are subject to conditions and limitations, among them, the right of the underwriters of an offering to limit the number of shares included in a registration. Pursuant to agreements with the underwriters of this offering, the holders entitled to these various registration rights have agreed to waive such rights for 180 days following the date of this prospectus. ANTI-TAKEOVER MEASURES Delaware Law We are governed by the provisions of Section 203 of the DGCL. In general, Section 203 prohibits a public Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless: - prior to the business combination our board of directors approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; or - upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, such stockholder owned at least 85% of our outstanding voting stock at the time such transaction commenced, excluding for the purpose of determining the number of shares outstanding those shares owned: -- by our officers and directors and -- by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or - at or subsequent to such time the business combination is approved by our board of directors and authorized at an annual or special meeting of our stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of our outstanding voting stock which is not owned by the interested stockholder. A "business combination" includes mergers, asset sales or other transactions resulting in a financial benefit to the stockholder. An "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years did own) 15% or more of the corporation's voting stock. The statute could have the effect of delaying, deferring or preventing a charge in our control or reducing the price that some investors might be willing to pay in the future for our common stock. Charter and Bylaw Provisions Our second restated certificate of incorporation to be effective upon consummation of the offering provides that any action required or permitted to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and may not be effected by any consent in writing. In addition, our bylaws restrict the ability of our stockholders to call a special meeting of stockholders. Our second restated certificate of incorporation also specifies that our board of directors will be classified, the authorized number of directors may be changed only by resolution of the board of directors and does not include a provision for cumulative voting for directors. Under cumulative voting, a minority stockholder holding a sufficient percentage of a class of shares may be able to ensure the election of one or more directors. These and other provisions contained in our second restated certificate of incorporation and 48 52 bylaws could delay or discourage certain types of transactions involving an actual or potential change in control of us or our management (including transactions in which stockholders might otherwise receive a premium for their shares over then current prices) and may limit the ability of stockholders to remove current management or approve transactions that stockholders may deem to be in their best interests and, therefore, could adversely affect the price of our common stock. THE NASDAQ STOCK MARKET'S NATIONAL MARKET We have applied to list our common stock on the Nasdaq National Market under the trading symbol "LXNT." TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is . 49 53 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no market for our common stock, and we cannot assure you that a significant public market for our common stock will develop or be sustained after this offering. As described below, no shares currently outstanding will be available for sale immediately after this offering due to certain contractual restrictions on resale. Sales of substantial amounts of our common stock in the public market after the restrictions lapse could adversely affect the prevailing market price and our ability to raise equity capital in the future. Upon completion of this offering, we will have outstanding shares of common stock, assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options or warrants. Of these shares, all of the shares sold in this offering will be freely tradable and transferable without restriction under the Securities Act unless purchased by our affiliates. The remaining shares of common stock held by existing stockholders are restricted securities. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration described below under Rules 144, 144(k) or 701 promulgated under the Securities Act. As a result of the lock-up agreements, described below, and the provisions of Rules 144, 144(k) and 701 described below, these restricted shares will be available for sale in the public market as follows: - shares may be sold prior to 180 days from the date of this prospectus; - shares will have been held long enough to be sold under Rule 144 or Rule 701 beginning 181 days after the effective date of this offering which we expect to be ; and - the remaining shares may be sold under Rule 144 or 144(k) once they have been held for the required time. Lock-Up Agreements. Certain of our stockholders and option holders have agreed not to transfer or dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for shares of our common stock, for a period of 180 days after the date of this prospectus. Transfers or dispositions can be made sooner with the prior written consent of Credit Suisse First Boston Corporation. Rule 144. In general, under Rule 144, a person who has beneficially owned restricted securities for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: - 1% of the number of shares of our common stock then outstanding which will equal approximately shares immediately after this offering; or - the average weekly trading volume of our common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. Sales under Rule 144 are also subject to manner-of-sale provisions and notice requirements and to the availability of current public information about us. Rule 144(k). However, a person who is not deemed to have been one of our affiliates at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144 discussed above. Rule 701. In general, under Rule 701, any of our employees, consultants or advisors who purchases or receives shares from us in connection with a compensatory stock purchase plan or option plan or other written agreement will be eligible to resell their shares beginning 90 days after the date of this prospectus. Non-affiliates will be able to sell their shares subject only to the manner-of-sale provisions of Rule 144. 50 54 Affiliates will be able to sell their shares without compliance with the holding period requirements of Rule 144. Registration Rights. Upon completion of this offering, the holders of 6,615,583 shares of our common stock will be entitled to rights with respect to the registration of their shares under the Securities Act. See "Description of Capital Stock -- Registration Rights." Pursuant to agreements with underwriters of this offering, the holders entitled to registration rights agreed to waive those rights for 180 days following the date of this prospectus. Except for shares purchased by affiliates, registration of their shares under the Securities Act would result in such shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. Stock Options. Immediately after this offering, we intend to file a registration statement under the Securities Act covering approximately shares for sale upon the exercise of outstanding stock options or shares reserved for future issuance pursuant to our stock option plan. The registration statement is expected to be filed and become effective as soon as practicable after the closing of this offering. Accordingly, shares registered under the registration statement will, subject to Rule 144 volume limitations applicable to affiliates, be available for sale in the open market beginning 180 days after the effective date of the registration statement of which this prospectus is a part. 51 55 UNDERWRITING Under the terms and subject to the conditions contained in the underwriting agreement dated 2000, we have agreed to sell to the underwriters named below, for whom Credit Suisse First Boston Corporation, Chase Securities Inc. and Raymond James & Associates, Inc. are acting as representatives, the following respective numbers of shares of common stock:
NUMBER UNDERWRITER OF SHARES - ----------- --------- Credit Suisse First Boston Corporation...................... Chase Securities Inc. ...................................... Raymond James & Associates, Inc. ........................... -------- Total..................................................... ========
The underwriting agreement provides that the underwriters are obligated to purchase all the shares of common stock in the offering, if any are purchased, other than those shares covered by the over-allotment option described below. The underwriting agreement also provides that, if an underwriter defaults, the purchase commitments of non-defaulting underwriters may be increased or the offering of common stock may be terminated. We have granted to the underwriters a 30-day option to purchase on a pro rata basis up to additional shares from us at the initial public offering price less the underwriting discounts and commissions. The option may be exercised only to cover any over-allotments of common stock. The underwriters propose to offer the shares of common stock initially at the public offering price on the cover page of this prospectus and to selling group members at that price less a concession of $ per share. The underwriters and the selling group members may allow a discount of $ per share on sales to other broker/dealers. After the initial public offering, the public offering price and concession and discount to dealers may be changed by the representatives. The following table summarizes the compensation and estimated expenses we will pay.
PER SHARE TOTAL -------------------------------- -------------------------------- WITHOUT WITH WITHOUT WITH OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT -------------- -------------- -------------- -------------- Underwriting discounts and commissions paid by us............ Expenses payable by us..............
The underwriters have informed us that they do not expect discretionary sales to exceed 5% of the shares of common stock being offered. We have agreed that we will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Securities and Exchange Commission a registration statement under the Securities Act relating to, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, or publicly disclose the intention to make any such offer, sale, pledge, disposition or filing, without the prior written consent of Credit Suisse First Boston Corporation for a period of 180 days after the date of this prospectus, except issuances pursuant to the exercise of employee stock options outstanding on the date hereof. Our officers and directors and certain other stockholders have agreed that they will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, enter into a transaction which would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of our common stock, whether any such aforementioned transaction is to be settled by delivery of our common stock or such other securities, in cash or otherwise, or publicly disclose the intention to make any such offer, sale, pledge 52 56 or disposition, or to enter into any such transaction, swap, hedge or other arrangement, without, in each case, the prior written consent of Credit Suisse First Boston Corporation for a period of 180 days. The underwriters have reserved for sale, at the initial public offering price, up to shares of the common stock offered hereby for employees, directors and certain other persons associated with us who have expressed an interest in purchasing common stock in the offering. The number of shares of common stock available for sale to the general public in the offering will be reduced to the extent these persons purchase the reserved shares. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares. We have agreed to indemnify the underwriters against liabilities under the Securities Act, or to contribute to payments which the underwriters may be required to make in that respect. We have applied to list our common stock on the Nasdaq National Market under the symbol "LXNT." Before this offering, there has been no public market for the common stock. The initial public offering price was determined by negotiation between the underwriters and us. The principal factors considered in determining the public offering price included the following: - the information set forth in this prospectus; - the history and the prospects for the industry in which we will compete; - the ability of our management; - the prospects for our future earnings; - the present state of our development and our current financial condition; - the general condition of the securities markets at the time of this offering; and - the recent market prices of, and the demand for, publicly traded common stock of generally comparable companies. A pricing committee of our board of directors established the initial public offering price following such negotiations. The representatives, on behalf of the underwriters, may engage in over-allotment, stabilizing transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Exchange Act. - Over-allotment involves syndicate sales in excess of this offering size, which creates a syndicate short position. - Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. - Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. - Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by such syndicate member is purchased in a stabilizing transaction or a syndicate covering transaction to cover syndicate short positions. These stabilizing transactions, syndicate covering transactions and penalty bids may cause the price of our common stock to be higher than it would otherwise be in the absence of these transactions. These transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. 53 57 NOTICE TO CANADIAN RESIDENTS RESALE RESTRICTIONS The distribution of the common stock in Canada is being made only on a private placement basis exempt from the requirement that we prepare and file a prospectus with the securities regulatory authorities in each province where trades of common stock are effected. Accordingly, any resale of the common stock in Canada must be made in accordance with applicable securities laws, which will vary depending on the relevant jurisdiction, and which may require resales to be made in accordance with available statutory exemptions or pursuant to a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the common stock. REPRESENTATIONS OF PURCHASERS Each purchaser of common stock in Canada who receives a purchase confirmation will be deemed to represent to us and the dealer from whom such purchase confirmation is received that: (i) the purchaser is entitled under applicable provincial securities laws to purchase such common stock without the benefit of a prospectus qualified under such securities laws, (ii) where required by law, the purchaser is purchasing as principal and not as agent, and (iii) the purchaser has reviewed the text above under "Resale Restrictions." RIGHTS OF ACTION (ONTARIO PURCHASERS) The securities being offered are those of a foreign issuer and Ontario purchasers will not receive the contractual right of action prescribed by Ontario securities law. As a result, Ontario purchasers must rely on other remedies that may be available, including common law rights of action for damages or rescission or rights of action under the civil liability provisions of the U.S. federal securities laws. ENFORCEMENT OF LEGAL RIGHTS All of our directors and officers as well as the experts named herein may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon us or these persons. All or a substantial portion of the assets of our company and these persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against our company or these persons in Canada or to enforce a judgment obtained in Canadian courts against our company or these persons outside of Canada. NOTICE TO BRITISH COLUMBIA RESIDENTS A purchaser of common stock to whom the Securities Act (British Columbia) applies is advised that the purchaser is required to file with the British Columbia Securities Commission a report within ten days of the sale of any common stock acquired by such purchaser pursuant to this offering. The report must be in the form attached to British Columbia Securities Commission Blanket Order BOR #95/17, a copy of which may be obtained from us. Only one report must be filed in respect of common stock acquired on the same date and under the same prospectus exemption. TAXATION AND ELIGIBILITY FOR INVESTMENT Canadian purchasers of common stock should consult their own legal and tax advisors for the tax consequences of an investment in the common stock in their particular circumstances and for the eligibility of the common stock for investment by the purchaser under relevant Canadian legislation. 54 58 LEGAL MATTERS Reboul, MacMurray, Hewitt, Maynard & Kristol will pass upon the validity of the shares of common stock offered by this prospectus and certain other legal matters. Simpson Thacher & Bartlett will pass upon certain legal matters for the underwriters. EXPERTS The consolidated financial statements of Lexent Inc. and its subsidiaries as of December 31, 1998, and 1999 and for each of the three years in the period ended December 31, 1999 have been included herein and in the registration statement in reliance upon the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in accounting and auditing. WHERE YOU CAN FIND ADDITIONAL INFORMATION ABOUT US We have filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act, with respect to the common stock offered by this prospectus. As permitted by the rules and regulations of the Commission, this prospectus, which is a part of the registration statement, omits certain information, exhibits, schedules and undertakings set forth in the registration statement. For further information pertaining to our company and the common stock offered hereby, reference is made to such registration statement and the exhibits and schedules thereto. Statements contained in this prospectus as to the contents or provisions of any contract or other document filed as an exhibit referred to herein are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the registration statement, each such statement being qualified in all respects by such reference. A copy of the registration statement may be inspected without charge at the office of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices located at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of all or any part of the registration statement may be obtained from such offices upon the payment of the fees prescribed by the SEC. For further information, please call the SEC at 1-800-SEC-0330. In addition, registration statements and certain other filings made with the commission through its Electronic Data Gathering, Analysis and Retrieval system, including our registration statement and all exhibits and amendments to our registration statements, are publicly available through the Commission's Website at http://www.sec.gov. As a result of this offering we will become subject to the information and reporting requirements of the Exchange Act and, in accordance therewith, will file periodic reports, proxy statements and other information with the Securities and Exchange Commission. 55 59 LEXENT INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Accountants........................... F-2 Consolidated Balance Sheets as of December 31, 1998 and 1999........................................................ F-3 Consolidated Statements of Income for the Years Ended December 31, 1997, 1998 and 1999............................ F-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1998 and 1999............................ F-5 Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the Years Ended December 31, 1997, 1998 and 1999........................................................ F-6 Notes to Consolidated Financial Statements.................. F-7
F-1 60 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Lexent Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, changes in stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Lexent Inc. and Subsidiaries at December 31, 1999 and December 31, 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /S/ PRICEWATERHOUSECOOPERS LLP New York, New York February 1, 2000 F-2 61 LEXENT INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, DECEMBER 31, 1998 1999 ------------ ------------ ASSETS: Current Assets: Cash...................................................... $ 1,495 $ 1,158 Receivables, net.......................................... 26,342 48,748 Prepaid expenses and other assets......................... 535 156 Deferred tax asset, net................................... 1,696 2,748 ------- ------- Total current assets................................... 30,068 52,810 ------- ------- Property and equipment, net................................. 2,087 6,180 Other assets................................................ 154 545 ------- ------- Total assets........................................... $32,309 $59,535 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT): Current Liabilities: Accounts payable.......................................... $ 5,369 $ 8,434 Accrued liabilities....................................... 4,149 9,700 Income taxes payable...................................... 3,076 5,711 Billings in excess of costs and estimated earnings on uncompleted projects................................... 306 1,084 Notes payable to bank..................................... 4,500 -- Subordinated notes payable to stockholder................. 1,582 1,582 Equipment and capital lease obligations................... 384 1,014 Due to related parties.................................... 11 432 ------- ------- Total current liabilities.............................. 19,377 27,957 ------- ------- Subordinated notes payable to stockholders.................. 7,114 5,533 Notes payable to banks...................................... -- 8,841 Equipment and capital lease obligations..................... 405 1,842 ------- ------- Total liabilities...................................... 26,896 44,173 ------- ------- Commitments and contingencies Redeemable convertible preferred stock at stated liquidation preference of $2.131 per share at 1998 and $2.2553 per share at 1999, $.001 par value, 5,538,458 shares authorized, issued and outstanding........................ 11,801 12,491 ------- ------- Stockholders' equity (deficit): Common stock, $.001 par value, 44,461,542 shares authorized, 15,144,400 and 15,279,400 shares outstanding at 1998 and 1999, respectively............. 15 16 Additional paid-in capital................................ 1,804 2,496 Retained earnings (accumulated deficit)................... (8,207) 359 ------- ------- Total stockholders' equity (deficit)................... (6,388) 2,871 ------- ------- Total liabilities and stockholders' equity............. $32,309 $59,535 ======= =======
See accompanying notes to consolidated financial statements. F-3 62 LEXENT INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, ------------------------------ 1997 1998 1999 ------- ------- -------- Revenues.................................................... $53,718 $70,959 $150,862 Cost of revenues............................................ 43,226 56,497 120,750 General, administrative and marketing expenses.............. 6,992 7,945 11,750 ------- ------- -------- Operating income............................................ 3,500 6,517 18,362 Interest expense............................................ 1,151 1,143 1,104 Other expense, net.......................................... 9 166 27 ------- ------- -------- Income before income taxes.................................. 2,340 5,208 17,231 Provision for income taxes.................................. 151 1,380 7,975 ------- ------- -------- Net income.................................................. $ 2,189 $ 3,828 $ 9,256 ======= ======= ======== Net income per share: Basic..................................................... $ 0.14 $ 0.23 $ 0.57 ======= ======= ======== Diluted................................................... $ 0.14 $ 0.22 $ 0.42 ======= ======= ======== Weighted average common shares outstanding: Basic..................................................... 15,144 15,144 15,147 ======= ======= ======== Diluted................................................... 15,144 17,593 21,862 ======= ======= ======== Pro forma information (unaudited): Income before income taxes................................ $ 2,340 $ 5,208 Pro forma provision for income taxes...................... 1,053 2,344 ------- ------- Pro forma net income...................................... $ 1,287 $ 2,864 ======= ======= Pro forma net income per common share (unaudited): Basic..................................................... $ 0.08 $ 0.16 $ 0.43 ======= ======= ======== Diluted................................................... $ 0.08 $ 0.16 $ 0.41 ======= ======= ======== Pro forma weighted average common shares outstanding: Basic..................................................... 15,144 18,016 21,690 ======= ======= ======== Diluted................................................... 15,144 18,016 22,578 ======= ======= ========
See accompanying notes to consolidated financial statements. F-4 63 LEXENT INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------- 1997 1998 1999 ------- -------- -------- Cash flows from operating activities: Net income................................................ $ 2,189 $ 3,828 $ 9,256 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for uncollectible amounts, net................ (102) 1,096 1,812 Depreciation and amortization........................... 510 779 1,495 Loss on disposition of assets........................... -- 42 71 Stock option compensation expense....................... -- -- 43 Provision for deferred taxes............................ -- (1,696) (1,052) Changes in working capital items: Accounts receivable including unbilled receivables and costs of uncompleted projects.................. 1,924 (13,854) (24,218) Prepaid expenses and other assets.................... (244) (1) (12) Accounts payable..................................... 962 658 3,065 Accrued liabilities.................................. 433 2,613 5,464 Income taxes payable................................. (147) 3,012 3,304 Billings in excess of costs and estimated earnings on uncompleted projects............................... (947) 110 778 ------- -------- -------- Net cash provided by (used in) operating activities....................................... 4,578 (3,413) 6 ------- -------- -------- Cash flows from investing activities: Acquisitions of property, plant and equipment, net of equipment loans and capital leases...................... (414) (910) (2,908) ------- -------- -------- Net cash used in investing activities.............. (414) (910) (2,908) ------- -------- -------- Cash flows from financing activities: Proceeds from issuance of convertible preferred stock..... -- 11,500 -- Proceeds from stock options exercised..................... -- -- 68 Issuance costs of convertible preferred stock............. -- (339) -- Proceeds from subordinated notes payable to shareholders............................................ -- 388 -- Repayment of subordinated notes payable to shareholder.... -- (1,902) (1,581) Borrowings under revolving credit agreement............... 100 -- 8,841 Repayment of notes payable to bank........................ -- -- (4,500) Dividends and distributions to common shareholders........ (212) (5,138) -- Net borrowings from (payments to) related parties......... (3,022) (599) 421 Repayment of equipment loans and capital leases........... (243) (404) (684) ------- -------- -------- Net cash provided by (used in) financing activities....................................... (3,377) 3,506 2,565 ------- -------- -------- Net increase (decrease) in cash............................. 787 (817) (337) Cash at beginning of year................................... 1,525 2,312 1,495 ------- -------- -------- Cash at end of year......................................... $ 2,312 $ 1,495 $ 1,158 ======= ======== ======== Supplemental cash flow information: Cash paid for: Interest................................................ $ 518 $ 1,626 $ 1,009 Income taxes............................................ 288 252 3,532 Supplemental disclosures of noncash investing and financing activities: Property, plant and equipment additions financed by equipment loans and capital leases...................... $ 423 $ 443 $ 2,751 Note payable issued to acquire treasury stock............. 10,210 -- -- Cancellation of treasury shares due to merger............. -- 8,818 -- Adjustment to common shares due to merger................. -- 85 -- Distributions to common shareholders included in due to related parties......................................... 238 -- -- Accrued dividends on preferred shares..................... -- 301 690 Tax benefit from exercise of nonqualified stock options... -- -- 582
See accompanying notes to consolidated financial statements. F-5 64 LEXENT INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS)
STOCKHOLDERS' EQUITY # SHARES ------------------------------------------------------------------------ REDEEMABLE REDEEMABLE RETAINED CONVERTIBLE CONVERTIBLE # SHARES ADDITIONAL EARNINGS TREASURY TOTAL PREFERRED PREFERRED COMMON COMMON PAID-IN (ACCUMULATED STOCK, STOCKHOLDERS' STOCK STOCK STOCK STOCK CAPITAL DEFICIT) AT COST EQUITY ----------- ----------- -------- ------ ---------- ------------ -------- ------------- Balance January 1, 1997.... -- $ -- 15,144 $100 $ -- $ 3,786 $ (91) $ 3,795 Purchase of common stock (14.5 shares)............ -- -- -- -- -- (1,483) (8,727) (10,210) Distributions to common stockholders............. -- -- -- -- -- (450) -- (450) Net income................. -- -- -- -- -- 2,189 -- 2,189 ----- ------- ------ ---- ------ ------- ------- -------- Balance at December 31, 1997..................... -- $ -- 15,144 $100 $ -- $ 4,042 $(8,818) $ (4,676) Conversion of Hugh O'Kane Electric Co. Inc. common shares into Lexent Inc. common shares............ -- -- -- (85) -- 85 -- -- Cancellation of treasury stock due to merger of Hugh O'Kane Electric Co. Inc. into Lexent Inc..... -- -- -- -- -- (8,818) 8,818 -- Dividends declared to common stockholders...... -- -- -- -- -- (4,900) -- (4,900) Net income January 1, 1998 through July 23, 1998.... -- -- -- -- -- 1,804 -- 1,804 Transfer of undistributed retained earnings to additional paid-in capital upon termination of S Corporation election................. -- -- -- -- 1,804 (1,804) -- -- Issuance of 5,538,458 redeemable convertible preferred shares at $2.07639 per share....... 5,538 11,500 -- -- -- -- -- -- Cost of issuing preferred shares................... -- -- -- -- -- (339) -- (339) Dividends accrued on preferred shares......... -- 301 -- -- -- (301) -- (301) Net income July 24, 1998 through December 31, 1998..................... -- -- -- -- -- 2,024 -- 2,024 ----- ------- ------ ---- ------ ------- ------- -------- Balance at December 31, 1998..................... 5,538 $11,801 15,144 $ 15 $1,804 $(8,207) $ -- $ (6,388) Issuance of 135,000 common shares................... -- -- 135 1 67 -- -- 68 Tax benefit from exercise of nonqualified stock options.................. -- -- -- -- 582 -- -- 582 Stock option compensation expense.................. -- -- -- -- 43 -- -- 43 Dividends accrued on preferred shares......... -- 690 -- -- -- (690) -- (690) Net income................. -- -- -- -- -- 9,256 -- 9,256 ----- ------- ------ ---- ------ ------- ------- -------- Balance at December 31, 1999..................... 5,538 $12,491 15,279 $ 16 $2,496 $ 359 $ -- $ 2,871 ===== ======= ====== ==== ====== ======= ======= ========
See accompanying notes to consolidated financial statements. F-6 65 LEXENT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FORMATION OF COMPANY Lexent Inc. ("Lexent"), formerly named National Network Technologies, Inc., was incorporated in Delaware in January 1998. Its wholly owned subsidiary, Hugh O'Kane Electric Co. LLC ("HOK LLC") was formed in June 1998. On July 16, 1998, Hugh O'Kane Electric Co., Inc. ("HOK Inc.") issued dividends aggregating $4.9 million in the form of promissory notes to its two principal common stockholders. On July 22, 1998, HOK Inc. was merged with and into Lexent, and Lexent issued 15,144,400 shares of common stock to the stockholders of the former HOK Inc. In addition on such date, substantially all of the assets of Lexent were contributed to HOK LLC, and HOK LLC assumed all of the obligations of the former HOK Inc. The merger was accounted for in a manner similar to a pooling of interests since all entities were under common control. Accordingly, HOK LLC recorded the assets and liabilities of HOK Inc. at their historical book values, and HOK LLC's results of operations have been presented as if the merger had occurred at the beginning of the earliest period presented. On July 23, 1998, Lexent sold 5,538,458 shares of preferred stock for cash proceeds of $11.5 million, and used 4.9 million of such proceeds to pay dividends to common stockholders and $2.6 million to pay portions of promissory notes to stockholders, with the balance of $4.0 million retained for general corporate purposes. Lexent's wholly owned subsidiary, National Network Technologies LLC ("NNT LLC") was formed in August 1998. Lexent, HOK LLC and NNT LLC are together referred to herein as "the Company". DESCRIPTION OF BUSINESS The Company provides outsourced local telecommunications network services to telecommunications companies by supplying expertise and resources to enable its customers to build and connect their networks to other telecommunications companies and individual end users. Certain projects whose duration is expected to exceed 90 days may be structured with milestone events that dictate the timing of payments, and customers for these projects may withhold 10% from each billing until after the project has been completed and satisfactorily accepted. The Company operates in cities in the Northeast and MidAtlantic regions, including Baltimore, Boston, Newark, New York, Philadelphia, Stamford and Washington, D.C. For the year 1999, a majority of revenues was earned from services provided in the New York metropolitan region, including New York City, New Jersey, Long Island and Westchester County. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Lexent and its wholly-owned subsidiaries, HOK LLC and NNT LLC. All significant intercompany accounts and transactions have been eliminated in consolidation. REVENUE AND COST RECOGNITION The Company's services are performed under unit price, fixed price, cost-plus-fee, or time and materials agreements. For projects whose duration is expected to be 90 days or less, revenues and related costs are recognized using the completed contract method. Under this method, revenues and costs are recognized when the project has been completed. For projects whose duration is expected to exceed 90 days, revenues are recognized using the percentage-of-completion method. Under the percentage-of-completion method, in each period revenues are recognized based on a comparison of the costs incurred for each project to the currently estimated F-7 66 LEXENT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) total costs to be incurred for the project. Accordingly, the revenue recognized in a given period depends on the costs incurred for individual projects through that period and currently estimated total remaining costs to complete the individual projects. If in any period the estimates of the total remaining costs to complete a project are significantly increased, very little or no additional revenue may be recognized with respect to that project. Project costs include all direct material, equipment, and labor costs and allocated indirect costs related to project performance, such as fringe benefits, payroll taxes, depreciation, maintenance, supplies, and small tools. Revenues from cost-plus-fee projects are recognized on the basis of costs incurred during the period plus the fee earned. General, administrative and marketing costs are charged to expense as incurred. Provisions for estimated losses on projects are made in the period in which such losses are determined. PROPERTY AND EQUIPMENT Property and equipment is stated at cost, less accumulated depreciation and amortization. Depreciation of property and equipment is calculated on the straight-line basis and accelerated methods over the estimated useful lives of the assets. Useful lives of property and equipment are as follows: motor vehicles - 5 years, tools and equipment - 7 years, furniture, office and computer equipment - 5 years, leasehold improvements - lesser of 3 years or duration of lease. Expenditures for repairs and maintenance are expensed as incurred; expenditures for major renewals and betterments are capitalized. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any gain or loss on disposition is reflected in current operations. Property and equipment is reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. The Company capitalizes the costs of purchased software and amortizes such costs over its estimated useful life of three years. Management does not believe that there are any material impairments at December 31, 1999. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates relate to realizability of accounts receivable including unbilled receivables and costs of uncompleted projects, percentages of completion of projects in progress, contracts, property and equipment and accrued expenses. Actual results could differ from those estimates. INCOME TAXES The Company recognizes deferred income taxes for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense consists of the tax payable for the period and the change during the period in deferred tax assets and liabilities. F-8 67 LEXENT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) STOCK-BASED COMPENSATION The Company accounts for stock-based compensation in accordance with SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 permits entities to recognize the fair value of all stock-based awards on the date of grant as expense over the vesting period or allows entities to apply the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Under APB No. 25 compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price, with pro forma net income disclosures as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash, accounts receivable, accounts payable, and accrued expenses approximate fair value due to the short-term nature of these instruments. The carrying amounts reported for the equipment obligations approximate fair value because the underlying instruments earn interest at rates comparable to current terms offered to the Company for instruments of similar risk. The carrying amounts reported for the notes payable to banks approximate fair value because the interest rate on such notes fluctuates with the prime rate. The fair values of subordinated notes payable to stockholders are not estimable due to their related party nature. SEGMENT REPORTING All of the Company's business activities are aggregated into one reportable segment given the similarities of economic characteristics between the activities and the common nature of the Company's services and customers. RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, which requires entities to capitalize certain cost related to internal-use software once certain criteria have been met. In April 1998, the same committee issued Statement of Position 98-5, Reporting on the Costs of Start-Up Activities. These standards are effective for the first quarter of the year 1999. The adoption of these standards did not have a material effect on our consolidated financial statements. NET INCOME PER SHARE Basic net income per share is computed by dividing net income (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 F-9 68 LEXENT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) shares outstanding for each period. Options granted in 1998 were anti-dilutive and are therefore excluded from the calculation below. Details of the calculation are as follows:
YEAR ENDED DECEMBER 31, -------------------------- 1997 1998 1999 ------ ------ ------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NET INCOME PER SHARE -- BASIC: Net Income............................................... $2,189 $3,828 $9,256 Less: preferred dividends................................ -- (301) (690) ------ ------ ------ Net income available to common shareholders.............. $2,189 $3,527 $8,566 ====== ====== ====== Weighted average shares -- basic......................... 15,144 15,144 15,147 ====== ====== ====== Net Income per share -- basic............................ $ 0.14 $ 0.23 $ 0.57 ====== ====== ====== NET INCOME PER SHARE -- DILUTED: Net Income............................................... $2,189 $3,828 $9,256 ====== ====== ====== Weighted average shares outstanding...................... 15,144 15,144 15,147 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.................................................. -- 2,448 5,827 Dilutive effect of stock options......................... -- -- 888 ------ ------ ------ Weighted average shares -- diluted....................... 15,144 17,593 21,862 ====== ====== ====== Net income per share -- diluted.......................... $ 0.14 $ 0.22 $ 0.42 ====== ====== ======
RECLASSIFICATIONS Certain prior period amounts have been reclassified to conform to the current year presentation. PRO FORMA INFORMATION -- (UNAUDITED) Pro forma information included in the consolidated statements of income for the years 1997 and 1998 reflects the pro forma effect of providing income taxes on previously untaxed subchapter "S" income before taxes. This pro forma effect is calculated assuming a 45% effective tax rate. Pro forma information for the years 1998 and 1999 reflects the pro forma effect of the conversion of redeemable convertible preferred stock into common stock upon the consummation of the Company's initial public offering at the conversion rate of 1.1814 shares of common stock for each share of redeemable convertible preferred stock. The pro forma basic and diluted weighted average share F-10 69 LEXENT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) calculations reflect the conversion of redeemable convertible preferred stock at the later of the beginning of the period presented or the date of issuance of the redeemable convertible preferred stock, at such conversion rate. The calculation of pro forma basic and diluted income per share after giving effect to the foregoing assumptions is as follows:
YEAR ENDED DECEMBER 31, -------------------------- 1997 1998 1999 ------ ------ ------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) PRO FORMA NET INCOME PER SHARE -- BASIC: Pro forma net income..................................... $1,287 $2,864 $ -- ------ ------ ------ Actual net income........................................ $ -- $ -- $9,256 ====== ====== ====== Weighted average shares - actual......................... 15,144 15,144 15,147 Assumed conversion of preferred stock at 1.1814 common shares for each share of redeemable convertible preferred stock........................................ -- 2,872 6,543 ------ ------ ------ Pro forma weighted average shares -- basic............... 15,144 18,016 21,690 ====== ====== ====== Pro forma net income per share -- basic.................. $ 0.08 $ 0.16 $ 0.43 ====== ====== ====== PRO FORMA NET INCOME PER SHARE -- DILUTED: Adjustments to basic weighted average shares for outstanding options.................................... -- -- 888 ------ ------ ------ Pro forma weighted average shares -- diluted............. 15,144 18,016 22,578 ====== ====== ====== Pro forma net income per share -- diluted................ $ 0.08 $ 0.16 $ 0.41 ====== ====== ======
2. RECEIVABLES, NET
DECEMBER 31, DECEMBER 31, 1998 1999 ------------ ------------ (IN THOUSANDS) Accounts receivable -- billed to customers................. $18,567 $30,226 Unbilled receivables on completed projects accounted for under the completed contract method...................... 3,883 4,908 Costs and estimated earnings in excess of billings on projects accounted for under the percentage-of-completion method................................................... 1,832 3,858 Unbilled receivables on cost-plus contracts................ -- 6,066 Costs of uncompleted projects accounted for under the completed contract method................................ 3,116 6,138 Retainage.................................................. 734 1,154 ------- ------- 28,132 52,350 Less: allowance for uncollectible amounts.................. (1,790) (3,602) ------- ------- $26,342 $48,748 ======= =======
For the years ended December 31, 1997, 1998 and 1999 the Company's provision for uncollectible amounts were $0.5 million, $1.6 million and $2.4 million, respectively. The amounts written off against the provision for those years were $0.6 million, $0.5 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. F-11 70 LEXENT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, DECEMBER 31, 1998 1999 ------------ ------------ (IN THOUSANDS) Motor vehicles............................................. $ 2,672 $ 5,069 Tools and equipment........................................ 846 2,171 Office equipment and furniture............................. 205 640 Computer equipment......................................... 336 1,059 Leasehold improvements..................................... 179 363 Purchased software......................................... 167 383 ------- ------- Property, plant and equipment............................ 4,405 9,659 Less: accumulated depreciation and amortization............ (2,318) (3,479) ------- ------- Property, plant and equipment, net....................... $ 2,087 $ 6,180 ======= =======
Depreciation and amortization expense for the years ended December 31, 1997, 1998 and 1999 was $0.5 million, $0.8 million, and $1.5 million, respectively. Accumulated amortization at December 31, 1999 included $0.1 million related to capitalized leases -- see Note 9 of Notes to Consolidated Financial Statements for further information. 4. NOTES PAYABLE AND OTHER FINANCING ARRANGEMENTS At December 31, 1999, the Company had notes payable to banks aggregating $8.8 million under a $12.5 million collateralized revolving credit facility, with substantially all assets of the Company pledged as collateral. The credit facility expires in June 2002. Borrowings bear interest at the banks' prime rate plus 0.25% (8.75% at December 31, 1999). The Company must meet certain covenants related to earnings and interest coverage. In addition, the credit agreement prohibits the Company from declaring or paying dividends, incurring additional indebtedness other than for equipment obtained in the ordinary course of business, and making acquisitions of other businesses in excess of $250,000 in any calendar year. The bank loans are partially guaranteed by the Company's two principal common stockholders up to a maximum of $1.5 million each. As of December 31, 1999, the Company was in compliance with all covenants under the credit agreement. At December 31, 1998 the Company had two unsecured notes payable to a bank aggregating $4.5 million. The notes were guaranteed by the Company's common stockholders and bore interest at the bank's prime rate (7.75% at December 31, 1998). The notes were repaid in June 1998 from proceeds of the collateralized revolving credit facility mentioned above. At December 31, 1998 and 1999, the Company had $0.8 million and $2.2 million, respectively, of installment loans payable, primarily related to its fleet of vehicles. Of those amounts, $0.4 million and $0.7 million, respectively, were classified as current, with the balance classified as noncurrent. The loans bear interest at rates ranging between 1.9% and 9.5%, have terms averaging three years, and are collateralized by the vehicles. At December 31, 1999 the Company had $0.7 million of capital lease obligations. See Note 9 of Notes to Consolidated Financial Statements for further information. F-12 71 LEXENT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following are the maturities of long-term debt (excluding capitalized lease obligations) for each of the next five years:
MATURITY AMOUNT -------- -------------- (IN THOUSANDS) 2000................................................... $ 714 2001................................................... 620 2002................................................... 9,372 2003................................................... 287 2004................................................... 43 ------- $11,036 =======
5. SUBORDINATED NOTES PAYABLE TO STOCKHOLDERS AND RELATED PARTY TRANSACTIONS SUBORDINATED NOTES PAYABLE TO STOCKHOLDERS On January 1, 1997, the Company repurchased common shares owned by a stockholder and issued a subordinated promissory note in the amount of $10.2 million. The note bears interest at the rate of 6%. The first payment on the note was made on July 23, 1998, at which time $1.5 million plus accrued interest was paid. The remaining balance is payable in twenty-two quarterly installments of $0.4 million plus accrued interest starting October 1, 1998, with the final payment due on January 1, 2004. As of December 31, 1998 and 1999, the outstanding principal balance of the note was $8.3 million and $6.7 million, respectively, of which $1.6 million is classified as current at both dates, and the balance is classified as non-current. The note is subordinated to all senior debt. As of December 31, 1999, the Company also had outstanding subordinated promissory notes payable to its two principal common stockholders in the aggregate amount of $0.4 million, which are classified as non-current. The notes bear interest at 6% and are subordinated to all senior debt. Payment of principal and interest on these notes is not permitted under the Company's bank credit agreement. RELATED PARTY TRANSACTIONS The Company leases several premises from entities which are owned by its principal common stockholders. Prior to 1998, the Company paid rent based on an informal arrangement with the stockholders. Such rent was insignificant for calendar year 1997. During 1998, the Company entered into a formal lease agreement for these premises. Annual rentals for office and warehouse premises at 88-90 White Street, New York, NY are $0.3 million for calendar years 1998 through 2001, and $0.4 million for calendar year 2002. Annual rentals for office and warehouse premises in South Plainfield, NJ are $0.1 million for the twelve-month periods April through March, commencing April 1998 through March 2008. At December 31, 1998 amounts payable by the Company to the foregoing related entities aggregated $0.1 million. Such amounts were paid during 1999. Periodically the Company's principal common stockholders advance money to the Company for its operating needs, and periodically the Company makes repayments of such advances. At December 31, 1998 a common stockholder owed the Company $0.1 million. At December 31, 1999, the amounts owed by the Company to its two principal common stockholders aggregated $0.2 million. At December 31, 1998, such amounts were insignificant. Such amounts bear interest at the rate of 6%, are not subordinated, and are classified as current because there are no formal repayment terms. During 1998 and 1999, the Company purchased services for total costs of $0.5 million and $1.4 million, respectively, from Metro Design Systems, Inc. ("MDS"), an entity which was owned by the F-13 72 LEXENT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company's principal common stockholders and a director of the Company. During 1997 such purchased services were insignificant. In September 1999, the Company acquired the plant and equipment, trade name, and goodwill of MDS for a purchase price of $0.2 million which was paid in cash. As of December 31, 1999 amounts payable by the Company to MDS amounted to $0.2 million. On July 20, 1998 the Company agreed to provide a former officer, who is currently a common stockholder, with a new automobile every three years and lifetime medical, dental and life insurance benefits consistent with his then-existing coverage, while he remains a stockholder of the Company. Costs incurred for such benefits are charged to expense as incurred, and were insignificant for the years 1998 and 1998. The Company has also agreed to pay its founder a pension of $0.1 million per year for life. Interest expense incurred by the Company from related parties during the years 1997, 1998 and 1999 amounted to $0.8 million, $0.6 million and $0.5 million, respectively. Accrued interest payable to related parties as of December 31, 1998 and 1999 was $0.1 million. 6. RETIREMENT PLANS AND 401K SAVINGS PLAN Until December 31, 1998, the Company had two noncontributory, defined contribution pension plans and a defined benefit pension plan covering all employees who are not subject to collective bargaining agreements. Contributions from the Company were accrued and funded annually. Those plans were terminated as of December 31, 1998, and the assets were distributed to the participants in January 1999. No pension expense was recorded for the year ended December 31, 1998, because the plans were fully funded at termination. Effective January 1, 1999, the Company adopted The Vanguard Group Prototype 401(k) Savings Plan, covering all employees who are not subject to collective bargaining agreements. Each covered employee is eligible to become a participant, and may contribute up to 15% of salary on a tax-deferred basis. The Company contributes 3% of each covered employee's salary up to the maximum annual amount permitted by IRS regulations. The Company's contributions vest ratably over the employees' first five years of service. For the year ended December 31, 1999, $0.2 million was charged to expense for the 401(k) plan. 7. INCOME TAXES The Company files a consolidated federal income tax return with its subsidiaries. The provision for income taxes consists of:
DECEMBER 31, --------------------------- 1997 1998 1999 ------ ------- ------ (IN THOUSANDS) Current: Federal....................................... $ -- $ 2,099 $7,950 State and local............................... 151 977 2,360 Deferred........................................ -- (1,696) (2,338) ------ ------- ------ Provision for income taxes...................... $ 151 $ 1,380 $7,975 ====== ======= ======
In July 1998, the Company's tax status was changed from an S corporation to a C corporation in connection with the transactions described in Note 1 of Notes to Consolidated Financial Statements. The difference between the expected federal income tax provision calculated using statutory rates and the actual provision recorded for the year ended December 31, 1998 is due principally to the effect of the F-14 73 LEXENT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company's change in tax status, the allowance for uncollectible amounts, depreciation and amortization, deferred costs on uncompleted projects and certain accrued liabilities. The components of deferred tax assets and liabilities are as follows:
DECEMBER 31, ---------------- 1998 1999 ------ ------ (IN THOUSANDS) Deferred tax assets: Allowance for uncollectible amounts...................... $ 498 $1,669 Deferred costs on uncompleted projects................... 643 858 Accrued liabilities...................................... 558 340 ------ ------ Total deferred tax assets............................. 1,699 2,867 ------ ------ Deferred tax liability: Depreciation and amortization............................ 3 119 ------ ------ Net deferred tax asset..................................... $1,696 $2,748 ====== ======
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based upon the level of historical taxable income and projections for future taxable income, management believes it is more likely than not that the Company will realize the deferred tax assets. As such, no valuation allowance was established during the years 1998 or 1999. A reconciliation of statutory federal income tax expense on the earnings from continuing operations is as follows:
1997 1998 1999 ------ ------ ----- Federal statutory rate applied to pre-tax income.......................................... 34.00% 34.00% 35.00% State taxes, net of federal benefit............... 11.39 11.46 10.40 Tax effect of non-deductible items................ 3.39 2.39 0.88 Effect on income from S corporation years......... (39.41) (22.65) -- ------ ------ ----- Total tax provision............................... 9.37% 25.20% 46.28% ====== ====== =====
8. CONTINGENCIES From time to time, the Company is involved in various lawsuits and legal proceedings which arise in the ordinary course of business. In addition, in August 1999, a former employee filed a charge of employment discrimination against the Company with the New York State Division of Human Rights and the Equal Employment Opportunity Commission and has been granted a right to sue in federal court. If suit is brought, Company's management is prepared to defend this claim vigorously. The Company believes that the resolution of these matters will not have a material impact on the Company's financial position, results of operations or liquidity. 9. LEASE COMMITMENTS The Company leases equipment, motor vehicles and real estate (other than real estate leased from related parties referred to in Note 5 of the Notes to Consolidated Financial Statements) under leases accounted for as operating leases for lease terms ranging from one to nine years. Total rent expense amounted to $0.4 million, $0.8 million and $1.8 million for the years ended December 31, 1997, 1998 and F-15 74 LEXENT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1999, respectively. Future minimum lease payments under operating leases as of December 31, 1999 are as follows:
AMOUNT -------------- (IN THOUSANDS) 2000................................................... $1,625 2001................................................... 1,427 2002................................................... 1,230 2003................................................... 670 2004................................................... 495 After 2004............................................. 354 ------ $5,801 ======
During 1999, the Company leased computer equipment under capital leases. As of December 31, 1999, the asset balance of such capital leases was $0.8 million, and accumulated amortization was $0.1 million. The weighted average interest rate for capitalized leases is 6.5%. The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of December 31, 1999:
AMOUNT -------------- (IN THOUSANDS) 2000................................................... $300 2001................................................... 291 2002................................................... 167 ---- Total minimum lease payments........................... 758 Less: amount representing interest..................... 97 ---- Present value of net minimum lease payments............ $661 ====
10. REDEEMABLE CONVERTIBLE PREFERRED STOCK On July 23, 1998, Lexent sold 5,538,458 shares of redeemable convertible preferred stock for proceeds of $11.5 million. Costs of $0.3 million incurred in connection with issuing such preferred stock were charged to stockholders' equity. The preferred stock is entitled to cumulative dividends at the rate of 6% per annum. At the option of the holders, dividends may be paid in the form of additional value of preferred stock or in cash. Dividends are payable in cash in the event of liquidation or redemption. The preferred stock is convertible into common stock at a conversion rate which increases to give effect to cumulative accrued dividends. For the years ended December 31, 1998 and 1999, dividends have been accrued as additional value of preferred stock in the amounts of $0.3 million and $0.7 million, respectively, offset by a charge to retained earnings (accumulated deficit). Conversion is automatic upon the closing of a public offering of common stock. If not otherwise converted into common stock, the preferred stock is redeemable over a three-year period at the option of the holders beginning July 23, 2003, or under certain circumstances, beginning July 23, 2001. The holders of the preferred stock have agreed that in the event a public offering of common stock is consummated, preferred dividends accrued through December 31, 1998 will be paid in the form of additional value of preferred stock, and preferred dividends accrued from January 1, 1999 through date of conversion will be paid in cash. Accordingly, assuming a public offering of common stock is consummated, the conversion rate will be 1.1814 shares common share for each share of preferred stock. F-16 75 LEXENT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. STOCK OPTIONS AND AWARDS The Company has adopted a Stock Option and Restricted Stock Purchase Plan, pursuant to which up to 5,800,000 common shares are available for option grants. Stock options granted under the plan may be incentive stock options or nonqualified stock options and are exercisable for up to ten years following the date of grant. Vesting provisions are determined by the Board of Directors on a case by case basis. Options granted become exercisable over periods ranging from immediately to up to four years after the date of grant. In July 1998, the Company issued 110,000 nonqualified options to an outside director as a finder's fee in connection with the Company's sale of preferred stock in July 1998. The fair value of the options at the date of grant was $0.2 million. The options vested immediately. Accordingly, the Company recorded a charge to retained earnings of $0.2 million in 1998 as a cost of issuing the preferred stock. In September 1998, the Company issued 50,000 options to an outside director. The vesting period of such options was 50% after the first year, with the balance vesting over the next three years. For options issued to outside directors, the Company's policy is to charge compensation expense over the vesting period in an amount equal to the fair value of the options at grant date as determined by the Board of Directors. For the years ended December 31, 1998 and 1999, such charge to compensation expense was immaterial. Stock option transactions are summarized below:
WEIGHTED AVERAGE FAIR VALUE OF WEIGHTED COMMON NUMBER OF AVERAGE STOCK AT DATE SHARES EXERCISE PRICE OF GRANT --------- -------------- ------------- Outstanding at December 31, 1997.............. -- -- Granted..................................... 380,000 $0.50 $0.50 Exercised or canceled....................... -- -- Outstanding at December 31, 1998.............. 380,000 $0.50 Granted..................................... 2,116,500 $3.90 $3.90 Exercised................................... (135,000) $0.50 Canceled.................................... -- -- --------- Outstanding at December 31, 1999.............. 2,361,500 $3.54 =========
The following table summarizes options outstanding and exercisable at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------- ---------------------------- WEIGHTED WEIGHTED WEIGHTED RANGE OF NUMBER AVERAGE AVERAGE NUMBER AVERAGE EXERCISE PRICES OUTSTANDING REMAINING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE - --------------- ----------- -------------- -------------- ----------- -------------- $0.50 - $1.52 1,661,500 9.1 $ 0.83 377,083 $ 0.74 $10.00 700,000 10.0 $10.00 200,000 $10.00 --------- ------- 2,361,500 $ 3.54 577,083 $ 3.95 ========= =======
For option grants to employees, the Company's policy is to grant options with an exercise price equal to the fair value per share of the underlying common stock at grant date, as determined by the Board of Directors. Accordingly, the Company is not required to record compensation expense in connection with grants of stock options to employees. If compensation expense had been determined based on the fair value of the options at grant date, consistent with the Black-Scholes option pricing methodology, the F-17 76 LEXENT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company's net income for the year ended December 31, 1999 would have decreased by approximately $0.2 million. In making that calculation, the following assumptions were used: Expected volatility factor.......................... 74.13% Risk-free interest rate............................. 6.04% Expected life:...................................... 4 years Expected dividend rate.............................. 0%
For purposes of pro forma disclosures, the estimated fair value of options at grant date is amortized to pro forma expense over the options' vesting period. Pro forma information for the year ended December 31, 1999 is as follows:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net income: As reported................................ $9,256 Pro forma.................................. $9,063 Basic and diluted net income per share as reported: Basic...................................... $ 0.57 Diluted.................................... $ 0.42 Basic and diluted pro forma net income per share: Basic...................................... $ 0.55 Diluted.................................... $ 0.41
12. ACCRUED LIABILITIES Accrued liabilities are comprised of:
DECEMBER 31, ------------------ 1998 1999 ------ ------ (IN THOUSANDS) Accrued payroll and related items........................... $2,704 $5,265 Accrued project costs....................................... 439 1,844 Other....................................................... 1,006 2,591 ------ ------ Total.................................................. $4,149 $9,700 ====== ======
13. CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the Company to credit risk consist primarily of cash and trade receivables. Cash balances may, at times, exceed amounts covered by FDIC insurance. The Company believes that it mitigates its risk by depositing cash balances with high quality financial institutions that it believes are financially sound. Recoverability is dependent upon the performance of the institution. Trade receivables are primarily short-term receivables from competitive local exchange carriers and generally well known contracting companies. To reduce credit risk, the Company performs credit evaluations of its customers but does not generally require collateral and, therefore, the majority of its trade receivables are unsecured. Credit risk is affected by conditions within the economy. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information. F-18 77 LEXENT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company believes concentration of credit risk with respect to accounts receivable is limited due to the large number of customers comprising the Company's customer base and their dispersion across geographic areas. For the year 1997, the Company had revenues from two separate customers, which comprised 21.2% and 10.3% of the Company's total revenues. At December 31, 1997, accounts receivable from these customers totaled $3.2 million and $0.9 million, respectively. For the year 1998, the Company had revenues from two separate customers, which comprised 16.4% and 12.7% of the Company's total revenues. At December 31, 1998, accounts receivable from these customers totaled $3.9 million and $2.6 million, respectively. For the year 1999, the Company had revenues from two separate customers, which comprised 25.7% and 13.2% of the Company's total revenues. At December 31, 1999, accounts receivable from these customers totaled $6.8 million and $3.6 million, respectively. F-19 78 [LEXENT LOGO] 79 PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the Registrant's expenses in connection with the issuance and distribution of the securities being registered. Except for the SEC Registration Fee and the National Association of Securities Dealers, Inc. ("NASD") Filing Fee, the amounts listed below are estimates:
AMOUNT TO BE PAID ------- SEC Registration Fee........................................ $22,770 NASD Filing Fee............................................. 9,125 Nasdaq Listing Fees......................................... * Legal Fees and Expenses..................................... * Blue Sky Fees and Expenses.................................. 10,500 Accounting Fees and Expenses................................ * Printing and Engraving...................................... * Transfer Agent and Register Fees and Expenses............... * Miscellaneous............................................... * ------- $ =======
- --------------- * To be provided by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company's Second Amended and Restated Certificate of Incorporation (the "Restated Certificate") provides that the Company shall indemnify to the fullest extent authorized by the Delaware General Corporation Law ("DGCL"), each person who is involved in any litigation or other proceeding because such person is or was a director or officer of the Company or is or was serving as an officer or director of another entity at the request of the Company, against all expense, loss or liability reasonably incurred or suffered in connection therewith. The Restated Certificate provides that the right to indemnification includes the right to be paid expenses incurred in defending any proceeding in advance of its final disposition; provided, however, that such advance payment will only be made upon delivery to the Company of an undertaking, by or on behalf of the director or officer, to repay all amounts so advanced if it is ultimately determined that such director is not entitled to indemnification. If the Company does not pay a proper claim for indemnification in full within 60 days after a written claim for such indemnification is received by the Company, the Restated Certificate and the Company's Bylaws authorize the claimant to bring an action against the Company and prescribe what constitutes a defense to such action. Section 145 of the DGCL permits a corporation to indemnify any director or officer of the corporation against expenses (including attorney's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with any action, suit or proceeding brought by reason of the fact that such person is or was a director or officer of the corporation if they acted in good faith and reasonably believed they were acting in the best interests of the corporation, and, with respect to any criminal action or proceeding, if he or she had no reason to believe his or her conduct was unlawful. In a derivative action, (i.e., one brought by or on behalf of the corporation), indemnification may be made only for expenses, actually and reasonably incurred by any director or officer in connection with the defense or settlement of such an action or suit, if such person acted in good faith and in a manner that he reasonably believed to be in, or not opposed to, the best interests of the corporation, except that no indemnification shall be made if such person shall have been adjudged to be liable to the corporation, unless and only to II-1 80 the extent that the court in which the action or suit was brought shall determine that the defendant is fairly and reasonably entitled to indemnity for such expenses despite such adjudication of liability. Pursuant to Section 102(b)(7) of the DGCL, the Restated Certificate eliminates the liability of a director to the corporation or its stockholders for monetary damages for such breach of fiduciary duty as a director, except for liabilities arising (i) from any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) from acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL, or (iv) from any transaction from which the director derived an improper personal benefit. The Company has obtained primary and excess insurance policies insuring the directors and officers of the Company against certain liabilities that they may incur in their capacity as directors and officers. Under such policies, the insurers, on behalf of the Company, may also pay amounts for which the Company has granted indemnification to the directors or officers. In addition, we have entered into indemnification agreements with each of our directors and executive officers. Additionally, reference is made to the Underwriting Agreement filed as Exhibit 1.1 hereto, which provides for indemnification by the Underwriters of the Company, its directors and officers who sign the Registration Statement and persons who control the Company, under certain circumstances. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since inception, the Company has sold and issued the following securities that were not registered under the Securities Act: 1. On July 23, 1998, pursuant to the terms of the merger in which Hugh O'Kane Electric Co. Inc. merged with and into the Company, the Company issued 15,144,400 shares of common stock to three former shareholders of Hugh O'Kane Electric Co., Inc. 2. On July 23, 1998, pursuant to the terms of an equity financing of the Company, the Company issued 5,538,458 shares of Series A Convertible Preferred Stock to two investors for $11.5 million. 3. During the period from July 23, 1998 through February 17, 2000, the Company granted either incentive stock options or non-qualified stock options to employees, officers, directors and other individuals eligible to participate in the Lexent Inc. and its Subsidiaries Stock Option and Restricted Stock Purchase Plan covering an aggregate of 3,691,500 shares of the Company's common stock. Pursuant to these grants, the Company has issued 465,625 shares of common stock upon the exercise thereof. 4. On February 17, 2000, pursuant to a common stock purchase agreement dated January 21, 2000, the Company issued 20,000 shares of common stock to a director of the Company for $200,000. The sale and issuance of the above securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the Securities Act, as transactions by an issuer not involving a public offering or transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under such Rule 701. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and instruments issued in such transactions. All recipients had adequate access, through their relationships with the Company, to information about the Company. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits II-2 81
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1.1* -- Form of Underwriting Agreement. 3.1 -- Amended and Restated Certificate of Incorporation of Registrant as amended. 3.2* -- Form of Registrant's Second Amended and Restated Certificate of Incorporation to be effective upon the consummation of this offering. 3.3 -- By Laws of Registrant. 3.4* -- Form of Registrant's Amended and Restated By-Laws to be effective upon the consummation of this offering. 4.1* -- Specimen certificate for shares of Common Stock. 4.2 -- Registration Rights Agreement, dated as of July 23, 1998, among Registrant and the investors named therein. 4.3 -- Stockholders Agreement, dated as of July 23, 1998, as amended January 13, 2000, among Registrant and the stockholders identified on Annex I thereto. 4.4 -- Agreement, dated July 20, 1998, by and among Registrant, Hugh O'Kane Electric Co., Inc. and Denis J. O'Kane. 4.5 -- Voting Agreement, dated February 11, 2000, by and among Registrant, Hugh J. O'Kane, Jr. and Kevin M. O'Kane. 5.1* -- Opinion of Reboul, MacMurray, Hewitt, Maynard & Kristol, with respect to the legality of securities being registered. 10.1* -- Lexent Inc. and Its Subsidiaries Amended and Restated Stock Option and Restricted Stock Purchase Plan. 10.2 -- Form of Stock Option Agreement pursuant to the Stock Option and Restricted Stock Purchase Plan. 10.3 -- Credit Agreement, dated as of June 29, 1999, as amended November , 1999, by and among Registrant and European American Bank, as Administrative Agent, and the lenders party thereto. 10.4 -- Amended and Restated Promissory Note, dated July 23, 1998, between Registrant and Denis J. O'Kane. 10.5* -- Form of Indemnification Agreement between Lexent Inc. and Directors thereof. 10.6 -- Employment Agreement, dated July 23, 1998, as amended February 14, 2000, between Hugh O'Kane Jr. and Registrant. 10.7 -- Employment Agreement, dated July 23, 1998, as amended February 14, 2000, between Kevin O'Kane and Registrant. 10.8 -- Employment Agreement, dated August 20, 1998, as amended February 14, 2000, between Jonathan H. Stern and Registrant. 10.9 -- Employment Agreement, dated December 13, 1999, between Joseph Haines and Registrant. 10.10 -- Employment Agreement, dated December 20, 1999, between Rif K. Haffar and Registrant. 10.11 -- Employment Agreement, dated December 23, 1999, between Victor P. DeJoy, Sr. and Registrant. 10.12 -- Employment Agreement, dated January 9, 2000, between Alf T. Hansen and Registrant. 10.14* -- Engineer, Procure and Construct Contract, dated December 28, 1998, between Level 3 Communications, LLC and Registrant. 11.1 -- Statement Regarding Computation of Per Share Earnings. 21.1 -- Subsidiaries of the Company. 23.1 -- Consent of PriceWaterhouseCoopers LLP, independent accountants.
II-3 82
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 23.2* -- Consent of Reboul, MacMurray, Hewitt, Maynard & Kristol (see Exhibit 5.1). 24.1 -- Power of Attorney (see Signature Page). 27.1 -- Financial Data Schedule.
- --------------- * To be filed by amendment. (b) Financial Statement Schedules All schedules are omitted because they are not required, are not applicable or the information is included in our financial statements or notes thereto. ITEM 17. UNDERTAKINGS (a) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described under "Item 14 -- Indemnification of Directors and Officers" above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (b) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) The undersigned Registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. II-4 83 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned thereunto duly authorized, on February 17, 2000. LEXENT INC. By: /s/ HUGH J. O'KANE, JR. ------------------------------------ Hugh J. O'Kane, Jr. Chairman of the Board of Directors POWER OF ATTORNEY AND SIGNATURES We the undersigned officers and directors of Lexent Inc., hereby severally constitute and appoint Hugh J. O'Kane, Jr. and Kevin M. O'Kane, and each of them singly (with full power to each of them to act alone), our true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution in each of them for him and in his name, place and stead, and in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement (or any other Registration Statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933), and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as full to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities held on the dates indicated.
SIGNATURES TITLE DATE ---------- ----- ---- /s/ ALF T. HANSEN President and Chief Executive February 17, 2000 - --------------------------------------------------- Officer (Principal Alf T. Hansen executive officer); Director /s/ JONATHAN H. STERN Executive Vice President and February 17, 2000 - --------------------------------------------------- Chief Financial Officer Jonathan H. Stern (Principal financial and accounting officer) /s/ HUGH J. O'KANE, JR. Chairman of the Board of February 17, 2000 - --------------------------------------------------- Directors Hugh J. O'Kane, Jr. /s/ KEVIN M. O'KANE Vice Chairman and Chief February 17, 2000 - --------------------------------------------------- Operating Officer Kevin M. O'Kane /s/ WALTER C. TEAGLE III Executive Vice President and February 17, 2000 - --------------------------------------------------- Director Walter C. Teagle III
II-5 84
SIGNATURES TITLE DATE ---------- ----- ---- /s/ PETER O. CRISP Director February 17, 2000 - --------------------------------------------------- Peter O. Crisp /s/ THOMAS W. HALLAGAN Director February 17, 2000 - --------------------------------------------------- Thomas W. Hallagan /s/ L. WHITE MATTHEWS Director February 17, 2000 - --------------------------------------------------- L. White Matthews /s/ RICHARD W. SMITH Director February 17, 2000 - --------------------------------------------------- Richard W. Smith
II-6 85 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1.1* -- Form of Underwriting Agreement. 3.1 -- Amended and Restated Certificate of Incorporation of Registrant as amended. 3.2* -- Form of Registrant's Second Amended and Restated Certificate of Incorporation to be effective upon the consummation of this offering. 3.3 -- By Laws of Registrant. 3.4* -- Form of Registrant's Amended and Restated By-Laws to be effective upon the consummation of this offering. 4.1* -- Specimen certificate for shares of Common Stock. 4.2 -- Registration Rights Agreement, dated as of July 23, 1998, among Registrant and the investors named therein. 4.3 -- Stockholders Agreement, dated as of July 23, 1998, as amended January 13, 2000, among Registrant and the stockholders identified on Annex I thereto. 4.4 -- Agreement, dated July 20, 1998, by and among Registrant, Hugh O'Kane Electric Co., Inc. and Denis J. O'Kane. 4.5 -- Voting Agreement, dated February 11, 2000, by and among Registrant, Hugh J. O'Kane, Jr. and Kevin M. O'Kane. 5.1* -- Opinion of Reboul, MacMurray, Hewitt, Maynard & Kristol, with respect to the legality of securities being registered. 10.1* -- Lexent Inc. and Its Subsidiaries Amended and Restated Stock Option and Restricted Stock Purchase Plan. 10.2 -- Form of Stock Option Agreement pursuant to the Stock Option and Restricted Stock Purchase Plan. 10.3 -- Credit Agreement, dated as of June 29, 1999, as amended November , 1999, by and among Registrant and European American Bank, as Administrative Agent, and the lenders party thereto. 10.4 -- Amended and Restated Promissory Note, dated July 23, 1998, between Registrant and Denis J. O'Kane. 10.5* -- Form of Indemnification Agreement between Lexent Inc. and Directors thereof. 10.6 -- Employment Agreement, dated July 23, 1998, as amended February 14, 2000, between Hugh O'Kane Jr. and Registrant. 10.7 -- Employment Agreement, dated July 23, 1998, as amended February 14, 2000, between Kevin O'Kane and Registrant. 10.8 -- Employment Agreement, dated August 20, 1998, as amended February 14, 2000, between Jonathan H. Stern and Registrant. 10.9 -- Employment Agreement, dated December 13, 1999, between Joseph Haines and Registrant. 10.10 -- Employment Agreement, dated December 20, 1999, between Rif K. Haffar and Registrant. 10.11 -- Employment Agreement, dated December 23, 1999, between Victor P. DeJoy, Sr. and Registrant. 10.12 -- Employment Agreement, dated January 9, 2000, between Alf T. Hansen and Registrant. 10.14* -- Engineer, Procure and Construct Contract, dated December 28, 1998, between Level 3 Communications, LLC and Registrant. 11.1 -- Statement Regarding Computation of Per Share Earnings.
86
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 21.1 -- Subsidiaries of the Company. 23.1 -- Consent of PriceWaterhouseCoopers LLP, independent accountants. 23.2* -- Consent of Reboul, MacMurray, Hewitt, Maynard & Kristol (see Exhibit 5.1). 24.1 -- Power of Attorney (see Signature Page). 27.1 -- Financial Data Schedule.
- --------------- * To be filed by amendment. EX-3.1 2 AMENDED & RESTATED CERT. OF INC. 1 Exhibit 3.1 CERTIFICATE OF AMENDMENT TO AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF LEXENT INC. --------------------------------- Under Sections 228 and 242 of the General Corporation Law of the State of Delaware --------------------------------- It is HEREBY CERTIFIED that: 1. The name of the corporation (hereinafter called the "Corporation") is Lexent Inc. 2. The amended and restated certificate of incorporation of the Corporation is hereby amended by striking out the number "4,800,000" appearing in the first clause of Section 6(c) of Article III thereof and by substituting in lieu of said number the number "5,800,000." 3. The amendment of the certificate of incorporation herein certified has been duly adopted and written consent has been given in accordance with the provisions of Sections 228 and 242 of the General Corporation Law of the State of Delaware. Signed on February 17, 2000 /s/ Kevin M. O'Kane --------------------- Kevin M. O'Kane Chief Operating Officer 2 STATE OF DELAWARE PAGE 1 OFFICE OF THE SECRETARY OF STATE -------------------------------- I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT OF "LEXENT INC.", FILED IN THIS OFFICE ON THE TWENTY-SEVENTH DAY OF JANUARY, A.D. 2000, AT 9 O'CLOCK A.M. A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE KENT COUNTY RECORDER OF DEEDS. [STATE OF DELAWARE SECRETARY OF STATE SEAL] /s/ Edward J. Freel ---------------------------------------- Edward J. Freel, Secretary of State 2850935 8100 AUTHENTICATION: 0222806 001042197 DATE: 01-28-00 3 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 09:00 AM 01/27/2000 001042197 - 2850935 CERTIFICATE OF AMENDMENT TO AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF LEXENT INC. --------------------------------- Under Sections 228 and 242 of the General Corporation Law of the State of Delaware --------------------------------- It is HEREBY CERTIFIED that: 1. The name of the corporation (hereinafter called the "Corporation") is Lexent Inc. 2. The amended and restated certificate of incorporation of the Corporation is hereby amended by (1) striking out Section 5(f) of Article III thereof and by substituting in lieu of said Section the following new Section: "(f) Notwithstanding anything contained herein to the contrary, in determining the Liquidation Amount for the purposes of this Section 5 only, in the event any Common Stock or any option or other security exercisable or convertible into, or exchangeable for, Common Stock, or any right to acquire any such options or other securities (each such share of Common Stock, option, security or right, an "Incentive Security") is issued, granted or awarded pursuant to any Corporation incentive compensation plan, the Liquidation Amount shall be increased (or decreased in accordance with clause (i) or (ii) hereof, as the case may be) by MULTIPLYING the Liquidation Amount immediately prior to such issuance, grant or award by the sum of one plus the quotient of the number of shares of Common Stock awarded or for which such Incentive Security is (directly or indirectly) exercisable, convertible or exchangeable, divided by the total amount of Common Stock on a fully diluted basis (excluding any Common Stock issued or issuable upon conversion of Series A Preferred Stock) outstanding immediately prior to such issuance, grant or award; provided that: 4 (i) on any change in the number of shares of Common Stock deliverable upon the exercise, conversion or exchange of any such Incentive Security (other than a change resulting from the antidilution provisions thereof), the Liquidation Amount shall forthwith be readjusted to such Liquidation Amount as would have been obtained had the adjustment made upon the issuance of such Incentive Securities (or such portion thereof as may then be outstanding) been made upon the basis of such change; and (ii) on the expiration, forefeiture or termination of any such Incentive Securities, the Liquidation Amount shall forthwith be readjusted to such Liquidation Amount as would have been obtained had the adjustment made upon the issuance of such Incentive Securities been made upon the basis of the issuance of only that portion of such Incentive Securities as were actually exercised or converted into, or exchanged for, shares of Common Stock prior to such expiration, forfeiture or termination; and provided further that the provisions of this Section 5(f) are intended to permit increases to the Liquidation Amount only in respect of Incentive Securities representing a maximum 2,288,000 shares (as adjusted equitably for stock dividends, stock splits, combinations, etc.) of Common Stock and, accordingly, nothing contained herein shall permit any further increase to the Liquidation Amount."; and (2) striking out the number "2,288,000" appearing in the first clause of Section 6(c) of Article III thereof and by substituting in lieu of said number the number "4,800,000." 4. The amendment of the certificate of incorporation herein certified has been duly adopted and written consent has been given in accordance with the provisions of Sections 228 and 242 of the General Corporation Law of the State of Delaware. Signed on January 20, 2000 /s/ Kevin M. O'Kane ---------------------------------------- Kevin M. O'Kane Chief Operating Officer 5 STATE OF DELAWARE PAGE 1 OFFICE OF THE SECRETARY OF STATE I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT OF "NATIONAL NETWORK TECHNOLOGIES INC.", CHANGING ITS NAME FROM "NATIONAL NETWORK TECHNOLOGIES INC." TO "LEXENT INC.", FILED IN THIS OFFICE ON THE TWENTY-FIRST DAY OF OCTOBER, A.D. 1999, AT 9 O'CLOCK A.M. [STATE OF DELAWARE SECRETARY OF STATE SEAL] /s/ Edward J. Freel ----------------------------------- Edward J. Freel, Secretary of State 2850935 8100 AUTHENTICATION: 0114894 99151494 DATE: 12-02-99 6 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 09:00 AM 10/21/1999 991447119 - 2850935 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF NATIONAL NETWORK TECHNOLOGIES INC. --------------------------------- Under Sections 228 and 242 of the General Corporation Law of the State of Delaware --------------------------------- It is HEREBY CERTIFIED that: 1. The name of the corporation (hereinafter called the "Corporation") is National Network Technologies Inc. 2. The amended and restated certificate of incorporation of the Corporation is hereby amended by striking out Article I thereof and by substituting in lieu of said Article the following new Article: "ARTICLE I The name of the corporation is Lexent Inc. (the "Corporation")." 3. The amendment of the certificate of incorporation herein certified has been duly adopted and written consent has been given in accordance with the provisions of Sections 228 and 242 of the General Corporation Law of the State of Delaware. Signed on October 21, 1999 /s/ Kevin O'Kane ---------------------------------------- Kevin O'Kane, Secretary 7 PAGE 1 STATE OF DELAWARE OFFICE OF THE SECRETARY OF STATE -------------------------------- I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT OF "NATIONAL NETWORK TECHNOLOGIES INC.", FILED IN THIS OFFICE ON THE SEVENTEENTH DAY OF AUGUST, A.D. 1998, AT 11 O'CLOCK A.M. /s/ Edward J. Freel --------------------------------------- Edward J. Freel, Secretary of State [STATE OF DELAWARE SECRETARY OF STATE SEAL] 2850935 8100 AUTHENTICATION: 0114893 991514964 DATE: 12-02-99 8 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 11:00 AM 08/17/1998 981321269 - 2850935 CERTIFICATE OF AMENDMENT TO AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF NATIONAL NETWORK TECHNOLOGIES INC. The undersigned, Hugh J. O'Kane, Jr. and Kevin M. O'Kane, being the President and Secretary, respectively, of NATIONAL NETWORK TECHNOLOGIES INC. (the "Corporation"), a corporation organized and existing under the laws of the State of Delaware, on behalf of the Corporation, hereby certify as follows: FIRST The Corporation was organized under the name "National Network Services, Corp." on January 26, 1998. The Corporation thereafter changed its name to National Network Technologies Inc. The Corporation filed an Amended and Restated Certificate of Incorporation on July 20, 1998 (the "Amended and Restated Certificate of Incorporation"). SECOND Section 5(f) of Article III of the Amended and Restated Certificate of Incorporation of the Corporation is hereby amended to read in its entirety as follows: (a) Notwithstanding anything contained herein to the contrary, in determining the Liquidation Amount for the purposes of this Section 5 only, in the event any option, convertible or exchangeable security or contract right (each, an "Incentive Option") is issued, granted or awarded pursuant to any Corporation incentive compensation plan, the Liquidation Amount shall be increased (but in no event decreased) by MULTIPLYING the Liquidation Amount immediately prior to such issuance by the sum of one plus the quotient of the number of capital securities for which such Incentive Option is convertible or exercisable divided by the total amount of Common stock on a fully diluted basis (excluding any Common Stock issued or issuable upon conversion of Series A Preferred Stock) outstanding immediately prior to such issuance, grant or award; provided that: (i) on any change in the number of shares or exercise price of Common Stock deliverable upon exercise of any such Incentive Options, other than a change resulting from the antidilution provisions thereof, the Liquidation Amount shall forthwith be readjusted to such Liquidation Amount as would have obtained had the adjustment made upon the issuance of such options, rights or securities not converted prior to such change or options or rights related to such securities not converted prior to such change been made upon the basis of such change; and (ii) on the expiration or forfeiture of any such Incentive Options, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such Incentive Options, the Liquidation Amount shall forthwith be readjusted to such Liquidation Amount as would have been obtained had the adjustment made upon the issuance of such Incentive Options or rights related to such securities been made upon the basis of the issuance of only the number of shares of Common Stock. 9 actually issued upon the exercise of such Incentive Options, upon the conversion or exchange of such securities, or upon the exercise of the Incentive Options related to such Incentive Options and subsequent conversion or exchange thereof. THIRD This Amendment to the Amended and Restated Certificate of Incorporation was duly adopted in accordance with Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, this Certificate of Amendment has been signed by the duly authorized officers of this Corporation this 17th day of August, 1998. NATIONAL NETWORK TECHNOLOGIES INC. By: /s/ Hugh O'Kane ------------------------------ Hugh O'Kane President Attest: /s/ Kevin O'Kane - ---------------------- Kevin O'Kane Vice President and Secretary 10 STATE OF DELAWARE PAGE 1 OFFICE OF THE SECRETARY OF STATE I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF MERGER, WHICH MERGES: "HUGH O'KANE ELECTRIC CO. INC.", A NEW YORK CORPORATION WITH AND INTO "NATIONAL NETWORK TECHNOLOGIES INC." UNDER THE NAME OF "NATIONAL NETWORK TECHNOLOGIES INC.", A CORPORATION ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE, AS RECEIVED AND FILED IN THIS OFFICE THE TWENTY-SECOND DAY OF JULY, A.D. 1998, AT 1 O'CLOCK P.M. [STATE OF DELAWARE SECRETARY OF STATE SEAL] /s/ Edward J. Freel ___________________________________ Edward J. Freel, Secretary of State 2850935 8100M AUTHENTICATION: 0114892 991514964 DATE: 12-02-99 11 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 01:00 PM 07/22/1998 981284387 - 2850935 CERTIFICATE OF MERGER of HUGH O'KANE ELECTRIC CO. INC. (A NEW YORK CORPORATION) into NATIONAL NETWORK TECHNOLOGIES INC. (A DELAWARE CORPORATION) ____________________________ Under Section 252 of the General Corporation Law of the State of Delaware _____________________________ Pursuant to the provisions of Section 252 of the General Corporation Law of the State of Delaware (the "DGCL"), National Network Technologies Inc., a Delaware corporation ("NNTI"), into which Hugh O'Kane Electric Co. Inc., a New York Corporation ("O'Kane"), will merge with NNTI surviving, hereby certifies as follows: FIRST: The names of the constituent corporation are Hugh O'Kane Electric Co. Inc., a New York corporation, and National Network Technologies Inc., a Delaware corporation. SECOND: An Agreement and Plan of Merger dated as of June 23, 1998, between O'Kane and NNTI (referred to herein together as the "Corporations") has been approved, adopted, certified, executed and acknowledged by each of the Corporations in accordance with Section 252(c) of the DGCL. THIRD: The name of the surviving corporation is National Network Technologies Inc. FOURTH: The Certificate of Incorporation of NNTI was filed with the Department of State of the State of Delaware on January 26, 1998 under the name "National Network Services, Corp." A Certificate of Amendment to the Certificate of Incorporation of NNTI was filed on January 30, 1998, pursuant to which NNTI's name was changed to "National Network Technologies Inc." The Certificate of Incorporation of NNTI was further amended and restated and an Amended and Restated Certificate of Incorporation was filed on July 20, 1998, and this shall remain the Certificate of Incorporation for the surviving corporation. 1 12 FIFTH: The executed Agreement and Plan of Merger is on file at the office of NNTI located at 88 White Street, New York, New York 10013. SIXTH: A copy of the Agreement and Plan of Merger will be furnished by NNTI, on request and without cost, to any stockholder of either of the Corporations. SEVENTH: The authorized capital stock of O'Kane on the date hereof (immediately prior to the merger effected hereby) consists of 200 shares of Common Stock, no par value. IN WITNESS WHEREOF, NNTI has caused this Certificate of Merger to be executed on its behalf by its officer thereunto duly authorized, and the undersigned affirms its contents as true under penalty of perjury on July 20, 1998. NATIONAL NETWORK TECHNOLOGIES INC. (a Delaware corporation) By /s/ Kevin O'Kane ______________________________ Kevin O'Kane Vice President 2 13 PAGE 1 STATE OF DELAWARE OFFICE OF THE SECRETARY OF STATE I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE RESTATED CERTIFICATE OF "NATIONAL NETWORK TECHNOLOGIES INC.", FILED IN THIS OFFICE ON THE TWENTIETH DAY OF JULY, A.D. 1998, AT 1 O'CLOCK P.M. [STATE OF DELAWARE SECRETARY OF STATE SEAL] /s/ Edward J. Freel, Secretary of State --------------------------------------- Edward J. Freel, Secretary of State 2850935 8100 AUTHENTICATION: 0114891 991514964 DATE: 12-02-99 14 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 01:00 PM 01/20/1998 981280293 - 2850935 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION NATIONAL NETWORK TECHNOLOGIES INC. The undersigned, Hugh J. O'Kane, Jr. and Kevin M. O'Kane, being the President and Secretary, respectively, of National Networks Technologies Inc., a corporation organized and existing under the laws of the State of Delaware, on behalf of said corporation, hereby certify as follows: FIRST: The corporation (hereinafter, the "Corporation") was organized under the name "National Network Services, Corp." on January 26, 1998. The Corporation thereafter changed its name to National Network Technologies Inc. SECOND: The Certificate of Incorporation of the Corporation as in effect on the date hereof is hereby amended to read in its entirety as set forth on Exhibit A hereto. THIRD: This Amended and Restated Certificate of Incorporation was duly adopted in accordance with Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, we have executed this Certificate this 23rd day of June, 1998. /s/ Hugh J. O'Kane, Jr. ----------------------- President Attest: /s/ Kevin M. O'Kane ------------------- Secretary 15 EXHIBIT A ARTICLE I The name of the corporation is National Network Technologies Inc. (the "Corporation"). ARTICLE II The purpose for which the Corporation is organized is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. ARTICLE III The total number of shares of all classes of stock which the Corporation shall have authority to issue is 50,000,000, consisting of (a) 44,461,542 shares of Common Stock, par value $.001 per share (the "Common Stock"), and (b) 5,538,458 shares of Preferred Stock, par value $.001 per share (the ("Preferred Stock"), consisting of 5,538,458 shares of Series A Convertible Preferred Stock, par value $.001 per share (the "Series A Preferred Stock"). The designations, powers, preferences and relative, participating, optional or other special rights, and the qualifications, limitations and restrictions thereof in respect of the Series A Preferred Stock and the Common Stock are as follows: SERIES A PREFERRED STOCK 1. Dividends. (a) The holders of Series A Preferred Stock shall be entitled to receive, out of funds legally available for that purpose, dividends at the rate of 6% of the Base Amount for each 12-month period (or portion thereof) ending December 31, calculated on the basis of a year of 360 days comprised of twelve 30-day months. The "Base Amount" shall be $2.07639 per share of Series A Preferred Stock in respect of which the dividend is being calculated. Dividends on a share of Series A Preferred Stock shall be cumulative from the Original Issuance Date of such share, and shall be payable (i) when and if declared, (ii) upon the conversion of such share into Common Stock, (iii) upon a Liquidation or (iv) upon the redemption of such share, whichever shall be the first to occur. Dividends on the Series A Preferred Stock shall be payable in cash, if payable at a time specified in clause (i), (iii) or (iv), or in shares of Common Stock (pursuant to the terms of Section 5) if payable at the time specified in clause (ii) unless the holders of 75% of the Series A Preferred Stock then outstanding shall then agree with the Corporation in writing that such dividends shall be paid in each at such time. If the assets of the Corporation shall be 16 insufficient to pay the holders of Series A Preferred Stock in cash the full accrued and unpaid dividends to which they shall be entitled, at a time when such dividends are required to be paid in cash, the holders of Series A Preferred Stock shall share in any such payment of dividends on a pro rata basis in accordance with the total dividends that each such holder would have received had there been such sufficient assets. After payment of all dividends owing to holders of Series A Preferred Stock, such holders shall share ratably (on an as-converted basis) in any dividends thereafter paid on the Common Stock. (b) In the event the Corporation shall fail to pay in full all accrued dividends when due on all shares of Series A Preferred Stock, then the Corporation shall not thereafter declare or pay or set apart for payment any dividend or other distribution upon shares of Common Stock, or any other stock ranking on a parity with or junior to the Series A Preferred Stock as to dividends, until and unless such accrued but unpaid dividends have been paid in full. 2. Liquidation. Upon a Liquidation, after payment or provision for payment of the debts and other liabilities of the Corporation and all amounts which the holders of any class of capital stock ranking senior to the Series A Preferred Stock shall be entitled to receive upon such Liquidation, the proceeds the stockholders shall be entitled to receive, out of the remaining assets of the Corporation will be allocated as follows: (a) if such proceeds exceed $43 million: (i) first, to the holders of Series A Preferred Stock an amount per share equal to the Liquidation Amount; (ii) second, to the holders of Common Stock, $43 million minus the aggregate Liquidation Amount; (iii) third, to the holders of Series A Preferred Stock the greater of (x) an amount sufficient to assure a 20% IRR on the Original Issuance Price of each share of Series A Preferred Stock held by such holders and (y) such holders' pro rata portion of the remaining proceeds, which pro rata portion shall be determined based on the number of shares of Common Stock into which such holder's shares of Series A Preferred Stock are then convertible pursuant to Section 5; and (iv) if the proceeds are divided as set forth in Section Z(a)(iii)(x), then fourth, to the holders of Common Stock the remaining proceeds; or (b) if such proceeds are $43 million or less: (i) first, to the holders of Series A Preferred Stock, the aggregate Liquidation Amount; and (ii) second, to the holders of Common Stock, the remaining proceeds. If, upon any Liquidation, the assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the holders of Series A Preferred Stock the full -2- 17 Liquidation Amount to which they shall be entitled, the holders of Series A Preferred Stock shall share in any distribution of assets in accordance with such full Liquidation Amount (pro rata in accordance with the total Liquidation Amount that each such holder would have received had there been such sufficient assets.) 3. Redemption (a) Subject to Section 3(d) below, each holder of Series A Preferred Stock shall have the right to require the Corporation to redeem shares of Series A Preferred Stock held by such holder pursuant to the terms hereof. (i) Each holder of Series A Preferred Stock may elect to have its shares of Series A Preferred Stock redeemed under this Section 3(a) in the following amounts: (x) on or after the fifth anniversary of the Original Issuance Date, the first 1/3 of the then outstanding Series A Preferred Stock then held by such holder, (y) on or after the sixth anniversary of the Original Issuance Date, the next 1/3 of such Series A Preferred Stock (calculated on the basis of the number of shares of Series A Preferred Stock held by such holder on the fifth anniversary of the Original Issuance Date) and (z) on or after the seventh anniversary of the Original Issuance Date, the remaining Series A Preferred Stock. In the event any holder of Series A Preferred Stock elects to have all or part of its shares of Series A Preferred Stock redeemed (such amount, a "Redeemable Amount") pursuant to this Section 3(a)(i) and gives notice as required below, such holder shall be required to sell to the Corporation and the Corporation shall be obligated to redeem such Redeemable Amount in accordance with the terms of this Section 3(a)(i). (ii) Notwithstanding anything to the contrary contained in clause(i), if the Board does not actively support a Qualified Public Offering within 180 days after a request therefor by the holders of at least 75% of the then outstanding Series A Preferred Stock, which request is made at a time both (A) after the third anniversary of the Original Issuance Date and (B) when the market value of the Corporation, as determined by an independent appraiser reasonably acceptable to at least 85% of the members of the Board, exceeds $125 million, each holder of Series A Preferred Stock shall have the right to require the Corporation to redeem immediately all shares of its Series A Preferred Stock. If requested by the holders of at least 75% of the then outstanding Series A Preferred Stock, the Board shall select a reputable independent appraiser reasonably acceptable to at least 85% of the members of the Board. If such Board members are not able to agree upon such appraiser, which shall be an investment banking firm of national reputation not then engaged by the Corporation, within ten (10) business days after such request by the holders of at least 75% of the then outstanding Series A Preferred Stock, then the appraiser will be selected by an arbitrator located in the City of New York, New York selected by the American Arbitration Association (or if such organization ceases to exist, an arbitrator chosen by a court of competent jurisdiction.) The arbitrator shall select the investment banking firm (within ten (10) days after his appointment) from a list, jointly prepared by the Corporation and the requesting holders, of not more than six investment banking firms of national standing in the United States, of which no more than three may be named by the Corporation and no more than three may be named by the requesting holders. The arbitrator may consider, within the ten-day period allotted, arguments from the parties regarding which investment banking firm to choose, but the selection by the -3- 18 arbitrator shall be made in its sole discretion from the list of six. The Board and the requesting holders shall submit to the investment banking firm their respective determinations of the market value of the Corporation, and any supporting arguments and other data as they may desire, within ten (10) days of the appointment of the investment banking firm, and the investment banking firm, shall as soon as practicable thereafter, make its own determination of such market value based on the public sale of the Corporation's securities without regard to any discounting, including, without limitation, any discount for the fact that the securities being valued may be held by a minority stockholder of the Corporation. The determination by such investment banking firm shall be final and binding upon the parties. The Corporation shall pay the fees and expenses of the investment banking firm and arbitrators (if any) used to determine the valuation amount. If required by any such investment banking firm or arbitrator, the Corporation shall execute a retainer and engagement letter containing reasonable terms and conditions, including, without limitation, customary provisions concerning the rights of indemnification and contribution by the Corporation in favor of such investment banking firm or arbitrator and its officers, directors, partners, employees, agents and affiliates. Each holder electing redemption of its Series A Preferred Stock pursuant to Section 3(a)(i) or (ii) will provide the Company written notice of such election at least 30 days prior to the fifth anniversary of the Original Issuance Date or the forty-third month after the Original Issuance Date, as the case may be, and the Corporation shall redeem such shares of Series A Preferred Stock at the offices of the Corporation within 90 days. If the assets of the Corporation available for redemption of Series A Preferred Stock shall be insufficient to permit the payment of the full price required to be paid under this Section 3, then the holders of Series A Preferred Stock shall (in addition to their rights under Section 3(d) below) share ratably in any such redemption based on the respective number of shares that such holders own. (b) The price (the "Redemption Price") at which each share of Series A Preferred Stock is to be redeemed by the Corporation pursuant to this Section 3 shall be equal to the greater of (i) the Liquidation Amount of such share on the date of such redemption or (ii) the Fair Market Value of such shares of Series A Preferred Stock. On and after any date that the Corporation redeems shares of Series A Preferred stock pursuant to this Section 3, all rights in respect of the shares of Series A Preferred Stock to be redeemed, except the right to receive the Redemption Price, shall cease and terminate, and such shares shall no longer be deemed to be outstanding, whether or not the certificates representing such shares have been received by the Corporation. The conversion of any shares of Series A Preferred Stock into Common Stock shall have no effect on the Redemption Price payable in connection with the redemption of the shares of Series A Preferred Stock not so converted. (c) The number of shares of Series A Preferred Stock deemed to be held by the holders of the Series A Preferred Stock and to be redeemed pursuant to the terms of this Section 3 shall be adjusted on the same basis that the number of shares of Common Stock into which such shares of Series A Preferred Stock are convertible pursuant to the terms of Section 5 hereof is adjusted in accordance with the provisions of such Section 5; provided, however, that for purposes of calculating the Liquidation Amount only in connection with determining the Redemption Price pursuant to clause (i) of Section 3(b) above, the Base Amount shall be adjusted, as necessary, so that the proportionate aggregate Liquidation Amount shall be based on the number of shares of Series A Preferred Stock issued on the Original Issuance Date subject to adjustment pursuant to -4- 19 stock splits, reverse splits or other recapitalizations of only such shares of Series A Preferred Stock. (d) If the Corporation fails to redeem that portion of the Series A Preferred Stock when due in accordance with clause (x) of Section 3(a)(i), the entire Redeemable Amount (not theretofore redeemed) shall thereafter accrue dividends at the rate of 10% per annum. If the Corporation fails to redeem that portion of the Series A Preferred Stock when due in accordance with clause (y) of Section 3(a)(i), all Redeemable Series A Preferred Stock shall thereafter accrue dividends at the rate of 15% per annum. If the Corporation fails to redeem that portion of the Series A Preferred Stock when due in accordance with clause (z) of Section 3(a)(i), the entire Redeemable Amount (not theretofore redeemed) shall thereafter accrue dividends at the rate of 20% per annum. (e) For the purposes of this Section 3, "Fair Market Value" means, as of any date of determination, the fair value of each share of Series A Preferred Stock, determined as provided herein, without regard to any discount, including, without limitation, any discount for the fact (i) that such share is held by a minority stockholder of the Corporation, (ii) that there is no market for the Corporation's equity securities or (iii) that if there were a public market for such equity securities, such shares would be "restricted" as defined under Rule 144 promulgated under the Securities Act of 1933. At any time that the Fair Market Value per share of Series A Preferred Stock shall be required to be determined hereunder, the Board shall make a good faith determination (the "Board's Determination") of the fair value of each share of Series A Preferred Stock and provide to the holder with respect to whose shares of Series A Preferred Stock such determination is being made a written notice thereof, which notice shall set forth supporting data in respect of such calculation (the "Determination Notice"). The holder shall have 30 days following his or its receipt of the Determination Notice within which to deliver to the Corporation a written notice (the "Objection Notice") of his or its objection, if any, to the Board's Determination, which Objection Notice shall set forth the holder's good faith determination (the "Holder's Determination") of the fair market value of each share of Series A Preferred Stock. The failure by the holder to deliver the Objection Notice within such 30-day period shall constitute the holder's acceptance of the Determination Notice. Upon the timely delivery of an Objection Notice, the Corporation and the Holder shall attempt in good faith to arrive at an agreement with respect to the Fair Market Value per share of Series A Preferred Stock, which agreement shall be set forth in writing within 30 days following delivery of the Objection Notice. If the Corporation and the Holder are unable to reach an agreement within such 30-day period, the matter shall be referred for determination to a regionally or nationally recognized investment banking or valuation firm (the "Valuer") reasonably acceptable to the Corporation and the holder. The Corporation and the holder will cooperate with each other in good faith to select such Valuer. The Valuer may select the Board's Determination or the Holder's Determination as the Fair Market Value per share of Series A Preferred Stock or may select any other number or value. The Valuer's selection will be (i) furnished to the Corporation and the holder in writing and (ii) conclusive and binding upon the Corporation and the holder. The fees and expenses of the Valuer shall be split equally by the Corporation and the holder with respect to whose share(s) such determination relates. (f) Any communication or notice relating to redemption given pursuant to this Section 3 shall be sent by first-class certified mail, return receipt requested, postage prepaid, to the holders of record of shares of Series A Preferred Stock, at their respective addresses as the same shall -5- 20 appear on the books of the Corporation, or to the Corporation at the address of its principal, or registered office, as the case may be. At any time on or after the Redemption Date, the holders of record of shares of Series A Preferred Stock being redeemed in accordance with this Section 3 shall be entitled to receive the Redemption Price upon actual delivery to the Corporation or its agents of the certificates representing the shares to be redeemed. 4. Voting Rights. (a) In addition to the rights provided by law or in the Corporation's By-laws, each share of Series A Preferred Stock shall entitle the holder thereof to such number of votes as shall equal the number of shares of Common Stock into which such share of Series A Preferred Stock is then convertible pursuant to Section 5 at the record date for the determination of shareholders entitled to vote or, if no record date is established, at the date such vote is taken. The holders of Series A Preferred Stock shall be entitled to vote on all matters as to which holders of Common Stock shall be entitled to vote, in the same manner and with the same effect as such holders of Common stock, voting together with the holders of Common Stock as one class. (b) In addition to the other rights specified in this Section 4, until such time as fewer than one-third of the shares of Series A Preferred Stock issued and outstanding on the Original Issuance Date are outstanding, the holders of seventy-five percent of the shares of Series A Preferred Stock form time to time outstanding, voting separately as one class, shall at all times have the special and exclusive right to elect three directors to the Board. In any election of directors by the Series A Preferred Stock pursuant to this Section 4(b), each holder of Series A Preferred Stock shall be entitled to one vote for each share of Series A Preferred Stock held. The Corporation shall take all actions necessary to effectuate the terms and provisions of this Section 4(b). The special and exclusive voting rights of the holders of Series A Preferred Stock contained in this Section 4(b) may be exercised either at a special meeting of the holders of Series A Preferred Stock called as provided below, or at any annual or special meeting of the shareholders of the Corporation, or by written consent of such holders in lieu of a meeting. The directors to be elected pursuant to this Section 4(b) shall serve for a term extending from the date of their election and qualification until their respective successors have been elected and qualified. If at any time any directorship to be filled by the holders of Series A Preferred Stock pursuant to this Section 4(b) has been vacant for a period of 10 days, the Secretary of the Corporation shall, upon the written request of any holder of Series A Preferred Stock, call a special meeting of the holders of Series A Preferred Stock for the purpose of electing a director to fill such vacancy. Such meeting shall be held at the earliest practicable date, and at such place, as is specified in or determined in accordance with the By-laws of the Corporation. If such meeting shall not be called by the Secretary of the Corporation within 10 days after personal service of such written request on him or her, then any holder of Series A Preferred Stock may designate in writing one of their members to call such meeting at the expense of the Corporation, and such meeting may be called by such person so designated upon the notice required for annual meetings of shareholders and shall be held at such place as specified in such notice. Any holder of Series A Preferred Stock so designated shall have access to the stock books of the Corporation relating to Series A Preferred Stock for the purpose of calling a meeting of the stockholders pursuant to these provisions. At any meeting held for the purpose of electing directors as provided in this Section 4(b), the presence, in person or by proxy, of the holders of record of shares representing at least seventy-five percent of the voting power of the Series A Preferred -6- 21 Stock then outstanding shall be required to constitute a quorum of the Series A Preferred Stock for such election. A vacancy in the directorship to be elected by the holders of Series A Preferred Stock pursuant to this Section 4(b) may be filled only by vote or written consent in lieu of a meeting of the holders of at least seventy-five percent of the voting power of the Series A Preferred Stock. (c) Until such time as fewer than one-third of the shares of Series A Preferred Stock issued and outstanding on the Original Issuance Date are outstanding, the Corporation shall not, without the affirmative consent or approval of the holders of seventy-five percent of the shares of Series A Preferred Stock from time to time outstanding: (i) in any manner authorize, create, designate, issue or sell any class or series of capital stock (including any shares of treasury stock) or rights, options, warrants or other securities convertible into or exercisable or exchangeable for capital stock or any debt security which by its terms is convertible into or exchangeable for any equity security or has any other equity feature or any security that is a combination of debt and equity, which, in each case, as to the payment of dividends, distribution of assets or redemptions, including, without limitation, distributions to be made upon a Liquidation, is pari passu with or is senior to the Series A Preferred Stock or which in any manner adversely affects the holders of the Series A Preferred Stock; (ii) in any manner alter or change the terms, designations, powers, preferences or relative, participating, optional or other special rights, or the qualifications, limitations or restrictions, of the Series A Preferred Stock; (iii) reclassify the shares of any class or series of capital stock into shares of any class or series of capital stock (A) ranking, either as to payment of dividends, distributions of assets or redemptions, including, without limitation, distributions to be made upon a Liquidation, senior to or on a parity with the Series A Preferred Stock, or (B) which in any manner adversely affects the rights of the holders of the Series A Preferred Stock in their capacity as such; or (iv) take any action to cause any amendment, alteration or repeal of any of the provisions of (A) the Amended and Restated Certificate of Incorporation or (B) the By-laws of the Corporation, if such amendment, alteration or repeal would have an adverse effect on the rights of the holders of the Series A Preferred Stock. (v) approve or authorize any Liquidation or any recapitalization or reorganization of the Corporation or a material subsidiary thereof; (vi) approve or authorize the sale of all or substantially all of the assets of the Corporation or any material subsidiary thereof; (vii) approve or authorize any offering (public or otherwise) of any securities by the Corporation, other than under or in connection with Board-approved stock-based incentive or compensation plans for the benefit of directors, officers and/or key employees of the Corporation as permitted hereby; (viii) approve or authorize the commencement of any substantial new business by -7- 22 the Corporation or any material subsidiary thereof; (ix) approve or authorize the payment of any dividend or other distribution upon shares of capital stock other than the Series A Preferred Stock; (x) approve or authorize the payment of any single capital expenditure in excess of $500,000 during any 12-month period; (xi) approve or authorize the incurrence of any indebtedness or the issuance of any guarantee of any obligation of any other person or entity (other than a subsidiary) if the aggregate amount of the principal amount of such indebtedness and the principal amount of the indebtedness so guaranteed shall exceed $3,000,000 (not including, in any case, indebtedness to redeem capital stock of the Corporation or its predecessors or otherwise repay loans made to the Corporation by Stockholders of the Corporation, which obligations are, in each case, outstanding as of the Original Issuance Date); (xii) approve or authorize any change to any promissory note of the Company, its predecessor or any subsidiary issued to any of Denis O'Kane, Kevin O'Kane or Hugh O'Kane, Jr.; or (xiii) approve any new stock option or stock issuance plan for the benefit of employees or consultants of the Corporation or its subsidiaries, provided that the Board may establish a plan or plans to provide stock-based compensation and incentives if the aggregate number of shares of Common Stock available for issuance in respect of awards granted thereunder does not exceed 2,288,000 in the aggregate. 5. Conversion. (a) Upon the terms set forth in this Section 5, each holder of each share of Series A Preferred Stock shall have the right, at such holder's option, at any time and from time to time, to convert such share into the number of fully paid and nonassessable shares of Common Stock equal to the quotient obtained by dividing (A) the Liquidation Amount (which for the purposes of this Section 5 shall be subject to adjustment pursuant to Section 5(f) below) by (B) the Conversion Price (as defined below), as last adjusted and then in effect, by surrender of the certificate representing such share. The conversion price per share at which shares of Common Stock shall be issuable upon conversion of shares of Series A Preferred Stock (the "Conversion Price") shall be the Base Amount as adjusted pursuant to Section 5(e) below. The holder of any shares of Series A Preferred Stock may exercise the conversion right pursuant to this Section 5(a) by delivering to the Corporation the certificate for the shares to be converted, duly endorsed or assigned in blank or to the Corporation (if required by it), accompanied by written notice stating that the holder elects to convert such shares and stating the name or names (with address) in which the certificate or certificates for the shares of Common Stock are to be issued. Conversion shall be deemed to have been effected on the date when such delivery is made or upon the consummation of a Qualified Public Offering as provided below, if applicable (the "Conversion Date"). (b) Upon the consummation of a Qualified Public Offering and upon the terms set forth in this Section 5, each share of Series A Preferred Stock shall automatically be converted to that -8- 23 number of fully paid and nonassessable shares of Common Stock equal to the quotient obtained by dividing (A) the Liquidation Amount (which for the purposes of this Section 5 shall be subject to adjustment pursuant to Section 5(f) below) by (B) the Conversion Price, as last adjusted and then in effect. (c) As promptly as practicable after the conversion of any shares of Series A Preferred Stock into Common Stock under Section 5(a) or 5(b) above, the Corporation shall issue and deliver to or upon the written order of such holder, to the place designated by such holder, a certificate or certificates for the number of full shares of Common Stock to which such holder is entitled, and a cash amount in respect of any fractional interest in a share of Common Stock as provided in Section 5(d) below. The person in whose name the certificate or certificates for Common Stock are to be issued shall be deemed to have become a stockholder of record on the Conversion Date unless the transfer books of the Corporation are closed on that date, in which event such person shall be deemed to have become a stockholder of record on the next succeeding date on which the transfer books are open, but the Conversion Price shall be that in effect on the Conversion Date, and the rights of the holder of the shares of Series A Preferred Stock so converted shall cease on the Conversion Date. Upon conversion of only a portion of the number of shares covered by a certificate representing shares of Series A Preferred Stock surrendered for conversion, the Corporation shall issue and deliver to or upon the written order of the holder of the certificate so surrendered for conversion, at the expense of the Corporation, a new certificate covering the number of shares of Series A Preferred Stock representing the unconverted portion of the certificate so surrendered. (d) No fractional shares of Common Stock or scrip shall be issued upon conversion of shares of Series A Preferred Stock. The number of full shares of Common Stock issuable upon conversion of Series A Preferred Stock shall be computed on the basis of the aggregate number of shares of such Series A Preferred Stock to be converted. Instead of any fractional shares of Common Stock which would otherwise be issuable upon conversion of any such shares, the Corporation shall pay a cash adjustment in respect of such fractional interest in an amount equal to the product of (i) the price of one share of Common Stock as determined in good faith by the Board and (ii) such fractional interest. The holders of fractional interests shall not be entitled to any rights as stockholders of the Corporation in respect of such fractional interests. (e) The Conversion Price shall be subject to adjustment from time to time as follows: (i) If the Corporation shall, at any time or from time to time after the Original Issuance Date, issue any shares of Common Stock (or be deemed to have issued shares of Common Stock as provided herein), other than Excluded Stock, without consideration or for a consideration per share less than the Conversion Price for such Series A Preferred Stock, in effect immediately prior to the issuance of such Common Stock, then the Conversion Price, as in effect immediately prior to each such issuance, shall forthwith be lowered to a price equal to the quotient obtained by dividing: (A) an amount equal to the sum of (x) the total number of shares of Common Stock outstanding on a fully-diluted basis immediately prior to such issuance, multiplied by the Conversion Price in effect immediately prior to such issuance, and (y) the consideration received by the Corporation upon such issuance; by -9- 24 (B) the total number of shares of Common Stock outstanding on a fully-diluted basis immediately after the issuance of such Common Stock. (ii) For the purposes of any adjustment of the Conversion Price pursuant to clause (i) above, the following provisions shall be applicable: (A) In the case of the issuance of Common Stock for cash in a public offering or private placement, the consideration shall be deemed to be the amount of cash paid therefor after deducting therefrom any discounts, commissions or placement fees payable by the Corporation to any broker, investment banker, underwriter or placement agent in connection with the issuance and sale thereof. (B) In the case of the issuance of Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair market value thereof as determined in good faith by the Board of Directors of the Corporation, irrespective of any accounting treatment. (C) In the case of the issuance of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock, or options to purchase or rights to subscribe for such convertible or exchangeable securities except for options to acquire Excluded Stock: (1) the aggregate maximum number of shares of Common Stock deliverable upon exercise of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in Sections (e)(ii)(1) and 5(e)(ii)(2) above), if any, received by the Corporation upon the issuance of such options or rights plus the minimum purchase price provided in such options or rights for the Common Stock covered thereby; (2) the aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities, options, or rights were issued and for a consideration equal to the consideration received by the Corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the additional consideration, if any, to be received by the Corporation upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in Sections 5(e)(ii)(1) and 5(e)(ii)(2) above); (3) on any change in the number of shares or exercise price of Common Stock deliverable upon exercise of any such options or rights or conversions of or exchanges for such securities, other than a change resulting from the antidilution provisions thereof, the Conversion Price shall forthwith be readjusted to the -10- 25 Conversion Price as would have been obtained had the adjustment made upon the issuance of such options, rights or securities not converted prior to such change or options or rights related to such securities not converted prior to such change been made upon the basis of such change; and (4) on the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Price shall forthwith be readjusted to the Conversion Price as would have obtained had the adjustment made upon the issuance of such options, rights, securities or options or rights related to such securities been made upon the basis of the issuance of only the number of shares of Common Stock actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities, or upon the exercise of the options or rights related to such securities and subsequent conversion or exchange thereof. (D) No further adjustment of the Conversion Price adjusted upon the issuance of any such options, rights, convertible securities or exchangeable securities shall be made as a result of the actual issuance of Common Stock on the exercise of any such rights or options or any conversion or exchange of any such securities. (iii) If, at any time after the Original Issuance Date, the number of shares of Common Stock outstanding is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, following the record date for the determination of holders of Common Stock entitled to receive such stock dividend, subdivision or split-up, the Conversion Price shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of Series A Preferred Stock shall be increased in proportion to such increase in outstanding shares. (iv) If, at any time after the Original Issuance Date, the number of shares of Common Stock outstanding is decreased by a combination of the outstanding shares of Common Stock, then, following the record date for such combination, the Conversion Price shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of Series A Preferred Stock shall be decreased in proportion to such decrease in outstanding shares. (v) In the event of any capital reorganization of the Corporation, any reclassification of the stock of the Corporation (other than a change in par value or from par value to no par value or from no par value to par value or as a result of a stock dividend or subdivision, split-up or combination of shares), or any consolidation or merger of the Corporation, each share of Series A Preferred Stock shall after such reorganization, reclassification, consolidation, or merger be convertible into the kind and number of shares of stock or other securities or property of the Corporation or of the corporation resulting from such consolidation or surviving such merger to which the holder of the number of shares of Common Stock deliverable (immediately prior to the time of such reorganization, reclassification, consolidation or merger) upon conversion of such share of Series A Preferred Stock would have been entitled upon such -11- 26 reorganization, reclassification, consolidation or merger. The provisions of this clause shall similarly apply to successive reorganizations, reclassifications, consolidations or mergers. (vi) No adjustment in the Conversion Price shall be required unless such adjustment would require an increase or decrease of at least 0.1% in such Conversion Price; provided, that any adjustments not required to be made by virtue of this sentence shall be carried forward and taken into account in any subsequent adjustment. All calculations under Sections 5(c)(i) through 5(e)(v) above shall be made to the nearest one hundredth (1/100) of a cent or the nearest one tenth (1/10) of a share, as the case may be. (vii) In any case in which the provisions of this Section 5(e) shall require that an adjustment shall become effective immediately after a record date of an event, the Corporation may defer until the occurrence of such event (A) issuing to the holder of any share of Series A Preferred Stock converted after such record date and before the occurrence of such event the shares of capital stock issuable upon such conversion by reason of the adjustment required by such event in addition to the shares of capital stock issuable upon such conversion before giving effect to such adjustments, and (B) paying to such holder any amount in cash in lieu of a fractional share of capital stock pursuant to Section 5(d) above; provided, however, that the Corporation shall deliver to such holder an appropriate instrument evidencing such holder's right to receive such additional shares and such cash. (viii) Whenever the Conversion Price shall be adjusted as provided in Section 5(e)(iv), the Corporation shall make available for inspection during regular business hours, at its principal executive offices or at such other place as may be designated by the Corporation, a statement, signed by its chief executive officer, showing in detail the facts requiring such adjustment and the Conversion Price that shall be in effect after such adjustment. The Corporation shall also cause a copy of such statement to be sent by first class certified mail, return receipt requested and postage prepaid, to each holder of Series A Preferred Stock affected by the adjustment at such holder's address appearing on the Corporation's records. Where appropriate, such copy may be given in advance and may be included as part of any notice required to be mailed under the provisions of Section 5(e)(ix) below. (ix) If the Corporation shall propose to take any action of the types described in clauses (iii), (iv) or (v) of this Section 5(e), the Corporation shall give notice to each holder of shares of Series A Preferred Stock, in the manner set forth in Section 5(e)(vii) above, which notice shall specify the record date, if any, with respect to any such action and the date on which such action is to take place. Such notice shall also set forth such facts with respect thereto as shall be reasonably necessary to indicate the effect of such action (to the extent such effect may be known at the date of such notice) on the Conversion Price and the number, kind or class of shares or other securities or property which shall be deliverable or purchasable upon the occurrence of such action or deliverable upon conversion of shares of Series A Preferred Stock. In the case of any action which would require the fixing of a record date, such notice shall be given at least 20 days prior to the date so fixed, and in case of all other action, such notice shall be given at least 30 days prior to the taking of such proposed action. Failure to give such -12- 27 notice, or any defect therein, shall not affect the legality or validity of any such action. (x) The Corporation shall at all times keep reserved, free from preemptive rights, out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of Series A Preferred Stock, sufficient shares of Common Stock to provide for the conversion of all outstanding shares of Series A Preferred Stock. (xi) Without duplication of any other adjustment provided for in this Section 5, at any time the Corporation makes or fixes a record date for the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in securities other than shares of Common Stock, provision shall be make so that each holder of Series A Preferred Stock shall receive upon conversion thereof, in addition to the shares of Common Stock receivable thereupon, the number of securities of the Corporation which it would have received had its shares of Series A Preferred Stock been converted into shares of Common Stock on the date of such event and had such holder thereafter, during the period from the date of such event to and including the date of conversion, retained such securities receivable by it pursuant to this paragraph during such period, subject to the sum of all other adjustments called for during such period under this Section 5 with respect to the rights of such holder of Series A Preferred Stock. (f) Notwithstanding anything contained herein to the contrary, in determining the Liquidation Amount for the purposes of this Section 5 only, in the event any option, convertible or exchangeable security or contract right (each, an "Incentive Option") is issued, granted or awarded pursuant to any Corporation incentive compensation plan, the Liquidation Amount shall be increased (but in no event decreased) by dividing the Liquidation Amount immediately prior to such issuance by the fraction equal to one minus the quotient of the number of capital securities for which such Incentive Option is convertible or exercisable divided by the total amount of Common Stock (on a fully diluted basis) outstanding immediately prior to such issuance, grant or award; provided that: (i) on any change in the number of shares or exercise price of Common Stock deliverable upon exercise of any such Incentive Options, other than a change resulting from the antidilution provisions thereof, the Liquidation Amount shall forthwith be readjusted to such Liquidation Amount as would have obtained had the adjustment made upon the issuance of such options, rights or securities not converted prior to such change or options or rights related to such securities not converted prior to such change been made upon the basis of such change; and (ii) on the expiration or forfeiture of any such Incentive Options, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such Incentive Options, the Liquidation Amount shall forthwith be readjusted to such Liquidation Amount as would have been obtained had the adjustment made upon the issuance of such Incentive Options or rights related to such securities been made upon the basis of the issuance of only the number of shares of Common Stock actually issued upon the exercise of such Incentive Options, upon the conversion or exchange of such securities, or upon the exercise of the Incentive Options related to such Incentive Options and subsequent conversion or exchange thereof. -13- 28 6. Definitions. As used herein, the following terms shall have the following meanings: (a) "Board" shall mean the Board of Directors of the Corporation. (b) "Change of Control" shall mean any transaction or any event after the Original Issuance Date as a result of which (i) any one or more Persons acquires or for the first time controls or is able to vote (directly or through nominees or beneficial ownership) after the Original Issuance Date 40% or more of any class of stock of the Corporation outstanding at the time having power ordinarily to vote for directors of the Corporation or (ii) the control of more than 40% of the number of shares of Common Stock held by Persons on the Original Issuance Date has been transferred (including transfers by and among such Persons) since the Original Issuance Date in the aggregate. For purpose of this paragraph (b), "Common Stock" shall include shares of Common Stock issuable upon exercise of warrants, options and other rights to acquire Common Stock outstanding on the Original Issuance Date, whether or not at the time exercised or exercisable. (c) "Excluded Stock" means (i) up to 2,288,000 shares (as adjusted equitably for stock dividends, stock splits, combinations, etc.) of Common Stock available for issuance in respect of awards granted to directors, officers and employees of the Corporation or its subsidiaries under stock-based compensation and incentive plans approved by the Board, and (ii) shares of Common Stock issued upon conversion of shares of Series A Preferred Stock, including in the case of both (i) and (ii), any additional shares of Common Stock as may be issued by virtue of antidilution provisions, if any, applicable to such options, warrants or shares, as the case may be. (d) "IRR" means, with respect to shares of Series A Preferred Stock, the pre-tax, compounded annual internal rate of return realized thereon (i) assuming all such shares were purchased by one Person on the Original Issuance Date at a price equal to the Original Issuance Price and all such shares were held continuously by such Person from the dates of issuance through the date of the Liquidation and (ii) including, as a return on the shares of Series A Preferred Stock, any cash dividends, distributions or redemptions made by the Corporation in respect of such shares during such period (other than tax distributions). (e) "Liquidation" means (i) any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, other than any dissolution, liquidation or winding up in connection with any reincorporation of the Corporation in another jurisdiction, (ii) any merger of the Corporation with or into another corporation which such corporation survives the merger, (iii) a Change of Control or (iv) a sale of all or substantially all of the assets of the Corporation. (f) "Liquidation Amount" means as to each share of Series A Preferred Stock the Base Amount plus all accrued and unpaid dividends thereon through the date of payment of such amount to the holder thereof. (g) "Original Issuance Date" means the date of original issuance of the first share of the Series A Preferred Stock. -14- 29 (h) "Original Issuance Price" means $2.07639 per share of Series A Preferred Stock as issued on the Original Issuance Date. (i) "Qualified Public Offering" shall mean an underwritten public offering of shares of Common Stock registered pursuant to the Securities Act of 1933, as amended, that is approved by the holders of Series A Preferred Stock pursuant to Section 4(c) hereof. COMMON STOCK Each holder of shares of Common Stock shall be entitled to one vote for each share of Common Stock held on all matters as to which holders of Common Stock shall be entitled to vote. Except for and subject to those rights expressly granted to the holders of the Series A Preferred Stock, or except as may be provided by the laws of the State of Delaware, the holders of Common Stock shall have exclusively all other rights of stockholders including, but not by way of limitation, (a) the right to receive dividends, when and as declared by the Board of Directors of the Corporation out of assets legally available therefor, and (b) in the event of any distribution of assets upon a Liquidation or otherwise, the right to receive ratably and equally all the assets and funds of the Corporation remaining after the payment to the holders of shares of the holders of the Series A Preferred Stock of the specific amounts which they are entitled to receive, respectively, upon such Liquidation as herein provided. ARTICLE IV The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors, and the directors need not be elected by ballot unless required by the by-laws of the Corporation. ARTICLE V In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, the Board of Directors of the Corporation is expressly authorized to make, amend and repeal the By-Laws of the Corporation. ARTICLE VI A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (a) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (b) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (c) under Section 174 of the Delaware General Corporation Law, or (d) for any transaction from which the director derived any improper personal benefit. If the Delaware General Corporation Law is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. Any repeal or modification of this provision shall not adversely affect any right - 15 - 30 or protection of a director of the Corporation existing at the time of such repeal or modification. ARTICLE VII The address of the Corporation's registered office in the State of Delaware is 15 East North St., Dover, Delaware. The Corporation's registered agent at such address is XL Corporate Services, Inc. ARTICLE VIII Whenever a compromise or arrangement is proposed between the Corporation and its creditors or any class of them and/or between the Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the state of Delaware may, on the application in a summary way of the Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for the Corporation under the provisions of Section 279 of Title 8 of the Delaware Code, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, to be summoned in such matter as the said court directs. If a majority in number representing 3/4 in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of the Corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of or creditors, and/or on all the stockholders or class of stockholders, of the Corporation, as the case may be, and also on the Corporation. 16 EX-3.3 3 BY LAWS 1 EXHIBIT 3.3 ---------------------------------- AMENDED AND RESTATED BY-LAWS Effective as of June 23, 1998 ---------------------------------- ARTICLE I Offices Section 1. Registered Office. The registered office of the Corporation shall be in the City of Dover, County of Kent, State of Delaware, and the registered agent of the Corporation shall be XL Corporate Services, Inc., 15 East North Street, Dover, Delaware 19901, or such other agent within the State of Delaware as the Board of Directors of the Corporation shall select. Section 2. Other Officers. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II Meetings of Stockholders Section 1. Annual Meeting. The annual meeting of the stockholders of the Corporation for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held within six months following the close of each fiscal year of the Corporation, or on such other date as may be fixed from time to time by resolution of the Board of Directors, and at such place within or without the State of Delaware as shall be designated by the Board of Directors. Section 2. Special Meeting. Special meetings of the stockholders may be called by the holders of record of the Corporation's Series A Preferred Stock for the purpose or purposes, at the time or times, and in the manner, specified in the Certificate of Incorporation, and may be called for any purpose or purposes by the Chairman of the Board, if any, the President of the Corporation, a Supermajority of the Board of Directors (as defined in Section 7 of Article III) or the holders of more than fifty percent (50%) of the shares of stock of the Corporation issued and outstanding and entitled to vote thereat. Such meetings shall be held at such time and at such place within or without the State of Delaware as shall be specified in the notice of the meeting, provided that, a special meeting called for the purpose of filling a vacancy among the directors elected by the holders of record of Series A Preferred Stock in accordance with Section 12 of Article III shall be held at the earliest practicable date after notice thereof is given, not less than ten nor more than 60 days after such notice. 2 Section 3. Notice of Meetings. Notice of the place, date and time of the holding of each annual and special meeting of the stockholders and the purpose or purposes thereof shall be given personally or by mail in a postage prepaid envelope to each stockholder entitled to vote at such meeting, not less than ten nor more than 60 days before the date of such meeting, and, if mailed, it shall be directed to such stockholder at his address as it appears on the records of the Corporation, unless he shall have filed with the Secretary of the Corporation a written request that notices to him be mailed to some other address, in which case it shall be directed to him at such other address. Any such notice for any meeting other than the annual meeting of stockholders shall indicate that it is being issued at the direction of holders of record of Series A Preferred Stock, the Chairman of the Board, if any, the President, the Board of Directors or the stockholders, as applicable, which notice shall not be required to be given to any stockholder and who shall attend such meeting in person or by proxy and shall not, at the beginning of such meeting, object to the transaction of any business because the meeting is not lawfully called or convened, or who shall, either before or after the meeting, submit a signed waiver of notice, in person or by proxy. Unless the Board of Directors shall fix a new record date for an adjourned meeting, notice of such adjourned meeting need not be given if the time and place to which the meeting shall be adjourned are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than 30 days or, if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 4. Quorum. Except as otherwise required by law or the Certificate of Incorporation, at all meetings of the stockholders, the presence in person or by proxy of the holders of record of a majority of the shares of stock of the Corporation issued and outstanding and entitled to vote shall constitute a quorum for the transaction of any business. At any meeting held for the purpose of electing directors representing the holders of Series A Preferred Stock, the presence, in person or by proxy, of the holders of record of at least 80% of the voting power of the Series A Preferred Stock then issued and outstanding shall constitute a quorum for the transaction of such business. In the absence of a quorum, the holders of a majority of the shares of stock present in person or by proxy and entitled to vote or, if no stockholder entitled to vote is present, then any officer of the Corporation, may adjourn the meeting from time to time. At any such adjourned meeting at which a quorum may be present, any business may be transacted which might have been transacted at the meeting as originally called. Section 5. Organization. At each meeting of the stockholders, the Chairman of the Board, if any, or in his absence or inability to act, the President, or in his absence or inability to act, any person chosen by a majority of those stockholders present or represented, shall act as chairman of the meeting. The Secretary, or, in his absence or inability to act, an Assistant Secretary or any other officer appointed by the chairman of the meeting, shall act as secretary of the meeting and keep the minutes thereof. Section 6. Order of Business. The order of business at all meetings of the stockholders shall be as determined by the chairman of the meeting. Section 7. Voting. Except as otherwise provided by statute or the Certificate of Incorporation, at each meeting of the stockholders, each holder of record of shares of (a) Common Stock of the Corporation -2- 3 shall be entitled to one vote for every share of such stock standing in his name on the record of stockholders of the Corporation, and (b) Series A Preferred Stock of the Corporation shall be entitled to one vote for every share of Common Stock of the Corporation into which such shares of Series A Preferred are then convertible pursuant to the Certificate of Incorporation, in each case (i) on the date fixed by the Board of Directors as the record date for the determination of the stockholders who shall be entitled to notice of and to vote at such meeting; or (ii) if such record date shall not have been so fixed, then at the close of business on the day next preceding the day on which notice thereof shall be given; or (iii) if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. Except as otherwise specified in the Certificate of Incorporation or these By-laws, the holders of record of shares of Series A Preferred Stock or shares of Common Stock shall vote together as one class. Each stockholder entitled to vote at any meeting of stockholders may authorize another person or persons to act for him by a proxy signed by such stockholder or his attorney-in-fact. Any such proxy shall be delivered to the secretary of such meeting at or prior to the time designated in the order of business for so delivering such proxies. No proxy shall be valid after the expiration of three years from the date thereof, unless the proxy provides for a longer period. Every proxy shall be revocable at the pleasure of the stockholder executing it, except in those cases where an irrevocable proxy is permitted by law. Except as otherwise required by law, the Certificate of Incorporation or these By-Laws, any corporate action to be taken by vote of the stockholders shall be authorized by a majority of the total votes cast at a meeting of stockholders by the holders of shares present in person or represented by proxy and entitled to vote on such action, or, at any meeting held for the purpose of electing directors representing the holders of Series A Preferred Stock, by vote of the holders of record of at least 75% of the voting power of the Series A Preferred Stock then issued and outstanding. Unless required by statute, or determined by the chairman of the meeting to be advisable, the vote on any question need not be by written ballot. On a vote by written ballot, each ballot shall be signed by the stockholder voting, or by his proxy, if there be such proxy, and shall state the number of shares voted. Section 8. List of Stockholders. The officer who has charge of the stock ledger of the Corporation shall prepare and make, or shall cause to be prepared and made, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. -3- 4 Section 9. Inspectors. The Board of Directors may, in advance of any meeting of stockholders, appoint one or more inspectors to act at such meeting or any adjournment thereof. If inspectors shall not be so appointed or if any of them shall fail to appear or act, the chairman of the meeting may, and on the request of any stockholder entitled to vote thereat shall, appoint one or more inspectors. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The inspectors shall determine the number of shares outstanding, the number of shares represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the chairman of the meeting or any stockholder entitled to vote thereat, the inspectors shall make a report in writing of any challenge, request or matter determined by them and shall execute a certificate of any fact found by them. No director or candidate for the office of director shall act as inspector of an election of directors. Inspectors need not be stockholders. Section 10. Consent of Stockholders in Lieu of Meeting. Unless otherwise provided by the Certificate of Incorporation or by law, any action which is required or permitted to be taken at any meeting of stockholders may be taken without a meeting, without prior notice and without a vote, if a written consent setting forth the action so taken is signed by the holders of record of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. Section 11. Notice of Stockholder Business. At an annual meeting of stockholders, only such business shall be conducted as shall properly have been brought before the meeting. To be brought properly before an annual meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given as set forth in the Certificate of Incorporation or by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors or by the Chairman of the Board or the President of the Corporation or (c) otherwise properly brought before the meeting by a stockholder. For business to be brought properly before an annual meeting by a stockholder, the stockholder must have given timely notice thereof (as determined by the Board of Directors or otherwise pursuant to the Certificate of Incorporation) in writing to the Secretary of the Corporation. As used in this Section 11 of these By-Laws, the phrase "notice or prior public disclosure of the date of the meeting" shall mean notice or prior public disclosure of the date on which the meeting is originally scheduled to be called to order and shall not refer to notice or prior public disclosure of any date to which such meeting may be adjourned. A stockholder's notice to the Secretary shall set forth, as to each matter the stockholder proposes to bring before the annual meeting, (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address, as they appear on the Corporation's stock transfer books, of the stockholder proposing such business, and (iii) the class and number of shares of capital stock of the Corporation which are beneficially owned (such term being used in this Section 11 of these By-Laws with the meaning ascribed to such term in Rule 13d-3 of the rules under the Securities Exchange Act of 1934, as amended, as such Rule was in effect -4- 5 on July 1, 1990) by the stockholder. If the presiding officer of an annual meeting determines and declares that business was not properly brought before the meeting in accordance with this Section 11, any such business shall not be transacted. ARTICLE III BOARD OF DIRECTORS Section 1. General Powers. The property, business and affairs of the Corporation shall be managed by the Board of Directors. The Board of Directors may exercise all such authority and powers of the Corporation and do all such lawful acts and things as are not by statute or the Certificate of Incorporation or these By-Laws directed or required to be exercised or done by the stockholders. Section 2. Number, Term of Office, Qualifications and Election. The number of directors of the Corporation shall be at least seven, and shall otherwise be determined by the Board of Directors or the stockholders in accordance with the Certificate of Incorporation, unless there shall be no Series A Preferred Stock issued and outstanding, in which case the number of directors comprising the entire Board shall be one, or such other number as shall be determined from time to time by the Board of Directors. Until such time as specified in the Certificate of Incorporation, the holders of record of Series A Preferred Stock, voting as a class as specified herein and in the Certificate of Incorporation, shall be entitled to elect that number of directors as set forth in the Certificate of Incorporation (the "Series A Directors") and the holders of record of shares of Common Stock, voting as a class, shall be entitled to elect that number of directors as set forth in the Certificate of Incorporation (the "Common Directors"). At each annual meeting of stockholders, directors elected to succeed the directors whose terms expire at such annual meeting shall be elected to hold office for a term expiring at the next annual meeting. Directors need not be stockholders. Except as otherwise required by statute or the Certificate of Incorporation or these By-Laws, directors to be elected at each annual meeting of stockholders shall be elected by a plurality of the votes cast at the meeting by the holders of shares present in person or represented by proxy and entitled to vote for the election of such directors. Section 3. Annual Meeting. The Board of Directors shall meet for the purpose of organization, the election of officers and the transaction of other business, as soon as practicable after each annual meeting of the stockholders, on the same day and at the same place where such annual meeting shall be held or at such other time and place as the Board of Directors shall determine. Notice of such meeting need not be given. Such meeting may be held at any other time or place (within or without the State of Delaware) which shall be specified in a notice thereof given as hereinafter provided in Section 6 of this Article III, or in a waiver of notice thereof. Section 4. Regular Meetings. Regular meetings of the Board of Directors shall be held at such times and places within or without the State of Delaware as the Board of Directors may from time to time by resolution determine. If any day fixed for a regular meeting shall be a legal holiday at the place where the meeting is to be held, then the meeting which would otherwise be held on that day shall be held at the same -5- 6 hour on the next succeeding business day. Notice of regular meetings of the Board of Directors need not be given except as otherwise required by statute or these By-Laws. Section 5. Special Meetings. Special meetings of the Board of Directors may be called at any time by the Chairman of the Board, if any, the President or any three directors of the Corporation and shall be held at such time and at such place within or without the State of Delaware as shall be specified in the notice of meeting or waiver thereof. Section 6. Notice of Meetings. Notice of each special meeting of the Board of Directors (and of each regular meeting for which notice shall be required) shall be given by the Secretary as hereinafter provided in this Section 6, in which notice shall be stated the time and place of the meeting. Notice of each such meeting shall be delivered to each director, either personally or by telephone, telegraph, facsimile transmission, cable, or wireless, at least twenty-four hours before the time at which such meeting is to be held or shall be mailed to each director by first-class mail postage prepaid, addressed to him at his residence, or usual place of business, at least two days before the day on which such meeting is to be held. Notice of any such meeting need not be given to any director who shall, either before or after the meeting, submit a signed waiver of notice or who shall attend such meeting without objecting, at the beginning of such meeting, to the transaction of any business because the meeting is not lawfully called or convened. Except as otherwise specifically required by these By-Laws, a notice or waiver of notice of any regular or special meeting of the Board of Directors need not state the purpose or purposes of such meeting. Section 7. Quorum and Manner of Acting. A majority in number of each of the Series A Directors and the Common Directors, and, so long as the Company may be party to stockholders agreement requiring the holders of each of the Series A Preferred Stock and the Common Stock to elect a certain number of unaffiliated, unrelated directors (the "Independent Directors") among both the Series A Directors and the Common Directors, a majority in number of such Independent Directors (who shall also count for purposes of determining whether a majority of the class of directors to which they otherwise each belong is present) shall be present in person at any meeting of the Board of Directors in order to constitute a quorum for the transaction of business at such meeting, and, except as otherwise expressly required by statute, the Certificate of Incorporation or these By-Laws, the act of a majority of the directors present at any such meeting at which a quorum is present shall be the act of the Board of Directors. In the absence of a quorum at any meeting of the Board of Directors, a majority of the directors present, or if no director is present, the Secretary, may adjourn such meeting to another time and place, or such meeting, unless it be the annual meeting of the Board of Directors, need not be held. At any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally called. Except as provided in Section 12 of this Article III and Article IV of these By-Laws and as otherwise specifically authorized by resolution of the Board of Directors, the directors shall act only as a Board of Directors and the individual directors shall have no power as such. Section 8. Action Requiring Supermajority Vote. Notwithstanding anything contained herein to the contrary, so long as the number of directors constituting the entire Board of Directors of the Corporation shall be seven, the following actions to be taken by the Board of Directors shall require the affirmative vote of at least six of the seven directors or, if applicable, the vote of all directors other than the director or directors -6- 7 who have a direct personal interest in the outcome of a matter to be voted upon (a "Supermajority"): (a) any of the transactions or actions requiring the approval of the holders of 75% of the shares of Series A Preferred Stock as set forth in Section 4(c) of the Certificate of Incorporation; (b) the election or removal without cause of any of the Chairman of the Board (if any), President, any Vice President, Treasurer or Secretary of the Corporation; (c) the termination of any employment agreement between an officer named in Section 8(b) above and the Corporation, or the entry into an employment agreement between the Corporation and such an officer; (d) the removal, without cause, of a director of the Corporation; (e) the repeal or amendment of any of these By-laws, or the adoption of new By-laws; (f) the creation and appointment of any committee of the Board of Directors, and the designation of its duties, pursuant to Article IV of these By-laws, unless the composition of such committee reflects the same proportionate representation of Series A Directors and Common Directors as such directors represent on the entire Board of Directors; (g) the dissolution of any committee appointed pursuant to Article IV of these By-laws; (h) the declaration of dividends, or the payment of dividends in cash if otherwise payable in stock pursuant to the Certificate of Incorporation; (i) the determination not to undertake in full then existing indemnity obligations of the Corporation; (j) a change in the number of directors constituting the entire Board of Directors and (k) any other action or transaction requiring such a vote hereunder or under the Certificate of Incorporation. Section 9. Organization. At each meeting of the Board of Directors, the Chairman of the Board, if any, or, in his absence or inability to act, the President, or, in his absence or inability to act, another director chosen by a majority of the directors present, shall act as chairman of the meeting and preside thereat. The minutes of the meeting shall be recorded by any officer of the Corporation present and designated by such chairman. Section 10. Resignations. Any director of the Corporation may resign at any time by giving written notice of his or her resignation to the Board of Directors, the Chairman of the Board, the President or the Secretary of the Corporation. Any such resignation shall take effect at the time specified therein, or, if the time when it shall become effective shall not be specified therein, immediately upon its receipt; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 11. Removal of Directors. Except as otherwise provided in the Certificate of Incorporation, any director may be removed, at any time, with or without cause, by the affirmative vote of (a) the holders of a majority of the outstanding shares of the class of stock that was entitled to vote for the election of such director at a meeting of such stockholders called and held for that purpose, (b) a majority of the Board of Directors, if for cause, or (c) a Supermajority of the Board of Directors, if without cause. Section 12. Vacancies. Except as otherwise required by statute or by the Certificate of Incorporation, during the intervals between annual meetings of stockholders, any vacancies and any newly created directorships resulting from an increase in the authorized number of directors of the Corporation and vacancies occurring in the Board of Directors for any reason may be filled by majority vote of the directors then remaining in office of the same class as the class of the director to be elected, whether or not a quorum, or by a sole remaining such director, at a meeting of the Board of Directors. Each director chosen to fill a vacancy shall hold office for the unexpired term in respect of which such vacancy occurred. Except as otherwise required by the Certificate of Incorporation, each director chosen to fill a newly created directorship -7- 8 shall hold office for a term expiring at the next annual meeting. Each director shall hold office for the specified term and until a successor shall be duly elected and qualified, except in the event of death, resignation or removal. If there are no directors in office, then a special meeting of stockholders for the election of directors may be called and held in the manner provided by statute. Section 13. Compensation. The Board of Directors or a committee of the Board designated by it in accordance with the terms hereof shall have authority to fix the compensation, if any, including, without limitation, fees and reimbursement of expenses, of directors for services to the Corporation in any capacity; provided, however, that no such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Section 14. Action without Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. Section 15. Participation in Meetings by Telephone and Other Equipment. Members of the Board of Directors or of any committee thereof may participate in a meeting of the Board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section shall constitute presence in person at such meeting. ARTICLE IV Executive and Other Committees Section 1. Executive and Other Committees. The Board of Directors may, acting in accordance with Article III, designate an Executive Committee, to consist of two or more directors of the Corporation, and one or more other committees, each such other committee to consist of two or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. The Executive Committee, while the Board of Directors is not in session, shall have and may exercise, and any such other committee, to the extent provided in the applicable resolution of the Board of Directors establishing such committee, shall have and may exercise, all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, amending the By-Laws of the Corporation or otherwise taking any of the actions that require the vote of a Supermajority of the Board or the approval of the stockholders or any class thereof, whether pursuant to these By-law or the Certificate of Incorporation. Each committee shall keep written -8- 9 minutes of its proceedings and shall report such minutes to the Board of Directors when required. All such proceedings shall be subject to revision or alteration by the Board of Directors; provided, however, that rights of third parties shall not be prejudiced by such revision or alteration. The Board may, at any time, fill vacancies in, change the membership of, or dissolve any such committee as set forth in Section 8 of Article III. Section 2. Executive Committee General. Regular meetings of the Executive Committee shall be held at such times and places, within or without the State of Delaware, as a majority of such Committee may from time to time by resolution determine. Special meetings of the Executive Committee may be called at the request of any member thereof and may be held at such times and places, within or without the State of Delaware, as such Committee may from time to time by resolution determine or as shall be specified in the respective notices or waivers of notice thereof. Notice of regular meetings of such Committee need not be given except as otherwise required by statute of these By-Laws. Notice of each special meeting of such Committee shall be given to each member of such Committee in the manner provided for in Section 6 of Article III of these By-Laws. Subject to the provisions of this Article IV, the Executive Committee, by resolution of a majority of such Committee, shall fix its own rules of procedure. A majority of the Executive Committee shall be present in person at any meeting of the Executive Committee in order to constitute a quorum for the transaction of business at such meeting, and the act of a majority of those present at any meeting at which a quorum is present shall be the act of the Executive Committee. The members of the Executive Committee shall act only as a committee, and the individual members shall have no power as such. Section 3. Other Committees: General. A majority of any committee may fix its rules of procedure, determine its action, and fix the time and place, within or without the State of Delaware, or its meetings, unless the Board of Directors shall otherwise by resolution provide. Notice of such meetings shall be given to each member of the committee in the manner provided for in Section 6 of Article III of these By-Laws. Nothing in this Article IV shall be deemed to prevent the Board of Directors from appointing one or more committees consisting in whole or in part of persons who are not directors of the Corporation; provided, however, that no such committee shall have or may exercise any authority of the Board of Directors unless any action taken thereby is approved by a majority of the members thereof, each member of which is a member of the Board of Directors. ARTICLE V Officers Section 1. Number and Qualifications. The officers of the Corporation shall be a President, a Treasurer and a Secretary. Any two or more offices may be held by the same person. Such officers shall be elected from time to time by the Board of Directors, each to hold office until the meeting of the Board following the next annual meeting of the stockholders, or until his successor shall have been duly elected and shall have qualified, or until his death, or until he shall have resigned or until he shall have been removed, as hereinafter provided in these By-Laws. The Board of Directors may from time to time elect such other officers (including a Chairman of the Board and one or more Vice Presidents, Assistant Treasurers and Assistant -9- 10 Secretaries) and such agents as it may deem necessary or desireable for the business of the Corporation. The Board of Directors may from time to time authorize any principal officer or committee to appoint, and to prescribe the authority and duties of, any such subordinate officers or agents. Each of such other officers and agents shall have such authority, perform such duties, and hold office for such period, as are provided in these By-Laws or as may be prescribed by the Board of Directors or by the principal officer or committee appointing such officer or agent. Section 2. Resignations. Any officer of the Corporation may resign at any time by giving written notice of his or her resignation to the Board of Directors, the Chairman of the Board, if any, the President or the Secretary. Any such resignation shall take effect at the time specified therein or, if the time when it shall become effective shall not be specified therein, immediately upon its receipt; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 3. Removal. Any officer or agent of the Corporation may be removed, either with or without cause, at any time, by vote of the Board of Directors as specified in Section 8 of Article III, or (except in the case of an officer or agent elected or appointed by the Board) by any principal officer or committee upon whom such power of removal may be conferred by the Board. Section 4. Vacancies. A vacancy in any office, whether arising from death, resignation, disqualification, removal or any other cause, may be filled for the unexpired portion of the term of the office which shall be vacant, in the manner prescribed in these By-Laws for the regular election or appointment to such office. Section 5. The Chairman of the Board. The Chairman of the Board, if elected, shall, if present, preside at all meeting of the stockholders and the Board of Directors and, in general, shall have such other powers and perform such other duties as usually pertain to the office of the Chairman of the Board or as from time to time may be assigned to him or her by the Board of Directors. At the discretion of the Board of Directors, the Chairman of the Board, if elected, may be the chief executive officer of the Corporation and, if so appointed by the Board of Directors, shall have general and active supervision and direction over the business and affairs of the Corporation and over its officers, subject, however, to the control of the Board of Directors. Section 6. The President. The President shall be the chief executive officer of the Corporation and shall have general and active supervision and direction over the business and affairs of the Corporation and over its officers, unless the Chairman of the Board, if any, is appointed to serve as chief executive officer, in which case the President shall be the chief operating officer of the Corporation and shall have general and active supervision and direction over the ordinary business operations and affairs of the Corporation and over its officers, subject, however, to the supervision and direction of the Chairman of the Board, if any, who is also the chief executive officer of the Corporation, and to the control of the Board of Directors. He or she shall, if present, in the absence or inability to act of the Chairman of the Board, preside at meetings of the stockholders and at meeting of the Board of Directors. In general, the President shall have such other powers and perform such other duties as usually pertain to the office of the President and chief -10- 11 executive officer or chief operating officer, as the case may be, or as from time to time may be assigned to him or her by the Board of Directors or the Chairman of the Board, if any. Section 7. Vice Presidents. Each Vice President shall have such powers and perform such duties as usually pertain to his office or as from time to time may be assigned to him by the Board of Directors, the Chairman of the Board, if any, or the President. During the absence of the President or his inability to act, the Vice President, or, if there is more than one Vice President, the Vice President designated by the Board of Directors, shall exercise the powers and perform the duties of the President, subject to the direction of the Board of Directors or the Chairman of the Board, if any. Section 8. Treasurer. The Treasurer shall: (a) have charge and custody of, and be responsible for, all the funds and securities of the Corporation; (b) keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and have control of all books of account of the Corporation; (c) cause all moneys and other valuables to be deposited to the credit of the Corporation in such depositories as may be designated by the Board of Directors; (d) receive, and give receipts for, moneys due and payable to the Corporation from any source whatsoever; (e) disburse the funds of the Corporation and supervise the investment of its funds as ordered or authorized by the Board of Directors, taking proper vouchers therefor; (f) render to the Chairman of the Board, if any, the President, the Board of Directors or any committee thereof, whenever required, an account of the financial condition of the Corporation and of his transactions as Treasurer; and (g) in general, have such other powers and perform such other duties as usually pertain to the office of Treasurer or as from time to time may be assigned to him or her by the Board of Directors, the Chairman of the Board, if any, or the President. Section 9. Assistant Treasurers. At the request of the Treasurer or in the case of his or her absence or inability to act, the Assistant Treasurer, or if there be more than one, the Assistant Treasurer designated by the Board of Directors or, in the absence of such designation, by the Chairman of the Board, if any, or the President, shall perform all the duties of the Treasurer, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Treasurer. In general, each Assistant Treasurer shall have such other powers and perform such other duties as from time to time may be assigned to him or her by the Board of Directors, the Chairman of the Board, if any, the President or the Treasurer. -11- 12 Section 10. The Secretary. The Secretary shall: (a) keep or cause to be kept, in one or more books provided for the purpose, the minutes of all meetings of the Board of Directors, of the committees of the Board of Directors and of the stockholders; (b) see that all notices are duly given in accordance with the provisions of these By-Laws and as required by law; (c) be custodian of the records and the seal of the Corporation and affix and attest the seal to all stock certificates of the Corporation (unless the seal of the Corporation on such certificates shall be a facsimile, as hereinafter provided) and affix and attest the seal to all other documents to be executed on behalf of the Corporation under its seal; (d) see that the books, reports, statements, certificates and other documents and records required by law to be kept and filed are properly kept and filed; and (e) in general, have such other powers and perform such other duties as usually pertain to the office of Secretary or as from time to time may be assigned to him or her by the Board of Directors, the Chairman of the Board, if any, or the President. Section 11. Assistant Secretaries. At the request of the Secretary or in case of his or her absence or inability to act, the Assistant Secretary, or if there be more than one, the Assistant Secretary designated by the Board of Directors or, in the absence of such designation, by the Chairman of the Board, if any, or the President shall perform all the duties of the Secretary, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Secretary. In general, each Assistant Secretary shall have such other powers and perform such other duties as from time to time may be assigned to him or her by the Board of Directors, the Chairman of the Board, if any, the President or the Secretary. Section 12. Officers' Bonds or Other Security. If required by the Board of Directors, any officer of the Corporation shall give a bond for the faithful performance of his or her duties, for such term and in such amount and with such surety or sureties as the Board may require. Section 13. Compensation. The compensation of the officers of the Corporation for their services as such officers shall be fixed from time to time by the Board of Directors or a committee of the Board designated by it, and no officer of the Corporation shall be prevented from receiving compensation by reason of the fact that he or she is also a director of the Corporation. ARTICLE VI Checks, Drafts, Bank Accounts Etc. -12- 13 Section 1. Checks, Drafts, etc. All checks, drafts, bills of exchange or other orders for the payment of money out of the funds of the Corporation, and all notes or other evidences of indebtedness of the Corporation shall be signed in the name and on behalf of the Corporation by such person or persons and in such manner as shall from time to time be authorized by the Board of Directors. Section 2. Deposits. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositories as the Board of Directors may from time to time designate or as may be designated by any officer or officers of the Corporation to whom such power of designation may from time to time be delegated by the Board of Directors. For the purpose of deposit and for the purpose of collection for the account of the Corporation, checks, drafts and other orders for the payment of money which are payable to the order of the Corporation may be endorsed, assigned and delivered by any officer or agent of the Corporation. Section 3. General and Special Bank Accounts. The Board of Directors may from time to time authorize the opening and keeping of general and special bank accounts with such banks, trust companies or other depositaries as the Board may designate or as may be designated by any officer or officers of the Corporation to whom such power of designation may from time to time be delegated by the Board of Directors. The Board of Directors may make such special rules and regulations with respect to such bank accounts, not inconsistent with provisions of these By-Laws, as it may deem expedient. Section 4. Proxies in Respect of Securities of Other Corporations. Unless otherwise provided by resolution adopted by the Board of Directors, the Chairman of the Board, if any, the President or any Vice President may from time to time appoint an attorney or attorneys or agent or agents of the Corporation in the name and on behalf of the Corporation to cast the votes which the Corporation may be entitled to cast as the holder of stock or other securities in any other corporation any of whose stock or other securities may be held by the Corporation, at meetings of the holders of the stock or other securities of such other corporation, or to consent in writing in the name of the Corporation as such holder to any action by such other corporation, and may instruct the person or persons so appointed as to the manner of casting such votes or giving such consent, and may execute or cause to be executed in the name of or on behalf of the Corporation and under its corporate seal, or otherwise, all such written proxies or other instruments as he may deem necessary or proper in the premises. ARTICLE VII Shares and Their Transfer; Examination of Books Section 1. Stock Certificates. Every holder of stock in the Corporation shall be entitled to have a certificate, in such form as shall be approved by the Board of Directors, certifying the number and class of shares of stock of the Corporation owned by him or her. The certificates representing shares of the respective classes of stock shall be numbered in order of their issue and shall be signed in the name of the Corporation by the Chairman of the Board, if any, or the President or a Vice President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary and sealed with the seal of the Corpo- -13- 14 ration (which seal may be a facsimile, engraved or printed). Any or all the signatures on the certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he or she were such officer, transfer agent, or registrar at the date of issue. Section 2. Books of Account and Record of Stockholders. The books and records of the Corporation may be kept at such places, within or without the State of Delaware, as the Board of Directors may from time to time determine. The stock record books and the blank stock certificate books shall be kept by the Secretary or by any other officer or agent designated by the Board of Directors. Section 3. Transfers of Shares. Transfers of shares of stock of the Corporation shall be made on the stock records of the Corporation only upon authorization by the registered holder thereof, or by his or her attorney thereunto authorized by power of attorney duly executed and filed with the Secretary or with a transfer agent or transfer clerk, and on surrender of the certificate or certificates for such shares properly endorsed or accompanied by a duly executed stock transfer power and the payment of all taxes thereon. Except as otherwise provided by law, the Corporation shall be entitled to recognize the exclusive right of a person in whose name any share or shares stand on the record of stockholders as the owner of such share or shares for all purposes, including, without limitation, the rights to receive dividends or other distributions, and to vote as such owner, and the Corporation may hold any such stockholder of record liable for calls and assessments and the Corporation shall not be bound to recognize any equitable or legal claim to or interest in any such share or shares on the part of any other person whether or not it shall have express or other notice thereof. Whenever any transfers of shares shall be made for collateral security and not absolutely, and both the transferor and transferee request the Corporation to do so, such fact shall be stated in the entry of the transfer. Section 4. Regulations. The Board of Directors may make such additional rules an regulations, not inconsistent with these By-Laws or the Certificate of Incorporation, as it may deem expedient concerning the issue, transfer and registration of certificates for shares of stock of the Corporation. It may appoint, or authorize any officer or officers to appoint, one or more transfer agents or one or more transfer clerks and one or more registrars and may require all certificates for shares of stock to bear the signature or signatures of any of them. Section 5. Lost, Destroyed or Mutilated Certificates. The holder of any certificate representing shares of stock of the Corporation shall immediately notify the Corporation of any loss, destruction or mutilation of such certificate, and the Corporation may issue a new certificate of stock in the place of any certificate theretofore issued by it which the owner thereof shall allege to have been lost, stolen or destroyed or which shall have been mutilated, and the Board of Directors may, in its discretion, require such owner or his or her legal representatives to give the Corporation and/or any agent of the Corporation designated by it a bond in such sum, limited or unlimited, and in such form and with such surety or sureties as the Board of Directors in its absolute discretion shall determine, to indemnify the Corporation and/or such agent against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate, or the issuance of a new certificate. Anything herein to the contrary notwithstanding, the -14- 15 Board of Directors, in its absolute discretion, may refuse to issue any such new certificate, except pursuant to legal proceedings under the laws of the State of Delaware. Section 6. Stockholder's Right of Inspection. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the Corporation's stock ledger, a list of its stockholders, and its other books and records, and to make copies or extracts therefrom. In every instance where an attorney or other agent shall be the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing which authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the Corporation at its registered office in the State of Delaware or at its principal place of business. Section 7. Fixing of Record Date. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. ARTICLE VIII Dividends Subject to the provisions of applicable law or of the Certificate of Incorporation relating thereto, if any, dividends upon the capital stock of the Corporation may be declared by a Supermajority of the Board of Directors at any regular or special meeting. Dividends may be paid in cash, in property or in shares of the capital stock of the Corporation, subject to applicable law and the Certificate of Incorporation. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in its absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose or purposes as the Board of Directors shall determine to be in the interest of the Corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created. -15- 16 ARTICLE IX INDEMNIFICATION Section 1. Right to Indemnification. The Corporation shall, to the fullest extent permitted by applicable law as then in effect, indemnify any person (the "Indemnitee") who was or is involved in any manner (including, without limitation, as a party or a witness) or was or is threatened to be made so involved in any threatened, pending or completed investigation, claim, action, suit or proceeding, whether civil, criminal, administrative or investigative (including, without limitation, any action, suit or proceeding by or in the right of the Corporation to procure a judgment in its favor) (a "Proceeding") by reason of the fact that he or she is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director or officer of another corporation or of a partnership, joint venture, trust or other enterprise (including, without limitation, service with respect to any employee benefit plan), whether the basis of any such Proceeding is alleged action in an official capacity as a director or officer or in any other capacity while serving as a director or officer, against all expenses, liability and loss (including, without limitation, attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) actually and reasonably incurred by him in connection with such Proceeding. The right to indemnification conferred in this Article IX shall include the right to receive payment in advance of any expenses incurred by the indemnitee in connection with such Proceeding, consistent with applicable law as then in effect. All right to indemnification conferred in this Article IX, including such right to advance payments and the evidentiary, procedural and other provisions of this Article IX, shall be a contract right. The Corporation may, by action of its Board of Directors, provide indemnification for employees, agents, attorneys and representatives of the Corporation with up to the same scope and extent as provided for officers and directors. Section 2. Insurance Contracts and Funding. The Corporation may purchase and maintain insurance to protect itself and any person who is, was or may become an officer, director, employee, agent, attorney or representative of the Corporation or, at the request of the Corporation, an officer, director, employee, agent, attorney or representative of another corporation or entity, against any expense, liability or loss asserted against him or her or incurred by him or her in connection with any Proceeding in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him or her against such expense, liability or loss under the provisions of Article TENTH of the Certificate of Incorporation or this Article IX or otherwise. The Corporation may enter into contracts with any director, officer, employee, agent, attorney or representative of the Corporation, or any person serving as such at the request of the Corporation for another corporation or entity, in furtherance of the provisions of this Article IX and may create a trust fund, grant a security interest or use other means (including, without limitation, a letter of credit) to ensure the payment of such amounts as may be necessary to effect indemnification of any person entitled thereto. Section 3. Indemnification: Not Exclusive Right. The right of indemnification provided in this Article IX shall not be exclusive of any other rights to which any person seeking indemnification may otherwise be entitled under any provision of the Certificate of Incorporation or By-Laws or agreement or otherwise. The provisions of this Article IX shall inure to the benefit of the heirs and legal representatives of any person entitled to indemnity under this Article IX and shall be applicable to all Proceedings, whether arising from acts -16- 17 or omissions occurring before or after the adoption of this Article IX. No amendment or repeal of any provision of this Article IX shall remove, abridge or adversely affect any right of indemnification or any other benefits of the Indemnitee under the provisions of this Article IX with respect to any Proceeding involving any act or omission which occurred prior to such amendment. Section 4. Advancement of Expenses; Procedures; Presumptions and Effect of Certain Proceedings; Remedies. In furtherance, but not in limitation, of the provisions of the Certificate of Incorporation or the foregoing provisions of this Article IX, the following procedures, presumptions and remedies shall apply with respect to advancement of expenses and the right to Indemnification under the Certificate of Incorporation or this Article IX: (a) Advancement of Expenses: All reasonable expenses incurred by or on behalf of the Indemnitee in connection with any Proceeding shall be advanced to the Indemnitee by the Corporation within 20 days after the receipt by the Corporation of a statement or statements from the Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the expenses incurred by the indemnitee and; if required by law at the time of such advance, shall include or be accompanied by an undertaking by or on behalf of the Indemnitee to repay the amounts advanced if it should ultimately be determined that the Indemnitee is not entitled to be indemnified against such expense pursuant to this Article IX. (b) Procedure for Determination of Entitlement to Indemnification. (i) To obtain indemnification, an Indemnitee shall submit to the President or Secretary of the Corporation a written request, including such documentation and information as is reasonably available to the Indemnitee and reasonably necessary to determine whether and to what extent the Indemnitee is entitled to Indemnification (the "Supporting Documentation"). The determination of the Indemnitee's entitlement to indemnification shall be made not later than 60 days after receipt by the Corporation of the written request for indemnification together with the Supporting Documentation. The President or Secretary of the Corporation shall, promptly upon receipt of such a request for indemnification, advise the Board of Directors in writing that the Indemnitee has requested indemnification. (ii) The Indemnitee's entitlement to indemnification shall be determined in one of the following ways: (A) by a majority vote of the Disinterested Directors (as hereinafter defined) (or the Disinterested Director, if only one); (B) by a written opinion of Independent Counsel (as hereinafter defined) if (x) a Change of Control (as hereinafter defined) shall have occurred and the Indemnitee so requests or (y) there is no Disinterested Director or a majority of the Disinterested Directors (or the Disinterested Director, if only one) so directs; (C) by the stockholders of the Corporation other than any interested stockholder (but only if a majority of the Disinterested Directors (or the Disinterested Director, if only one) determines that the issue of entitlement to indemnification should be submitted to the stockholders for their determination); or (D) as provided in Section 4(c) of this Article IX. - 17 - 18 (iii) In the event the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 4(b)(ii) of this Article IX, a majority of the Disinterested Directors (or the Disinterested Director, if only one) shall select the Independent Counsel, but only an Independent Counsel to which the Indemnitee does not reasonably object; provided, however, that if a Change of Control shall have occurred, the Indemnitee shall select such Independent Counsel, but only an Independent Counsel to which the Board of Directors does not reasonably object. (c) Presumptions and Effect of Certain Proceedings. Except as otherwise expressly provided in this Article IX, the Indemnitee shall be presumed to be entitled to indemnification upon submission of a request for indemnification together with the Supporting Documentation in accordance with Section 4(b)(i) of this Article IX, and thereafter the Corporation shall have the burden of proof to overcome that presumption in reaching a contrary determination. In any event, if the person or persons empowered under Section 4(b) of this Article IX to determine entitlement to indemnification shall not have been appointed or shall not have made a determination within 60 days after receipt by the Corporation of the request therefor together with the Supporting Documentation, the Indemnitee shall be deemed to be entitled to indemnification. With regard to the right to indemnification for expenses, if and to the extent that the Indemnitee has been successful on the merits or otherwise in any Proceeding, or if and to the extent that the Indemnitee was not a party to the Proceeding or if a Proceeding was terminated without a determination of liability on the part of the Indemnitee with respect to any claim, issue or matter therein or without any payments in settlement or compromise being made by the Indemnitee with respect to a claim, issue or matter therein, the Indemnitee shall be deemed to be entitled to indemnification, which entitlement shall not be diminished by any determination which may be made pursuant to Sections (4)(b)(ii)(A), (B) or (C). In either case, the Indemnitee shall be entitled to such indemnification, unless (A) the Indemnitee misrepresented or failed to disclose a material fact in making the request for indemnification or in the Supporting Documentation or (B) such indemnification is prohibited by law, in either case as finally determined by adjudication or, at the Indemnitee's sole option, arbitration (as provided in Section 4(d)(i) of this Article IX). The termination of any Proceeding described in Section 1 of this Article IX, or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, adversely affect the right of the Indemnitee to indemnification or create any presumption with respect to any standard of conduct or belief or any other matter which might form a basis for a determination that the Indemnitee is not entitled to indemnification. (d) Remedies of Indemnitee. (i) In the event that a determination is made pursuant to Section 4(b) of this Article IX that the Indemnitee is not entitled to indemnification under this Article IX, (A) the Indemnitee shall be entitled to seek an adjudication of his entitlement to such indemnification either, at the Indemnitee's sole option, in (x) an appropriate court of the State of Delaware or any other court of competent jurisdiction or (y) an arbitration to be conducted by three arbitrators (or, if the dispute involves less than $100,000, by a single arbitrator) pursuant to the rules of the American Arbitration Association; (B) any such judicial proceedings or arbitration shall be de novo and the Indemnitee shall not be prejudiced by reason of such adverse determination; and (C) in any such judicial proceeding or arbitration the Corporation shall have the burden of proof that the Indemnitee is not entitled to indemnification under this Article IX. -18- 19 (ii) If a determination shall have been made or deemed to have been made, pursuant to Section 4(b) or (c) of this Article IX, that the Indemnitee is entitled to indemnification, the Corporation shall be obligated to pay the amounts constituting such indemnification within five days after such determination has been made or deemed to have been made and shall be conclusively bound by such determination, unless (A) the Indemnitee misrepresented or failed to disclose a material fact in making the request for indemnification or in the Supporting Documentation or (B) such indemnification is prohibited by law, in either case as finally determined by adjudication or, at the indemnitee's sole option, arbitration (as provided in Section 4(d)(i) of this Article IX). In the event that (C) advancement of expenses is not timely made pursuant to Section 4(a) of this Article IX or (D) payment of indemnification is not made within five days after a determination of entitlement to indemnification has been made or deemed to have been made pursuant to Section 4(b) or (c) of this Article IX, the Indemnitee shall be entitled to seek judicial enforcement of the Corporation's obligation to pay to the Indemnitee such advancement of expenses or indemnification. Notwithstanding the foregoing, the Corporation may bring an action, in an appropriate court in the State of Delaware or any other court of competent jurisdiction, contesting the right of the Indemnitee to receive indemnification hereunder due to the occurrence of an event described in subclause (A) or (B) of this clause (ii) (a "Disqualifying Event"), provided, however, that if the Indemnitee shall elect, at his sole option, that such dispute shall be determined by arbitration (as provided in Section 4(d)(i) of this Article IX), the Corporation shall proceed by such arbitration. In any such enforcement or other proceeding or action in which whether a Disqualifying Event has occurred is an issue, the Corporation shall have the burden of proving the occurrence of such Disqualifying Event. (iii) The Corporation shall be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section 4(d) that the procedures and presumptions of this Article IX are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator or arbitrators that the Corporation is bound by all the provisions of this Article IX. (iv) In the event that the Indemnitee, pursuant to this Article IX, seeks a judicial adjudication of or an award in arbitration to enforce his rights under, or to recover damages for breach of, this Article IX, or is otherwise involved in any adjudication or arbitration with respect to his right to indemnification, the Indemnitee shall be entitled to recover from the Corporation, and shall be indemnified by the Corporation against, any expenses actually and reasonably incurred by him if the Indemnitee prevails in such judicial adjudication or arbitration. If it shall be determined in such judicial adjudication or arbitration that the Indemnitee is entitled to receive part but not all of the indemnification or advancement of expenses sought, the expenses incurred by the Indemnitee in connection with such judicial adjudication or arbitration shall be prorated accordingly. (e) Definitions. For purposes of this Section 4: (i) "Change in Control" means a change in control of the ultimate corporate parent of the Corporation of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934 (the "Act"), as such item was in effect on November 1, 1992, whether or not the Corporation is then -19- 20 subject to such reporting requirement; provided that, without limitation, such a change in control shall be deemed to have occurred if (A) any "person" (as such term is used in Sections 13(d) and 14(d) of the Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Corporation representing 20 percent or more of the combined voting power of the Corporation's then outstanding securities without the prior approval of at least two-thirds of the members of the Board of Directors in office immediately prior to such acquisition; (B) the Corporation is a party to a merger, consolidation, sale of assets or other reorganization, or a proxy contest, as a consequence of which members of the Board of Directors in office immediately prior to such transaction or event constitute less than a majority of the Board of Directors thereafter; or (C) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors (including for this purpose any new director whose election or nomination for election by the Corporation's stockholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board of Directors. (ii) "Disinterested Director" means a director of the Corporation who is not or was not a material party to the Proceeding in respect of which indemnification is sought by the Indemnitee. (iii) "Independent Counsel" means a law firm or a member of a law firm that neither presently is, nor in the past five years has been, retained to represent: (A) the Corporation or the Indemnitee in any matter or (B) any other party to the Proceeding giving rise to a claim for indemnification under this Article IX. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing under the law of the State of Delaware, would have a conflict of interest in representing either the Corporation or the Indemnitee in an action to determine the Indemnitee's rights under this Article IX. Section 5. Acts of Disinterested Directors. Disinterested Directors considering or acting on any indemnification matter under this Article IX or otherwise may consider or take action as the Board of Directors or may consider or take action as a committee or individually or otherwise. Section 6. Severability. If any provision or provisions of this Article IX shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Article IX (including, without limitation, all portions of any paragraph of this Article IX containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (b) to the fullest extent possible, the provisions of this Article IX (including, without limitation, all portions of any paragraph of this Article IX containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. -20- EX-4.2 4 REGISTRATION RIGHTS AGREEMENT 1 Exhibit 4.2 REGISTRATION RIGHTS AGREEMENT dated as of July 23, 1998 among NATIONAL NETWORK TECHNOLOGIES INC. and the INVESTORS 2 Table of Contents Section 1. Definitions.................................................. 1 Section 2. Required Registration........................................ 2 Section 3. Piggyback Registration....................................... 4 Section 4. Registrations on Form S-3.................................... 5 Section 5. Holdback Agreement........................................... 5 Section 6. Preparation and Filing....................................... 6 Section 7. Expenses..................................................... 9 Section 8. Indemnification.............................................. 9 Section 9. Underwriting Agreement....................................... 12 Section 10. Information by Holder....................................... 12 Section 11. Exchange Act Compliance..................................... 12 Section 12. No Conflict of Rights....................................... 12 Section 13. Termination................................................. 12 Section 14. Successors and Assigns...................................... 13 Section 15. Assignment.................................................. 13 Section 16. Entire Agreement............................................ 13 Section 17. Notices..................................................... 13 Section 18. Modifications; Amendments; Waivers.......................... 14 Section 19. Counterparts; Facsimile Signatures.......................... 14 Section 20. Headings.................................................... 14 Section 21. Governing Law............................................... 15 3 REGISTRATION RIGHTS AGREEMENT, dated as of July, 1998, among NATIONAL NETWORK TECHNOLOGIES INC., a Delaware corporation (the "Corporation"), and the INVESTORS (as herein defined). The Investors own shares of Preferred Stock (as hereinafter defined), which is convertible, as and when set forth in the Corporation's Amended and Restated Certificate of Incorporation, into Common Stock (as hereinafter defined) of the Corporation. The Corporation and the Investors deem it to be in their respective best interests to set forth the rights of the Investors in connection with public offerings and sales of the Common Stock and are entering into this Agreement as a condition to and in connection with the Securities Purchase Agreement (as hereinafter defined). NOW, THEREFORE, in consideration of the premises and mutual covenants and obligations hereinafter set forth, the Corporation and the Investors hereby agree as follows: SECTION 1. DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings: "Charter" means the Company's Amended and Restated Certificate of Incorporation. "Commission" means the Securities and Exchange Commission or any other Federal agency at the time administering the Securities Act. "Common Stock" means the common stock, $.001 par value per share, of the Corporation. "Exchange Act" means the Securities Exchange Act of 1934 or any successor Federal statute, and the rules and regulations of the Commission promulgated thereunder, all as the same shall be in effect from time to time. "Investors" means the persons set forth on Schedule I and each additional person who shall execute a counterpart signature page hereto, and includes any successor to, or assignee or transferee of, any such person who or which agrees in writing to be treated as an Investor hereunder and to be bound by the terms and comply with all applicable provisions hereof. "Other Shares" means at any time those shares of Common Stock which do not constitute Primary Shares or Registrable Shares. "Preferred Stock" means the Series A Convertible Preferred Stock, $.001 par value per 4 share, of the Corporation. "Primary Shares" means at any time the authorized but unissued shares of Common Stock and shares of Common Stock held by the Corporation in its treasury. "Registrable Shares" means at any time, with respect to any Investor, the shares of Common Stock held by such Investor, or into which Shares of Preferred Stock held by such Investor are convertible, which constitute Restricted Shares. "Restricted Shares" means shares of Common Stock held by or issuable upon the conversion of shares of the Preferred Stock held by, any Investor, and any other securities which by their terms are exercisable or exchangeable for or convertible into Common Stock or other securities which are so exercisable or convertible and any securities received in respect thereof, held by such Investor. As to any particular Restricted Shares, once issued, such Restricted Shares shall cease to be Restricted Shares when (a) they have been registered under the Securities Act, and the registration statement in connection therewith has been declared effective, (b) they are eligible to be sold or distributed pursuant to Rule 144 within any consecutive three month period (including without limitation, Rule 144(k)) without volume limitations, or (c) they shall have ceased to be outstanding. "Registration Date" means the date upon which the registration statement pursuant to which the Corporation shall have initially registered shares of Common Stock under the Securities Act for sale to the public shall have been declared effective. "Rule 144" means Rule 144 promulgated under the Securities Act or any successor rule thereto or any complementary rule thereto (such as Rule 144A). "Securities Act" means the Securities Act of 1933 or any successor Federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect from time to time. "Securities Purchase Agreement" means the Securities Purchase Agreement dated the date hereof, among the Corporation, among others, and the Investors. SECTION 2. REQUIRED REGISTRATION. If at any time on or after ninety days after the Registration Date, holders representing not less than 33-1/3% of the Restricted Shares then outstanding shall in writing state that such holders desire to sell Registrable Shares in the public securities markets and request the Corporation to effect the registration under the Securities Act of Registrable Shares, the Corporation shall promptly use its best efforts to effect tho registration under the Securities Act of the Registrable Shares which the Corporation has been so requested to register; provided, however, that the Corporation shall not be obligated to effect any registration under the Securities Act except in 2 5 accordance with the Amended and Restated Certificate of Incorporation and the following provisions: (a) The Corporation shall not be obligated to use its best efforts to file and cause to become effective (i) more than two registration statements initiated pursuant to this Section 2 on Form S- 1 promulgated under the Securities Act or any successor form thereto, (ii) any registration statement during any period in which any other registration statement (other than on Form S-4 or Form S-8 promulgated under the Securities Act or any successor forms thereto) pursuant to which Primary Shares are to sold has been filed and not withdrawn or has been declared effective within the prior 90 days. (b) The Corporation may delay the filing or effectiveness of any registration statement for a period of up to 90 days after the date of a request for registration pursuant to this Section 2 if at the time of such request (i) the Corporation is engaged, or has fixed plans to engage within 90 days of the time of such request, in a firm commitment underwritten public offering of Primary Shares in which the holders of Registrable Shares may include Registrable Shares pursuant to Section 3 or (ii) the Corporation reasonably determines that such registration and offering would interfere with any material transaction involving the Corporation, as approved by the Board of Directors, provided, however, that the Corporation may only delay the filing or effectiveness of a registration statement pursuant to this Section 2(b) for a total of 180 days after the date of a request for registration pursuant to this Section 2. (c) With respect to any registration pursuant to this Section 2, the Corporation shall give notice of such registration to the Investors who do not request registration hereunder and to the holders of all Other Shares that are entitled to registration rights and the Corporation may include in such registration any Primary Shares or Other Shares; provided, however, that if the managing underwriter advises the Corporation that the inclusion of all Registrable Shares, Primary Shares and/or Other Shares proposed to be included in such registration would interfere with the successful marketing (including pricing) of the Registrable Shares proposed to be included in such registration, then the number of Registrable Shares, Primary Shares and/or Other Shares proposed to be included in such registration shall be included in the following order: (i) First, the Registrable Shares requested to be included in such registration (or, if necessary, such Registrable Shares pro rata among the holders thereof based upon the number of Registrable Shares requested to be registered by each such holder); (ii) second, the Primary Shares; and (iii) third, the Other Shares which are entitled to registration rights. 3 6 (d) If the holders of the Registrable Shares requesting to be included in a registration pursuant to this Section 2 so elect, the offering of such Registrable Shares pursuant to such registration shall be in the form of an underwritten offering. The holders of Registrable Shares then holding 75% of the Registrable Shares requested to be included in such registration shall select one or more nationally recognized firms of investment bankers reasonably acceptable to the Company to act as the lead managing underwriter or underwriters in connection with such offering. (e) At any time before the registration statement covering Registrable Shares becomes effective, the holders of 75% of such shares may request the Corporation to withdraw or not to file the registration statement. In that event, if such request of withdrawal shall not have been caused by, or made in response to, the material adverse effect of an event on the business, properties, condition, financial or otherwise, or operations of the Corporation, the holders shall have used one of their demand registration rights under this Section 2 and the Corporation shall no longer be obligated to register Registrable Shares pursuant to the exercise of such one registration right pursuant to this Section 2 unless the remaining holders shall pay to the Corporation the expenses incurred by the Corporation through the date of such request. SECTION 3. PIGGYBACK REGISTRATION. If the Corporation at any time proposes for any reason to register Primary Shares or Other Shares under the Securities Act (other than on Form S-4 or Form S-8 promulgated under the Securities Act or any successor forms thereto), it shall give written notice to the Investors of its intention to so register such Primary Shares or Other Shares at least 30 days before the initial filing of such registration statement and, upon the written request, delivered to the Corporation within 20 days after delivery of any such notice by the Corporation, of the Investors to include in such registration Registrable Shares (which request shall specify the number of Registrable Shares proposed to be included in such registration and shall state that such Investors desire to sell such Registrable Shares in the public securities markets), the Corporation shall use its best efforts to cause all such Registrable Shares to be included in such registration on the same terms and conditions as the securities otherwise being sold in such registration; Provided, however, that if the managing underwriter advises the Corporation that the inclusion of all Registrable Shares requested to be included in such registration would interfere with the successful marketing (including pricing) of the Primary Shares or Other Shares proposed to be registered by the Corporation, then the number of Primary Shares, Registrable Shares and Other Shares proposed to be included in such registration shall be included in the following order: if the Corporation proposes to register Primary Shares, or Primary Shares and Other Shares: (a) first, the Primary Shares; and 4 7 (b) second, the Registrable Shares requested to be included in such registration (or, if necessary, such Registrable Shares pro rata among the holders thereof based upon the number of Registrable Shares requested to be registered by each such holder); and (c) third, the Other Shares requested to be included in such registration (or, if necessary, such Other Shares pro rata among the holders thereof based upon the number of Other Shares requested to be registered by each such holder). Without in any way limiting the number of registrations in which the Corporation shall be required to include Registrable Securities at the request of the required number of Investors pursuant to this Section 3 and Section 4 below, the Corporation shall only be responsible for the costs and expenses (including all expenses under Section 7 below) of up to four piggyback registrations pursuant to this Section 3 and up to four S-3 registrations pursuant to Section 4 below. SECTION 4. REGISTRATIONS ON FORM S-3. Anything contained in Section 2 to the contrary notwithstanding and subject to the last sentence of Section 3, at such time as the Corporation shall have qualified for the use of Form S-3 promulgated under the Securities Act or any successor form thereto, the holders of the Registrable Shares then outstanding shall have the right to request in writing an unlimited number of registrations of Registrable Shares on Form S-3 or such successor form of Registrable Shares, which request or requests shall (a) specify the number of Registrable Shares intended to be sold or disposed of and the holders thereof, (b) state the intended method of disposition of such Registrable Shares and (c) relate to Registrable Shares having an aggregate offering price of at least $250,000. A requested registration on Form S-3 or any such successor form in compliance with this Section 4 shall not count as a registration statement initiated pursuant to Section 2 but shall otherwise be treated as a registration initiated pursuant to, and shall, except as otherwise expressly provided in this Section 4, be subject to Section 2, including, without limitation, Section 2(a). SECTION 5. HOLDBACK AGREEMENT. If the Corporation at any time shall register shares of Common Stock under the Securities Act (including any registration pursuant to Sections 2, 3 or 4 hereof) for sale to the public, the Investors shall not sell publicly, make any short sale of, grant any option for the purchase of, or otherwise dispose publicly of, any Registrable Shares (other than those shares of Common Stock included in such registration pursuant to Sections 2, 3 or 4 hereof) without the prior written consent of the Corporation, for a period designated by the Corporation in writing to the Investors, which period shall begin not more than 10 days prior to the effectiveness of the registration statement pursuant to which such public offering shall be made and shall not last more than 90 days after the effective date of such registration statement. The Corporation shall obtain the agreement of any person permitted to sell shares of stock in a registration to be bound by and to 5 8 comply with this Section 5 as if such person was an Investor hereunder. SECTION 6. PREPARATION AND FILING. If and whenever the Corporation is under an obligation pursuant to the provisions of this Agreement to use its best efforts to effect the registration of any Registrable Shares, the Corporation shall, as expeditiously as practicable: (a) use its best efforts to cause a registration statement that registers such Registrable Shares to become and remain effective for a period of 90 days or until all of such Registrable Shares have been disposed of (if earlier); (b) furnish, at least five business days before filing a registration statement that registers such Registrable Shares, a prospectus relating thereto or any amendments or supplements relating to such a registration statement or prospectus, to one legal counsel selected by 75% of the Investors initiating such Registration, and timely identified to the Corporation (the "Investors' Counsel"), copies of all such documents proposed to be filed (it being understood that such five-business-day period need not apply to successive drafts of the same document proposed to be filed so long as such successive drafts are supplied to the Investors' Counsel in advance of the proposed filing by a period of time that is customary and reasonable under the circumstances); (c) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for at least a period of 90 days or until all of such Registrable Shares have been disposed of (if earlier) and to comply with the provisions of the Securities Act with respect to the sale or other disposition of such Registrable Shares; (d) notify in writing the Investors' Counsel of the receipt by the Corporation of any notification with respect to (i) any comments by the Commission with respect to such registration statement or prospectus or any amendment or supplement thereto or any request by the Commission for the amending or supplementing thereof or for additional information with respect thereto, (ii) the issuance by the Commission of any stop order suspending the effectiveness of such registration statement or prospectus or any amendment or supplement thereto or the initiation or threatening of any proceeding for that purpose and (iii) the suspension of the qualification of such Registrable Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for such purposes; (e) use its best efforts to register or qualify such Registrable Shares under such other securities or blue sky laws of such jurisdictions as the Investors reasonably request and do any and all other acts and things which may be reasonably necessary or advisable to enable the Investors to consummate the disposition in such jurisdictions of the 6 9 Registrable Shares owned by the Investors; provided, however, that the Corporation will not be required to qualify generally to do business, subject itself to general taxation or consent to general service of process in any jurisdiction where it would not otherwise be required to do so but for this paragraph (e) or to provide any material undertaking or make any changes in its By-laws or the Amended and Restated Certificate of Incorporation of the Corporation which the Board of Directors determines to be contrary to the best interests of the Corporation or to modify any of its contractual relationships then existing; (f) furnish to the Investors holding such Registrable Shares such number of copies of a summary prospectus, if any, or other prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as such Investors may reasonably request in order to facilitate the public sale or other disposition of such Registrable Shares; (g) without limiting subsection (e) above, and subject in each case to the limitations contained therein, use its best efforts to cause such Registrable Shares to be registered with or approved by such other governmental agencies or authorities as may be necessary by virtue of the business and operations of the Corporation to enable the Investors holding such Registrable Shares to consummate the disposition of such Registrable Shares; (h) notify the Investors holding such Registrable Shares on a timely basis at any time when a prospectus relating to such Registrable Shares is required to be delivered under the Securities Act within the appropriate period mentioned in subparagraph (a) of this Section 6, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing and, at the request of the Investors, prepare and furnish to such Investors a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the offerees of such shares, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; (i) subject to the execution of confidentiality agreements in form and substance satisfactory to the Corporation, make available upon reasonable notice and during normal business hours, for inspection by the Investors holding such Registrable Shares, any underwriter participating in any disposition pursuant to such registration statement and any attorney, accountant or other agent retained by the Investors or underwriter (collectively, the "Inspectors"), all pertinent financial and other records, pertinent corporate documents and properties of the Corporation (collectively, the 7 10 "Records"), as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Corporation's officers, directors and employees to supply all information (together with the Records, the "Information") reasonably requested by any such Inspector in connection with such registration statement. Any of the Information which the Corporation determines in good faith to be confidential, and of which determination the Inspectors are so notified, shall not be disclosed by the Inspectors unless (i) the disclosure of such Information is necessary to avoid or correct a misstatement or omission in the registration statement, provided that such disclosure is made only after consultation with the Corporation, (ii) the release of such Information is ordered pursuant to a subpoena or other order from a court of competent jurisdiction or (iii) such Information has been made generally available to the public, other than by any party hereto in breach of its obligations hereunder; the Investors agree that they will, upon learning that disclosure of such Information is sought in a court of competent jurisdiction, give notice to the Corporation and allow the Corporation, at the Corporation's expense, to undertake appropriate action to prevent disclosure of the Information deemed confidential; (j) use its best efforts to obtain from its independent certified public accountants "cold comfort" letters in customary form and at customary times and covering matters of the type customarily covered by cold comfort letters under the circumstances; (k) use its best efforts to obtain from its counsel an opinion or opinions in customary form; (l) provide a transfer agent and registrar (which may be the same entity and which may be the Corporation) for such Registrable Shares; (m) issue to any underwriter to which the Investors holding such Registrable Shares may sell shares in such offering certificates evidencing such Registrable Shares; (n) list such Registrable Shares on any national securities exchange on which any shares of the Common Stock are listed or, if the Common Stock is not listed on a national securities exchange, use its best efforts to qualify such Registrable Shares for inclusion on the automated quotation system of the National Association of Securities Dealers, Inc. (the "NASD") or such other national securities exchange as the holders of seventy-five percent of such Registrable Shares shall reasonably request; (o) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, including by making available to its securityholders earning statements that satisfy the provisions of Section 11 (a) of the Securities Act; and (p) subject to all the other provisions of this Agreement, use its best efforts to take all other steps necessary to effect the registration of such Registrable Shares contemplated hereby. 8 11 Each holder of the Registrable Shares, upon receipt of any notice from the Corporation of any event of the kind described in Section 6(h) hereof, shall forthwith discontinue disposition of the Registrable Shares pursuant to the registration statement covering such Registrable Shares until such holder's receipt of the copies of the supplemented or amended prospectus contemplated by Section 6(h) hereof, and, if so directed by the Corporation, such holder shall deliver to the Corporation all copies, other than permanent file copies then in such holder's possession, of the prospectus covering such Registrable Shares at the time of receipt of such notice. SECTION 7. EXPENSES. All expenses (other than underwriting discounts and commissions relating to the Registrable Shares, as provided in the last sentence of this Section 7) incurred by the Corporation in complying with Section 6, including, without limitation, all registration and filing fees, fees and expenses of complying with securities and blue sky laws, printing expenses, fees and expenses of the Corporation's counsel and accountants and reasonable fees and expenses of the Investors' Counsel, shall be paid by the Corporation in connection with Registrations the costs of which the Corporation is required to bear pursuant to Sections 2 and 3 hereof; provided, however, that all underwriting discounts, selling commissions applicable to the Registrable Shares and Other Shares shall become by the holders selling such Registrable Shares and Other Shares, in proportion to the number of Registrable Shares and Other Shares sold by each such holder. SECTION 8. INDEMNIFICATION. (a) In connection with any registration of any Registrable Shares under the Securities Act pursuant to this Agreement, the Corporation shall indemnify and hold harmless the holders of Registrable Shares, each underwriter, broker or any other person acting on behalf of the holders of Registrable Shares and each other person, if any, who controls any of the foregoing persons within the meaning of the Securities Act against any losses, claims, damages or liabilities, joint or several (or actions in respect thereof), to which any of the foregoing persons may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or allegedly untrue statement of a material fact contained in the registration statement under which such Registrable Shares were registered under the Securities Act, any preliminary prospectus or final prospectus contained therein or otherwise filed with the Commission, any amendment or supplement thereto or any document incident to registration or qualification of any Registrable Shares, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or, with respect to any prospectus, necessary to make the statements therein in light of the circumstances under which they were made not misleading, or any violation by the Corporation of the Securities Act or state securities or blue sky laws applicable to the Corporation and relating to action or inaction required of the Corporation in connection with such registration or qualification under such state 9 12 securities or blue sky laws; and shall reimburse the holders of Registrable Shares, such underwriter, such broker or such other person acting on behalf of the holders of Registrable Shares and each such controlling person for any legal or other expenses reasonably incurrwith investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Corporation shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action (including any legal or other expenses incurred) arises out of or is based upon an untrue statement or allegedly untrue statement or omission or alleged omission made in said registration statement, preliminary prospectus, final prospectus, amendment, supplement or document incident to registration or qualification of any Registrable Shares in reliance upon and in conformity with written information furnished to the Corporation through an instrument duly executed by any holder of Registrable Shares or his or its counsel or underwriter specifically for use in the preparation thereof; provided further, however, that the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any untrue statement, allegedly untrue statement, omission or alleged omission made in any preliminary prospectus but eliminated or remedied in the final prospectus (filed pursuant to Rule 424 of the Securities Act), such indemnity agreement shall not inure to the benefit of any Investor, underwriter, broker or other person acting on behalf of holders of the Restricted Shares from whom the person asserting any loss, claim, damage, liability or expense purchased the Restricted Shares which are the subject thereof, if a copy of such final prospectus had been made available to such person and such Investor, underwriter, broker or other person acting on behalf of holders of the Registrable Shares and such final prospectus was not delivered to such person with or prior to the written confirmation of the sale of such Registrable Shares to such person. (b) In connection with any registration of Registrable Shares under the Securities Act pursuant to this Agreement, each holder of Registrable Shares shall severally and not jointly indemnify and hold harmless (in the same manner and to the same extent as set forth in the preceding paragraph (a) of this Section 8) the Corporation, each director of the Corporation, each officer of the Corporation who shall sign such registration statement, each underwriter, broker or other person acting on behalf of the holders of Registrable Shares and each person who controls any of the foregoing persons within the meaning of the Securities Act with respect to any statement or omission from such registration statement, any preliminary prospectus or final prospectus contained therein or otherwise filed with the Commission, any amendment or supplement thereto or any document incident to registration or qualification of any Registrable Shares, if such statement or omission was made in reliance upon and in conformity with written information furnished to the Corporation or such underwriter specifically for use in connection with the preparation of such registration statement, preliminary prospectus, final prospectus, amendment, supplement or document; provided, however, that the maximum amount of liability in respect of such indemnification shall be limited, in the case of each seller of Registrable Shares, to an amount equal to the net proceeds actually received by such Seller from the sale of Registrable Shares effected pursuant to such 10 13 registration. (c) Promptly after receipt by an indemnified party of notice of the commencement of any action involving a claim referred to in the preceding paragraphs of this Section 8, such indemnified party will, if a claim in respect thereof is made against an indemnifying party, give written notice to the latter of the commencement of such action. The failure of any indemnified party to notify an indemnifying party of any such action shall not (unless such failure shall have a material adverse effect on the indemnifying party) relieve the indemnifying party from any liability in respect of such action that it may have to such indemnified party on account of this Section 8. In case any such action is brought against an indemnified party, the indemnifying party will be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be responsible for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof; provided, however, that if any indemnified party shall have reasonably concluded that there may be one or more legal or equitable defenses available to such indemnified party which are additional to or conflict with those available to the indemnifying party, or that such claim or litigation involves or could have an effect upon matters beyond the scope of the indemnity agreement provided in this Section 8, the indemnifying party shall not have the right to assume the defense of such action on behalf of such indemnified party (but shall have the right to participate therein with counsel of its choice) and such indemnifying party shall reimburse such indemnified party and any person controlling such indemnified party for that portiny counsel retained by the indemnified party which is reasonably related to the matters covered by the indemnity agreement provided in this Section 8. If the indemnifying party is not entitled to, or elects not to, assume the defense of a claim, it will not be obligated to pay the fees and expenses of more than one counsel with respect to such claim. (d) If the indemnification provided for in this Section 8 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, claim, damage, liability or action referred to herein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amounts paid or payable by such indemnified party as a result of such loss, claim, damage, liability or action in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions which resulted in such loss, claim, damage, liability or action as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, 11 14 access to information and opportunity to correct or prevent such statement or omission. The parties agree that it would not be just and equitable if contribution pursuant hereto were determined by pro rata allocation or by any other method or allocation which does not take account of the equitable considerations referred to herein). No person guilty of fraudulent misrepresentation shall be entitled to contribution from any person. SECTION 9. UNDERWRITING AGREEMENT. Notwithstanding the provisions of Sections 5, 6, 7 and 8, to the extent that the Investors shall enter into an underwriting or similar agreement, which agreement contains provisions covering one or more issues addressed in such Sections, the provisions contained in such agreement addressing such issue or issues shall control. SECTION 10. INFORMATION BY HOLDER. The Investors shall furnish to the Corporation such written information regarding the Investors and the distribution proposed by the Investors as the Corporation may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification or compliance referred to in this Agreement. SECTION 11. EXCHANGE ACT COMPLIANCE. From the Registration Date or such earlier date as a registration statement filed by the Corporation pursuant to the Exchange Act relating to any class of the Corporation's securities shall have become effective, the Corporation shall comply with all of the reporting requirements of the Exchange Act applicable to it (whether or not it shall be required to do so, but specifically excluding Section 14 of the Exchange Act if not then applicable to the Corporation) and shall comply with all other public information reporting requirements of the Commission which are conditions to the availability of Rule 144 for the sale of the Common Stock. The Corporation shall cooperate with the Investors in supplying such information as may be necessary for the Investors to complete and file any information reporting forms presently or hereafter required by the Commission as a condition to the availability of Rule 144. SECTION 12. NO CONFLICT OF RIGHTS. The Corporation shall not, after the date hereof, grant any registration rights which conflict with or impair the registration rights granted hereby. SECTION 13. TERMINATION. This Agreement shall terminate and be of no further force or effect when there shall no longer be any Registrable Shares outstanding. 12 15 SECTION 14. SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to the benefit of the Corporation and the Investors and, subject to Section 15, the respective successors and assigns of the Corporation and the Investors. SECTION 15. ASSIGNMENT. Each Investor may assign its rights hereunder to any purchaser or transferee of Registrable Shares; provided, however, that such purchaser or transferee shall, as a condition to the effectiveness of such assignment, be required to execute a counterpart to this Agreement agreeing to be treated as an Investor whereupon such purchaser or transferee shall have the benefits of, and shall be subject to the restrictions contained in, this Agreement as if such purchaser or transferee was originally included in the definition of an Investor herein and had originally been a party hereto. SECTION 16. ENTIRE AGREEMENT. This Agreement, the Securities Purchase Agreement, and the Stockholders Agreement (as defined in the Securities Purchase Agreement), each dated as of the date hereof, and the other writings referred to herein or therein or delivered pursuant hereto or thereto, contain the entire agreement among the Investors and the Corporation with respect to the subject matter hereof and supersede all prior and contemporaneous arrangements or understandings with respect thereto. SECTION 17. NOTICES. All notices, requests, consents and other communications hereunder to any party shall be deemed to be sufficient if contained in a written instrument delivered in person or sent by telecopy, nationally-recognized overnight courier or first class registered or certified mail, return receipt requested, postage prepaid, addressed to such party at the address set forth below or such other address as may hereafter be designated in writing by such party to the other parties: (i) if to the Corporation, to: National Network Technologies Inc. 88 White Street New York, NY 10013 Telephone: (212) 431-6007 Telecopy: (212) 334-0847 Attention: President with a copy to: 13 16 Christy & Viener 620 Fifth Avenue New York, NY 10020 Telephone: (212) 632-5500 Telecopy: (212) 632-5555 Attention: John F. Cambria, Esq. (ii) if to the Investors, to their respective addresses set forth on Schedule I hereto, with a copy to: O'Sullivan Graev & Karabell, LLP 30 Rockefeller Plaza New York, New York 10112 Telephone: (212) 408-2400 Telecopy: (212) 408-2420 Attention: Robert Seber, Esq. All such notices, requests, consents and other communications shall be deemed to have been delivered (a) in the case of personal delivery or delivery by telecopy, on the date of such delivery, (b) in the case of dispatch by nationally-recognized overnight courier, on the next business day following such dispatch and (c) in the case of mailing, on the third business day after the posting thereof. SECTION 18. MODIFICATIONS; AMENDMENTS; WAIVERS. The terms and provisions of this Agreement may not be modified or amended, nor may any provision be waived, except pursuant to a writing signed by the Corporation and the holders of at least 75% of the Registrable Shares then outstanding. SECTION 19. COUNTERPARTS; FACSIMILE SIGNATURES. This Agreement may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. Facsimile counterpart signatures to this Agreement shall be acceptable at the Closing (as defined in the Securities Purchase Agreement) if the originally executed counterpart is delivered within a reasonable period thereafter. SECTION 20. HEADINGS. The headings of the various sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be a part of this Agreement. 14 17 SECTION 21. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed wholly therein by residents thereof. 15 18 IN WITNESS WHEREOF, the parties hereto have executed this Registration Rights Agreement on the date first written above. NATIONAL NETWORK TECHNOLOGIES INC. By: /s/ Hugh O'Kane, Jr. ------------------------- Name: Hugh O'Kane, Jr. Title: President INVESTORS: LAWRENCE, SMITH & HOREY III, L.P. BY: LSH PARTNERS III, L.P., ITS GENERAL PARTNER By: /s/ Richard W. Smith ---------------------------- Richard W. Smith General Partner ABBOTT CAPITAL 1330 INVESTORS I, LP BY: ABBOTT CAPITAL 1330 GENPAR, LLC, ITS GENERAL PARTNER By: /s/ Thomas W. Hallagan -------------------------------- Thomas W. Hallagan, Its Manager Registration Rights Agreement Signature Page 16 19 SCHEDULE I INVESTORS Lawrence, Smith & Horey III, L.P. Abbott Capital 1330 Investors I, LP 17 EX-4.3 5 STOCKHOLDER AGREEMENT 1 EXHIBIT 4.3 - -------------------------------------------------------------------------------- STOCKHOLDERS' AGREEMENT DATED AS OF JULY 23,1998 - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
PAGE ---- Section.1. Definitions .................................................. 1 Section.2. Limitations on Transfers of Stock by Restricted Stockholders.. 5 Section.3. Right of First Refusal; Restricted Stockholders' Shares ...... 5 Section.4. Rights of Co-Sale ............................................ 8 Section.5. Right of First Offer; Investor Shares ........................ 9 Section.6. Right of First Offer; Corporation Stock ...................... 10 Section.7. Voting Agreement ............................................. 11 Section.8. Legend on Stock Certificates ................................. 12 Section.9. Additional Shares of Stock, Etc. ............................. 13 Section.10. Duration of Agreement; Compliance ............................ 13 Section.11. Severability; Governing Law .................................. 13 Section.12. Successors and Assigns ....................................... 13 Section.13. Notices ...................................................... 14 Section.14. Modification ................................................. 15 Section.15. Headings ..................................................... 15 Section.16. Nouns and Pronouns ........................................... 15 Section.17. Entire Agreement ............................................. 15 Section.18. Counterparts ................................................. 15
3 STOCKHOLDERS' AGREEMENT dated as of July 23, 1998, among NATIONAL NETWORK TECHNOLOGIES INC., a Delaware corporation (the "Corporation"), and the STOCKHOLDERS of the Corporation identified on Annex I (each, a "Stockholder," and, collectively, the "Stockholders"). Each Stockholder owns, on the date hereof, that number of shares of Stock (as hereinafter defined) set forth opposite such Stockholder's name on Annex I hereto. It is deemed to be in the best interest of the Corporation and the Stockholders that provision be made for the continuity and stability of the business and policies of the Corporation, and, to that end, the Corporation and the Stockholders hereby set forth their agreements with respect to the ownership, voting and transfer of shares of Stock owned by the Stockholders. NOW, THEREFORE, in consideration of the premises and of the mutual consents and obligations hereinafter set forth, the parties hereto hereby agree as follows: Section 1. Definitions. As used herein, the following terms shall have the following respective meanings: "Affiliate" means, with respect to any Person, any of (a) a director, officer, member, manager or partner of such Person, (b) the spouse, lineal descendant or adopted children of a Person who is an individual or a Person who is an Affiliate of such Person by virtue of clause (a); or (c) any other Person that, directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with, another Person. The term "control" includes, without limitation, the possession, directly or indirectly, of the power to direct the management and policies of a Person, whether through the ownership of voting securities or equity interests, by contract or otherwise. "Board" means the Board of Directors of the Corporation. "Charter" shall mean the Amended and Restated Certificate of Incorporation of the Corporation, as hereafter amended from time to time. "Common Stock" shall mean the common stock, par value, $.001 per share, of the Corporation. "Executive Management Stockholders" means Hugh O'Kane, Jr. and Kevin O'Kane. Each Executive Management Stockholder is also a Management Stockholder hereunder. 4 "Fair Value per Share" shall mean the fair value of each share of Stock, as determined in good faith by the Board, including at least one member of the Board designated by holders of Preferred Stock in accordance herewith. "Group" shall mean: (i) in the case of any Stockholder who is an individual, (A) such Stockholder, (B) the spouse, lineal descendants and adopted children of such Stockholder and (C) any entity established for the benefit of, or owned by, any of the foregoing; (ii) in the case of any Stockholder that is a partnership or limited liability company, (A) such entity and any of its members or limited or general partners, (B) any Person to which such partnership shall sell or transfer all or substantially all of its assets or with which it shall be merged and (C) any Affiliate of such partnership or limited liability company by virtue of the operation of clause (c) of the definition of "Affiliate" only; and (iii) in the case of any Stockholder that is a corporation, (A) such corporation, (B) any Person to which such corporation shall sell or transfer all or substantially all of its assets or with which it shall be merged and (C) any Affiliate of such corporation by virtue of the operation of clause (c) of the definition of "Affiliate" only. "Investors" shall mean the Persons designated as such on Annex I hereto, and shall include any successor to, or assignee or transferee of, any of the Investors who shall agree in writing to be treated as an Investor and to be bound by the terms and to comply with the provisions of this Agreement. Unless such an assignee or transferee agrees to be so bound and to comply, any such assignment or transfer by an Investor shall be null and void and shall not bind any of the parties hereto. "Liquidation" shall have the meaning set forth in the Charter. "Management Stockholders" shall mean each Person acquiring Stock who shall become a party hereto and who shall be designated a Management Stockholder on Annex I hereto and each member of the Group related to each of such Persons. "Outside Stockholders" shall mean each Person, other than a Stockholder identified on Annex I or a member of the Group related to a Stockholder, acquiring Stock who shall become a party hereto and who shall be designated an Outside Stockholder and each member of the Group related to each of such Persons. "Person" shall mean any individual, partnership, limited liability company, corporation, group, trust or other legal entity. 2 5 "Preferred Stock" shall mean the Series A Preferred Stock, par value $.001 per share, of the Corporation. "Proportionate Percentage" shall mean: (a) for the purposes of Section 3(a)(i), the pro rata percentage of Stock being offered by a Selling Group pursuant to Section 3(a)(i) that each Restricted Stockholder (other than the Selling Group) shall be entitled to purchase, which pro rata percentage, as to each such Restricted Stockholder, shall be the percentage figure which expresses the ratio, on a Common Stock equivalent basis (which for purposes of this Agreement shall mean after giving effect to the conversion of all securities convertible into Common Stock and the exercise of all options and warrants then exercisable for Common Stock), between the number of shares of Stock (as so converted) owned by such Restricted Stockholder and the aggregate number of shares of Stock (as so converted) owned by all Restricted Stockholders at the date of determination; (b) for the purposes of Section 3(a)(ii), the pro rata percentage of Stock being offered by a Selling Group pursuant to Section 3(a)(ii) that each Investor (other than the Selling Group) shall be entitled to purchase, which pro rata percentage, as to each such Investor, shall be the percentage figure which expresses the ratio, on a Common Stock equivalent basis (as described in clause (a) above), between the number of shares of Stock owned by such Investor and the aggregate number of shares of Stock owned by all Investors at the date of determination; (c) for the purposes of Section 3(b), the pro rata percentage of Stock being offered by a Selling, Group pursuant to Section 3(b) that each Investor (other than the Selling Group) shall be entitled to purchase, which pro rata percentage, as to each such Investor, shall be the percentage figure which expresses the ratio, on a Common Stock equivalent basis (as described in clause (a) above), between the number of shares of Stock owned by such Investor and the aggregate number of shares of Stock owned by all Investors at the date of determination; (d) for the purposes of Section 4(a), the pro rata percentage of the number of shares of Stock to which a Section 4(a) Offer relates that each Investor shall be entitled to Transfer to the Section 4(a) Offeror, which pro rata percentage, as to each such Investor, shall be the percentage figure which expresses the ratio, on a Common Stock equivalent basis (as described in clause (a) above), between the number of shares of Stock owned by such Investor and the aggregate number of shares of Stock owned by all Investors at the date of determination; (e) for the purposes of Section 4(b), the pro rata percentage of the number of shares of Stock to which a Section 4(b) Offer relates that each Investor shall be entitled to Transfer to the Section 4(b) Offeror, which pro rata percentage, as to each such Investor, shall be the percentage figure which expresses the ratio, on a Common Stock equivalent basis (as described in clause (a) above), between the number of shares of Stock owned by such Investor and the aggregate number of shares of Stock owned by all Investors other than the Section 4(b) Offeree at the date of determination; 3 6 (f) for the purposes of Section 5, the pro rata percentage of Stock being offered by a Section 5 Offeree pursuant to Section 5 that each Management Stockholder shall be entitled to purchase, which pro rata percentage, as to each such Management Stockholder, shall be the percentage figure which expresses the ratio, on a Common Stock equivalent basis (as described in clause (a) above), between the number of shares of Stock owned by such Management Stockholder and the aggregate number of shares of Stock owned by all Management Stockholders at the date of determination; and (g) for the purposes of Section 6, the pro rata percentage of Stock subject to purchase pursuant to Section 6 that each Investor shall be entitled to purchase, which pro rata percentage, as to each such Investor, shall be the percentage figure which expresses the ratio, on a Common Stock equivalent basis (as described in clause (a) above), between the number of shares of Stock owned by such Investor and the aggregate number of shares of Stock owned by all Investors at the date of determination. "Purchase Agreement" shall mean the Securities Purchase Agreement dated as of the date hereof, between the Corporation and the purchasers named therein, among others. "Qualified Public Offering" shall have the meaning set forth in the Charter. "Restricted Stockholders" shall mean Management Stockholders and Outside Stockholders. "Selling Group" shall mean a Stockholder or a member of the Group related to a Stockholder proposing to Transfer its Stock, or which has delivered a notice of intention to Transfer, pursuant to Section 3 or Section 5 hereof, as the case may be. "Stock" shall mean (a) the presently issued and outstanding shares of Common Stock and Preferred Stock and any options or stock subscription warrants exercisable therefor (which options and warrants shall be deemed to be that number of outstanding shares of Stock for which they are exercisable), (b) any additional shares of capital stock of the Corporation hereafter issued and outstanding and (c) any shares of capital stock of the Corporation into which such shares may be converted or for which they may be exchanged or exercised. "Stockholders" shall mean those persons identified on Annex I and shall include any other Person that owns Stock and agrees in writing to be bound by and to comply with all applicable provisions of this Agreement as a Stockholder hereunder. "Transfer," as to any Stock, shall mean to sell, or in any other way transfer, assign, pledge, distribute, encumber or otherwise dispose of, such Stock, either voluntarily or involuntarily, and with or without consideration. 4 7 Section 2. Limitations on Transfers of Stock by Restricted Stockholders. The Restricted Stockholders shall not, at any time during the term of this Agreement, Transfer any Stock without the prior written consent of the holders of at least seventy-five percent of the then outstanding Preferred Stock and without first complying with the provisions of Sections 3 and 4; provided, that a Restricted Stockholder may Transfer Stock to (a) an Affiliate of the Restricted Stockholder or (b) another member of the Group related to such Restricted Stockholder, in each case without such consent and without complying with Sections 3 and 4 of this Agreement, in each case if the recipient of such Stock shall agree in writing to be bound by and to comply with all applicable provisions of this Agreement and to be deemed a Restricted Stockholder hereunder. Notwithstanding anything contained herein to the contrary, each Executive Management Stockholder will have the right to Transfer without restriction hereunder or under Section 3 or 4, Stock aggregating up to (and including) 20% of the Stock held by such Executive Management Stockholder on the date hereof. Section 3. Right of First Refusal; Restricted Stockholders' Shares. (a) Except as otherwise provided in Section 2, a Restricted Stockholder shall not transfer any Stock, except in accordance with the applicable procedures in this Section 3. (i) In the event such Restricted Stockholder receives an offer from a Person to acquire any Stock of such Stockholder and such Stockholder intends to accept such offer, the Selling Group shall first deliver to the Corporation, the other non-selling Restricted Stockholders (the "Other Restricted Stockholders") and the Investors a written notice (the "Section 3(a) Offer Notice"), which shall be irrevocable for a period of 30 days after delivery thereof, offering (the "Section 3(a) Offer") all of the Stock proposed to be Transferred by the Selling Group at the purchase price and on the terms specified therein (such Section 3(a) Offer Notice shall include the foregoing information and all other relevant terms of the proposed Transfer). The Other Restricted Stockholders shall have the right and option, for a period of 30 days after receipt of a Section 3(a) Offer Notice, (i) to accept all or any part of its Proportionate Percentage of the Stock so offered at the purchase price and on the terms stated in the Section 3(a) Offer Notice, and (B) to offer, in any written notice of acceptance, to purchase any of such Stock not accepted by any of the Other Restricted Stockholders, in which case such Stock not accepted by any of the Other Restricted Stockholders shall be deemed to have been offered to and accepted by the Other Restricted Stockholders which exercised their options under this clause (B) pro rata in accordance with their respective Proportionate Percentages (computed without including the Other Restricted Stockholders who have not exercised their options to purchase Stock under clause (B) of this subparagraph (a)(i)), on the above-described terms and conditions. Such acceptance shall be made by delivering a written notice to the Corporation and the Selling Group within said 30-day period. 5 8 (ii) If the Other Restricted Stockholder(s) shall fail to accept all of the Stock offered for sale pursuant to, or shall reject in writing, the Section 3(a) Offer, then, upon the earlier of the expiration of such 30-day period or the receipt of such written notice of rejection or failure to accept such offer by the Other Restricted Stockholder(s), the Investors shall have the right and option, for a period of 30 days after the expiration of the above 30 days (A) to accept all or any part of its Proportionate Percentage of such Stock so offered and not accepted by the Other Restricted Stockholder(s) at the purchase price and on the terms stated in the Section 3 (a) Offer Notice and (ii) to offer, in any written notice of acceptance, to purchase any of such Stock not accepted by the other Investors, in which case such Stock not accepted by the other Investors shall be deemed to have been offered to and accepted by the Investors which exercised their option under this clause (B) pro rata in accordance with their respective Proportionate Percentage (computed without including the other Investors who have not exercised their option to purchase stock under clause (B) of this subparagraph (a)(ii)), on the above described terms and conditions. Such acceptance shall be made by delivering a written notice to the Corporation and the Selling Group within said 30-day period. (b) The Investors shall have a right of first refusal on Investors' shares as follows: (i) In the event that any Investor receives an offer from a Person to acquire any Stock of such Investor and such Investor intends to accept such offer, the Selling Group shall first deliver to the Corporation and other non-selling Investors (the "Other Investors") written notice (the "Section 3(b) Offer Notice" and, for purposes of Sections 3(c) through 3(f) hereof, together with the Section 3(a) Notice, the "Section 3 Notices") which shall be irrevocable for a period of 30 days after delivery thereof, offering (the "Section 3(b) Offer") all of the Stock proposed to be transferred by the Selling Group at the purchase price and on the terms specified therein (such Section 3(b) Offer shall include the foregoing information and all other terms of the Proposed Transfer). The Other Investors shall have the right and option, for a period of 30 days after receipt of a Section 3(b) Offer Notice, (i) to accept all or any part of its Proportionate Percentage of the Stock so offered at the purchase price and on the terms stated in the Section 3(b) Offer Notice, and (ii) to offer, in any written notice of acceptance, to purchase any of such stock not accepted by any of the Other Investors, in which case such Stock not accepted by any of the Other Investors shall be deemed to have been offered to and accepted by the Other Investors which exercised their options under this clause (ii) pro rata in accordance with their respective Proportionate Percentages (computed without including the Other Investors who have not exercised their options to purchase Stock under clause (ii) of this subparagraph (b)); on the above-described terms and conditions. Such acceptance shall be made by 6 9 delivering a written notice to the corporation and the Selling group within said 30-day period. (ii) If the Other Investor(s) shall fail to accept all of the Stock offered for sale pursuant to, or shall reject in writing, the Section 3(b) Offer, then, upon the earlier of the expiration of such 30-day period or the receipt of such written notice of rejection or failure to accept such offer by any of the Other Investor(s), each Investor shall have the right and option, for a period of 30 days after the expiration of the above 30 days to offer, in any written notice of acceptance, to purchase any of such Stock not accepted by the other Investors, in which case such Stock not accepted by the Other Investors shall be deemed to have been offered to and accepted by the Investors which exercised their options under this clause (ii) pro rata in accordance with their respective Proportionate Percentages (computed without including the Other Investors who have not exercised their option to purchase stock under this subparagraph (b)(ii)), on the above described terms and conditions. Such acceptance shall be made by delivering a written notice to the Corporation and the Selling Group within said 30-day period. (c) A notice of acceptance delivered by any of the Other Restricted Stockholders or the Investors pursuant to Sections 3(a) or 3(b), as the case may be, shall be a binding commitment to purchase the Stock referred to therein. (d) Transfers of Stock under the terms of Sections 3(a) and 3(b) shall be made at the offices of the Corporation on a mutually satisfactory business day within 30 days after the expiration of the last applicable period described in Section 3(a) or Section 3(b), as the case may be. Delivery of certificates or other instruments evidencing such Stock duly endorsed for Transfer shall be made on such date against payment of the purchase price therefor. (e) If effective acceptance shall not be received pursuant to Section 3(a) or Section 3(b), as the case may be, with respect to all Stock offered for sale pursuant to the Section 3 Offer Notices, then (subject, for events pursuant to Section 3(b), to Section 5 with respect to the Investors' shares of Preferred Stock) the Selling Group may Transfer all or any part of the Stock so offered and not so accepted at a price not less than the price, and on terms not more favorable to the purchaser thereof than upon the terms, stated in the Section 3 Offer Notices at any time within 30 days after the expiration of the offers required by Sections 3(a) and 3(b). In the event that the Stock is not Transferred by the Selling Group during such 30-day period, the right of the Selling Group to Transfer such Stock shall expire and the obligations of this Section 3 shall be reinstated. (f) Anything contained herein to the contrary notwithstanding, any purchaser of Stock pursuant to Section 3 who is not a Stockholder shall agree in writing in advance with the parties hereto to be bound by and comply with all applicable provisions of this Agreement and shall be deemed to be a Restricted Stockholder for all purposes of this Agreement. 7 10 Section 4. Rights of Co-Sale. (a) In the event that any Restricted Stockholder (hereinafter, the "Section 4(a) Offeree") receives an offer (the "Section 4(a) Offer") from a third party (other than a Person to whom Stock may be freely Transferred pursuant to Section 2, and other than for Stock that may be freely Transferred pursuant to Section 2) (the "Section 4(a) Offeror") to purchase from such Section 4(a) Offeree shares of Stock representing any of the shares of Stock held by such Stockholder for a specified price payable in cash or otherwise and on specified terms and conditions, such Section 4(a) Offeree shall promptly forward a notice (the "Section 4(a) Notice") complying with Section 4(c) to the Corporation and the Investors. Subject to Section 4(d), the Section 4(a) Offeree shall not Transfer any Stock to the Section 4(a) Offeror unless the terms of the Section 4(a) Offer are extended to the Investors with respect to their Proportionate Percentage of the aggregate number of shares of Stock (on a Common Stock equivalent basis) to which the Section 4(a) Offer relates, whereupon each Investor shall be entitled to Transfer to the Section 4(a) Offeror pursuant to the Section 4(a) Offer the Investor's Proportionate Percentage of the aggregate number of shares of Stock (on a Common Stock equivalent basis) to which the Section 4(a) Offer relates. (b) In the event that any Investor (hereinafter, the "Section 4(b) Offeree," and, for the purposes of Sections 4(c) and 4(d) hereof, together with the Section 4(a) Offeree, the "Section 4 Offerees") receives an offer (the "Section 4(b) Offer," and, for the purposes of Sections 4(c) and (d) hereof, together with the Section 4(a) Offer, the "Section 4 Offers") from a third party that is not a member of the Group related to such Stockholder (the "Section 4(b) Offeror," and, for the purposes of Sections 4(c) and (d) hereof, together with the Section 4(a) Offeror, the "Section 4 Offerors") to purchase from such Section 4(b) Offeree shares of Stock representing any of the shares of Stock held by such Stockholder for a specified price payable in cash or otherwise and on specified terms and conditions, such Section 4(b) Offeree shall promptly forward a notice (the "Section 4(b) Notice," and, for the purposes of Sections 4(c) and (d) hereof together with the Section 4(a) Notice, the "Section 4 Notices") complying with Section 4(c) to the Corporation and the Investors. Subject to Section 4(d), the Section 4(b) Offeree shall not Transfer any Stock to the Section 4(b) Offeror unless the terms of the Section 4(b) Offer are extended to the other Investors with respect to their Proportionate Percentage of the aggregate number of shares of Stock (on a Common Stock equivalent basis) to which the Section 4(b) Offer relates, whereupon each other Investor shall be entitled to Transfer to the Section 4(b) Offeror pursuant to the Section 4(b) Offer the Investor's Proportionate Percentage of the aggregate number of shares of Stock (on a Common Stock equivalent basis) to which the Section 4(b) Offer relates. (c) Any Section 4 Notices shall set forth, as appropriate, (i) the number of shares of Stock to which the applicable Section 4 Offer relates and the name of the applicable Section 4 Offeree, (ii) the name and address of the applicable Section 4 Offeror, (iii) the proposed amount and type of consideration (including, if the consideration consists in whole or in part of non-cash consideration, such information available to such Section 4 Offeree as may be reasonably necessary for the Investors to properly analyze the economic value and investment risk of such 8 11 non-cash consideration) and the terms and conditions of payment offered by such Section 4 Offeror and (iv) that such Section 4 Offeror has been informed of the co-sale rights provided for in this Section 4 and has agreed to purchase Stock in accordance with the terms of this Section 4. (d) Anything contained herein to the contrary notwithstanding, the Section 4 Offerees shall, in addition to complying with the provisions of this Section 4, comply with the provisions of Section 3 (it being understood that the Section 3 Offer Notice contemplated by Section 3(a) and the Section 4 Notices may be included in a single notice), and each Restricted Stockholder, prior to Transferring any Stock to the Section 4(a) Offeror, shall comply with the provisions of Section 3. (e) Anything contained herein to the contrary notwithstanding, any purchaser of Stock pursuant to this Section 4 which is not a Stockholder shall agree in writing to be bound by all applicable provisions of this Agreement and shall be deemed to be a Stockholder for all purposes of this Agreement. Section 5. Right of First Offer; Investor Shares. (a) At any time prior to a Qualified Public Offering or a Liquidation, none of the Investors shall sell or transfer all or any part of its Preferred Stock to any third party which is not then a member of the Group related to such Investor (a "Section 5 Offeree"), unless such Investor shall have first offered to sell such Preferred Stock to the Management Stockholders (the "Section 5 Offered Securities"), at each Management Stockholder's Proportional Percentage at a price and on such other terms and conditions as shall have been specified by such Investor in writing delivered to each Management Stockholder (the "Section 5 Offer"), which such Section 5 Offer by its terms shall remain open and irrevocable for a period of 30 days from the date it is delivered by the Investor to the Management Stockholders. (b) The Investor may specify in the Section 5 Offer that all or a minimum amount of the Section 5 Offered Securities must be sold in such offering (to the Management Stockholders and/or any third parties pursuant to Section 5(d)), in which case any Section 5 Notice of Acceptance (as defined below) shall be deemed conditioned upon (i) receipt of Section 5 Notices of Acceptance of all or such minimum amount, as applicable, of the Section 5 Offered Securities and/or (ii) the sale of all, or such minimum amount, as applicable, of the Section 5 Offered Securities pursuant to Section 5(d). (c) Notice of the Management Stockholders' intention to accept, in whole or in part, a Section 5 Offer shall be evidenced by a writing signed by such Management Stockholder and delivered to the Corporation prior to the end of the 30-day period of such Section 5 Offer, setting forth such portion of the Section 5 Offered Securities the Management Stockholders elect to purchase (the "Section 5 Notice of Acceptance"). 9 12 (d) In the event that Section 5 Notices of Acceptance are not given by the Management Stockholders in respect of all the Section 5 Offered Securities, the Investors shall have 120 days from the expiration of the foregoing 30-day period to sell all or any part of such Section 5 Offered Securities as to which Section 5 Notice of Acceptances have not been given by the Management Stockholders (the "Section 5 Refused Securities") to any other Person or Persons, but only upon terms and conditions in all material respects, including, without limitation, unit price, which are no more favorable to such other Person or Persons and no less favorable to the Investor(s) than those set forth in the Section 5 Offer. Upon the closing, which shall include full payment to the Investor(s), of the sale to such other Person or Persons of all the Refused Securities, the Management Stockholders shall purchase from the Investors, and the Investors shall sell to the Management Stockholders, the Section 5 Offered Securities in respect of which Section 5 Notice of Acceptances were delivered to the Investors by the Management Stockholders, at the terms specified in the Section 5 Offer. Section 6. Right of First Offer; Corporation Stock. (a) Except in the case of Excluded Securities (as hereinafter defined), the Corporation shall not issue, sell or exchange, agree to issue, sell or exchange, or reserve or set aside for issuance, sale or exchange, any (i) Stock, (ii) any other equity security of the Corporation, (iii) any debt security of the Corporation which by its terms is convertible into or exchangeable for any equity security of the Corporation or has any other equity feature, (iv) any security of the Corporation that is a combination of a debt and equity security or (v) any option, warrant or other right to subscribe for, purchase or otherwise acquire any security of the Corporation specified in the foregoing clauses (i) through (iv), unless in each case the Corporation shall have first offered to sell such securities to the Investors (the "Section 6 Offered Securities"), at each Investor's respective Proportional Percentage at a price and on such other terms and conditions as shall have been specified by the Corporation in writing delivered to each Investor (the "Section 6 Offer"), which Offer by its terms shall remain open and irrevocable for a period of 30 days from the date it is delivered by the Corporation to the Investors. (b) The Corporation may specify in the Section 6 Offer that all or a minimum amount of the Section 6 Offered Securities must be sold in such offering (to the Investors and/or any third parties pursuant to Section 6(d)), in which case any Section 6 Notice of Acceptance (as defined below) shall be deemed conditioned upon (i) receipt of Section 6 Notices of Acceptance of all or such minimum amount, as applicable, of the Section 6 Offered Securities and/or (ii) the sale of all, or such minimum amount, as applicable, of the Section 6 Offered Securities pursuant to Section 6(d). (c) Notice of the Investor's intention to accept, in whole or in part, a Section 6 Offer shall be evidenced by a writing signed by such Investor and delivered to the Corporation prior to the end of the 30-day period of such Offer, setting forth such portion of the Section 6 Offered Securities the Investors elect to purchase (the "Notice of Acceptance"). 10 13 (d) In the event that Notice of Acceptance is not given by the Investor(s) in respect of all the Offered Securities, the Corporation shall have 120 days from the expiration of the foregoing 30-day period to sell all or any part of such Section 6 Offered Securities as to which Section 6 Notice of Acceptances have not been given by the Investor(s) (the "Section 6 Refused Securities") to any other Person or Persons, but only upon terms and conditions in all material respects, including, without limitation, unit price and interest rates, which are no more favorable to such other Person or Persons and no less favorable to the Corporation than those set forth in the Section 6 Offer. Upon the closing, which shall include full payment to the Corporation, of the sale to such other Person or Persons of all the Section 6 Refused Securities, the Investors shall purchase from the Corporation, and the Corporation shall sell to the Investors, the Section 6 Offered Securities in respect of which Section 6 Notice of Acceptances were delivered to the Corporation by the Investors, at the terms specified in the Section 6 Offer. (e) In each case, any Section 6 Offered Securities not purchased by the Investors or any other Person or Persons in accordance with Section 6(d) may not be sold or otherwise disposed of until they are again offered to the Investors under the procedures specified in Sections 6(a), (c) and (d). (f) The rights of the Investors under this Section 6 shall not apply to the following securities (the "Excluded Securities"): (i) (A) up to a total of 2,288,000 shares (as adjusted equitably for stock dividends, stock splits, combinations, etc.) of Common Stock available for issuance pursuant to awards of stock-based compensation or incentives granted under plans for the benefit of directors, officers and employees of the Corporation or its subsidiaries pursuant to and in accordance with Stock Incentive Plans duly authorized by the Board and/or the appropriate committee thereof, and (B) shares of Stock issued upon conversion of shares of Preferred Stock, including in the case of both (A) and (B), any additional shares of Common Stock as may be issued by virtue of antidilution provisions, if any, applicable to such options or shares, as the case may be; (ii) Stock issued as a stock dividend or upon any stock, split or other subdivision or combination of shares of Stock; and (iii) Stock issued pursuant to a Qualified Public Offering. Section 7. Voting Agreement. Each Stockholder shall vote all of his or its Stock and shall take all other necessary or desirable actions within his or its control (whether in such Stockholder's capacity as a stockholder of the Corporation or otherwise, and including, without limitation, attendance at meetings in person or by proxy for purposes of obtaining a quorum and execution of written consents in lieu 11 14 of meetings), and the Corporation shall take all necessary and desirable actions within its control (including, without limitation, calling special Board and Stockholder meetings), so that: (a) the authorized number of directors on the Board shall be established at no less than seven directors; (b) three representatives designated by the holders of seventy-five percent of the Preferred Stock shall be elected to the Board in accordance with the terms of the Charter, at least one of which directors shall be (i) a third party that is unaffiliated, independent and unrelated to any of the holders of Preferred Stock and (ii) subject to the prior approval of the Management Stockholders, which approval shall not be unreasonably delayed or withheld; and (c) four representatives designated by the holders of a majority of the shares then held by the Management Stockholders shall be elected to the Board at least two of which directors shall be (i) third parties that are unaffiliated, independent and unrelated to any of the Corporation or any Management Stockholder and (ii) subject to the prior approval of the holders of a majority of the Preferred Stock then outstanding which approval shall not be unreasonably delayed or withheld. (d) Each Stockholder shall vote his, her or its shares of Stock (i) to remove any director whose removal is required by the party or parties with the power to designate such director and (ii) to fill any vacancy created by the removal, resignation or death of a director, in each case, for the election of a new director designated and approved, if approval is required, in accordance with the provisions of this Section 7. Vacancies of the Board shall be filled within thirty (30) days of the date such vacancy is created or immediately before the first action to be taken by the Board after the date such vacancy is created. (e) In the event that the Corporation acquires or creates any subsidiary, the Corporation and the Stockholders shall use their best efforts, in their capacity as a stockholder, partner or member of each such subsidiary, to cause the composition of the board of directors or equivalent governing body of such subsidiary to be identical or as nearly identical as possible, to the composition of the Board. In the event the Board creates or elects to create any committee of the Board or any committee of any subsidiary board of directors, any such committee shall reasonably reflect the voting composition of the Board or as otherwise agreed by six (6) out of seven (7) members of the Board. Section 8. Legend on Stock Certificates. Each certificate representing shares of Stock shall bear a legend containing the following words (in addition to any other legend required by law or applicable agreement): "THE SALE, TRANSFER, ASSIGNMENT, PLEDGE OR ENCUMBRANCE OF THE SECURITIES REPRESENTED BY 12 15 THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS OF A STOCKHOLDERS' AGREEMENT DATED AS OF JULY __, 1998, AMONG NATIONAL NETWORK TECHNOLOGIES INC. AND CERTAIN HOLDERS OF THE OUTSTANDING CAPITAL STOCK OF SUCH CORPORATION. COPIES OF SUCH AGREEMENT MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF SUCH CORPORATION." Section 9. Additional Shares of Stock, Etc. In the event additional shares of Stock are issued by the Corporation to a Stockholder or any employee of the Corporation at any time during the term of this Ageement, either directly or upon the exercise or exchange of securities of the Corporation exercisable for or exchangeable into shares of Stock, the Corporation shall require such additional shares of Stock, as a condition to such issuance, to become subject to the terms and provisions of this Agreement. Section 10. Duration of Agreement; Compliance. The rights and obligations of each Stockholder under this Agreement shall terminate as to such Stockholder upon the earliest to occur of (a) the Transfer of all Stock owned by such Stockholder, (b) the tenth anniversary of the date hereof, (c) the date on which less than one-third of the aggregate number of Preferred Shares issued to the Investors and outstanding as of the date hereof remains issued and outstanding and (d) a Qualified Public Offering. Section 11. Severability; Governing Law. If any provision of this Agreement shall be determined to be illegal and unenforceable by any court of law, the remaining provisions shall be severable and enforceable in accordance with their terms. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York, applicable to agreements made and fully to be performed therein by residents thereof, except to the extent that this Agreement relates to the internal laws of the Corporation, which shall be governed by and construed and enforced in accordance with the laws of the State of Delaware. Section 12. Successors and Assigns. This Agreement shall bind and inure to the benefit of the parties and their respective successors and permitted assigns, transferees, legal representatives and heirs. 13 16 Section 13. Notices. All notices, requests, consents and other communications hereunder to any party shall be deemed to be sufficient if contained in a written instrument delivered in person or by telecopy or sent by nationally-recognized overnight courier or first class registered or certified mail, return receipt requested, postage prepaid, addressed to such party at the address set forth below or at such other address as may hereafter be designated in writing by such party to the other parties: if to the Corporation, to: National Network Technologies Inc. 88 White Street New York, NY 10013 Telephone: (212) 431-6007 Telecopy: (212) 334-0847 Attention: President with a copy to: Christy & Viener 620 Fifth Avenue New York, NY 10020 Telephone: (212) 632-5500 Telecopy: (212) 632-5555 Attention: John F. Cambria, Esq if to the Investors, to their respective addresses set forth on Schedule I hereto with a copy to: O'Sullivan Graev & Karabell, LLP 30 Rockefeller Plaza New York, New York 10112 Telephone: (212) 408-2400 Telecopy: (212) 408-2420 Attention: Robert Seber, Esq. All such notices, requests, consents and other communications shall be deemed to have been delivered (a) in the case of personal delivery or delivery by telecopy, on the date of such delivery, (b) in the case of dispatch by nationally-recognized overnight courier, on the next business day following such dispatch and (c) in the case of mailing, on the third business day after the posting thereof. 14 17 Section 14. Modification. Except as otherwise provided herein, neither this Agreement nor any provisions hereof can be modified, changed, discharged or terminated except by an instrument in writing signed by (a) the Corporation, (b) the holders of at least seventy-five percent of the Stock then held by the Investors, and (c) the Executive Management Stockholders; provided, however, that no modification or amendment shall be effective to reduce the percentage of the shares of Stock the consent of the holders of which is required under this Section 14. Section 15. Headings. The headings of the sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be a part of this Agreement. Section 16. Nouns and Pronouns. Whenever the context may require, any pronouns used herein shall include the corresponding masculine, feminine or neuter forms, and the singular form of names and pronouns shall include the plural and vice versa. Section 17. Entire Agreement. This Agreement and the other writings referred to herein or delivered pursuant hereto contain the entire agreement among the parties hereto with respect to the subject matter hereof and supersede all prior and contemporaneous agreements and understandings with respect thereto. Section 18. Counterparts. This Agreement may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. * * * * * * 15 18 IN WITNESS WHEREOF, the parties hereto have executed this Stockholders' Agreement on the date first above written. NATIONAL NETWORK TECHNOLOGIES INC. By: /s/ Hugh O'Kane, Jr. ---------------------------- Name: Hugh O'Kane, Jr. Title: President 16 19 INVESTORS: LAWRENCE, SMITH & HOREY III, L.P. BY: LSH PARTNERS III, L.P., ITS GENERAL PARTNER By: /s/ Richard W. Smith ----------------------------- Richard W. Smith General Partner 17 20 ABBOTT CAPITAL 1330 INVESTORS I, LP BY: ABBOTT CAPITAL 1330 GENPAR, LLC, ITS GENERAL PARTNER By: /s/ Thomas W. Hallagan ___________________________________ Thomas W. Hallagan, Its Manager 18 21 MANAGEMENT STOCKHOLDERS By: /s/ Hugh O'Kane, Jr. ___________________________________ Hugh O'Kane, Jr. 19 22 By: /s/ Kevin O'Kane ________________________________________ Kevin O'Kane 20 23 By: /s/ Denis O'Kane ________________________________________ Denis O'Kane 21 24 ANNEX I
- -------------------------------------------------------------------------------- SERIES A CONVERTIBLE STOCKHOLDERS PREFERRED STOCK COMMON STOCK - -------------------------------------------------------------------------------- INVESTORS - -------------------------------------------------------------------------------- Lawrence, Smith & Horey III, 1,685,618 L.P. - -------------------------------------------------------------------------------- Abbott Capital 1330 Investors I, 3,852,840 L.P. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- MANAGEMENT STOCKHOLDERS - -------------------------------------------------------------------------------- Hugh O'Kane, Jr. - -------------------------------------------------------------------------------- Kevin O'Kane - -------------------------------------------------------------------------------- Denis O'Kane - --------------------------------------------------------------------------------
22 25 AMENDMENT NO. 1 TO STOCKHOLDERS' AGREEMENT AMENDMENT NO. 1, dated JANUARY 13, 2000, to the STOCKHOLDERS' AGREEMENT, dated as of July 23, 1998 (as amended to date, the "Stockholders' Agreement"), among Lexent Inc. (known in the original Stockholders' Agreement as National Network Technologies Inc.) (the "Corporation"), and the Stockholders of the Corporation identified on the signature pages hereto (each a "Stockholder" and collectively, the "Stockholders"). WHEREAS, the Executive Management Stockholders, Allegra Capital Partners III, L.P. (known in the original Stockholders' Agreement as Lawrence, Smith & Horey III, L.P.) ("Allegra III") and Allegra Capital Partners IV, L.P. ("Allegra IV") have entered into a Securities Purchase Agreement dated as of the date hereof, whereby Allegra III and Allegra IV have agreed to purchase an aggregate of 300,000 shares of Common Stock (the "Shares"), par value $.001 per share, of the Corporation from the Executive Management Stockholders; and WHEREAS, the parties hereto desire to amend the Stockholders' Agreement to (i) include Allegra IV as a party thereto for purposes of Section 7 and Sections 10 through 18, (ii) amend the provisions of the voting agreement contained in Section 7 and (iii) amend the definition of Excluded Securities. NOW THEREFORE, the parties hereto agree as follows: SECTION 1. Definitions. Capitalized terms used herein without definition shall have the meanings ascribed to them in the Stockholders' Agreement. SECTION 2. Joinder; Treatment of the Shares. Allegra IV shall be deemed a "Stockholder" under the Stockholders' Agreement solely for purposes of Section 7 and Sections 10 through 18 thereof. Allegra IV hereby confirms and agrees to be bound by Section 7 and Sections 10 through 18 of the Stockholders' Agreement. Other than for purposes of Section 7 of the Stockholders' Agreement, the Shares shall not be subject to the provisions of the Stockholders' Agreement, nor shall the holders of the Shares have any of the benefits of the Stockholders' Agreement or be subject to any of its restrictions or obligations with respect to the Shares. SECTION 3. Amendment to Section 7. Section 7 of the Stockholders' Agreement is hereby amended to read in its entirety as follows: 26 "Section 7. Voting Agreement. (a) Each Stockholder shall vote all of his, her or its Stock and shall take all other necessary or desirable actions within his, her or its control (whether in such Stockholder's capacity as a stockholder of the Corporation or otherwise, and including, without limitation, attendance at meetings in person or by proxy for purposes of obtaining a quorum and execution of written consents in lieu of meetings), and the Corporation shall take all necessary and desirable actions within its control (including, without limitation, calling special Board and Stockholder meetings), so that: (i) the authorized number of directors on the Board shall be established at no less than seven directors; (ii) three representatives designated by the holders of seventy-five percent of the Preferred Stock shall be elected to the Board in accordance with the terms of the Charter, one of which shall be designated by Abbott Capital 1330 Investors I, L.P., one of which shall be designated by Allegra IV and at least one of which directors shall be (A) a third party that is unaffiliated, independent and unrelated to any of the holders of Preferred Stock and (B) subject to the prior approval of the Management Stockholders, which approval shall not be unreasonably delayed or withheld; and (iii) four representatives designated by the holders of a majority of the shares then held by the Management Stockholders shall be elected to the Board at least two of which directors shall be (A) third parties that are unaffiliated, independent and unrelated to any of the Corporation or any Management Stockholder and (B) subject to the prior approval of the holders of a majority of the Preferred Stock then outstanding, which approval shall not be unreasonably delayed or withheld. (b) Each Stockholder shall vote his, her or its Stock (i) to remove any director whose removal is required by the party or parties with the power to designate such director and (ii) to fill any vacancy created by the removal, resignation or death of a director, in each case, for the election of a new director designated and approved, if approval is required, in accordance with the provisions of this Section 7. Vacancies of the Board shall be filled within thirty (30) days of the date such vacancy is created or immediately before the first action to be taken by the Board after the date such vacancy is created. (c) In the event that the Corporation acquires or creates any subsidiary, the Corporation and the Stockholders shall use their best efforts, in their capacity as a stockholder, partner or member of each such subsidiary, to cause the composition of the board of directors or equivalent governing body of such subsidiary to be identical or as nearly identical as possible, to the composition of the Board. In the event the Board creates or elects to create any committee of the -2- 27 Board or any committee of any subsidiary board of directors, any such committee shall reasonably reflect the voting composition of the Board or as otherwise agreed by six (6) out of seven (7) members of the Board." SECTION 4. Amendment to Section 6. Subsection (f) of Section 6 of the Stockholders' Agreement is hereby amended to read in its entirety as follows: "(f) The rights of the Investors under this Section 6 shall not apply to the following securities (the "Excluded Securities"): (i) (A) up to a total of 4,800,000 shares (as adjusted equitably for stock dividends, stock splits, combinations, etc.) of Common Stock available for issuance pursuant to awards of stock-based compensation or incentives granted under plans for the benefit of directors, officers and employees of the Corporation or its subsidiaries pursuant to and in accordance with Stock Incentive Plans duly authorized by the Board and/or the appropriate committee thereof, and (B) shares of Stock issued upon conversion of shares of Preferred Stock, including in the case of both (A) and (B), any additional shares of Common Stock as may be issued by virtue of antidilution provisions, if any, applicable to such options or shares, as the case may be; (ii) Stock issued as a stock dividend or upon any stock split or other subdivision or combination of shares of Stock; (iii) Up to a total of 215,000 shares of Common Stock to be issued to Alf Hansen for a purchase price of not less than $10.00 per share; and (iv) Stock issued pursuant to a Qualified Public Offering." SECTION 5. Amendment to Section 10. Section 10 of the Stockholders' Agreement is hereby amended to read in its entirety as follows: "The rights and obligations of each Stockholder under this Agreement shall terminate as to such Stockholder upon the earliest to occur of (a) the Transfer of all Stock owned by such Stockholder (and, in the case of Allegra IV's right to designate a director pursuant to Section 7, the Transfer of all Stock owned by Allegra III to any party which is not part of Allegra III's or Allegra IV's Group), (b) the tenth anniversary of the date hereof, (c) the date on which less than one-third of the aggregate number of Preferred Shares issued to the Investors and outstanding as of the date hereof remains issued and outstanding and (d) a Qualified Public Offering." SECTION 6. Applicable Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York, without regard to conflicts of law principles. -3- 28 SECTION 7. Original Agreement. Except as amended or modified pursuant to this Amendment, the terms of the Stockholders' Agreement shall remain in full force and effect. SECTION 8. Counterparts; Effectiveness. This Amendment may be executed in any number of counterparts, each of which shall be an original with the same effect as if the signatures thereto and hereto were upon the same instrument. -4- 29 IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. LEXENT INC. By /s/ KEVIN M. O'KANE ------------------------------ Name: Kevin M. O'Kane Title: Chief Operating Officer ALLEGRA CAPITAL PARTNERS III, L.P. By: Allegra Partners III, L.P., its general partner By /s/ RICHARD W. SMITH ------------------------------ Name: Richard W. Smith Title: General Partner ALLEGRA CAPITAL PARTNERS IV, L.P. By: Allegra Partners IV, L.L.C., its general partner By /s/ RICHARD W. SMITH ------------------------------- Name: Richard W. Smith Title: General Partner ABBOTT CAPITAL 1330 INVESTORS I, LP By: Abbott Capital 1330 GenPar, LLC., its general partner By /s/ THOMAS W. HALLAGAN -------------------------------- Name: Thomas W. Hallagan Title: General Partner -5- 30 /s/ HUGH J. O'KANE, JR. ----------------------------------- Hugh O' Kane /s/ KEVIN M. O'KANE ----------------------------------- Kevin O' Kane -6- EX-4.4 6 AGREEMENT 1 Exhibit 4.4 AGREEMENT AGREEMENT, dated as of July 20, 1998, by and among National Network Technologies, Inc., a corporation organized and existing under the laws of the State of Delaware (the "Company"), Hugh O'Kane Electric Co., Inc., a corporation organized and existing under the laws of the State of New York (the "Predecessor") and Denis J. O'Kane, a resident of the State of New York. WHEREAS the Company and the Predecessor entered into that certain Merger Agreement dated on or about July 22, 1998 (the "Merger Agreement"), pursuant to the terms of which, the Predecessor shall be merged with and into the Company (the "Merger"), with the Company surviving and continuing in existence under the provisions of the General Corporation Law of the State of Delaware (the "DGCL"); and WHEREAS the Company, Denis J. O'Kane, Hugh O'Kane, Jr. and Kevin O'Kane, and Lawrence, Smith & Horey III, L.P. and Abbott Capital 1330 Investors I, L.P. intend to enter into that certain Securities Purchase Agreement dated as of July 23, 1998 (the "Securities Purchase Agreement"), pursuant to the terms of which Lawrence, Smith & Horey III, L.P. and Abbott Capital 1330 Investors I, L.P. shall purchase 5,538,458 shares of Series A Convertible Preferred Stock, $.001 par value, of the Company for $11.5 million (the "Securities Purchase"); and WHEREAS Denis J. O'Kane is a shareholder of the Predecessor; NOW, THEREFORE, as a material inducement to Denis J. O'Kane to enter into and perform his obligations under the Merger Agreement and the Securities Purchase Agreement, each of the Company and the Predecessor hereby agree as follows: 1. Denis J. O'Kane's interest in the Company following the consummation of the Merger and the Securities Purchase shall be four and 17/100ths percent (4.17%) of the capital stock of the Company, which stock shall be fully paid and non-assessable. Denis J. O'Kane's holding of capital stock of the Company shall be subject to dilution only (i) by the same percentage amount applicable to each of the shareholders of the Company's capital stock, such that, for example, if the amount of stock held by one of the shareholders is to be diluted by 2%, then the amount of stock held by Denis J. O'Kane shall be diluted only to the extent of 2%; (ii) to the extent of 417/1000ths percent (0.417%) (yielding a total holding of 3.7530% of such capital stock) and only in the context of shares being offered to key executives or employees for purposes of an employee stock option plan; and (iii) as provided for by the Securities Purchase Agreement and in accordance with the DGCL in the event of a properly approved future offering or financing. 2. The Company shall provide Denis J. O'Kane with lifetime medical, dental, life and health insurance benefits consistent with Denis J. O'Kane's existing coverage. 2 3. The Company agrees to make available to Denis J. O'Kane the use of a Chevrolet Suburban for so long as Denis J. O'Kane remains a shareholder of the Company. Such automobile shall be replaced at Denis J. O'Kane's option by the Company every three years, with the first new Chevrolet Suburban to be provided on or about August 1, 1998. In the event the Company is unable, through no fault of its own, to procure a current model Chevrolet Suburban by December 31, 1998 or at the end of any such three-year period, the Company shall, at Denis J. O'Kane's option, provide Denis J. O'Kane with a model of vehicle similar to the Chevrolet Suburban in both cost and specifications. 4. As of the date hereof, the Predecessor holds the title to the following automobiles: (a) 1996 Mercedes 420S; and (b) 1984 Mercedes Station Wagon. Following the consummation of the Merger and the Securities Purchase, the Company shall offer to Denis J. O'Kane the 1996 Mercedes 420S for $35,000 and the 1984 Mercedes Station Wagon for $1.00. Denis J. O'Kane shall have the option of purchasing one or both of these automobiles for such amounts, and this provision shall in no way be interpreted as requiring Denis J. O'Kane to purchase either or both of these automobiles. 5. The Company agrees to provide without charge to Denis J. O'Kane an office for Denis J. O'Kane at his primary residence and secretarial services at the Company for so long as Denis J. O'Kane shall remain a shareholder of the Company. 6. The Company agrees to provide Denis J. O'Kane with the following reports: (a) As soon as practicable after the end of each fiscal year, and in any event within 120 days thereafter, consolidated and consolidating balance sheets of the Company and all direct or indirect subsidiaries of the Company, as of the end of such fiscal year, and consolidated and consolidating statements of income and consolidated and consolidating statements of changes in cash flow of the Company and its subsidiaries for such fiscal year, prepared in accordance with Generally accepted accounting principles and setting forth in each case in comparative form the figures for the previous fiscal year and the budgeted figures for the current fiscal year, all in reasonable detail and audited, together with a certificate of the Company executed by the chief executive officer or principal financial or accounting officer of the Company certifying that all covenants to be complied with by the Company, as provided in the Securities Purchase Agreement have been complied with (or setting forth in reasonable detail any covenants that have not been so complied with). (b) As soon as practicable after the end of the first, second, third and fourth quarterly accounting periods in each fiscal year of the Company and in any event within 45 days thereafter, consolidated and consolidating balance sheets of the Company and all direct and indirect subsidiaries of the Company, as of the end of each such quarterly period, and consolidated and consolidating statements of income and consolidated and consolidating statements of change in cash flow of the Company and its subsidiaries for such period and for the current fiscal year to date, prepared in accordance with generally accepted accounting principles 2 3 (other than for accompanying notes), subject to changes resulting from normal year-end audit adjustments, and setting forth in each case in comparative form the figures for the same periods of the previous year and the budgeted figures for the current periods, all in reasonable detail and signed by the principal financial or accounting officer of the Company, together with a certificate of the Company executed by the chief executive officer or principal financial or accounting officer of the Company certifying that all covenants to be complied with by the Company under the Securities Purchase Agreement have been complied with (or setting forth in reasonable detail any covenants that have not been so complied with). 7. The Company agrees to pay all legal fees and other expenses incurred by Denis J. O'Kane in connection with the Merger, the Securities Purchase, and such other transactions as relate to the Merger and the Securities Purchase. Provided the Merger and the Securities Purchase close on or before July 31, 1998, the maximum of such reimbursement under this provision shall not exceed $40,000. 8. The Company hereby indemnifies Denis J. O'Kane and shall save and hold him harmless against and pay on behalf of or reimburse him as and when incurred for any loss, liability, legal fees, interest, penalty, demand, claim, action, cause of action, cost, damage, deficiency, tax, fine or expense, arising out of or related to any claims made by or on behalf of any person or entity, which Denis J. O'Kane may suffer, sustain or become subject to, as a result of, or in connection with, relating or incidental to the Company or the Predecessor. 9. Denis J. O'Kane (i) acknowledges that he has consulted with, and been advised by, independent counsel with respect to this Agreement and the transactions contemplated by the Merger Agreement, and the Securities Purchase Agreement, and that he and his counsel have been provided copies of these and related agreements; and (ii) acknowledges that he has approved the proposed transaction contemplated by the Merger Agreement and the Securities Purchase Agreement, and releases any claims and causes of action with respect to the Merger and the Securities Purchase Agreement as against the Company, the Predecessor, Hugh O'Kane, Jr. and Kevin O'Kane; provided, however, that notwithstanding anything contained herein, Denis J. O'Kane does not release any claim or cause of action for breach of (a) this Agreement, (b) the Merger Agreement, (c) the Securities Purchase Agreement, (d) that certain Stockholders' Agreement by and among the Company, Denis J. O'Kane, Hugh O'Kane, Jr. and Kevin O'Kane, and Lawrence, Smith & Horey III, L.P. and Abbott Capital 1330 Investors I, LP., dated as of July 23, 1998, (d) that certain Promissory Note dated July 16, 1998, and executed and delivered by the Predecessor to Denis J. O'Kane, (e) that certain Promissory Note dated January 1, 1997, and executed and delivered by the Predecessor to Denis J. O'Kane, or (f) that certain Amended and Restated Promissory Note dated July 23, 1998, and executed and delivered by the Company to Denis J. O'Kane. 10. This Agreement shall not confer any rights or remedies upon any individual or legal entity other than the parties and their respective successors and permitted assigns, personal representatives, heirs and estates, as the case may be. 3 4 11. This Agreement constitutes the entire agreement among the parties and supersedes any prior understandings, agreements or representations by or among the parties, written or oral, that may have related in any way to the subject matter of this Agreement. 12. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors, heirs, estate and permitted assigns. No party may assign either this Agreement or any of its rights, interests, or obligations hereunder without the prior written approval of the other parties. 13. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 14. This Agreement will be governed by and construed in accordance with the domestic laws of the State of New York, without giving effect to any choice of law or conflicting provision or rule that would cause the laws of any jurisdiction other than the State of New York to be applied. In furtherance of the foregoing, the internal law of the State of New York will control the interpretation and construction of this Agreement, even if under such jurisdiction's choice of law or conflict of law analysis, the substantive law of some other jurisdiction would ordinarily apply. The parties hereby irrevocably submit to the jurisdiction of any New York State or Federal court sitting in the State, City and County of New York in any action or proceeding arising out of or relating to this Agreement, and the parties hereto irrevocably agree that all claims with respect to such action or proceeding shall be heard and determined in such a New York State or Federal court. 15. No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by all of the parties. No waiver by any party of any default, misrepresentation, or breach of covenant hereunder, whether or not intentional, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 16. The parties shall each have and retain all other rights and remedies existing in their favor at law or equity, including, without limitation, any actions for specific performance and/or injunctive or other equitable relief to enforce or prevent any violations of the provisions of this Agreement. 17. It is the desire and intent of the parties that the provisions of this Agreement be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any particular provision of this Agreement shall be adjudicated by a court of competent jurisdiction to be invalid, prohibited or unenforceable for any reason, such provision, as to such jurisdiction, shall be ineffective, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. Notwithstanding the foregoing, if such provision could be more narrowly drawn so 4 5 as not to be invalid, prohibited or unenforceable in such jurisdiction, it shall, as to such jurisdiction, be so narrowly drawn, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. * * * * * IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. Company: NATIONAL NETWORK TECHNOLOGIES, INC. By: /s/ HUGH J. O'KANE, JR. --------------------------------- Name: Hugh O'Kane, Jr. Title: President Predecessor: HUGH O'KANE ELECTRIC CO., INC. By: /s/ HUGH J. O'KANE, JR. --------------------------------- Name: Hugh O'Kane, Jr. Title: President By: /s/ DENIS J. O'KANE --------------------------------- Name: Denis J. O'Kane Title: President 5 EX-4.5 7 VOTING AGREEMENT 1 Exhibit 4.5 VOTING AGREEMENT, dated as of February 14, 2000, by and among Lexent Inc. (the "Company"), Hugh J. O'Kane, Jr. ("Hugh O'Kane"), and Kevin M. O'Kane ("Kevin O'Kane" and together with Hugh O'Kane, the "Stockholders"). WHEREAS, Hugh O'Kane and Kevin O'Kane are stockholders of the Company and wish to provide for the continuity and stability of the policy and management of the Company in the event that either dies; and WHEREAS, Hugh O'Kane is about to establish the Hugh J. O'Kane, Jr. 2000 Grantor Retained Annuity Trust (the "GRAT Trust") and the Hugh J. O'Kane, Jr. 2000 Remainder Trust (the "Remainder Trust" and together with the GRAT Trust, the "Trusts"), and he is initially going to transfer 1,400,000 shares of Common Stock, $.001 par value, of the Company ("Common Stock"), to the GRAT Trust, which shares he wishes to be and remain subject to the provisions of this Voting Agreement; NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, and other good and valuable consideration, the parties hereto agree as follows: SECTION 1. Voting Agreement; Proxies. (a) Hugh O'Kane agrees that in the event of his death, Kevin O'Kane shall have, for a period of three (3) years from such date (the "HOK Voting Period"), the unilateral right to vote all shares of capital stock (and other voting interests) of the Company (and any other shares of capital stock or other equity interests of any successor entity or as may result from any reorganization, reclassification, merger, or similar event, as the case may be (such shares and interests are collectively referred to herein as the "HOK Voting Shares")) owned of record or beneficially by him at his death, and, accordingly, the undersigned Hugh O'Kane hereby irrevocably appoints Kevin O'Kane as his lawful proxy agent to vote any or all of the aforementioned HOK Voting Shares during the HOK Voting Period at any and all general or special meetings of stockholders, whether in person, by proxy or by written consent. Hugh O'Kane expressly intends that this Agreement shall be binding upon his heirs, beneficiaries, legatees, executors, trustees and legal guardians. Hugh O'Kane acknowledges that the Common Stock being transferred by him to the GRAT Trust (and thereafter to the Remainder Trust) is and shall remain subject to this Agreement. (b) Kevin O'Kane agrees that in the event of his death, Hugh O'Kane shall have, for a period of three (3) years from such date (the "KOK Voting Period"), the unilateral right to vote all shares of capital stock (and other voting interests) of the Company (and any other shares of capital stock or other equity interests of any successor entity or as may result from any reorganization, reclassification, merger, or similar event, as the case may be (such shares and interests are collectively referred to herein as the "KOK Voting Shares," and together with the HOK Voting Shares, as the "Voting Shares")) owned of record or beneficially by him at his 2 death, and, accordingly, the undersigned Kevin O'Kane hereby irrevocably appoints Hugh O'Kane as his lawful proxy agent to vote any or all of the aforementioned KOK Voting Shares during the KOK Voting Period at any and all general or special meetings of stockholders, whether in person, by proxy or by written consent. Kevin O'Kane expressly intends that this Agreement shall be binding upon his heirs, beneficiaries, legatees, executors, trustees and legal guardians. SECTION 2. Restriction on Transfer. No Stockholder shall transfer any Voting Shares during the term of this Agreement unless, in each case, either (i) the recipient of such Voting Shares shall agree in writing to be bound by and comply with all applicable provisions of this Agreement as fully as required of the transferor and be deemed to be a Stockholder hereunder, or (ii) the transfer is pursuant to a registered public offering under the Securities Act of 1933, as amended (the "Act") or pursuant to Rule 144 under the Act. SECTION 3. Legend on Stock Certificates. Each certificate representing Voting Shares shall conspicuously bear the following legend until such time as the shares represented thereby are no longer subject to the provisions hereof: "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS OF AN AGREEMENT, DATED FEBRUARY 14, 2000, AMONG THE COMPANY, HUGH J. O'KANE, JR., KEVIN M. O'KANE. COPIES MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE COMPANY." The Company covenants that it shall file a copy of this Agreement in its stock books and shall keep a copy thereof at its corporate headquarters. SECTION 4. Duration of Agreement. This Agreement shall terminate upon the earlier to occur of either the (i) third anniversary of the death of the first to die of Hugh O'Kane or Kevin O'Kane or (ii) the first date upon which both individuals are deceased. SECTION 5. Representations and Warranties. Each Stockholder, severally and not jointly, represents and warrants to the Company and the other Stockholders as follows: (a) The execution, delivery and performance of this Agreement by such Stockholder will not violate any provision of law, any order of any court or other agency of government, or any provision of any indenture, agreement or other instrument to which such Stockholder or any of its or his properties or assets is bound, or conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any such indenture, agreement or other instrument, or result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the properties or assets of such Stockholder. (b) This Agreement has been duly executed and delivered by such Stockholder 3 and, when executed by the other parties hereto, constitutes the legal, valid and binding obligation of such Stockholder, enforceable in accordance with its terms, subject, as to enforcement of remedies, to applicable bankruptcy, insolvency, fraudulent conveyance and similar laws and to limitations on the availability of equitable remedies. (c) The shares of Common Stock listed in Annex I opposite the name of such Stockholder constitute all the shares of the capital stock of the Company owned by such Stock holder on the date hereof. SECTION 6. Headings. Headings of articles, sections and paragraphs of this Agreement are inserted for convenience of reference only and shall not affect the interpretation or be deemed to constitute a part hereof. SECTION 7. Severability. In the event that any one or more of the provisions contained in this Agreement or in any other instrument referred to herein shall, for any reason, be held to be invalid, illegal or unenforceable, such illegality, invalidity or unenforceability shall not affect any other provisions of this Agreement. SECTION 8. Benefits of Agreement. Nothing expressed by or mentioned in this Agreement is intended or shall be construed to give any person other than the parties hereto and their respective successors and permitted assigns any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of the parties hereto and their respective successors and permitted assigns. SECTION 9. Notices. Any notice or other communications required or permitted hereunder shall be deemed to be sufficient and received if contained in a written instrument delivered in person or by courier or duly sent by first class certified mail, postage prepaid, or by telecopy addressed to such party at the address or telecopy number set forth below: (1) if to the Company, to it at: Lexent Inc. 3 New York Plaza New York, NY 10004 Attention: Chairman Telecopy: (212) 981-2493 with a copy to: Reboul, MacMurray, Hewitt, Maynard & Kristol 45 Rockefeller Plaza New York, NY 10111 4 Attention: Joshua A. Leuchtenburg, Esq. Telecopy: (212) 841-5725 (2) if to any Stockholder, to it at its address appearing on Annex I hereto; or, in any case, at such other address or telecopy number as shall have been furnished in writing by such party to the other parties hereto. All such notices, requests, consents and other communications shall be deemed to have been received (a) in the case of personal or courier delivery, on the date of such delivery, (b) in the case of mailing, on the fifth business day following the date of such mailing and (c) in the case of telecopy, when received. SECTION 10. Modification. Except as otherwise provided herein, neither this Agreement nor any provision hereof may be modified, changed, discharged or terminated except by an instrument in writing signed by the parties hereto. SECTION 11. Counterparts. This Agreement may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. SECTION 12. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF DELAWARE. 5 IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement as a sealed instrument, all as of the day and year first above written. LEXENT INC. By /s/ HUGH O'KANE, JR. ---------------------------------- Name: Hugh J. O'Kane, Jr. Title: Chairman /s/ HUGH O'KANE, JR. ---------------------------------- Hugh J. O'Kane, Jr. /s/ KEVIN M. O'KANE ---------------------------------- Kevin M. O'Kane ACKNOWLEDGED AND CONSENTED TO AS OF FEBRUARY 14, 2000 By /s/ PATRICIA O'KANE ------------------------------- Name of Spouse: Patricia O'Kane By /s/ MARGARET O'KANE ------------------------------- Name of Spouse: Margaret O'Kane HUGH J. O'KANE, JR. 2000 GRANTOR RETAINED ANNUITY TRUST By /s/ KEVIN M. O'KANE -------------------------------- Name of Trustee: Kevin M. O'Kane By /s/ PATRICIA O'KANE -------------------------------- Name of Trustee: Patricia O'Kane HUGH J. O'KANE, JR. 2000 REMAINDER TRUST By /s/ KEVIN M. O'KANE -------------------------------- Name of Trustee: Kevin M. O'Kane By /s/ PATRICIA O'KANE -------------------------------- Name of Trustee: Patricia O'Kane EX-10.2 8 FORM OF STOCK OPTION AGREEMENT 1 Exhibit 10.2 LEXENT INC. Incentive Stock Option Agreement , 2000 Employee/Optionee: Number of shares of Common Stock subject to this Agreement: SHARES Pursuant to the Lexent Inc. and its Subsidiaries Amended and Restated Stock Option and Restricted Stock Purchase Plan (the "Plan"), the Board of Directors of Lexent Inc. (the "Company") has granted to you on this date an option (the "Option") to purchase in the aggregate, on the terms and subject to the conditions set forth herein, shares of the Company's Common Stock, $.001 par value ("Common Stock"). Such shares (as the same may be adjusted as described in Section 11 below) are herein referred to as the "Option Shares". The Option shall constitute and be treated at all times by you and the Company as an "incentive stock option" as defined under Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"). The terms and conditions of the Option are set out below. 1. Date of Grant. The Option is granted to you on , 2000 (the "Grant Date"). 2. Termination of Option. Your right to exercise the Option (and to purchase the Option Shares) shall expire and terminate in all events on the earlier of (i) ten years from the Grant Date or (ii) the date provided in Section 8 below in the event you cease to be employed by the Company or any "Subsidiary" or "Parent" thereof ("Subsidiary" and "Parent" are defined herein as defined in the Plan). 3. Option Price. The purchase price to be paid upon the exercise of the Option is $ per share, the fair market value of a share of Common Stock (as determined by the Board of Directors of the Company) on the Grant Date (subject to adjustment as provided in Section 11 hereof). 2 4. Vesting Provisions. The Option shall be exercisable as follows: 25% shall be exercisable 12 months after the Grant Date, and the balance shall be exercisable on an equal monthly basis at the end of each month thereafter for the following 36 months (in each case rounded to the nearest whole share). 5. Additional Provisions Relating to Exercise. (a) Once you become entitled to exercise the Option (and purchase Option Shares) as provided in Section 4 hereof, such right will continue until the date on which such Option expires and terminates pursuant to Section 2 hereof, unless otherwise stipulated herein. Notwithstanding anything contained herein to the contrary, no new rights to exercise the Option with respect to any Option Shares shall be acquired under Section 4 hereof after the date on which you cease to be employed on a full-time basis by the Company or any Subsidiary or Parent thereof. (b) The Board of Directors of the Company, in its sole discretion, may at any time accelerate the time set forth in Section 4 at which the Option may be exercised by you with respect to any Option Shares. 6. Exercise of Option. To exercise the Option, you must deliver a completed copy of the attached Option Exercise Form to the address indicated on the Form, specifying the number of Option Shares being purchased as a result of such exercise, together with payment of the full option price for the Option Shares being purchased. Payment of the option price must be made in cash or by check or such other consideration acceptable to the Board of Directors of the Company in its sole discretion. 7. Transferability of Option. You may not transfer the Option (other than by will or the laws of descent and distribution). The Option may be exercised during your lifetime only by you. 8. Termination of Employment. (a) In the event that (i) your employment by the Company or any Subsidiary or Parent thereof is terminated by such entity for cause or (ii) you terminate your employment by such entity for any reason whatsoever other than as a result of your death or "disability" (within the meaning of Section 22(e)(3) of the Code), then the Option may only be exercised within 15 days after the date on which you ceased to be so employed, and only to the extent that you could have otherwise exercised the Option as of the date on which you ceased to be so employed. (b) In the event that you cease to be employed on a full-time basis by the Company or any Subsidiary or Parent thereof for any reason other than (x) a termination specified in Section 8(a) above or (y) by reason of your death or "disability" (within the meaning of Section 22(e)(3) of the Code), then the Option may only be exercised within 30 days after the date on which you ceased to be so employed, and only to the extent that you could have otherwise exercised the Option as of the date on which you ceased to be so employed. 2 3 (c) In the event that you cease to be employed on a full-time basis by the Company or any Subsidiary or Parent thereof by reason of a "disability" (within the meaning of Section 22(e)(3) of the Code), then the Option may only be exercised within 180 days after the date you cease to be so employed, and only to the same extent that you were entitled to exercise the Option on the date you ceased to be so employed by reason of such disability and had not previously done so. (d) In the event that you die while employed by the Company or any Subsidiary or Parent thereof (or within a period of 15 days after ceasing to be employed by the Company or any Subsidiary or Parent thereof for any reason described in Section 8(a) or 8(b) above, or within a period of 180 days after ceasing to be so employed for any reason described in Section 8(c) above), then the Option may only be exercised within 180 days after your death. In such event, the Option may be exercised during such 180 day period by the executor or administrator of your estate or by any person who shall have acquired the Option through bequest or inheritance, but only to the same extent that you were entitled to exercise the Option immediately prior to the time of your death and you had not previously done so. (e) Notwithstanding any provision contained in this Section 8 to the contrary, in no event may the Option be exercised to any extent by anyone after the tenth anniversary of the Grant Date. 9. Representations. (a) You represent and warrant to the Company that, upon exercise of the Option, you will be acquiring the Option Shares attributable to such Option for your own account for the purpose of investment and not with a view to or for sale in connection with any distribution thereof, and you understand that (i) neither the Option nor any Option Shares have been registered with the Securities and Exchange Commission by reason of their issuance in a transaction exempt from the registration requirements and (ii) any Option Shares must be held indefinitely by you unless a subsequent disposition thereof is registered under the Securities Act or is exempt from such registration. The stock certificates for any Option Shares issued to you will bear the following legend: THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS THEY HAVE BEEN REGISTERED UNDER THAT ACT OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE. (b) You further represent and warrant that you understand the Federal, state and local income tax consequences of the granting of the Option to you, the acquisition of rights to exercise the Option with respect to any Option Shares, the exercise of the Option and purchase of Option Shares, and the subsequent sale or other disposition of any Option Shares. In addition, you understand that any "disqualifying disposition" of any Option Shares may result in the Company being required to withhold Federal, state or local taxes (including social security and 3 4 medicare taxes) in respect of any compensation income realized by you as a result of the exercise of the Option, which compensation income shall generally equal the excess of the fair market value of any Option Shares received upon exercise of the Option at the time of exercise over the exercise price of the Option. To the extent that the Company is required to withhold any such taxes as a result of the exercise of the Option and the "disqualifying disposition" of any Option Shares, you hereby agree that the Company may deduct from any payments of any kind otherwise due to you an amount equal to the total Federal, state and local taxes required to be so withheld, or if such payments are inadequate to satisfy such Federal, state and local taxes, or if no such payments are due or to become due to you, then you agree to provide the Company with cash funds or make other arrangements satisfactory to the Company regarding such payment. It is understood that all matters with respect to the total amount of taxes to be withheld in respect of any such compensation income shall be determined by the Board of Directors in its sole discretion. 10. Notice of Sale. You agree to give the Company prompt notice of any sale or other disposition of any Option Shares that occurs (i) within two years from the Grant Date or (ii) within one year after the transfer of such Option Shares to you upon the exercise of the Option. 11. Adjustments; Reorganization, Reclassification, Consolidation, Merger or Sale. (a) In the event that, after the date hereof, the outstanding shares of Common Stock shall be increased or decreased or changed into or exchanged for a different number or kind of shares of stock or other securities of the Company or of another corporation in each such case through reorganization, merger or consolidation, recapitalization, reclassification, stock split, split-up, combination or exchange of shares or declaration of any dividends payable in Common Stock, the Board of Directors of the Company shall, in good faith, appropriately adjust the number of shares of Common Stock (and the option price per share) subject to the unexercised portion of the Option (to the nearest possible full share), and such adjustment shall be effective and binding for all purposes of this Agreement and the Plan, subject to the limitations of Section 424 of the Code. (b) If any capital reorganization or reclassification of the capital stock of the Company or any consolidation or merger of the Company with another corporation, or the sale of all or substantially all its assets to another corporation, shall be effected after the date hereof in such a way that holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then you shall thereafter have the right to receive upon the basis and upon the terms and conditions specified in the Option and in lieu of the shares of Common Stock of the Company immediately theretofore receivable upon the exercise of the Option, such shares of stock, securities or assets (including cash) as may be issued or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of such stock immediately theretofore so receivable had such reorganization, reclassification, consolidation, merger or sale not taken place. (c) Notwithstanding Section 4 hereof, following a "Change of Control" (as defined below), you shall become entitled to immediately exercise the Option with respect to 4 5 50% of the previously unexercisable Option Shares, and the balance shall become exercisable according to the original schedule set forth in Section 4 above, in each case until the Option expires and terminates pursuant to Section 2 hereof. For purposes of the foregoing, "Change of Control" shall mean any capital reorganization, consolidation, merger or sale of assets as a result of which or in connection with which a person, corporation or other entity other than Kevin and Hugh O'Kane acquires (x) ownership of more than 50% of the equity securities of the Company or (y) all or substantially all of the assets and properties of the Company as an entirety. 12. Continuation of Employment. Neither the Plan nor the Option shall confer upon you any right to continue in the employ of the Company or any Subsidiary or Parent thereof, or limit in any respect the right of the Company or any Subsidiary or Parent thereof to terminate your employment or other relationship with the Company or any Subsidiary or Parent thereof, as the case may be, at any time. 13. Plan Documents. This Agreement is qualified in its entirety by reference to the provisions of the Plan applicable to "incentive stock options" as defined in Section 422(b) of the Code, which are hereby incorporated herein by reference. 14. General Provisions. (a) This Option Agreement shall be governed by and construed in accordance with the laws of the State of New York. If any one or more provisions of this Agreement shall be found to be illegal or unenforceable in any respect, the validity and enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby. (b) This Agreement and the Plan contain the entire agreement between the Company and you relating to the Option. Except as expressly provided in this Agreement or the Plan with respect to certain actions permitted to be taken by the Board of Directors of the Company or the Committee (as defined in the Plan) with respect to this Agreement and the terms of the Option, this Agreement may not be amended, modified, changed or waived other than by written instrument signed by the parties hereto. (c) This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 5 6 Please acknowledge receipt of this Agreement by signing the enclosed copy of this Agreement in the space provided below and returning it promptly to the Secretary of the Company. LEXENT INC. By __________________________________ Name: Title: Accepted and Agreed to As of , 2000: __________________________________ 6 7 LEXENT INC. STOCK OPTION AND RESTRICTED STOCK PURCHASE PLAN OPTION EXERCISE FORM I,___________________ , a Participant under the Lexent Inc. and its Subsidiaries Amended and Restated Stock Option and Restricted Stock Purchase Plan (the "Plan"), do hereby exercise the right to purchase __________ shares of Common Stock, $.001 par value, of Lexent Inc. pursuant to the incentive stock option granted to me on _________, ____ under the Plan. Enclosed herewith is $__________ , an amount equal to the total exercise price for the shares of Common Stock being purchased pursuant to this Option Exercise Form. Date:_____________________ __________________________ Signature Send a completed copy of this Option Exercise Form to: Lexent Inc. 3 New York Plaza New York, New York 10004 Attention: Kevin O'Kane Corporate Secretary EX-10.3 9 CREDIT AGREEMENT 1 EXHIBIT 10.3 ================================================================================ CREDIT AGREEMENT DATED AS OF JUNE 29, 1999 BY AND AMONG NATIONAL NETWORK TECHNOLOGIES, INC. AND EUROPEAN AMERICAN BANK, AS ADMINISTRATIVE AGENT AND THE LENDERS PARTY HERETO ================================================================================ 2 TABLE OF CONTENTS ARTICLE I DEFINITIONS AND ACCOUNTING TERMS.................................................................... 1 SECTION 1.01. Definitions............................................................. 1 SECTION 1.02. Terms Generally......................................................... 9 ARTICLE II LOANS............................................................................................... 9 SECTION 2.01. Revolving Credit Commitment............................................. 9 SECTION 2.02. Note.................................................................... 11 ARTICLE III PROVISIONS RELATING TO ALL EXTENSIONS OF CREDIT; FEES AND PAYMENTS................................................................................... 11 SECTION 3.01. Interest Rate; Continuation and Conversion of Loans..................... 11 SECTION 3.02. Use of Proceeds......................................................... 12 SECTION 3.03. Optional Prepayments.................................................... 12 SECTION 3.04. Fees.................................................................... 12 SECTION 3.05. Increased Costs......................................................... 13 SECTION 3.06. Taxes................................................................... 14 SECTION 3.07. Pro Rata Treatment and Payments......................................... 15 ARTICLE IV REPRESENTATIONS AND WARRANTIES...................................................................... 16 SECTION 4.01. Organization, Powers.................................................... 16 SECTION 4.02. Authorization of Borrowing, Enforceable Obligations..................... 16 SECTION 4.03. Financial Condition..................................................... 17 SECTION 4.04. Taxes................................................................... 17 SECTION 4.05. Title to Properties..................................................... 18 SECTION 4.06. Litigation.............................................................. 18 SECTION 4.07. Agreements.............................................................. 18 SECTION 4.08. Compliance with ERISA................................................... 18 SECTION 4.09. Federal Reserve Regulations; Use of Proceeds............................ 18 SECTION 4.10. Approvals............................................................... 19 SECTION 4.11. Subsidiaries............................................................ 19 SECTION 4.12. Hazardous Materials..................................................... 19 SECTION 4.13. Investment Company Act.................................................. 19 SECTION 4.14. No Default.............................................................. 19 SECTION 4.15. Material Contracts...................................................... 19 SECTION 4.16. Permits and Licenses.................................................... 20
i 3 SECTION 4.17. Compliance with Law..................................................... 20 SECTION 4.18. Y2K..................................................................... 20 SECTION 4.19. Disclosure.............................................................. 20 SECTION 4.20. Security Agreements..................................................... 21 SECTION 4.21. Pledge Agreement........................................................ 21 ARTICLE V CONDITIONS OF LENDING............................................................................... 21 SECTION 5.01. Conditions to Loans..................................................... 21 SECTION 5.02. Conditions to all Extensions of Credit.................................. 24 ARTICLE VI AFFIRMATIVE COVENANTS............................................................................... 24 SECTION 6.01. Existence, Properties, Insurance........................................ 24 SECTION 6.02. Payment of Indebtedness and Taxes....................................... 25 SECTION 6.03. Financial Statements, Reports, etc...................................... 25 SECTION 6.04. Books and Records; Access to Premises................................... 27 SECTION 6.05. Notice of Adverse Change................................................ 28 SECTION 6.06. Notice of Default....................................................... 28 SECTION 6.07. Notice of Litigation.................................................... 28 SECTION 6.08. Notice of Default in Other Agreements................................... 28 SECTION 6.09. Notice of ERISA Event................................................... 28 SECTION 6.10. Notice of Environmental Law Violations.................................. 29 SECTION 6.11. Notice Regarding Material Contracts..................................... 29 SECTION 6.12. Compliance with Applicable Laws......................................... 29 SECTION 6.13. Subsidiaries............................................................ 29 SECTION 6.14. Environmental Laws...................................................... 30 SECTION 6.15. Further Assurances...................................................... 30 ARTICLE VII NEGATIVE COVENANTS.................................................................................. 30 SECTION 7.01. Liens................................................................... 30 SECTION 7.02. Indebtedness............................................................ 31 SECTION 7.03. Guaranties.............................................................. 32 SECTION 7.04. Sale of Assets.......................................................... 33 SECTION 7.05. Sales of Receivables.................................................... 33 SECTION 7.06. Loans and Investments................................................... 33 SECTION 7.07. Nature of Business...................................................... 33 SECTION 7.08. Sale and Leaseback...................................................... 33 SECTION 7.09. Federal Reserve Regulations............................................. 33 SECTION 7.10. Accounting Policies and Procedures...................................... 33 SECTION 7.11. Hazardous Materials..................................................... 34 SECTION 7.12. Limitations on Fundamental Changes...................................... 34
ii 4 SECTION 7.13. Financial Covenants..................................................... 34 SECTION 7.14. Subordinated Debt....................................................... 35 SECTION 7.15. Dividends............................................................... 35 SECTION 7.16. Transactions with Affiliates............................................ 35 SECTION 7.17. Impairment of Security Interest......................................... 36 ARTICLE VIII EVENTS OF DEFAULT................................................................................... 36 SECTION 8.01. Events of Default....................................................... 36 ARTICLE IX THE ADMINISTRATIVE AGENT............................................................................ 38 SECTION 9.01. Appointment, Powers and Immunities...................................... 38 SECTION 9.02. Reliance by Administrative Agent........................................ 39 SECTION 9.03. Events of Default....................................................... 39 SECTION 9.04. Rights as a Lender...................................................... 40 SECTION 9.05. Indemnification......................................................... 40 SECTION 9.06. Non-Reliance on Administrative Agent and Other Lenders.................. 40 SECTION 9.07. Failure to Act.......................................................... 41 SECTION 9.08. Resignation of the Administrative Agent................................. 41 SECTION 9.09. Sharing of Collateral and Payments...................................... 41 ARTICLE X MISCELLANEOUS....................................................................................... 42 SECTION 10.01. Notices................................................................. 42 SECTION 10.02. Effectiveness; Survival................................................. 43 SECTION 10.03. Expenses................................................................ 43 SECTION 10.04. Amendments and Waivers.................................................. 44 SECTION 10.05. Successors and Assigns; Participations.................................. 45 SECTION 10.06. No Waiver; Cumulative Remedies.......................................... 47 SECTION 10.07. APPLICABLE LAW.......................................................... 48 SECTION 10.08. SUBMISSION TO JURISDICTION.............................................. 48 SECTION 10.09. Severability............................................................ 48 SECTION 10.10 Right of Setoff......................................................... 49 SECTION 10.11. Headings................................................................ 49 SECTION 10.12. Construction............................................................ 49 SECTION 10.13. Counterparts............................................................ 50
iii 5 SCHEDULES Schedule I - Subsidiaries Schedule II - Existing Liens Schedule III - Existing Indebtedness Schedule IV - Existing Guarantees Schedule V - Material Contracts EXHIBITS Exhibit A - Form of Note Exhibit B-1 - Form of Company Security Agreement Exhibit B-2 - Form of Guarantor Security Agreement Exhibit C - Form of Corporate Guaranty Exhibit D - Form of Individual Guaranty Exhibit E - Reserved Exhibit F - Form of Opinion of Counsel Exhibit G-1 - Form of Subordination Agreement (D.O'Kane) Exhibit G-2 - Form of Subordination Agreement (H.O'Kane/K.O'Kane) Exhibit H - Form of Pledge Agreement Exhibit I - Form of Assignment an Acceptance Agreement 6 CREDIT AGREEMENT dated as of June 29, 1999, by and among NATIONAL NETWORK TECHNOLOGIES, INC., a Delaware corporation (the "Company"), STATE BANK OF LONG ISLAND, a New York banking corporation ("SBLI"), EUROPEAN AMERICAN BANK, a New York banking corporation ("EAB"); with SBLI, each a "Lender" and collectively, the "Lenders") and EUROPEAN AMERICAN BANK, as Administrative Agent for the Lenders (in such capacity the "Administrative Agent"). RECITALS The Company has requested the Lenders to extend credit to the Company from time to time and the Lenders are willing to extend such credit to the Company, subject to the terms and conditions hereinafter set forth. Accordingly, the parties hereto agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.01. DEFINITIONS. As used herein, the following words and terms shall have the following meanings: "Affiliate" shall mean with respect to a specified Person, another Person which, directly or indirectly, controls or is controlled by or is under common control with such specified Person. For the purpose of this definition, "control" of a Person shall mean the power, direct or indirect, to direct or cause the direction of the management or policies of such Person whether through the ownership of voting securities, by contract or otherwise; provided that, in any event, any Person who owns directly or indirectly 10% or more of the securities having ordinary voting power for the election of directors or other governing body of a corporation or 10% or more of the partnership or other ownership interest of any Person (other than as a limited partner of such other Person) will be deemed to control such corporation or other Person. "Administrative Agent" shall mean EAB in its capacity as administrative and collateral agent for the Lenders under this Agreement or its successor Administrative Agent permitted pursuant to Section 9.08. "Agreement" shall mean this Credit Agreement, dated as of June 29, 1999, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time. "Assignment and Acceptance Agreement" shall mean the Assignment and Acceptance Agreement substantially in the form of Exhibit I attached hereto. "Borrowing Date" shall mean, with respect to any Loan, the date on which such Loan is disbursed to the Company. 7 "Business Day" shall mean any day not a Saturday, Sunday or legal holiday, on which banks in New York City are open for business "Capital Expenditures" shall mean additions to property and equipment of the Company and its consolidated Subsidiaries which, in conformity with Generally Accepted Accounting Principles, are included as "additions to property, plant or equipment" or similar items which would be reflected in the consolidated statement of cash flow of the Company, including, without limitation, property and equipment which are the subject of Capital Leases. "Capital Lease" shall mean any lease the obligations of which are required to be capitalized on the balance sheet of a Person in accordance with Generally Accepted Accounting Principles. "Chief Financial Officer" shall mean the Chief Financial Officer of the Company. "Closing Date" shall mean June 29, 1999. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. "Commitment Proportion" shall mean, with respect to each Lender, the proportion its Revolving Credit Commitment bears to the Total Revolving Credit Commitment. "Company" shall have the meaning set forth in the preamble hereto. "Consolidated EBITDA" shall mean for the Company and its consolidated Subsidiaries for any period, the Consolidated Net Income for such period, plus the sum, without duplication, of (a) gross interest expense, (b) depreciation and amortization expenses, (c) all income taxes to any government or governmental instrumentality expensed on the Company's, and any Subsidiary's books (whether paid or accrued), (d) the cumulative effect of changing accounting treatment with respect to the completed contract method on jobs whose duration are expected to be 90 days or less) and (e) any non-cash charges attributable to options outstanding to purchase shares of the Company minus the sum of (a) all extraordinary or unusual gains and (b) all non-cash income or gain attributable to options outstanding to purchase shares of the Company, in each case determined on a consolidated basis for the Company and its consolidated Subsidiaries in accordance with Generally Accepted Accounting Principles, applied on a consistent basis. All of the foregoing categories shall be calculated over the four fiscal quarters next preceding the date of calculation thereof. "Consolidated Fixed Charge Ratio" shall mean, for any period, the ratio of (a) the sum of (i) Consolidated EBITDA plus (ii) Consolidated Rent Expense plus (iii) operating lease expense, less Capital Expenditures to (b) the sum of (i) Consolidated Interest Expense plus (ii) the Current Portion of Long Term Debt plus (iii) Consolidated Rent Expense and (iv) operating lease expense. All the foregoing categories shall be calculated over the four fiscal quarters next preceding the date of calculation thereof. 2 8 "Consolidated Interest Coverage Ratio" shall mean, for any period, the ratio of (a) Consolidated EBITDA less consolidated Capital Expenditures to (b) Consolidated Interest Expense. All the foregoing categories shall be calculated over the four fiscal quarters next preceding the date of calculation thereof. "Consolidated Interest Expense" shall mean the gross interest expense of the Company and its consolidated Subsidiaries determined in accordance with Generally Accepted Accounting Principles applied on a consistent basis that is required to be or is paid in cash. "Consolidated Leverage Ratio" shall mean, for any period, the ratio of (a) total consolidated liabilities of the Company and its consolidated Subsidiaries excluding Subordinated Debt to (b) the sum of (i) Consolidated Tangible Net Worth plus (ii) Subordinated Debt, in each case, determined in accordance with Generally Accepted Accounting Principles, applied on a consistent basis. "Consolidated Net Income" shall mean, for any period, the net income (or net loss) of the Company and its consolidated Subsidiaries for such period determined in accordance with Generally Accepted Accounting Principles applied on a consistent basis. "Consolidated Rent Expense" shall mean rent expense of the Company and its consolidated Subsidiaries determined in accordance with Generally Accepted Accounting Principles, less all rents reimbursable to the Company or any of its consolidated Subsidiaries by their customers pursuant to a contractual obligation. "Consolidated Tangible Net Worth" shall mean (a) total consolidated assets of the Company and its consolidated Subsidiaries, except that there shall be excluded therefrom (i) all obligations due to the Company or Subsidiary from any Affiliate, and (ii) all intangible assets including, without limitation, organizational expenses, patents, trademarks, copyrights, goodwill, covenants not to compete, research and development costs, training costs and all unamortized debt discount and deferred charges less (b) total consolidated liabilities of the Company and its consolidated Subsidiaries, in each case, determined in accordance with Generally Accepted Accounting Principles, applied on a consistent basis. "Contingent Commitment" shall have the meaning specified in Section 2.01(f). "Corporate Guarantors" shall mean, collectively, National Network Technologies, LLC, a Delaware limited liability company, Hugh O'Kane Electric Co. LLC, a Delaware limited liability company and each Person who, from time to time, is required to execute a Corporate Guaranty in accordance with Section 6.13. "Corporate Guaranty" shall mean the Corporate Guaranty in the form attached hereto as Exhibit C to be executed and delivered by each Corporate Guarantor on the Closing Date and, thereafter, by any Person who may be required to execute the same pursuant to Section 6.13, as each 3 9 of the same may hereafter be amended, restated, supplemented or otherwise modified from time to time. "Current Portion of Long Term Debt" means that portion of long term indebtedness of the Company and its consolidated Subsidiaries which is required to be paid in the immediately succeeding twelve month period, as determined in accordance with Generally Accepted Accounting Principles consistently applied, but excluding the Loans). "Default" shall mean any condition or event which upon notice, lapse of time or both would constitute an Event of Default. "Dollar" and the symbol "$" shall mean lawful money of the United States of America. "Eligible Investments" shall mean (a) direct obligations of the United States of America or any governmental agency thereof which are fully guaranteed by the United States of America, provided that such obligations mature within one year from the date of acquisition thereof; or (b) dollar denominated certificates of time deposit maturing within one year issued by any bank organized and existing under the laws of the United States or any state thereof and having aggregate capital and surplus in excess of $1,000,000,000; or (c) money market mutual funds having assets in excess of $2,500,000,000; or (d) commercial paper rated not less than P-1 or A-1 or their equivalent by Moody's Investors Service, Inc. or Standard & Poor's Ratings Group, respectively; or (e) tax exempt securities of a U.S. issuer rated A or better by Standard and Poor's Ratings Group or Moody's Investors Service, Inc. "Environmental Law" shall mean any law, ordinance, rule, regulation, or policy having the force of law of any Governmental Authority relating to pollution or protection of the environment or to the use, handling, transportation, treatment, storage, disposal, release or discharge of Hazardous Materials, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (42 U.S.C. Sections 9601, et seq.), the Hazardous Materials Transportation Act, as amended (49 U.S.C. Sections 1801, et seq.) the Resource Conservation and Recovery Act, as amended (42 U.S.C. Sections 6901, et seq.) and the rules and regulations promulgated pursuant thereto. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Affiliate" shall mean each person (as defined in Section 3(9) of ERISA) which together with the Company or any Affiliate of the Company would be deemed to be a member of the same "controlled group" within the meaning of Section 414(b), (c), (m) or (o) of the Code. "Event of Default" shall have the meaning set forth in Article VIII. 4 10 "Executive Officer" shall mean any of the President, the Chief Executive Officer, the Chief Financial Officer or the Secretary of the Company or any Corporate Guarantor, as applicable, and their respective successors, if any, designated by the board of directors thereof. "Existing Indebtedness" shall mean the aggregate indebtedness of the Company and Hugh O'Kane Electric Co. LLC to SBLI on the Closing Date as evidenced by two (2) Notes, one in the original principal amount of $3,500,000, and the other in the original principal amount of $1,000,000, each dated as of February 22, 1999. "Generally Accepted Accounting Principles" shall mean those generally accepted accounting principles in the United States of America, as in effect from time to time. "Governmental Authority" shall mean any nation or government, any state, province, city or municipal entity or other political subdivision thereof, and any governmental, executive, legislative, judicial, administrative or regulatory agency, department, authority, instrumentality, commission, board or similar body, whether federal, state, provincial, territorial, local or foreign. "Guaranties" shall mean, collectively, the Individual Guaranties and the Corporate Guaranties. "Guarantors" shall mean, collectively, the Individual Guarantors and the Corporate Guarantors. "Hazardous Materials" shall mean any explosives, radioactive materials, or other materials, wastes, substances, or chemicals regulated as toxic hazardous or as a pollutant, contaminant or waste under any applicable Environmental Law. "Indebtedness" shall mean, without duplication, as to any Person or Persons (a) indebtedness for borrowed money; (b) indebtedness for the deferred purchase price of property or services; (c) indebtedness evidenced by bonds, debentures, term notes or other similar instruments; (d) obligations and liabilities secured by a Lien upon property owned by such Person, whether or not owing by such Person and even though such Person has not assumed or become liable for the payment thereof; (e) obligations and liabilities directly or indirectly guaranteed by such Person; (f) obligations or liabilities created or arising under any conditional sales contract or other title retention agreement with respect to property used and/or acquired by such Person; (g) obligations of such Person as lessee under Capital Leases; (h) net liabilities of such Person under foreign currency exchange agreements, as calculated on a basis satisfactory to the Administrative Agent and in accordance with accepted practice; and (i) all obligations, contingent or otherwise of such Person as an account party or applicant in respect of letters of credit. "Individual Guarantors" shall mean Mr. Hugh O'Kane, Jr. and Mr. Kevin O'Kane. 5 11 "Individual Guaranty" shall mean the Individual Guaranty in the form attached as Exhibit D to be executed and delivered by the Individual Guarantor on the Closing Date, as the same may hereafter be amended, restated, supplemented or otherwise modified from time to time. "Interest Payment Date" shall mean the last day of each month during the term hereof. "Lenders" shall have the meaning set forth in the preamble hereto. "Lending Office" shall mean, for each Lender, the office specified under such Lender's name on the signature pages hereof with respect to each Loan, or such other office as such Lender may designate in writing from time to time to the Company and the Administrative Agent with respect to such Loan. "Lien" shall mean any lien (statutory or otherwise), security interest, mortgage, deed of trust, pledge, charge, conditional sale, title retention agreement, Capital Lease or other encumbrance or similar right of others, or any agreement to give any of the foregoing. "Loan Documents" shall mean, collectively, this Agreement, the Notes, the Security Documents, the Guaranties, the Subordination Agreements and each other agreement executed in connection with the transactions contemplated hereby or thereby, as each of the same may hereafter be amended, restated, supplemented or otherwise modified from time to time. "Loans" shall mean the Revolving Credit Loans. "Material Adverse Effect" shall mean a material adverse effect upon (a) the business, operations, property, prospects or condition (financial or otherwise) of the Company or any Guarantor, or (b) the ability of the Company or any Guarantor to perform in any material respect any obligations under any Loan Document to which it is a party. "Material Contract" shall mean each contract, instrument or agreement (a) to which the Company or any Corporate Guarantor is a party which is material to the business, operations or condition (financial or otherwise), performance, prospects, or properties of the Company or any Corporate Guarantor or (b) which requires the payment during the term thereof in excess of $100,000. "Notes" shall have the meaning set forth in Section 2.02. "Obligations" shall mean all obligations, liabilities and indebtedness of the Company to the Lenders and the Administrative Agent, whether now existing or hereafter created, absolute or contingent, direct or indirect, due or not, whether created directly or acquired by assignment or otherwise, arising under or relating to this Agreement, the Notes or any other Loan Document including, without limitation, all obligations, liabilities and indebtedness of the Company with respect 6 12 to the principal of and interest on the Loans, and all fees, costs, expenses and indemnity obligations of the Company hereunder or under any other Loan Document. "Participant" shall have the meaning set forth in Section 10.05(b). "Payment Office" shall mean the Administrative Agent's office located at 335 Madison Avenue, New York, New York 10017, or such other office as the Administrative Agent may designate from time to time. "PBGC" shall mean the Pension Benefit Guaranty Corporation established pursuant to Section 4002 of ERISA, or any successor thereto. "Permitted Liens" shall mean the Liens specified in clauses (a) through (i) of Section 7.01. "Person" shall mean any natural person, corporation, limited liability company, limited liability partnership, business trust, joint venture, association, company, partnership or Governmental Authority. "Pledge Agreement" shall mean the Pledge Agreement in the form attached hereto as Exhibit H to be executed and delivered on the Closing Date by the Company as the same may hereafter be amended, restated, supplemented or otherwise modified from time to time. "Plan" shall mean any multi-employer or single-employer plan defined in Section 4001 of ERISA, which covers, or at any time during the five calendar years preceding the date of this Agreement covered, employees of the Company, any Corporate Guarantor or an ERISA Affiliate on account of such employees' employment by the Company, any Corporate Guarantor or an ERISA Affiliate. "Prime Rate" shall mean the rate per annum announced by the entity which is the Administrative Agent from time to time as its prime rate in effect at its principal office. Each change in the Prime Rate shall be effective on the date such change is announced to become effective. "Regulation D" shall mean Regulation D of the Board of Governors of the Federal Reserve System as the same may be amended or supplemented from time to time. "Reportable Event" shall mean an event described in Section 4043(c) of ERISA with respect to a Plan as to which the 30 day notice requirement has not been waived by the PBGC. "Required Lenders" shall mean (a), if there are two or fewer Lenders, all the Lenders, and (b), if there are three or more Lenders, Lenders owed at least 66 2/3% of the sum of the aggregate unpaid principal amount of the Loans or, if no Loans are outstanding, Lenders having at least 66 2/3% of the Revolving Credit Commitment. 7 13 "Revolving Credit Loan" and "Revolving Credit Loans" has the meaning assigned to such terms in subsection 2.01. "Revolving Credit Commitment" shall mean with respect to each Lender the obligation of such Lender to make Revolving Credit Loans to the Company initially in an aggregate amount not to exceed $5,000,000 with respect to SBLI and $5,000,000 with respect to EAB; provided, however, in the event the Contingent Commitment is in effect, EAB's Revolving Credit Commitment shall be increased by $2,500,000. "Revolving Credit Commitment Period" shall mean the period from and including the date hereof to but not including the Revolving Credit Expiration Date or such earlier date as the Revolving Credit Commitment shall terminate as provided herein. "Revolving Credit Commitment Termination Date" shall mean the third anniversary of the date hereof. "Security Agreements" shall mean, collectively, with respect to the Company, the Security Agreement in the form attached hereto as Exhibit B-1, and, with respect to each Corporate Guarantor, the Guarantor Security Agreement in the form attached hereto as Exhibit B-2 to be executed and delivered on the Closing Date by the Company and each Corporate Guarantor, and, thereafter, by any Person who may be required to execute the same pursuant to Section 6.13, as each of the same may hereafter be amended, restated, supplemented or otherwise modified from time to time. "Security Documents" shall mean the Security Agreements, the Pledge Agreement and each other collateral security document delivered to the Administrative Agent hereunder. "Shareholders Agreement" shall mean collectively, the Shareholders Agreement, dated as of July 23, 1998, among National Network Technologies, Inc. and the Stockholders of the Corporation identified on Annex I thereto and the Directed Share Agreement, dated as of July 23, 1998, by and among National Network Technologies, Inc. and the Investors named on Schedule I thereto. "Solvent" shall mean with respect to any Person as of the date of determination thereof that (a) the amount of the "present fair saleable value" of the assets of such Person will, as of such date, exceed the amount of all "liabilities of such Person, contingent or otherwise," as of such date, as such quoted terms are determined in accordance with applicable federal and state laws governing determinations of the insolvency of debtors, (b) the present fair saleable value of the assets of such Person will, as of such date, be greater than the amount that will be required on its debts as such debts become absolute and matured, (c) such Person will not have as of such date, an unreasonably small amount of capital with which to conduct its business, and (d) such Person will be able to pay its debts as they mature. 8 14 "Subordinated Debt" shall mean all debt which is subordinated in right of payment to the prior final and indefeasible payment in full of the obligations of the Company and/or of any Corporate Guarantor to the Lenders hereunder and under any other Loan Document on terms satisfactory to and approved in writing by the Required Lenders. "Subordination Agreements" shall mean the Subordination Agreements in the forms attached hereto as Exhibit G-1 and Exhibit G-2 to be executed and delivered on the Closing Date by Mr. Hugh O'Kane, Jr., Mr. Kevin O'Kane and Mr. Denis O'Kane as the same may hereafter be amended, restated, supplemented or otherwise modified from time to time. "Subsidiaries" shall mean with respect to any Person any corporation, association or other business entity more than 50% of the voting stock or other ownership interests (including, without limitation, membership interests in a limited liability company) of which is at the time owned or controlled, directly or indirectly, by such Person or one or more of its Subsidiaries or a combination thereof. "Taxes" shall have the meaning set forth in Section 3.06. "Total Revolving Credit Commitments" shall mean, at any time, the aggregate of the Revolving Commitments in effect at such time, which shall be initially $10,000,000, subject to adjustment in the Contingent Commitment is in effect. "Unfunded Current Liability" of any Plan shall mean the amount, if any, by which the present value of the accrued benefits under the Plan as of the close of its most recent plan year exceeds the fair market value of the assets allocable thereto, determined in accordance with Section 412 of the Code. SECTION 1.02. TERMS GENERALLY. The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, pronouns stated in the masculine, feminine or neuter gender shall include the masculine, feminine and the neuter. Except as otherwise herein specifically provided, each accounting term used herein shall have the meaning given to it under Generally Accepted Accounting Principles. The term "including" shall not be limited or exclusive, unless specifically indicated to the contrary. The word "will" shall be construed to have the same meaning in effect as the word "shall". The words "herein", "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole, including the exhibits and schedules hereto, all of which are by this reference incorporated into this Agreement. ARTICLE II LOANS SECTION 2.01. REVOLVING CREDIT COMMITMENT. (a) Subject to the terms and conditions, and relying upon the representations and warranties set forth herein, each Lender severally but not jointly agrees to make loans (individually a "Revolving Credit Loan" and, collectively, the 9 15 "Revolving Credit Loans") to the Company from time to time during the Revolving Credit Commitment Period up to but not exceeding at any one time outstanding the amount of its Revolving Credit Commitment; provided, however, that no Revolving Credit Loan shall be made if, after giving effect to such Revolving Credit Loan, the aggregate outstanding principal amount of all Revolving Credit Loans at such time would exceed the Revolving Credit Commitment in effect at such time. During the Revolving Credit Commitment Period, the Company may from time to time borrow, repay and reborrow hereunder on or after the date hereof and prior to the Revolving Credit Commitment Termination Date, subject to the terms, provisions and limitations set forth herein. (b) The Company may borrow under the Revolving Credit Commitment during the Revolving Credit Commitment Period on any Business Day; provided that the Company shall give the Administrative Agent irrevocable notice (which notice must be received by the Administrative Agent prior to 11:00 a.m. New York time on the day of the requested borrowing) for the Revolving Credit Loan. Such notice shall be irrevocable and shall specify (i) the amount of the proposed borrowing, (ii) the proposed use of the loan proceeds, and (iii) the proposed Borrowing Date. Upon receipt of such notice from the Company, the Administrative Agent shall promptly notify each Lender thereof. Each borrowing pursuant to the Revolving Credit Commitment shall be in an aggregate principal amount of (i) $200,000 or whole multiples of $100,000 in excess thereof (or, if less, an amount equal to the Revolving Credit Commitment in effect at such time). (c) The Company shall have the right, upon not less than three Business Days' prior written notice to the Administrative Agent, to terminate the Revolving Credit Commitment or from time to time to permanently reduce the amount of the Revolving Credit Commitment; provided, however, that no such termination or reduction shall be permitted if, after giving effect thereto and to any prepayments of the Revolving Credit Loans made on the effective date thereof, the aggregate outstanding principal amount of all Revolving Credit Loans at such time would exceed the Revolving Credit Commitment as then reduced. The Administrative Agent shall promptly notify each Lender of each notice from the Company to terminate or permanently reduce the amount of the Revolving Credit Commitment pursuant to this Section 2.01. Any such reduction shall be in the amount of $1,000,000 or whole multiples of $100,000 in excess thereof, and shall reduce permanently the amount of the Revolving Credit Commitment then in effect. (d) [RESERVED] (e) The several agreement of the Lenders to make Revolving Credit Loans pursuant to Section 2.01 shall automatically terminate on the Revolving Credit Commitment Termination Date. Upon such termination, the Company shall immediately repay in full the principal amount of the Revolving Credit Loans then outstanding, together with all accrued interest thereon and all other amounts due and payable hereunder. (f) At the request of the Company, EAB, in its sole and absolute discretion, upon five (5) Business Days' written notice to the Lenders may elect to increase the Revolving Credit Commitment by $2,500,000 (such increased portion the "Contingent Commitment"). In the event the Revolving 10 16 Credit Commitment is so increased then notwithstanding anything to the contrary in this Agreement all Revolving Credit Loans in excess of the Revolving Credit Commitment as in effect prior to the Contingent Commitment shall be funded by EAB as a Lender and no other Lender shall have any other obligation to fund such Revolving Credit Loans. The provisions of this Section 2.01(f) shall be binding upon any assignee of EAB pursuant to Section 10.05(c) to the extent of such assignee's pro rata portion of EAB's Revolving Credit Commitment immediately prior to such assignment. SECTION 2.02. NOTE. The Revolving Credit Loans made by each Lender shall be evidenced by a promissory note of the Company (individually a "Note" and, collectively, the "Notes"), substantially in the form attached hereto as Exhibit A, each appropriately completed, duly executed and delivered on behalf of the Company and payable to the order of such Lender in a principal amount equal to the Revolving Credit Commitment of such Lender. Each Note shall (a) be dated the Closing Date, (b) be stated to mature on the Revolving Credit Commitment Termination Date, and (c) bear interest from the date thereof until paid in full on the unpaid principal amount thereof from time to time outstanding as provided in Section 3.01. Each Lender is authorized to record the date and amount of each Revolving Credit Loan and the date and amount of each payment or prepayment of principal of each Revolving Credit Loan in such Lender's records or on the grid schedule annexed to the Note; provided, however, that the failure of a Lender to set forth each such Revolving Credit Loan, payment and other information shall not in any manner affect the obligation of the Company to repay each Revolving Credit Loan made by such Lender in accordance with the terms of its Note and this Agreement. The Note, the grid schedule and the books and records of each Lender shall constitute presumptive evidence of the information so recorded absent clear and obvious error. ARTICLE III PROVISIONS RELATING TO ALL EXTENSIONS OF CREDIT; FEES AND PAYMENTS SECTION 3.01. INTEREST RATE; CONTINUATION AND CONVERSION OF LOANS. (a) Each Loan shall bear interest for the period from the date thereof on the unpaid principal amount thereof at a fluctuating rate per annum equal to the Prime Rate plus one-quarter of one percent (.25%). (b) Upon the occurrence and during the continuance of an Event of Default arising pursuant to Section 8.01(a), the outstanding principal amount of the Loans (excluding any defaulted payment of principal accruing interest in accordance with clause (e) below), shall, at the option of the Required Lenders, bear interest payable on demand at a rate of interest 2% per annum in excess of the interest rate otherwise then in effect. (c) If the Company shall default in the payment of the principal of or interest on any portion of any Loan or any other amount becoming due hereunder, whether with respect to interest, fees, expenses or otherwise, the Company shall pay interest on such defaulted amount accruing from the date of such default (without reference to any period of grace) up to and including 11 17 the date of actual payment (after as well as before judgment) at a rate of 2% per annum in excess of the Prime Rate. (d) Anything in this Agreement or in any Note to the contrary notwithstanding, the obligation of the Company to make payments of interest shall be subject to the limitation that payments of interest shall not be required to be paid to a Lender to the extent that the charging or receipt thereof would not be permissible under the law or laws applicable to such Lender limiting the rates of interest that may be charged or collected by such Lender. In each such event payments of interest required to be paid to such Lender shall be calculated at the highest rate permitted by applicable law until such time as the rates of interest required hereunder may lawfully be charged and collected by such Lender. If the provisions of this Agreement or any Note would at any time otherwise require payment by the Company to any Lender of any amount of interest in excess of the maximum amount then permitted by applicable law, the interest payments to such Lender shall be reduced to the extent necessary so that such Lender shall not receive interest in excess of such maximum amount. (e) Interest on each Loan shall be payable in arrears on each Interest Payment Date and shall be calculated on the basis year of 360 days and shall be payable for the actual days elapsed. Any rate of interest on the Loans or other Obligations which is computed on the basis of the Prime Rate shall change when and as the Prime Rate changes in accordance with the definition thereof. Each determination by the Administrative Agent of an interest rate or fee hereunder shall, absent clear and obvious error, be conclusive and binding for all purposes. SECTION 3.02. USE OF PROCEEDS. The proceeds of the Loans shall be used solely to refinance the Existing Indebtedness and for general corporate purposes, including, without limitation, financing working capital, of the Company and the Corporate Guarantors in the ordinary course of business. SECTION 3.03. OPTIONAL PREPAYMENTS. The Company may at any time and from time to time, prepay the then outstanding Loans, in whole or in part, without premium or penalty, upon written notice to the Administrative Agent (or telephonic notice promptly confirmed in writing) not later than 11:00 a.m. New York, New York time, on the date of prepayment. Each notice shall be irrevocable and shall specify the date and amount of prepayment. Upon receipt of such notice, the Administrative Agent shall promptly notify each Lender thereof. If such notice is given, the Company shall make such prepayment, and the amount specified in such notice shall be due and payable, on the date specified therein together with accrued interest to such date on the amount repaid. Each prepayment shall be in the minimum principal amount of $100,000 or whole multiples of $100,000 in excess thereof. SECTION 3.04. FEES. (a) On the Closing Date, the Company agrees to pay to the Administrative Agent for the benefit of the Lenders, a facility fee of $37,500, $15,000 of which the Lenders acknowledge that they received prior to the date hereof and $22,500 of which shall be payable on the Closing Date, such fee to be distributed to the Lenders based upon their respective Commitment Proportion. 12 18 (b) The Company shall pay to each Lender, pro rata based on each Lender's Commitment Proportion of the Revolving Credit Commitment, a commitment fee on the average daily amount of the Revolving Credit Commitment less the aggregate principal amount of the Revolving Credit Loans outstanding from the date of this Agreement until the Revolving Credit Commitment Termination Date at the rate of 1/8 of 1% per annum, based on a year of 360 days, payable in arrears on the last business day of each calendar quarter, commencing June 30, 1999, and on the Revolving Credit Commitment Termination Date and on any day the Revolving Credit Commitment is permanently reduced in whole or in part. SECTION 3.05. INCREASED COSTS. (a) In the event that any introduction of or change in, on or after the date hereof, any applicable law, regulation, treaty, order, directive or in the interpretation or application thereof (including, without limitation, any request, guideline or policy, whether or not having the force of law, of or from any central bank or other governmental authority, agency or instrumentality and including, without limitation, Regulation D), by any authority charged with the administration or interpretation thereof shall occur, which: (i) shall subject any Lender to any tax of any kind whatsoever with respect to this Agreement, any Note, any Loan, or change the basis of taxation of payments to such Lender of principal, interest, fees or any other amount payable hereunder (other than any tax that is measured with respect to the overall net income of such Lender or Lending Office of such Lender and that is imposed by the United States of America, or any political subdivision or taxing authority thereof or therein, or by any jurisdiction in which such Lender's Lending Office is located, or by any jurisdiction in which such Lender is organized, has its principal office or is managed and controlled); or (ii) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement (whether or not having the force of law) against assets held by, or deposits or other liabilities in or for the account of, advances or loans by, or other credit extended by, or any other acquisition of funds by, any office of any Lender; or (iii) shall impose on any Lender any other condition, or change therein; and the result of any of the foregoing is to increase the cost to such Lender of making, renewing or maintaining or participating in advances or extensions of credit hereunder or to reduce any amount receivable hereunder, in each case by an amount which such Lender deems material, then, in any such case, the Company shall pay such Lender, upon demand, such additional amount or amounts as such Lender shall have determined will compensate such Lender for such increased costs or reduction. (b) If any Lender shall have determined that the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or any lending office of any Lender) or any Lender's holding company, with any request or directive regarding capital adequacy (whether or not having the force of the law) of any such authority, central 13 19 bank or comparable agency, has or would have the effect of reducing the rate of return on such Lender's capital or on the capital of such Lender's holding company as a consequence of its obligations hereunder to a level below that which such Lender could have achieved but for such adoption, change or compliance (taking into consideration such Lender's policies and the policies of such Lender's holding company with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time, the Company shall pay to such Lender the additional amount or amounts as such Lender shall have determined will compensate such Lender or such Lender's holding company for such reduction. Such Lender's determination of such amounts shall be conclusive and binding on the Company absent clear and obvious error. (c) A certificate of a Lender setting forth the amount or amounts payable pursuant to Sections 3.05(a) and 3.05(b) above shall be conclusive absent clear and obvious error. The Company shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof. (d) In the event any Lender shall be entitled to compensation pursuant to Section 3.05(a) or Section 3.05(b), it shall promptly notify the Administrative Agent and the Company of the event by reason of which it has become so entitled; provided, however, no failure on the part of any Lender to demand compensation under clause (a) or clause (b) above on one occasion shall constitute a waiver of its right to demand compensation on any other occasion. SECTION 3.06. TAXES. (a) Except as set forth in clause (c) below or as required by law, all payments made by the Company under this Agreement shall be made free and clear of, and without reduction for or on account of, any present or future taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority, excluding income and franchise taxes imposed on the Administrative Agent or a Lender by (i) the United States of America or any political subdivision or taxing authority thereof or therein, (ii) the jurisdiction under the laws of which the Administrative Agent or such Lender is organized or in which it has its principal office or is managed and controlled or any political subdivision or taxing authority thereof or therein, or (iii) any jurisdiction in which such Lender's Lending Office is located or any political subdivision or taxing authority thereof or therein (such non-excluded taxes being called "Taxes"). If any Taxes are required to be withheld from any amounts payable to the Administrative Agent, or any Lender hereunder, or under the Notes, the amount so payable to the Administrative Agent or such Lender shall be increased to the extent necessary to yield to the Administrative Agent or such Lender (after payment of all Taxes and free and clear of all liability in respect of such Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement and the Notes. Whenever any Taxes are payable by the Company, as promptly as possible thereafter, the Company shall send to the Administrative Agent for its own account or for the account of such Lender, as the case may be, a certified copy of an original official receipt showing payment thereof. If the Company fails to pay Taxes when due to the appropriate taxing authority or fails to remit to the Administrative Agent the required receipts or other required documentary evidence, the Company shall indemnify the Administrative Agent and the Lenders for any incremental taxes, interest or penalties that may become payable by the 14 20 Administrative Agent or such Lender as a result of any such failure together with any expenses payable by the Administrative Agent or such Lender in connection therewith. (b) Prior to the first Interest Payment Date, each Lender that is not organized under the laws of the United States or a state thereof agrees that it will deliver to the Administrative Agent (i) two duly completed copies of United States Internal Revenue Service Form 1001 or 4224 or successor applicable form, as the case may be, certifying in each case that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes, and (ii) an Internal Revenue Service Form W-8 or W-9 or successor applicable form, as the case may be, to establish an exemption from United States back-up withholding tax. Each Lender which delivers to the Company and the Administrative Agent a Form 1001 or 4224 and Form W-8 or W-9 pursuant to the preceding sentence further undertakes to deliver to the Administrative Agent two further copies of the said statement and Form 1001 or 4224 and Form W-8 or W-9, or successor applicable forms, or other manner of certification, as the case may be, on or before the date that any such letter or form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent letter and form previously delivered by it to the Administrative Agent, and such extensions or renewals thereof as may reasonably be requested by the Administrative Agent, certifying in the case of a Form 1001 or 4224 that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes. SECTION 3.07. PRO RATA TREATMENT AND PAYMENTS. Each borrowing by the Company from each Lender, each payment by the Company on account of any fee and any reduction of the Revolving Credit Commitment of the Lenders hereunder shall be made pro rata according to the respective relevant Commitment Proportions of the Lenders provided, however, the portion of the fee required to be paid pursuant to Section 3.04(b) which is allocable to the Contingent Commitment shall be paid solely to EAB for its account and any reduction of the Revolving Credit Commitment shall first reduce the Contingent Commitment. Each payment (including each prepayment) by the Company on account of principal of and interest on each Loan shall be made pro rata according to the respective outstanding principal amounts of such Loans held by each Lender; provided, however, in the event EAB has funded any Revolving Credit Loans pursuant to the Contingent Commitment, then all payments of principal received in respect to the Revolving Credit Loans shall be applied first to the Revolving Credit Loans funded by EAB pursuant to the Contingent Commitment until the principal amount of all such Revolving Credit Loans have been paid in full. All payments (including prepayments) to be made by the Company on account of principal, interest, fees and reimbursement obligations shall be made without set-off or counterclaim and shall be made to the Administrative Agent, for the account of the Lenders (or EAB as set forth above) at the Payment Office of the Administrative Agent in Dollars in immediately available funds. The Administrative Agent shall distribute such payments to the Lenders promptly upon receipt in like funds by wire transfer of each Lender's portion of such payment to such Lender for the account of its Lending Office. The Administrative Agent may, in its sole discretion, directly charge principal and interest payments due in respect of the Loans to the Company's or any Corporate Guarantors' accounts at the Payment Office or other office of the Administrative Agent. Except as otherwise 15 21 provided in the definition of "Interest Period", if any payment hereunder becomes due and payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day, and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. ARTICLE IV REPRESENTATIONS AND WARRANTIES In order to induce the Lenders and the Administrative Agent to enter into this Agreement and to make the Loans herein provided for, the Company and each Corporate Guarantor represents and warrants to each Lender and the Administrative Agent that: SECTION 4.01. ORGANIZATION, POWERS. The Company (a) is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, (b) has the corporate power and authority to own its properties and to carry on its business as now being conducted, (c) is duly qualified to do business in every jurisdiction wherein the conduct of its business or the ownership of its properties are such as to require such qualification, except where the failure to be so qualified could not reasonably be expected to have a Material Adverse Effect, and (d) has the corporate power to execute, deliver and perform each of the Loan Documents to which it is a party, including, without limitation, the power to obtain extensions of credit hereunder and to execute and deliver the Notes. Each Guarantor is (a) a corporation, limited liability company or a limited partnership, duly organized or formed, as applicable, validly existing and in good standing under the laws of the state of its incorporation or formation, (b) has the corporate, limited partnership or limited liability company and authority to own or lease its properties and carry on its business as now being conducted, (c) is duly qualified to do business in every jurisdiction wherein the conduct of its business or the ownership of its properties are such as to require such qualification except where the failure to be so qualified could not reasonably be expected to have a Material Adverse Effect, and (d) has the corporate limited liability company power or partnership power as applicable to execute, deliver and perform each of the Loan Documents to which it is a party. SECTION 4.02. AUTHORIZATION OF BORROWING, ENFORCEABLE OBLIGATIONS. The execution, delivery and performance by the Company of this Agreement, and the other Loan Documents to which it is a party, the borrowings and the other extensions of credit to the Company hereunder, and the execution, delivery and performance by each of the Guarantors of the Loan Documents to which such Guarantor is a party, (a) have, with respect to the Company and each Corporate Guarantor, been duly authorized by all requisite corporate and limited liability company action, as applicable, (b) will not violate or require any consent (other than consents as have been made or obtained and which are in full force and effect) under (i) any provision of law applicable to the Company or any Guarantor, any rule or regulation of any Governmental Authority, or the Certificate of Incorporation or By-laws or the Articles of Organization and Operating Agreement, as applicable, of the Company or of any Corporate Guarantor or (ii) any order of any court or other Governmental Authority binding on the Company or any Guarantor or any indenture, agreement or other instrument to which the Company or any Guarantor is a party, or by which the Company or any 16 22 Guarantor or any of its property is bound, and (c) will not be in conflict with, result in a breach of or constitute (with due notice and/or lapse of time) a default under, any such indenture, agreement or other instrument, or result in the creation or imposition of any Lien, of any nature whatsoever upon any of the property or assets of the Company or any Guarantor other than as contemplated by this Agreement or the other Loan Documents. This Agreement and each other Loan Document to which the Company or any Guarantor is a party constitutes a legal, valid and binding obligation of the Company and each such Guarantor, as the case may be, enforceable against the Company and each such Guarantor, as the case may be, in accordance with its terms except to the extent that enforcement may be limited by applicable bankruptcy, reorganization, moratorium, insolvency and similar laws affecting creditors' rights generally or by equitable principles of general application, regardless of whether considered in a proceeding in equity or at law. SECTION 4.03. FINANCIAL CONDITION. (a) The Company has heretofore furnished to each Lender (i) the audited consolidated balance sheet of the Company and its Subsidiaries and the related consolidated statement of income, retained earnings and cash flow of the Company and its Subsidiaries, audited by Pricewaterhouse Coopers LLP, independent certified public accountants, for the fiscal year ended December 31, 1998, and (ii) the unaudited consolidated and consolidating balance sheet of the Company and its Subsidiaries and the related consolidated and consolidating statements of income, retained earnings and cash flow of the Company and its Subsidiaries for the three month period ended March 31, 1999. Such financial statements were prepared in conformity with Generally Accepted Accounting Principles, applied on a consistent basis, and fairly present the financial condition and results of operations of the Company and its Subsidiaries, on a consolidated basis, as of the date of such financial statements and for the periods to which they relate and, since March 31, 1999, no Material Adverse Effect has occurred. The Company shall deliver to the Administrative Agent, with a copy for each Lender a certificate of the Chief Financial Officer of the Company to that effect on the Closing Date. Other than obligations and liabilities arising in the ordinary course of business since December 31, 1998, there are no obligations or liabilities contingent or otherwise, of the Company or any of its Subsidiaries which are not reflected or disclosed on such audited statements. (b) The Company, individually and together with the Corporate Guarantors, is Solvent and immediately after giving effect to the Loan and the execution of each Loan Document, will be Solvent. SECTION 4.04. TAXES. All assessed deficiencies resulting from Internal Revenue Service examinations of the federal income tax returns of the Company or any Guarantor have been discharged or reserved against in accordance with Generally Accepted Accounting Principles. The Company and each Guarantor has filed or caused to be filed all federal, state and local tax returns which are required to be filed, and has paid or has caused to be paid all taxes as shown on said returns or on any assessment received by them, to the extent that such taxes have become due, except taxes which are being contested in good faith and which are reserved against in accordance with Generally Accepted Accounting Principles. 17 23 SECTION 4.05. TITLE TO PROPERTIES. The Company and each Corporate Guarantor has good title to their respective properties and assets reflected on the financial statements referred to in Section 4.03 hereof, except for such properties and assets as have been disposed of since the date of such financial statements as no longer used or useful in the conduct of their respective businesses or as have been disposed of in the ordinary course of business, and all such properties and assets are free and clear of all Liens other than Permitted Liens. SECTION 4.06. LITIGATION. (a) There are no actions, suits or proceedings (whether or not purportedly on behalf of the Company or of any Guarantor) pending or, to the knowledge of the Company, threatened against or affecting the Company or any Guarantor at law or in equity or before or by any Governmental Authority, which involve any of the transactions contemplated herein or which, if adversely determined against the Company or such Guarantor could reasonably be expected to have a Material Adverse Effect or which involve a claim against the Company or any Guarantor in excess of $200,000 which is not fully covered by insurance (other than reasonable and customary deductibles); and (b) neither the Company nor any Guarantor is in default with respect to any judgment, writ, injunction, decree, rule or regulation of any Governmental Authority which could reasonably be expected to result in a Material Adverse Effect. SECTION 4.07. AGREEMENTS. Neither the Company nor any Guarantor is a party to any agreement or instrument or, with respect to the Company or any Corporate Guarantor, subject to any charter or other corporate restriction or any judgment, order, writ, injunction, decree or regulation which could reasonably be expected to have a Material Adverse Effect. Neither the Company nor any Guarantor is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any material agreement or instrument to which it is a party. SECTION 4.08. COMPLIANCE WITH ERISA. Each Plan is in compliance in all material respects with ERISA; no Plan is insolvent or in reorganization, no Plan or Plans have an Unfunded Current Liability, and no Plan has an accumulated or waived funding deficiency; neither the Company, any Corporate Guarantor nor any ERISA Affiliate has incurred any liability to or on account of a Plan pursuant to Section 515, 4062, 4063, 4064, 4201 or 4204 of ERISA or reasonably expects to incur any liability under any of the foregoing sections on account of the prior termination of participation in or contributions to any such Plan; no proceedings have been instituted to terminate any Plan; no condition exists which could reasonably be expected to present a risk to the Company, any Corporate Guarantor or any ERISA Affiliate of incurring a liability in excess of $50,000 to or on account of a Plan pursuant to the foregoing provisions of ERISA and the Code; no lien imposed under the Code or ERISA on the assets of the Company, any Corporate Guarantor or any of its ERISA Affiliates exists or to the knowledge of the Company is likely to arise on account of any Plan and the Company and such Corporate Guarantor may terminate contributions to any other employee benefit plans maintained by it without incurring any material liability to any Person interested therein. SECTION 4.09. FEDERAL RESERVE REGULATIONS; USE OF PROCEEDS. (a) Neither the Company nor any Guarantor is engaged principally in, nor has as one of its important activities, the 18 24 business of extending credit for the purpose of purchasing or carrying any "margin stock" (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System of the United States, as amended from time to time). (b) No part of the proceeds of the Loan will be used, whether directly or indirectly, and whether immediately, incidentally or ultimately, (i) to purchase or to carry margin stock or to extend credit to others for the purpose of purchasing or carrying margin stock, or to refund indebtedness originally incurred for such purposes, or (ii) for any purpose which violates or is inconsistent with the provisions of Regulation T, U or X of the Board of Governors of the Federal Reserve System. (c) The proceeds of the Loan shall be used solely for the purposes permitted under Section 3.02. SECTION 4.10. APPROVALS. No registration with or consent or approval of, or other action by, any Governmental Authority or any other Person is required in connection with the execution, delivery and performance of this Agreement by the Company or any Guarantor, or with the execution and delivery of other Loan Documents to which it is a party or, with respect to the Company, the borrowings hereunder. SECTION 4.11. SUBSIDIARIES. Attached hereto as Schedule I is a correct and complete list of each of the Company's and each Corporate Guarantor's Subsidiaries as of the Closing Date showing as to each Subsidiary, its name, the jurisdiction of its incorporation, its shareholders or other owners of an interest in each Subsidiary and the number of outstanding shares or other ownership interest owned by each shareholder or other owner of an interest. SECTION 4.12. HAZARDOUS MATERIALS. The Company and each Guarantor is in compliance in all material respects with all applicable Environmental Laws and neither the Company nor any Guarantor has used Hazardous Materials on, from, or affecting any property now owned or occupied or hereafter owned or occupied by the Company or any Guarantor in any manner which violates any applicable Environmental Law. To the best of the Company's knowledge, no prior owner of any such property or any tenant, subtenant, prior tenant or prior subtenant have used Hazardous Materials on, from, or affecting such property in any manner which violates any applicable Environmental Law. SECTION 4.13. INVESTMENT COMPANY ACT. Neither the Company nor any Corporate Guarantor is an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. SECTION 4.14. NO DEFAULT. No Default or Event of Default has occurred and is continuing. SECTION 4.15. MATERIAL CONTRACTS. All Material Contracts are disclosed on Schedule V hereto. Each such Material Contract is in full force and effect and is binding upon and enforceable 19 25 against the Company and any Corporate Guarantor, in each case, to the extent they are a party thereto, and, to the Company's knowledge, all other parties thereto in accordance with its terms, and there exists no default, in any material respect, under any Material Contract by the Company or any Corporate Guarantor or, to the Company's knowledge, by any other party thereto which has not been fully cured or waived. SECTION 4.16. PERMITS AND LICENSES. The Company and each Corporate Guarantor each has all permits, licenses, certifications, authorizations and approvals required for it lawfully to own and operate their respective businesses except where the failure to obtain or retain such permits, licenses, certifications, authorizations or approvals could not reasonably be expected to result in a Material Adverse Effect. SECTION 4.17. COMPLIANCE WITH LAW. The Company and each Guarantor are each in compliance, with all laws, rules, regulations, orders and decrees which are applicable to the Company or any Guarantor, or to any of their respective properties except where the failure to be in compliance cannot reasonably be expected to result in a Material Adverse Effect. SECTION 4.18. Y2K. Any reprogramming required to permit the proper functioning, in and following the year 2000, of (a) the Company's or any Corporate Guarantor's computer systems and (b) equipment containing embedded microchips (including systems and equipment supplied by others or with which the Company's or any Corporate Guarantor's systems interface, and the testing of all such systems and equipment, as so reprogrammed, will be completed by June 30, 1999 except where the failure to complete such testing and reprogramming cannot reasonably be expected to have a Material Adverse Effect; provided, however, for purposes of this Section 4.18, a failure of the Company or the Guarantor's billing or accounting systems to be properly functioning in and following the year 2000 shall be deemed to have a Material Adverse Effect. The cost to the Company and each Corporate Guarantor's of such reprogramming and testing and of the reasonably foreseeable consequences of the year 2000 to the Company and each Corporate Guarantor (including, without limitation, reprogramming errors and the failure of others' systems or equipment) will not result in a Default or Event of Default or have a Material Adverse Effect. Except for such of the reprogramming referred to in the preceding sentence as may be necessary, the computer and management information systems of the Company and each Corporate Guarantor are and, with ordinary course upgrading and maintenance, will continue to be sufficient to permit the Company and each of its Subsidiaries to conduct their respective businesses without having a Material Adverse Effect. SECTION 4.19. DISCLOSURE. Neither this Agreement, any other Loan Document, nor any other document, certificate or written statement furnished to the Administrative Agent or any Lender by or on behalf of the Company or any Guarantor for use in connection with the transactions contemplated by this Agreement contains any untrue statement of material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances in which they were made. 20 26 SECTION 4.20. SECURITY AGREEMENTS. Each Security Agreement executed by the Company and each Corporate Guarantor shall constitute a valid and continuing lien on and security interest in the collateral referred to in the Security Agreement in favor of the Administrative Agent for the ratable benefit of the Lenders, which shall be, upon the filing of the Uniform Commercial Code financing statements delivered on the Closing Date on behalf of the Company and each Corporate Guarantor at the offices in the jurisdictions listed on Schedule C to each Security Agreement prior to all other Liens, claims and rights of all other Persons and shall be enforceable as such against all other Persons. SECTION 4.21. PLEDGE AGREEMENT. The Pledge Agreement executed by the Company shall, pursuant to its terms, constitute a valid and continuing lien on and security interest in the collateral referred to in such Pledge Agreement in favor of the Administrative Agent, for the ratable benefit of the Lenders, which shall be prior to all other Liens, claims and rights of all other Persons in such collateral. ARTICLE V CONDITIONS OF LENDING SECTION 5.01. CONDITIONS TO LOANS. The several obligations of each Lender to make the Loan hereunder are subject to the following conditions precedent: (a) NOTES. On or prior to the Closing Date, each Lender shall have received for the account of each Lender a Note, each duly executed by the Company. (b) GUARANTIES. On or prior to the Closing Date, the Administrative Agent shall have received, with a counterpart for each Lender, the Guaranties duly executed by each Guarantor. (c) SECURITY DOCUMENTS. On or prior to the Closing Date, the Administrative Agent shall have received (i) the Security Documents duly executed by the Company and each Guarantor to the extent it is a party thereto and (ii) such stock certificates or members certificates pledged pursuant to the Pledge Agreement and stock powers, if applicable, duly executed in blank by the Company, as shall be necessary. (d) OPINION OF COUNSEL. On or prior to the Closing Date, the Administrative Agent shall have received, with a copy for each Lender, a written opinion of counsel for the Company and the Guarantors dated the Closing Date and addressed to the Administrative Agent and the Lenders, substantially in the form of Exhibit F attached hereto. (e) SUPPORTING DOCUMENTS. On or prior to the Closing Date, the Administrative Agent shall have received, with a copy for each Lender, (i) a certificate of good standing for the Company and each Corporate Guarantor from the secretary of state of the states of their organizational jurisdiction dated as of a recent date; (ii) certified copies of the Certificate of Incorporation and By-laws or Articles of Organization and Operating Agreement, as applicable, of the Company and each 21 27 Corporate Guarantor; (iii) a certificate of the Secretary or an Assistant Secretary of the Company and each Corporate Guarantor dated the Closing Date and certifying: (x) that neither the Certificate of Incorporation nor the By-laws or the Articles of Organization or Operating Agreement, as applicable, of the Company nor of any Corporate Guarantor has been amended since the date of their certification (or if there has been any such amendment, attaching a certified copy thereof); (y) that attached thereto is a true and complete copy of resolutions adopted by the Board of Directors of the Company and by the board of directors or other governing body or Persons of each Corporate Guarantor authorizing the execution, delivery and performance of each Loan Document to which it is a party and, with respect to the Company, the borrowings and other extensions of credit hereunder; and (z) the incumbency and specimen signature of each officer of the Company and of each officer or other authorized Person of each Corporate Guarantor executing each Loan Document to which the Company or any Corporate Guarantor is a party and any certificates or instruments furnished pursuant hereto or thereto, and a certification by another officer of the Company and each Corporate Guarantor as to the incumbency and signature of the Secretary or Assistant Secretary of the Company and each Corporate Guarantor; and (iv) such other documents as the Administrative Agent may reasonably request. (f) INSURANCE. On or prior to the Closing Date, the Administrative Agent shall have received a certificate or certificates of insurance from an independent insurance broker or brokers confirming the insurance required to be maintained pursuant to Section 6.01 hereof, and evidence that the Administrative Agent has been named loss payee and additional insured with respect to each policy of such insurance. (g) FILINGS, REGISTRATIONS AND RECORDINGS. On or prior to the Closing Date, the Administrative Agent shall have received each document, including, without limitation, UCC-1 Financing Statements required by the Security Documents or under the laws of any jurisdiction to be filed, registered or recorded in order to create, in favor of the Administrative Agent for the ratable benefit of the Lenders, a perfected first lien on the collateral described in the Security Documents, in form to be properly filed, registered or recorded, in each office in each such jurisdiction. (h) ASSETS FREE FROM LIENS. Prior to the Closing Date, the Administrative Agent shall have received UCC-1 financing statement, tax and judgment lien searches evidencing that the Company's and each Corporate Guarantor's accounts receivable, inventory, equipment and all other assets of the Company and each Corporate Guarantor are free and clear of all Liens except (i) Permitted Liens and (ii) Liens in favor of the Lenders. (i) FEES AND EXPENSES. On or prior to the Closing Date, the Administrative Agent shall have received for itself and for the account of the Lenders (i) all fees payable to the Lenders pursuant to the Loan Documents on or prior to the Closing Date and (ii) reimbursement of expenses in accordance with Section 10.03. (j) NO LITIGATION. There shall exist no action, suit, investigation, litigation or proceeding affecting the Company or any Guarantor pending or threatened before any court, governmental 22 28 agency or arbiter that could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. (k) CONSENTS AND APPROVALS. All governmental and third party consents and approvals necessary in connection with the transactions contemplated by this Agreement and the other Loan Documents shall have been obtained (without the imposition of any conditions that are not acceptable to the Required Lenders) and shall remain in effect, and no law or regulation shall be applicable in the reasonable judgment of the Required Lenders that imposes materially adverse conditions upon the transactions contemplated hereby. (l) NO MATERIAL ADVERSE CHANGES. There shall not have occurred any material adverse change in the business, operations, properties, prospects or condition (financial or otherwise) of the Company or any Guarantor since March 31, 1999. (m) PERSONAL FINANCIAL STATEMENTS. The Individual Guarantors shall have furnished to the Administrative Agent prior to the Closing Date completed personal financial statements on the Administrative Agent's form thereof prepared as of a recent date, together with a schedule of contingent liabilities and guarantees and letter certifying to the Lenders that since the date of those financial statements no material increase in liabilities or material adverse changes (financial or otherwise) have occurred and that each Individual Guarantor maintains cash or cash equivalents in an amount at least equal to the amount of cash and cash equivalents maintained by him as of the date of such statements, and the Lenders shall have been satisfied in their sole discretion with the form and substance thereof. (n) DUE DILIGENCE. The Lenders shall have completed their due diligence with respect to the Company and each Guarantor including, without limitation, bank checkings, trade checkings, customer checkings and litigation checkings and the Lenders shall have been satisfied with the result thereof. (o) SUBORDINATION AGREEMENTS. On or prior to the Closing Date, the Administrative Agent shall have received, with a copy for each Lender, each Subordination Agreement, duly executed by Hugh O'Kane, Jr., Kevin O'Kane and Denis O'Kane, as applicable, with respect to the indebtedness described therein, together with a copy of any note, agreement or other document evidencing such Subordinated Indebtedness. (p) ACCOUNTS RECEIVABLE AGING AND REVENUE SUMMARY. Prior to the Closing Date, the Lenders shall have received the latest monthly accounts receivable aging and revenue summary, which shall be in form and substance satisfactory to the Lenders. (q) REPORTS. Prior to the Closing Date, the Lenders shall have received (i) the quarterly job progress report and completed contract report for the fiscal quarter ended March 31, 1999, (ii) accounts receivable reconciliation reports with respect to the fiscal quarter ended March 31, 1999, which reports shall be in form and substance satisfactory to the Lenders. 23 29 (r) SHAREHOLDER AGREEMENT; PREFERRED STOCK. Prior to the Closing Date, the Lenders shall have received a copy of the Shareholder Agreement and any documents and agreements executed in connection therewith, including, but not limited to all documents pertaining to the issuance of preferred stock of the Company, and all such documents shall be in form and substance satisfactory to the Lenders. (s) COMPLETION OF PROCEEDINGS. All corporate and other proceedings, and all documents, instruments and other legal matters in connection with the transactions contemplated by the Loan Documents, shall be satisfactory in form and substance to the Administrative Agent, the Lenders and their counsel. (t) OTHER INFORMATION, DOCUMENTATION. The Administrative Agent and the Lenders shall have received such other and further information and documentation as any of them may require, including, but not limited to, any information or documentation relating to compliance by the Company and each Corporate Guarantor with the requirements of all Environmental Laws. SECTION 5.02. CONDITIONS TO ALL EXTENSIONS OF CREDIT. The obligation of the Lenders to make each Loan hereunder, including, without limitation, the initial Loan, is subject to the conditions precedent set forth in Section 5.01 and the following conditions precedent: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties by the Company and each Corporate Guarantor pursuant to this Agreement and the other Loan Documents to which each is a party shall be true and correct in all material respects on and as of the Borrowing Date, with the same effect as though such representations and warranties had been made on and as of such date unless such representation is as of a specific date, in which case, as of such date. (b) NO DEFAULT. No Default or Event of Default shall have occurred and be continuing on the Closing Date. Each Borrowing hereunder shall constitute a representation and warranty of the Company that the statements contained in clauses (a) and (b) of Section 5.02 are true and correct on and as of the Borrowing Date. ARTICLE VI AFFIRMATIVE COVENANTS The Company covenants and agrees with each Lender that so long as the Revolving Credit Commitment remains in effect, or any of the principal of or interest on the Notes or any other Obligations hereunder shall be unpaid it will, and will cause each Corporate Guarantor to: SECTION 6.01. EXISTENCE, PROPERTIES, INSURANCE. Do or cause to be done all things necessary to preserve and keep in full force and effect its corporate, partnership or limited liability company, as applicable, existence, rights and franchises and comply in all material respects with all 24 30 laws applicable to it; at all times maintain, preserve and protect all franchises and trade names and preserve all of its property used or useful in the conduct of its business and keep the same in good repair, working order and condition and from time to time make, or cause to be made, all needful and proper repairs, renewals, replacements, betterments and improvements thereto so that the business carried on in connection therewith may be properly and advantageously conducted in the ordinary course at all times; and at all times maintain insurance covering its assets and its businesses with financially sound and reputable insurance companies or associations in such amounts and against such risks (including, without limitation, hazard, business interruption, public liability and product liability) as are usually carried by companies engaged in the same or similar business. Each such policy of insurance shall provide for at least thirty (30) days' prior written notice to the Administrative Agent of any modification or cancellation of such policies and shall name the Administrative Agent as loss payee and additional insured. The Company shall provide to the Administrative Agent promptly upon receipt thereof evidence of the annual renewal of each such policy. SECTION 6.02. PAYMENT OF INDEBTEDNESS AND TAXES. (a) Pay all indebtedness and obligations, now existing or hereafter arising, as and when due and payable and (b) pay and discharge or cause to be paid and discharged promptly all taxes, assessments and government charges or levies imposed upon it or upon its income and profits, or upon any of its property, real, personal or mixed, or upon any part thereof, before the same shall become in default, as well as all lawful claims for labor, materials and supplies or otherwise which, if unpaid, might become a lien or charge upon such properties or any part thereof; provided, however, that neither the Company nor any Corporate Guarantor shall be required to pay and discharge or cause to be paid and discharged any such tax, assessment, charge, levy or claim so long as the validity thereof shall be contested in good faith by appropriate proceedings, and the Company or such Corporate Guarantor, as the case may be, shall have set aside on its books adequate reserves determined in accordance with Generally Accepted Accounting Principles with respect to any such tax, assessment, charge, levy or claim so contested; provided, further, that, subject to the foregoing proviso, the Company and each Corporate Guarantor will pay or cause to be paid all such taxes, assessments, charges, levies or claims upon the commencement of proceedings to foreclose any lien which has attached as security therefor. SECTION 6.03. FINANCIAL STATEMENTS, REPORTS, ETC. Furnish to the Administrative Agent and each Lender: (a) (i) as soon as available, but in any event within one hundred twenty (120) days after the end of each fiscal year of the Company, a copy of the audited consolidated balance sheet of the Company and its consolidated Subsidiaries as of the end of such year and the related audited consolidated statements of income, shareholders equity and cash flow for such year, in each case, prepared in accordance with Generally Accepted Accounting Principles setting forth in comparative form the respective figures as of the end of and for the previous fiscal year, and accompanied by a report thereon of independent certified public accountants of recognized standing selected by the Company and satisfactory to the Lenders (the "Auditor"), which report shall be unqualified; and (ii) as soon as available, but in any event within one hundred twenty (120) days after the end of each fiscal year of the Company, a 25 31 copy of the management prepared consolidating financial statements of the Company and its consolidated Subsidiaries setting forth in comparative form the respective figures as of the end of and for the previous fiscal year and which support the financial statements delivered pursuant to clause (i), in each case of (i) and (ii) prepared in accordance with Generally Accepted Accounting Principles, applied on a consistent basis, and with respect to the statements referred to in clause (ii) accompanied by a certificate to that effect executed by the Chief Financial Officer; (b) as soon as available, but in any event not later than forty five (45) days after the end of each quarterly period of each fiscal year of the Company, a copy of the unaudited interim consolidated and consolidating balance sheet of the Company and its consolidated Subsidiaries as of the end of each such quarter and the related unaudited interim consolidated and consolidating statements of income, shareholders equity and cash flow for such quarter and the portion of the fiscal year through such date and setting forth in each case in comparative form the respective figures for the corresponding date and period in the previous fiscal year (except that the quarterly comparisons to prior year shall not be required for the statement of cash flow until the first quarter of 2000), in each case prepared by the Chief Financial Officer in accordance with Generally Accepted Accounting Principles, applied on a consistent basis, and accompanied by a certificate to that effect executed by the Chief Financial Officer; (c) a certificate prepared and signed by the Chief Financial Officer with each delivery required by clauses (a)(ii) and (b), as to whether or not, as of the close of such preceding period and at all times during such preceding period, the Company or each of its Subsidiaries, as the case may be, was in compliance with all the provisions in this Agreement, showing computation of financial covenants and quantitative negative covenants, and if the Chief Financial Officer shall have obtained knowledge of any default in such compliance or notice of such default, it shall disclose in such certificate such default or defaults or notice thereof and the nature thereof, whether or not the same shall constitute a Default or an Event of Default hereunder; (d) a certificate prepared and signed by the Auditor with each delivery required by clause (a) above stating whether they obtained knowledge during the course of their examination of such financial statements of any Default or Event of Default (which certificate may be limited to the extent required by any accounting rules or guidelines binding upon the Auditors); (e) at all times indicated in clause (a) above, a copy of the management letter, if any, prepared by the Auditor; (f) if applicable, promptly after filing thereof, copies of all regular and periodic financial information, proxy materials and other information and reports which the Company or any of its Subsidiaries shall file with the Securities and Exchange Commission; 26 32 (g) promptly after submission to any government or regulatory agency, all documents and information furnished to such government or regulatory agency other than such documents and information prepared in the normal course of business and which could not reasonably be expected to result in any materially adverse action to be taken by such agency; (h) as soon as available and, in any event, within one hundred twenty (120) days after the end of each calendar year, financial statements of each Individual Guarantor for the preceding year prepared on the Administrative Agent's form thereof together with a schedule of contingent liabilities and guaranties; (i) as soon as available and, in any event, within thirty (30) days of the filing thereof, the federal, state and local returns of the Individual Guarantor, including schedules thereto; (j) as soon as available and in any event within twenty one (21) days after the end of each month, detailed monthly schedules of accounts receivable and accounts payables aging and a revenue summary, each in form and substance satisfactory the Lenders; (k) forty-five (45) days after the end of each fiscal quarter, a quarterly account receivable reconciliations report and quarterly job progress and completed contract reports for jobs accounts for on a percentage of completion basis; and (l) promptly, from time to time, such other information regarding the operations, business affairs and condition (financial or otherwise) of the Company or any of its Subsidiaries as any Lender may request. SECTION 6.04. BOOKS AND RECORDS; ACCESS TO PREMISES. Keep adequate records and proper books of record and account in which complete entries will be made in a manner to enable the preparation of financial statements in accordance with Generally Accepted Accounting Principles, and which shall reflect all financial transactions of the Company and each of its Subsidiaries. At any time, and from time to time (upon not less than three (3) Business Days' prior notice if no Default or Event of Default has occurred and is continuing provided no prior notice shall be required if a Default or Event of Default shall have occurred and be continuing), permit any Lender or any agent or representative thereof, to examine and make copies of any abstracts from the books and records of such information which the Lenders deem necessary or desirable (including, without limitation, the financial records of the Company and the Corporate Guarantors) and to visit the properties of the Company or any Corporate Guarantor and to discuss the affairs, finances and accounts of the Company or any Corporate Guarantor with any of their respective executive officers or the Company's independent accountants; and as often as required at any time upon reasonable notice to the Company or any Corporate Guarantor and during normal business hours, permit either any Lender or any agent or representative thereof, to examine and audit at the expense of the Company the inventory and receivables of the Company and such Corporate Guarantor, provided that so long as 27 33 no Default or Event of Default has occurred and is then continuing, the Company shall only be obligated to pay the costs and charges of one field audit in each fiscal year (such costs and charges not to exceed $10,000 per audit), commencing with the audit to be conducted on or about November 30, 1999. SECTION 6.05. NOTICE OF ADVERSE CHANGE. Promptly notify each Lender in writing of (a) any change in the business or the operations of the Company or any Corporate Guarantor which could reasonably be expected to have a Material Adverse Effect, and (b) any information which indicates that any financial statements which are the subject of any representation contained in this Agreement, or which are furnished to the Administrative Agent or the Lenders pursuant to this Agreement, fail, in any material respect, to present fairly, as of the date thereof and for the period covered thereby, the financial condition and results of operations purported to be presented therein, disclosing the nature thereof. SECTION 6.06. NOTICE OF DEFAULT. Promptly notify each Lender of any Default or Event of Default which shall have occurred, which notice shall include a written statement as to such occurrence, specifying the nature thereof and the action (if any) which is proposed to be taken with respect thereto. SECTION 6.07. NOTICE OF LITIGATION. Promptly notify each Lender of any action, suit or proceeding at law or in equity or by or before any governmental instrumentality or other agency which, if adversely determined against the Company or any Guarantor on the basis of the allegations and information set forth in the complaint or other notice of such action, suit or proceeding, or in the amendments thereof, if any, could reasonably be expected to have a Material Adverse Effect or which involve a claim against the Company or any Guarantor in excess of $200,000 which is not fully covered by insurance (other than reasonable and customary deductibles). SECTION 6.08. NOTICE OF DEFAULT IN OTHER AGREEMENTS. Promptly notify each Lender of any default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement or instrument to which the Company or any Guarantor is a party which default could reasonably be expected to have a Material Adverse Effect. SECTION 6.09. NOTICE OF ERISA EVENT. Promptly deliver to each Lender a certificate of the Chief Financial Officer of the Company setting forth details as to such occurrence and such action, if any, which the Company, such Corporate Guarantor or such ERISA Affiliate is required or proposes to take, together with any notices required or proposed to be given to or filed with or by the Company, such Corporate Guarantor ERISA Affiliate, the PBGC, a Plan participant or the Plan administrator, with respect thereto: that a Reportable Event has occurred with respect to a Plan, that an accumulated funding deficiency has been incurred or an application may be or has been made to the Secretary of the Treasury for a waiver or modification of the minimum funding standard (including any required installment payments) or an extension of any amortization period under Section 412 of the Code with respect to a Plan, that a Plan has been terminated, reorganized, partitioned or declared insolvent under Title IV of ERISA, that one or more Plans have an Unfunded 28 34 Current Liability giving rise to a Lien under ERISA, that proceedings may be or have been instituted to terminate a Plan, that a proceeding has been instituted pursuant to Section 515 of ERISA to collect a delinquent contribution to a Plan, or that the Company, any Corporate Guarantor or any ERISA Affiliate will incur any liability (including any contingent or secondary liability) to or on account of the termination of or withdrawal from a Plan under Section 4062, 4063, 4064, 4201 or 4204 of ERISA. The Company will deliver to each Lender a complete copy of the annual report (Form 5500) of each Plan that is a single employer Plan (within the meaning of Section 4001(a)(15) of ERISA), filed with the Internal Revenue Service. In addition to any certificates or notices delivered to each Lender pursuant to the first sentence hereof, copies of annual reports and any other notices received by the Company or any Corporate Guarantor required to be delivered to each Lender hereunder shall be delivered to each Lender no later than ten days after the later of the date such report or notice has been filed with the Internal Revenue Service or the PBGC, given to Plan participants or received by the Company or a Corporate Guarantor. SECTION 6.10. NOTICE OF ENVIRONMENTAL LAW VIOLATIONS. Promptly notify each Lender of the receipt of any notice of an action, suit, and proceeding before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, pending against the Company or any Guarantor relating to any alleged violation of any Environmental Law which could reasonably be expected to have a Material Adverse Effect. SECTION 6.11. NOTICE REGARDING MATERIAL CONTRACTS. Promptly notify each Lender of (a) any termination (prior to the end of its stated term), material amendment, material supplement or other material modification of any Material Contract and (b) the occurrence of a default by the Company or by any other party to any Material Contract of which the Company is aware. SECTION 6.12. COMPLIANCE WITH APPLICABLE LAWS. Comply with the requirements of all applicable laws, rules, regulations and orders of any Governmental Authority. SECTION 6.13. SUBSIDIARIES. Promptly notify the Lenders, prior to the occurrence thereof, of the creation, establishment or acquisition, of any Subsidiary of the Company or any Corporate Guarantor not existing on the date hereof and cause (a) each Subsidiary to execute a Guaranty and such Security Documents that the Lenders shall require, including, but not limited to a Security Agreement and a Pledge Agreement, concurrently with the creation, establishment or acquisition of such Subsidiary, and concurrently with the delivery of each Security Agreement and Guaranty pursuant to this Section 6.13 provide to the Administrative Agent the supporting documents identified in clauses (i), (ii), and (iii) of Section 5.01(e) in each case with respect to the Subsidiary executing the same, together with a favorable written opinion of counsel to such Subsidiary in form and substance satisfactory to the Lenders, as to the due execution, delivery and enforceability of such documents and such other matters as the Lenders may request. SECTION 6.14. ENVIRONMENTAL LAWS. Comply in all material respects with the requirements of all Environmental Laws, provide to the Lenders all documentation in connection with such compliance that the Lenders may reasonably request, and defend, indemnify, and hold harmless 29 35 the Administrative Agent and each Lender and their respective employees, agents, officers, and directors, from and against any claims, demands, penalties, fines, liabilities, settlements, damages, costs, or expenses of whatever kind or nature, known or unknown, contingent or otherwise, arising out of, or in any way related to, (a) the presence, disposal, or release of any Hazardous Materials on any property at any time owned or occupied by the Company or any Guarantor; (b) any personal injury (including wrongful death) or property damage (real or personal) arising out of or related to such Hazardous Materials; (c) any lawsuit brought or threatened, settlement reached, or government order relating to such Hazardous Materials, and/or (d) any violation of applicable Environmental Laws, including, without limitation, reasonable attorney and consultant fees, investigation and laboratory fees, court costs, and litigation expenses. SECTION 6.15. FURTHER ASSURANCES. Execute any and all further documents, agreements and instruments, and take all further actions, which the Administrative Agent or the Lenders shall reasonably request in order to effectuate the transactions contemplated by this Agreement and in order to grant, preserve, protect and perfect the liens purported to be created hereunder and under the Security Documents. ARTICLE VII NEGATIVE COVENANTS The Company covenants and agrees with each Lender that so long as the Revolving Credit Commitment remains in effect or any of the principal of or interest on any Note or any other Obligations hereunder shall be unpaid, it will not, and will not cause or permit any Corporate Guarantor, directly or indirectly, to: SECTION 7.01. LIENS. Incur, create, assume or suffer to exist any Lien on any of their respective assets now or hereafter owned, other than: (a) Liens existing on the date hereof as set forth on Schedule II attached hereto, including any renewals or extensions thereof; provided that no such Lien is extended to cover any additional property and that the amount of Indebtedness secured thereby is not increased; (b) Liens for taxes, assessments or other governmental charges or levies not yet delinquent or which are being contested in good faith by appropriate proceedings, provided, however, that adequate reserves with respect thereto are maintained on the books of the Company or any of its Subsidiaries in accordance with Generally Accepted Accounting Principles; (c) carriers', warehousemens', mechanics', suppliers' or other like Liens arising in the ordinary course of business and not overdue for a period of more than 30 days or which are being contested in good faith by appropriate proceedings in a manner which will not jeopardize or diminish in any material respect the interest of the Administrative Agent in any of the collateral subject to the Pledge Agreements; 30 36 (d) Liens incurred or deposits to secure the performance of tenders, bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety, performance and appeal bonds, and other obligations of similar nature incurred in the ordinary course of business; (e) any attachment, judgment or similar Lien arising in connection with any court or governmental proceeding provided that the execution or other enforcement of such Lien is effectively stayed; (f) easements, rights of way, restrictions and other similar charges or encumbrances which in the aggregate do not interfere in any material respect with the occupation, use and enjoyment by the Company or any Corporate Guarantor of the property or assets encumbered thereby in the normal course of their respective business or materially impair the value of the property subject thereto; (g) deposits under workmen's compensation, unemployment insurance and social security laws; (h) purchase money liens for fixed or capital assets, including obligations with respect to Capital Leases; provided in each case (i) no Default or Event of Default shall have occurred and be continuing or shall occur after giving effect to such Lien, (ii) such purchase money Lien does not exceed 100% of the purchase price of, and encumbers only, the property acquired and (iii) such purchase money Lien does not secure any Indebtedness other than in respect of the purchase price of the asset acquired; and (i) Liens granted to the Administrative Agent for the ratable benefit of the Lenders pursuant to the Security Documents. SECTION 7.02. INDEBTEDNESS. Incur, create, assume or suffer to exist or otherwise become liable in respect of any Indebtedness, other than: (a) Indebtedness incurred prior to the date hereof as described in Schedule III attached hereto, including any renewals or extensions thereof; provided such renewal or extension does not result in an increase in the aggregate principal amount of such Indebtedness; (b) Indebtedness to the Lenders, whether under this Agreement, the Notes or any other Loan Document; (c) Indebtedness for trade payables incurred in the ordinary course of business; provided such payables shall be paid or discharged when due; (d) Indebtedness consisting of guarantees permitted pursuant to Section 7.03; 31 37 (e) Subordinated Debt; provided, however, that no Default or Event of Default shall have occurred and is continuing or would occur after giving effect to the incurrence of such Subordinated Debt; (f) Indebtedness owing by the Company to any Corporate Guarantor or by any Corporate Guarantor to any other Corporate Guarantor; (g) Indebtedness secured by purchase money Liens as permitted under Section 7.01(h); provided that no Default or Event of Default shall have occurred and be continuing or would occur after giving effect to the incurrence of such Indebtedness; and (h) Indebtedness owing to all or a portion of the purchase price of an acquisition permitted pursuant to Section 7.12; provided, however, that (i) such Indebtedness does not exceed more than 50% of the original purchase price of such acquisition, (ii) prior to the incurrence of such Indebtedness the Lender shall have received certificates executed by an executive officer of the Company certifying that no default or Event of Default has occurred and is continuing or would occur after giving effect to the incurrence of such Indebtedness which certificate shall include calculation of the financial covenants on a pro forma basis after giving effect to incurrence of such Indebtedness and the consummation of such acquisition and such Indebtedness shall be unsecured. SECTION 7.03. GUARANTIES. Guarantee, endorse, become surety for, or otherwise in any way become or be responsible for the Indebtedness or obligations of any Person, whether by agreement to maintain working capital or equity capital or otherwise maintain the net worth or solvency of any Person or by agreement to purchase the Indebtedness of any other Person, or agreement for the furnishing of funds, directly or indirectly, through the purchase of goods, supplies or services for the purpose of discharging the Indebtedness of any other Person or otherwise, or enter into or be a party to any contract for the purchase of merchandise, materials, supplies or other property if such contract provides that payment for such merchandise, materials, supplies or other property shall be made regardless of whether delivery of such merchandise, supplies or other property is ever made or tendered except: (a) guaranties executed prior to the date hereof as described on Schedule IV attached hereto but not including any renewals or extension thereof; (b) endorsements of negotiable instruments for collection or deposit in the ordinary course of business; (c) guaranties of any Indebtedness under this Agreement or any other Indebtedness; and (d) guaranties by the Company of any Indebtedness of any Corporate Guarantor permitted pursuant to Section 7.02 (other than Indebtedness described in Section 7.02(e)). 32 38 (e) guaranties by any Corporate Guarantor of any Indebtedness of the Company or any other Corporate Guarantor permitted pursuant to Section 7.02 (other than Indebtedness described in Section 7.02(e)). SECTION 7.04. SALE OF ASSETS. Sell, lease, assign, transfer or otherwise dispose of any of their now owned or hereafter acquired respective properties and assets, whether or not pursuant to an order of a federal agency or commission, except for (a) the sale of inventory disposed of in the ordinary course of business, and (b) the sale or other disposition of properties or assets no longer used or useful in the conduct of their respective businesses. SECTION 7.05. SALES OF RECEIVABLES. Sell, transfer, discount or otherwise dispose of notes, accounts receivable or other obligations owing to the Company or any Corporate Guarantor, with or without recourse, except for collection in the ordinary course of business. SECTION 7.06. LOANS AND INVESTMENTS. Make or commit to make any advance, loan, extension of credit, or capital contribution to or purchase or hold beneficially any stock or other securities, or evidence of Indebtedness of, purchase or acquire all or a substantial part of the assets of, make or permit to exist any interest whatsoever in, any other Person except (a) for the ownership of stock of any Subsidiaries existing as of the Closing Date or created after the Closing Date or acquired after the date hereof, provided the Company has complied with its obligations under Section 6.13 with respect to such Subsidiary and (b) acquisitions expressly permitted pursuant to Section 7.12, and (c) Eligible Investments. SECTION 7.07. NATURE OF BUSINESS. Change or alter, in any material respect, the nature of its business from the nature of the business engaged in by it on the date hereof. SECTION 7.08. SALE AND LEASEBACK. Enter into any arrangement, directly or indirectly, with any Person whereby it shall sell or transfer any property, whether real or personal, used or useful in its business, whether now owned or hereafter acquired, of it or any Corporate Guarantor, if at the time of such sale or disposition it intends to lease or otherwise acquire the right to use or possess (except by purchase) such property or like property for a substantially similar purpose. SECTION 7.09. FEDERAL RESERVE REGULATIONS. Permit any Loan or the proceeds of any Loan to be used for any purpose which violates or is inconsistent with the provisions of Regulation T, U or X of the Board of Governors of the Federal Reserve System. SECTION 7.10. ACCOUNTING POLICIES AND PROCEDURES. Permit any change in the accounting policies and procedures of the Company or any Corporate Guarantor, including a change in fiscal year, provided, however, that any policy or procedure required to be changed by the Financial Accounting Standards Board (or other board or committee thereof) in order to comply with Generally Accepted Accounting Principles may be so changed. 33 39 SECTION 7.11. HAZARDOUS MATERIALS. Cause or permit any of its properties or assets to be used to generate, manufacture, refine, transport, treat, store, handle, dispose of, transfer, produce or process Hazardous Materials, except in compliance with all applicable federal, state and local laws or regulations, or cause or permit, as a result of any intentional or negligent act or omission on the part of the Company or any Corporate Guarantor, a release of Hazardous Materials onto such property or asset or onto any other property. SECTION 7.12. LIMITATIONS ON FUNDAMENTAL CHANGES, LIMITATIONS ON CONSIDERATION. Merge or consolidate with, or sell, assign, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now or hereafter acquired) to, any Person, or, acquire all of the stock or all or substantially all of the assets or the business of any Person or liquidate, wind up or dissolve or suffer any liquidation or dissolution provided, however, the Company or any Corporate Guarantor may acquire the business or all or substantially all of the assets of any Person provided that (i) no default or Event of Default shall have occurred and be continuing or would occur after giving effect to the proposed acquisition and (ii) the aggregate purchase price of all such acquisitions in any fiscal year shall not exceed $250,000 in the aggregate, calculated inclusive of the value of any common stock of the Company or any Corporate Guarantor issued to the Seller in such acquisition, and (iii) in the event of acquisition of stock of a Person, the Board of Directors of such Person has recommended the sale by its shareholder to the Company or the Corporate Guarantor as the case may be. SECTION 7.13. FINANCIAL COVENANTS. (a) MINIMUM CONSOLIDATED EBITDA. Permit Consolidated EBITDA to be less than $7,000,000. (b) CONSOLIDATED FIXED CHARGE RATIO. Permit the Consolidated Fixed Charge Ratio to be less 1.35:1.00. (c) CONSOLIDATED INTEREST COVERAGE RATIO. Permit at any time Consolidated Interest Coverage Ratio to be less than 4.50:1.00. (d) CONSOLIDATED TANGIBLE NET WORTH PLUS SUBORDINATED DEBT. Permit Consolidated Tangible Net Worth plus Subordinated Debt, as of the last day of any fiscal quarter, to be less than the amount set forth below opposite the relevant fiscal quarter: Fiscal Quarter Ending Amount --------------------- ------ June 30, 1999 $11,150,000 September 30, 1999 $11,150,000 December 31, 1999 $11,350,000 March 31, 2000 $11,350,000 June 30, 2000 $11,350,000 34 40 September 30, 2000 $11,350,000 December 31, 2000 $11,600,000 March 31, 2001 $11,600,000 June 30, 2001 $11,600,000 September 30, 2001 $11,600,000 December 31, 2001 and $11,850,000 each fiscal year thereafter (e) CONSOLIDATED NET LOSS. Suffer a consolidated net loss (calculated exclusive of extraordinary gains but inclusive of extraordinary losses) for any two consecutive fiscal quarters in any fiscal year of Company. (f) CONSOLIDATED LEVERAGE RATIO. Permit at any time the Consolidated Leverage Ratio to exceed 2.15:1.00. SECTION 7.14. SUBORDINATED DEBT. Directly or indirectly prepay, defease, purchase, redeem, or otherwise acquire any Subordinated Debt, except as provided in the Subordination Agreement or amend, supplement or otherwise modify any of the terms thereof without the prior written consent of the Required Lenders. SECTION 7.15. DIVIDENDS. Declare any dividend on, or make any payment on account of, or set apart assets for a sinking or other analogous fund for the purchase, redemption, defeasance, retirement or other acquisition of, any shares of any class of stock of the Company or any Corporate Guarantor, or warrant to purchase any class of stock of the Company or any Corporate Guarantor, whether now or hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash, securities or property or in obligations of the Company or any Corporate Guarantor or in any combination thereof, or permit any Subsidiary to make any payment on account of, or purchase or otherwise acquire, any shares of any class of the stock of the Company or any Corporate Guarantor or any warrant to purchase any class of stock of the Company or any Corporate Guarantor from any Person. SECTION 7.16. TRANSACTIONS WITH AFFILIATES. Enter into any transaction, including, without limitation, the purchase, sale, or exchange of property or the rendering of any service, with any Affiliate, except in the ordinary course of and pursuant to the reasonable requirements of the Company's or any Corporate Guarantor's business and upon fair and reasonable terms no less favorable to the Company or such Corporate Guarantor than they would obtain in a comparable arms-length transaction with a Person not an Affiliate. SECTION 7.17. IMPAIRMENT OF SECURITY INTEREST. Take or omit to take any action which could reasonably be expected to have the result of impairing the security interest in any property subject to a security interest in favor of the Administrative Agent or the Lenders or grant to any person any interest whatsoever in any property which is subject to a security interest in favor of the Administrative Agent for the ratable benefit of the Lenders. 35 41 ARTICLE VIII EVENTS OF DEFAULT SECTION 8.01. EVENTS OF DEFAULT. In the case of the happening of any of the following events (each an "Event of Default"): (a) failure to pay the principal of or interest on any Loan, or any fees under this Agreement as and when due and payable, and with respect to interest payments and fee payments only, such failure shall continue unremedied for a period of three Business Days; (b) default shall be made in (i) the due observance or performance of any covenant, condition or agreement of the Company or any Corporate Guarantor to be performed pursuant to Section 6.01 of this Agreement and such failure shall continue unremedied for a period of ten (10) days, or (ii) the due observance or performance of any other covenant, condition or agreement of the Company or any Corporate Guarantor to be performed pursuant to this Agreement or any other Loan Document (other than those specified in clause (a) of this Section 8.01); (c) any representation or warranty made or deemed made in this Agreement or any other Loan Document shall prove to be false or misleading in any material respect when made or given or when deemed made or given; (d) any report, certificate, financial statement or other instrument furnished in connection with this Agreement or any other Loan Document or the borrowings hereunder, shall prove to be false or misleading in any material respect when made or given or when deemed made or given; (e) default in the performance or compliance in respect of any agreement or condition relating to any Indebtedness of the Company or any Corporate Guarantor in excess of $50,000 individually or in the aggregate (other than the Notes), if the effect of such default is to accelerate the maturity of such Indebtedness or to permit the holder or obligee thereof (or a trustee on behalf of such holder or obligee) to cause such Indebtedness to become due prior to the stated maturity thereof, or, any such Indebtedness shall not be paid when due; (f) the Company or any Guarantor shall (i) voluntarily commence any proceeding or file any petition seeking relief under Title 11 of the United States Code or any other federal or state bankruptcy, insolvency or similar law, (ii) consent to the institution of, or fail to controvert in a timely and appropriate manner, any such proceeding or the filing of any such petition, (iii) apply for or consent to the employment of a receiver, trustee, custodian, sequestrator or similar official for the Company or any Guarantor or for a substantial part of its property; (iv) file an answer admitting the material allegations of a petition filed against it 36 42 in such proceeding, (v) make a general assignment for the benefit of creditors, (vi) take corporate action for the purpose of effecting any of the foregoing, or (vii) become unable or admit in writing its inability or fail generally to pay its debts as they become due; (g) an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief in respect of the Company or any Guarantor or of a substantial part of their respective property, under Title 11 of the United States Code or any other federal or state bankruptcy insolvency or similar law, (ii) the appointment of a receiver, trustee, custodian, sequestrator or similar official for the Company or any Guarantor or for a substantial part of their property, or (iii) the winding-up or liquidation of the Company or any Guarantor and such proceeding or petition shall continue undismissed for 30 days or an order or decree approving or ordering any of the foregoing shall continue unstayed and in effect for 30 days; (h) One or more orders, judgments or decrees for the payment of money in excess of $50,000 in the aggregate shall be rendered against the Company or any Corporate Guarantor and the same shall not have been paid in accordance with such judgment, order or decree or settlement and either (i) an enforcement proceeding shall have been commenced by any creditor upon such judgment, order or decree, or (ii) there shall have been a period of thirty (30) days during which a stay of enforcement of such judgment, order or decree, by reason of pending appeal or otherwise, was not in effect; (i) any Plan shall fail to maintain the minimum funding standard required for any Plan year or part thereof or a waiver of such standard or extension of any amortization period is applied for or granted under Section 412 of the Code, any Plan is terminated by the Company or any ERISA Affiliate or the subject of termination proceedings under ERISA, any Plan shall have an Unfunded Current Liability, a Reportable Event shall have occurred with respect to a Plan or the Company, any Corporate Guarantor, or any ERISA Affiliate shall have incurred a liability to or on account of a Plan under Section 515, 4062, 4063, 4201 or 4204 of ERISA, and there shall result from any such event or events the imposition of a lien upon the assets of the Company or any Corporate Guarantor, the granting of a security interest on such assets, or a liability to the PBGC or a Plan or a trustee appointed under ERISA or a penalty under Section 4971 of the Code; (j) any material provision of any Loan Document shall for any reason cease to be in full force and effect in accordance with its terms or the Company or any Corporate Guarantor shall so assert in writing; (k) Kevin O'Kane and Hugh O'Kane, Jr. shall cease to own beneficially and of record at least 51% of the voting capital stock the Company and each Corporate Guarantor which is not a wholly owned subsidiary of the Company or another Corporate Guarantor; 37 43 (l) any of the Liens purported to be granted pursuant to any Security Document shall fail or cease for any reason to be legal, valid and enforceable liens on the collateral purported to be covered thereby or shall fail or cease to have the priority purported to be created thereby; or (m) any Guarantor shall fail to perform or observe any term or provision of such Guarantor's Guaranty or any representation or warranty made by any Guarantor in connection with such Guarantor's Guaranty shall prove to have been incorrect in any material respect when made or deemed made, then, at any time thereafter during the continuance of any such event, the Administrative Agent may, and, upon the request of the Required Lenders, shall, by written or telephonic notice to the Company, take either or both of the following actions, at the same or different times, (a) terminate the Revolving Credit Commitment and (b) declare (i) the Notes, both as to principal and interest and (ii) all other Obligations, to be forthwith due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived, anything contained herein or in the Notes to the contrary notwithstanding; provided, however, that if an event specified in Section 8.01(f) or (g) shall have occurred, the Revolving Credit Commitment shall automatically terminate and interest, principal and amounts referred to in the preceding clauses (i), (ii), and (iii) shall be immediately due and payable without presentment, demand, protest, or other notice of any kind, all of which are expressly waived, anything contained herein or in the Notes to the contrary notwithstanding. ARTICLE IX THE ADMINISTRATIVE AGENT SECTION 9.01. APPOINTMENT, POWERS AND IMMUNITIES. Each Lender hereby irrevocably appoints and authorizes the Administrative Agent to act as its agent hereunder, under the Security Documents and the other Loan Documents with such powers as are specifically delegated to the Administrative Agent by the terms of this Agreement, the Security Documents and the other Loan Documents together with such other powers as are reasonably incidental thereto. The Administrative Agent shall have no duties or responsibilities except those expressly set forth in this Agreement, the Security Documents and the other Loan Documents and shall not be a trustee for any Lender, nor is the Administrative Agent acting in a fiduciary capacity of any kind under this Agreement, the Security Documents or the other Loan Documents or in respect thereof or in respect of any Lender. The Administrative Agent shall be not responsible to the Lenders for any recitals, statements, representations or warranties contained in this Agreement, the Security Documents, or the other Loan Documents, in any certificate or other document referred to or provided for in, or received by any of them under, this Agreement, the Security Documents or the other Loan Documents, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement, the Security Documents or the other Loan Documents or any other document referred to or provided for herein or therein or for the collectibility of the Loans or for the validity, effectiveness or value of any interest or security covered by the Security Documents or for the value of any collateral or for the validity or effectiveness of any assignment, mortgage, pledge, security 38 44 agreement, financing statement, document or instrument, or for the filing, recording, re-filing, continuing or re-recording of any thereof or for any failure by the Company or any Corporate Guarantor to perform any of its obligations hereunder or under the other Loan Documents. The Administrative Agent may take all actions by itself and/or it may employ agents and attorneys-in-fact, and shall not be responsible, except as to money or the securities received by it or its authorized agents, for the negligence or misconduct of itself or its employees or of any such agents or attorneys-in-fact, if such agents or attorneys-in-fact are selected by it with reasonable care. No Administrative Agent nor any of its directors, officers, employees or agents shall be liable or responsible for any action taken or omitted to be taken by it or them hereunder, under the Security Documents or the other Loan Documents or in connection herewith or therewith, except for its or their own gross negligence or willful misconduct. SECTION 9.02. RELIANCE BY ADMINISTRATIVE AGENT. The Administrative Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any certification, notice or other communication (including any thereof by telephone, telex, telegram or cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by the Administrative Agent. As to any matters not expressly provided for by this Agreement, the Security Documents or the other Loan Documents, the Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder, under the Security Documents or the other Loan Documents in accordance with instructions signed by the Required Lenders, or such other number of Lenders as is specified in Section 10.04 hereof, and such instructions of the Required Lenders or other number of Lenders as aforesaid and any action taken or failure to act pursuant thereto shall be binding on all of the Lenders. SECTION 9.03. EVENTS OF DEFAULT. The Administrative Agent shall not be deemed to have knowledge of the occurrence of a Default or Event of Default (other than the non-payment of principal of or interest on the Loans to the extent the same is required to be paid to the Administrative Agent for the account of the Lenders) unless the Administrative Agent has received notice from a Lender or the Company specifying such Default or Event of Default and stating that such notice is a "Notice of Default". In the event that the Administrative Agent receives such a notice of the occurrence of a Default, the Administrative Agent shall give prompt notice thereof to the Lenders. The Administrative Agent shall (subject to Section 9.07 hereof) take such action with respect to such Default as shall be directed by the Required Lenders, except as otherwise provided in Section 10.04 hereof; provided that unless and until the Administrative Agent shall have received such directions, the Administrative Agent may (but is not obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interest of the Lenders. SECTION 9.04. RIGHTS AS A LENDER. With respect to its Revolving Credit Commitment and the Loans made by it, the Administrative Agent in its capacity as a Lender hereunder shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not acting as the Administrative Agent, and the term "Lender" or "Lenders" 39 45 shall, unless the context otherwise indicates, include the entity which is the Administrative Agent in its individual capacity. The entity which is the Administrative Agent and its Affiliates may (without having to account therefor to any Lender) accept deposits from, lend money to and generally engage in any kind of banking, trust or other business with the Company or its Affiliates, as if it were not acting as the Administrative Agent, and, except to the extent otherwise herein specifically set forth, the entity which is the Administrative Agent may accept fees and other consideration from the Company or its Affiliates, for services in connection with this Agreement, the Security Documents or any of the other Loan Documents or otherwise without having to account for the same to the Lenders. SECTION 9.05. INDEMNIFICATION. The Lenders shall indemnify the Administrative Agent (to the extent not reimbursed by the Company under Section 10.03 hereof), ratably in accordance with the aggregate outstanding principal amount of the Loans made by the Lenders (or, if no Loans are at the time outstanding, ratably in accordance with their respective Revolving Credit Commitments), for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Administrative Agent in its capacity as the Administrative Agent in any way relating to or arising out of this Agreement, the Security Documents or any of the other Loan Documents or any other documents contemplated by or referred to herein or therein or the transactions contemplated hereby and thereby (including, without limitation, the costs and expenses which the Company is obligated to pay under Section 10.03 hereof or under the applicable provisions of any other Loan Document) or the enforcement of any of the terms hereof or of the Security Documents, or of any other Loan Document, provided that no Lender shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the Administrative Agent. SECTION 9.06. NON-RELIANCE ON ADMINISTRATIVE AGENT AND OTHER LENDERS. Each Lender agrees that it has, independently and without reliance on the Administrative Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Company and decision to enter into this Agreement and that it will, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement, the Security Documents or the other Loan Documents. The Administrative Agent shall not be required to keep itself informed as to the performance or observance by the Company of this Agreement, the Security Documents or the other Loan Documents or any other document referred to or provided for herein or therein or to inspect the properties or books of the Company. Except for notices, reports and other documents and information expressly required to be furnished to the Lenders by the Administrative Agent hereunder or under the Security Documents, or the other Loan Documents, the Administrative Agent shall not have any duty or ability to provide any Lender with any credit or other information concerning the affairs, financial condition or business of the Company, which may come into the possession of the Administrative Agent or any of its Affiliates. 40 46 SECTION 9.07. FAILURE TO ACT. Except for action expressly required of the Administrative Agent hereunder or under the Security Documents, the Administrative Agent shall in all cases be fully justified in failing or refusing to act hereunder or thereunder unless it shall be indemnified to its satisfaction by the Lenders against any and all liability (except gross negligence and willful misconduct) and expense which may be incurred by it by reason of taking or continuing to take any such action. SECTION 9.08. RESIGNATION OF THE ADMINISTRATIVE AGENT. Subject to the appointment and acceptance of a successor Administrative Agent as provided in this Section 9.08, the Administrative Agent may resign at any time by notifying the Lenders and the Company. Upon any such resignation, the Required Lenders shall have the right, in consultation with the Company to appoint a successor to the Administrative Agent. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the resigning Administrative Agent gives notice of its resignation, then the resigning Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent which shall be a bank with an office in New York, New York, or an Affiliate of any such bank with an office in New York, New York. Upon the acceptance of its appointment as Administrative Agent hereunder by a successor, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the resigning Administrative Agent, and the resigning Administrative Agent shall be discharged from its duties and obligations hereunder. The fees payable by the Company to a successor Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Company and such successor. After the Administrative Agent's resignation hereunder, the provisions of this Article and Section 10.03 shall continue in effect for the benefit of such resigning Administrative Agent in respect of any actions taken or omitted to be taken by it while it was acting as the Administrative Agent. SECTION 9.09. SHARING OF COLLATERAL AND PAYMENTS. In the event that at any time any Lender shall obtain payment in respect of a Note or interest thereon, or receive any collateral in respect thereof, whether voluntarily or involuntarily, through the exercise of a right of banker's lien, set-off or counterclaim against the Company or otherwise, in a greater proportion than the proportion received by any other Lender in respect of the corresponding Note held by it or interest thereon, then the Lender so receiving such greater proportionate payment shall purchase for cash from the other Lender or Lenders such portion of each such other Lender's or Lenders' Loan, or shall provide such other Lenders with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause the Lender receiving the proportionate over-payment to share the excess payment or benefits of such collateral or proceeds ratably with each of the Lenders each of which shall have a lien on its ratable portion of the amount described hereafter obtained from the Company; provided, however, that if all or any portion of such excess payment or benefits is thereafter recovered from the Lender which received the proportionate over-payment, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. The Company agrees, to the extent it may do so under applicable law, that each Lender so purchasing a portion of another Lender's Loan may exercise all rights of payment (including, without limitation, rights of set-off) with respect to such portion as fully as if such Lender were the direct holder of such portion. 41 47 ARTICLE X MISCELLANEOUS SECTION 10.01. NOTICES. All notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing (including telecopy), and unless otherwise expressly provided herein, shall be conclusively deemed to have been received by a party hereto and to be effective on the day on which delivered by hand to such party or one Business Day after being sent by overnight mail to the address set forth below, or, in the case of telecopy notice, when acknowledged as received, or if sent by registered or certified mail, three (3) Business Days after the day on which mailed in the United States, addressed to such party at such address: (a) if to the Agent, at European American Bank 335 Madison Avenue New York, New York 10017 Attention: Relationship Manager National Network Technologies, Inc. Telecopy: (212) 370-8524 (b) if to the Company, at National Network Technologies, Inc. 88 White Street New York, New York 10013 Attention: Mr. Hugh O'Kane, Jr. Telecopy: (212) 845-4083 (c) if to any Lender, to its address set forth in the signature page of this Agreement and to the person so designated - and - (d) as to each such party at such other address as such party shall have designated to the other in a written notice complying as to delivery with the provisions of this Section 10.01. SECTION 10.02. EFFECTIVENESS; SURVIVAL. This Agreement shall become effective on the date on which all parties hereto shall have signed a counterpart copy hereof and shall have delivered the same to the Administrative Agent. All representations and warranties made herein and in the other Loan Documents and in the certificates delivered pursuant hereto or thereto shall survive the making by the Lenders of the Loans as herein contemplated and the execution and delivery to the Lenders of the Notes evidencing the Loans and shall continue in full force and effect so long as the 42 48 Obligations hereunder are outstanding and unpaid and the Revolving Credit Commitments are in effect. The obligations of the Company pursuant to Section 3.05, Section 3.06, Section 3.07 and Section 10.03 shall survive termination of this Agreement and payment of the Obligations. SECTION 10.03. EXPENSES. The Company agrees (a) to indemnify, defend and hold harmless the Administrative Agent and each Lender and their respective officers, directors, employees, and affiliates (each, an "indemnified person") from and against any and all losses, claims, damages, liabilities or judgments to which any such indemnified person may be subject and arising out of or in connection with the Loan Documents, the financings contemplated hereby, the use of any proceeds of such financings or any related transaction or any claim, litigation, investigation or proceeding relating to any of the foregoing, whether or not any of such indemnified persons is a party thereto, and to reimburse each of such indemnified persons upon demand for any reasonable, legal or other expenses incurred in connection with the investigation or defending any of the foregoing; provided that the foregoing indemnity will not, as to any indemnified person, apply to losses, claims, damages, liabilities, judgments or related expenses to the extent arising from the wilful misconduct or gross negligence of such indemnified person, (b) to pay or reimburse the Administrative Agent for all its reasonable out-of-pocket costs and expenses incurred in connection with the preparation and execution of and any amendment, supplement or modification to this Agreement, the Notes any other Loan Documents, and any other documents prepared in connection herewith or therewith, and the consummation of the transactions contemplated hereby and thereby, including without limitation, the reasonable fees and disbursements of Farrell Fritz, P.C., counsel to the Administrative Agent and Lamb and Barnosky, LLP, special counsel to SBLI (provided that such fees and expenses of Lamb and Barnosky, LLP are not in excess of $3,500), (c) to pay or reimburse each Lender and the Administrative Agent for all their costs and expenses incurred in connection with the enforcement and preservation of any rights under this Agreement, the Notes, the other Loan Documents, and any other documents prepared in connection herewith or therewith, including, without limitation, the reasonable fees and disbursements of counsel (including, without limitation, in-house counsel) to the Administrative Agent and to the several Lenders, including all such out-of-pocket expenses incurred during any work-out, restructuring or negotiations in respect of the Obligations and (d) to pay or reimburse the Administrative Agent on demand for all costs, expenses and charges incurred by the Administrative Agent in connection with conducting an inspection or audit in accordance with Section 6.04, provided that such reimbursement shall not exceed $10,000 per audit. SECTION 10.04. AMENDMENTS AND WAIVERS. With the written consent of the Required Lenders, the Administrative Agent and the Company may, from time to time, enter into written amendments, supplements or modifications hereto for the purpose of adding any provisions to this Agreement or the Notes or any of the other Loan Documents or changing in any manner the rights of the Lenders or of the Company hereunder or thereunder, and with the written consent of the Required Lenders the Administrative Agent on behalf of the Lenders may execute and deliver to the Company a written instrument waiving, on such terms and conditions as the Administrative Agent or the Required Lenders may specify in such instrument, any of the requirements of this Agreement or the Notes or any of the other Loan Documents or any Event of Default; provided, however, that no such waiver and no such amendment, or supplement or modification shall (a) extend the maturity 43 49 of any Note, or any installment thereof, (b) reduce the rate or extend the time of payment of interest on any Note or any fees payable to the Lenders hereunder, (c) reduce the principal amount of any Note, (d) except as provided in 2.01(f), increase the Total Revolving Credit Commitment, (e) amend, modify or waive any provision of this Section 10.04, (f) reduce the percentage specified in the definition of Required Lenders or amend or modify any other provision hereof specifying the number or percentage of Lenders required to waive, amend or modify any rights hereunder or make any determination granting consent hereunder, (g) consent to the assignment or transfer by the Company or any Corporate Guarantor of any of its rights or obligations under this Agreement, (h) except as expressly permitted pursuant to this Agreement or any other Loan Document release any collateral security granted to the Administrative Agent under the Security Documents or (i) release any Guarantor from its Guaranty, or limit any Guarantor's liability with respect to its Guaranty, in each case specified in clauses (a) through (i) above without the written consent of all the Lenders; and provided, further, that no such waiver and no such amendment, supplement or modification shall (i) amend, modify, supplement or waive any provision of Article IX with respect to the Administrative Agent without the written consent of the Administrative Agent or (ii) increase the amount of any Lender's Revolving Credit Commitment without the written consent of such Lender. Any such waiver and any such amendment, supplement or modification shall apply equally to each of the Lenders and shall be binding upon the Company, the Lenders, the Administrative Agent and all future holders of the Notes. SECTION 10.05. SUCCESSORS AND ASSIGNS; PARTICIPATIONS. (a) This Agreement shall be binding upon and inure to the benefit of the Company, the Lenders, the Administrative Agent, all future holders of the Notes and their respective successors and assigns, except that the Company may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of each Lender. (b) Any Lender may, in the ordinary course of its commercial banking business and in accordance with applicable law, at any time sell to one or more banks or other financial institutions ("Participants") participating interests in any Loan owing to such Lender, any Note held by such Lender, any Revolving Credit Commitment of such Lender or any other interest of such Lender hereunder. In the event of any such sale by a Lender of participating interests to a Participant, such Lender's obligations under this Agreement to the other parties under this Agreement shall remain unchanged, such Lender shall remain solely responsible for the performance thereof, such Lender shall remain the holder of any such Note for all purposes under this Agreement, and the Company and the Administrative Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. The Company agrees that each Participant shall be entitled to the benefits of Sections 3.05, 3.06 and 3.07 with respect to its participation in the Revolving Credit Commitments and in the Loans outstanding from time to time; provided, however, that no Participant shall be entitled to receive any greater amount pursuant to such sections than the transferor Lender would have been entitled to receive in respect of the amount of the participation transferred by such transferor Lender to such Participant had no such transfer occurred. No Participant shall have the right to consent to any amendment to, or waiver of, any provision of this Agreement, except the transferor Lender may provide in its agreement with the 44 50 Participant that such Lender will not, without the consent of the Participant, agree to any amendment or waiver described in clause (a) through clause (j) of Section 10.04. (c) Subject to the last sentence of this paragraph (c) any Lender may, in the ordinary course of its commercial banking business and in accordance with applicable law, at any time sell to any Lender or any domestic banking affiliate thereof, and to one or more additional banks or financial institutions provided that such Purchasing Lender is a bank organized under the laws of the United States of America or any state thereof and which has combined capital and surplus of at least $200,000,000 ("Purchasing Lenders") all or any part of its rights and obligations under this Agreement and the Notes pursuant to an Assignment and Acceptance Agreement, executed by such Purchasing Lender, such transferor Lender and the Administrative Agent (and, in the case of an Assignment and Acceptance Agreement relating to a Purchasing Lender that is not then a Lender or a domestic banking affiliate thereof, also executed by the Company), and delivered to the Administrative Agent for its acceptance. Upon such execution, delivery and acceptance from and after the effective date specified in such Assignment and Acceptance Agreement, (i) the Purchasing Lender thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance Agreement, have the rights and obligations of a Lender hereunder with Revolving Credit Commitments as set forth therein and (ii) the transferor Lender thereunder shall, to the extent provided in such Assignment and Acceptance Agreement, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance Agreement covering all or the remaining portion of a transferor Lender's rights and obligations under this Agreement, such transferor Lender shall cease to be a party hereto except as to Sections 3.05, 3.06, 3.07 and 10.03 for the period prior to the effective date). Such Assignment and Acceptance Agreement shall be deemed to amend this Agreement to the extent, and only to the extent, necessary to reflect the addition of such Purchasing Lender and the resulting adjustment of Commitment Proportions arising from the purchase by such Purchasing Lender of all or a portion of the rights and obligations of such transferor Lender under or in respect of this Agreement and the Notes. On or prior to the effective date specified in such Assignment and Acceptance Agreement, the Company, at its own expense, shall execute and deliver to the Administrative Agent, in exchange for the surrendered Notes, new Notes to the order of such Purchasing Lender in an amount equal to the Revolving Credit Commitments assumed by it pursuant to such Assignment and Acceptance Agreement and, if the transferor Lender has retained any Revolving Credit Commitment hereunder, a new Note to the order of the transferor Lender in an amount equal to such Revolving Credit Commitment retained by it hereunder. Such new Notes shall be in a principal amount equal to the principal amount of such surrendered Notes, shall be dated the date of the Notes they replace and shall otherwise be in the form of the Notes replaced thereby. The Notes surrendered by the transferor Lender shall be returned by the Administrative Agent to the Company marked "cancelled". Anything in this Section 10.05 to the contrary notwithstanding, (i) no transfer to a Purchasing Lender shall be made pursuant to this paragraph (c) if such transfer by any one transferor Lender to any one Purchasing Lender (other than a Purchasing Lender which is a Lender hereunder prior to such transfer) (x) is in respect of less than $1,000,000 of the Revolving Credit Commitments of such transferor Lender or (y) if less than all of the Revolving Credit Commitment of such transferor Lender is transferred, after giving effect to such transfer the amount held by any Transferor Lender would be less than $1,000,000 and (ii) each transfer to a 45 51 Purchasing Lender shall be made in the same pro-rata portion with respect to the Revolving Credit Commitments. (d) The Administrative Agent shall maintain at its address referred to in Section 10.01 a copy of each Assignment and Acceptance Agreement delivered to it and a register (the "Register") for the recordation of the names and addresses of the Lenders and the commitments of, and principal amount of the Loans owing to, each Lender from time to time. The entries in the Register shall be conclusive, in the absence of clear and obvious error and the Company, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register as the owner of the Loans recorded therein for all purposes of this Agreement. The Register shall be available for inspection by the Company or any Lender at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of an Assignment and Acceptance Agreement executed by a transferor Lender and a Purchasing Lender (and, in the case of a Purchasing Lender that is not then a Lender or an Affiliate thereof, by the Company) together with payment by the Purchasing Lender to the Administrative Agent of a registration and processing fee of $3,500 if the Purchasing Lender is not a Lender prior to the execution of an Assignment and Acceptance Agreement and $2,500 if the Purchasing Lender is a Lender prior to the execution of an Assignment and Acceptance Agreement, the Administrative Agent shall (i) accept such Assignment and Acceptance Agreement, (ii) record the information contained therein in the Register, and (iii) give prompt notice of such acceptance and recordation to the Lenders and the Company. (f) The Company authorizes each Lender to disclose to any Participant or Purchasing Lender (each, a "Transferee") and any prospective Transferee any and all financial information in such Lender's possession concerning the Company and its Affiliates which has been delivered to such Lender by or on behalf of the Company pursuant to this Agreement or which has been delivered to such Lender by the Company in connection with such Lender's credit evaluation of the Company and Corporate Guarantor prior to entering into this Agreement. (g) If, pursuant to this Section 10.05, any interest in this Agreement, a participation agreement, or any Note is transferred to any transferee which is organized under the laws of any jurisdiction other than the United States or any State thereof, the transferor Lender shall cause such Transferee, concurrently with the effectiveness of such transfer, (i) to represent to the transferor Lender (for the benefit of the transferor Lender, the Administrative Agent and the Company) that under applicable law and treaties no taxes will be required to be withheld by the Administrative Agent, the Company, or the transferor Lender with respect to any payments to be made to such Transferee in respect of the Loans, (ii) to furnish to the Administrative Agent, the transferor Lender and the Company either U.S. Internal Revenue Service Form 4224 or U.S. Internal Revenue Service Form 1001 (wherein such Transferee claims entitlement to complete exemption from U.S. federal withholding tax on all interest payments hereunder) and (iii) to agree (for the benefit of the Administrative Agent, the transferor Lender and the Company) to provide the Administrative Agent, the transferor Lender and the Company a new Form 4224 or Form 1001 upon the expiration or 46 52 obsolescence of any previously delivered form and comparable statements in accordance with applicable U.S. laws and regulations and amendments duly executed and completed by such Transferee, and to comply from time to time with all applicable U.S. laws and regulations with regard to such withholding tax exemption. (h) Any Lender may at any time pledge or assign or grant a security interest in all or any part of its rights under this Agreement and its Notes to a Federal Reserve Bank, provided that no such assignment shall release the transferor Lender from its Revolving Credit Commitments or its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party to this Agreement. SECTION 10.06. NO WAIVER; CUMULATIVE REMEDIES. Neither any failure nor any delay on the part of any Lender or the Administrative Agent in exercising any right, power or privilege hereunder or under any Note or any other Loan Document shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any other right, power or privilege. The rights, remedies, powers and privileges herein provided or provided in the other Loan Documents are cumulative and not exclusive of any rights, remedies powers and privileges provided by law. SECTION 10.07. APPLICABLE LAW. THIS AGREEMENT AND THE NOTES SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OR CHOICE OF LAW. SECTION 10.08. SUBMISSION TO JURISDICTION; JURY WAIVER. THE COMPANY HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY FEDERAL OR STATE COURT IN THE STATE OF NEW YORK, COUNTY OF NEW YORK, COUNTY OF NASSAU OR COUNTY OF SUFFOLK IN ANY ACTION, SUIT OR PROCEEDING BROUGHT AGAINST IT AND RELATED TO OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, AND TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE COMPANY HEREBY WAIVES AND AGREES NOT TO ASSERT BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE, IN ANY SUCH SUIT, ACTION OR PROCEEDING ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH FEDERAL OR STATE COURTS, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM, THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER, OR THAT THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR ANY OTHER DOCUMENT OR INSTRUMENT REFERRED TO HEREIN OR THEREIN OR THE SUBJECT MATTER HEREOF THEREOF MAY NOT BE LITIGATED IN OR BY SUCH FEDERAL OR STATE COURTS. TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE COMPANY AGREES NOT TO (i) SEEK AND HEREBY WAIVES THE RIGHT TO ANY REVIEW OF THE JUDGMENT OF ANY SUCH 47 53 FEDERAL OR STATE COURT BY ANY FEDERAL OR STATE COURT OF ANY OTHER NATION OR JURISDICTION WHICH MAY BE CALLED UPON TO GRANT AN ENFORCEMENT OF SUCH JUDGMENT OR (ii) ASSERT ANY COUNTERCLAIM IN ANY SUCH SUIT, ACTION OR PROCEEDING. THE COMPANY AGREES THAT SERVICE OF PROCESS MAY BE MADE UPON IT BY CERTIFIED OR REGISTERED MAIL TO THE ADDRESS FOR NOTICES SET FORTH IN THIS AGREEMENT OR ANY METHOD AUTHORIZED BY THE LAWS OF NEW YORK. EACH PARTY HERETO WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT, THE NOTES OR ANY OTHER LOAN DOCUMENT. SECTION 10.09. SEVERABILITY. In case any one or more of the provisions contained in this Agreement, any Note or any other Loan Document should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby. SECTION 10.10 RIGHT OF SETOFF. If an Event of Default shall have occurred and be continuing, the Administrative Agent, each Lender and each Affiliate of each Lender are each hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Administrative Agent, any Lender or any Affiliate of any Lender to or for the credit or the account of the Company against any and all of the Obligations of the Company now and hereafter existing under this Agreement and the Notes held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement or any Note and although such obligations may be unmatured. The rights of the Administrative Agent, each Lender and each Affiliate of each Lender under this Section 10.10 are in addition to other rights and remedies (including, without limitation, other rights of setoff) which they may have. SECTION 10.11. HEADINGS. Section headings used herein are for convenience of reference only and are not to affect the construction of or be taken into consideration in interpreting this Agreement. SECTION 10.12. CONSTRUCTION. This Agreement is the result of negotiations between, and has been reviewed by, each of the Company, the Administrative Agent, the Lenders and their respective counsel. Accordingly, this Agreement shall be deemed to be the product of each party hereto, and no ambiguity shall be construed in favor of or against either the Company, the Administrative Agent, or any Lender. SECTION 10.13. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which, taken together, shall constitute one and the same agreement. 48 54 IN WITNESS WHEREOF, the Company, the Administrative Agent and the Lenders have caused this Agreement to be duly executed by their duly authorized officers, as of the day and year first above written. NATIONAL NETWORK TECHNOLOGIES, INC. By:/s/ JONATHAN H. STERN -------------------------------------------- Name: Jonathan H. Stern Title: Chief Financial Officer EUROPEAN AMERICAN BANK AS ADMINISTRATIVE AGENT AND AS A LENDER By: /s/ BENJAMIN J. NOBET -------------------------------------------- Name: Benjamin J. Nobet Title: Vice President Lending Office: 335 Madison Avenue New York, New York 10017 Telecopy: (212) 370-8524 Address for Notices: 335 Madison Avenue New York, New York 10017 Telecopy: (212) 370-8524 49 55 STATE BANK OF LONG ISLAND, AS A LENDER By: /s/ MICHAEL P. SABALA -------------------------------------------- Name: Michael P. Sabala Title: Vice President Lending Office: State Bank of Long Island Two Jericho Plaza Jericho, NY 11753 Telecopy: (516) 465-0562 Address for Notices: State Bank of Long Island Two Jericho Plaza Jericho, NY 11753 Attention: Mr. Michael Sabala Telecopy: (516) 465-0562 with a copy to: State Bank of Long Island 699 Hillside Avenue New Hyde Park, NY 11040 Attention: Mr. Michael Sabala Telecopy: (516) 437-1032 50 56 AMENDMENT dated as of November __, 1999 (this "Amendment") to the Credit Agreement dated as of June 29, 1999, as amended (the "Credit Agreement") by and among LEXENT INC. (formerly known as National Network Technologies, Inc.), a Delaware corporation (the "Company"), EUROPEAN AMERICAN BANK, a New York banking corporation ("EAB"), as Administrative Agent and the Lenders Party Thereto. WHEREAS, the Company has requested and the Administrative Agent and the Lenders have agreed, subject to the terms and conditions of this Amendment, to amend Schedule III to the Credit Agreement as set forth herein; NOW, THEREFORE, in consideration of the premises and of the mutual agreements herein contained, the parties hereto agree as follows: 1. The Company has advised the Administrative Agent and the Lenders that it has changed its name to Lexent Inc. Notwithstanding anything to the contrary herein, in the Credit Agreement or any Loan Document, all references to the terms "National Network Technologies, Inc." and "Company" in the Credit Agreement and the Loan Documents shall be deemed references to Lexent Inc. 2. AMENDMENT. Schedule III to the Credit Agreement shall be amended and restated and replaced with Schedule III attached to this Amendment. 3. MISCELLANEOUS. Capitalized terms used herein and not otherwise defined herein shall have the same meanings as defined in the Credit Agreement. Except as expressly amended hereby, the Credit Agreement shall remain in full force and effect in accordance with the original terms thereof. The amendments herein contained are limited specifically to the matters set forth above and do not constitute directly or by implication an amendment or waiver of any other provision of Credit Agreement or any default which may occur or may have occurred under the Credit Agreement. The Company hereby represents and warrants that (a) after giving effect to this Amendment, the representations and warranties by the Company and each Corporate Guarantor pursuant to the Credit Agreement and the Loan Documents to which each is a party are true and correct in all material respects as of the date hereof with the same effect as those such representations and warranties have been made on and as of such date, unless such representation is as of a specific date, in which case, as of such date, (b) after giving effect to this Amendment, no Default or Event of Default has occurred and is continuing. This Amendment may be executed in one or more counterparts, each of which shall constitute an original, but all of which when taken together shall constitute but one Amendment. This Amendment shall become 1 57 effective when duly executed counterparts hereof which, when taken together, bear the signatures of each of the parties hereto shall have been delivered to the Administrative Agent. This Amendment shall constitute a Loan Document. IN WITNESS WHEREOF, the Company and the Administrative Agent, as authorized on behalf of the Required Lenders, have caused this Amendment to be duly executed by their duly authorized officers, all as of the day and year first above written. LEXENT INC. (formerly known as National Network Technologies, Inc.) By: /s/ JONATHAN H. STERN ---------------------- Name: Jonathan H. Stern Title: Executive Vice President, CFO EUROPEAN AMERICAN BANK, as Administrative Agent By: /s/ ANDREW CUNNINGHAM ---------------------- Name: Andrew Cunningham Title: Vice President The undersigned, not as parties to the Credit Agreement, but as Guarantors under the Guarantees, each dated as of June 29, 1999, do hereby accept and agree to the terms of this Amendment and Waiver and further acknowledge that their respective Guaranty is in full force and effect with respect to such Guarantor. NATIONAL NETWORK TECHNOLOGIES, LLC By: /s/ JONATHAN H. STERN ---------------------- Title: Executive Vice President, CFO HUGH O'KANE ELECTRIC CO. LLC By: /s/ JONATHAN H. STERN ---------------------- Title: Executive Vice President, CFO /s/ HUGH J. O'KANE, JR. ----------------------- Hugh O'Kane, Jr. /s/ KEVIN M. O'KANE ------------------- Kevin O'Kane 2 58 Schedule III (Ref: Sec. 7.02) Existing Indebtedness Amended and Restated Promissory Note issued July 23, 1998, subordinated, payable to Denis J. O'Kane. Principal amount outstanding as of May 31, 1999 (excluding unpaid accrued interest): $7,516,695. Amended and Restated Promissory Note issued July 23, 1998, subordinated, payable to Kevin M. O'Kane. Principal amount outstanding as of May 31, 1999 (excluding unpaid accrued interest): $227,654. Amended and Restated Promissory Note issued July 23, 1998, subordinated, payable to Hugh J. O'Kane. Principal amount outstanding as of May 31, 1999 (excluding unpaid accrued interest): $161,922. Notes payable pursuant to financing arrangements on vehicles and equipment in the aggregate amount of $789,000 as disclosed in Note 7 to the Company's Consolidated Financial Statements as of December 31, 1998. Additional notes payable pursuant to financing arrangements on vehicles and equipment in the aggregate amount of $373,000 incurred subsequent to December 31, 1998 through May 31, 1999. Indebtedness payable to Lease Plan U.S.A. Inc. pursuant to financing arrangements on vehicles, in the aggregate amount of $519,500. 3 EX-10.4 10 AMENDED & RESTATED PROMISSORY NOTE 1 EXHIBIT 10.4 AMENDED AND RESTATED PROMISSORY NOTE $8,703,542.37 July 23, 1998 FOR VALUE RECEIVED, NATIONAL NETWORK TECHNOLOGIES INC. (successor by merger to Hugh O'Kane Electric Co. Inc.), a Delaware corporation ("Maker"), having an office at 88 White Street, New York, New York 10013, promises to pay to the order of DENIS J. O'KANE ("Payee"), having an address at 201 Sunset Road, Oyster Bay, New York, 11771, EIGHT MILLION SEVEN HUNDRED THREE THOUSAND FIVE HUNDRED FORTY-TWO AND 37/100 DOLLARS ($8,703,542.37) with interest on the unpaid balance hereof from the date of this Promissory Note (the "Note") at the Interest Rate (as defined in Article I). This Note evidences the purchase price payable to Payee in respect of the redemption of certain capital stock of Maker held by Payee. The unpaid principal balance of this Note, together with all accrued but unpaid interest thereon, and all other sums due hereunder (including delinquency charges), shall be due and payable on January 1, 2004 or on such earlier date as may be required under the terms hereof (the "Maturity Date"). ARTICLE I INTEREST AND PRINCIPAL A. INTEREST RATE, COMPUTATION AND PAYMENTS. As used herein, "Interest Rate" means six percent (6%) per annum. Interest shall accrue from the date hereof and shall be payable (i) quarterly, in arrears, on the first day of each January, April, July and October commencing on October 1, 1998, (ii) on the Maturity Date and (iii) on each date on which the principal balance of this Note is paid in part or in full, or if any such day is not a business day, on the next succeeding business day. Interest on the unpaid principal balance of this Note shall be computed on the basis of a 365-(or 366-) day year, as the case may be, for the number of actual days elapsed. B. PRINCIPAL REPAYMENT. This Note shall mature in twenty-two (22) consecutive quarterly installments of principal, the first twenty-one (21) of which shall be equal to $395,615.56, payable on the first day of each January, April, July and October, commencing on October 1, 1998, with the twenty-second (22nd) and final installment of principal on the Maturity Date of $395,448.61, or if any such day is not a business day, on the next succeeding business day. C. OPTIONAL PREPAYMENTS. Maker may prepay this Note in whole or in part, without premium or penalty, at any time and from time to time. Optional prepayments on this Note shall be applied pro rata to the then remaining installments of principal under this Note. 2 ARTICLE II EVENTS OF DEFAULT; REMEDIES A. EVENTS OF DEFAULT. Any of the following events shall constitute an "Event of Default" hereunder: (i) Maker shall fail to pay when due any payment of principal or interest due hereunder in accordance with the terms hereof, and in the case of interest, such failure continues for a period of ten business days after the date when such payment is due; or (ii) Maker shall (a) become insolvent, (b) be dissolved, (c) fail generally to pay its debts as such debts income become due, (d) commence a voluntary case under federal bankruptcy, insolvency or other similar law, (e) consent to the appointment of or taking of possession by a receiver, liquidator, assignee, trustee, custodian, or sequestrator (or other similar official) of Maker or of any substantial part of its property, (f) make an assignment for the benefit of creditors, or (g) take any action intended or likely to result in any event described in the foregoing clauses (a) through (f) or (iii) There shall be filed or entered in respect of Maker a petition, decree or order for relief by a court having jurisdiction in the premises in an involuntary case under the federal bankruptcy laws, as now or hereafter constituted, or any other applicable federal, state or foreign bankruptcy, insolvency or other similar law, or appointing a receiver, liquidator, assignee, custodian, trustee or sequestrator (or other similar official) of Maker or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and any such petition, decree or order shall continue undismissed, unstayed and in effect for a period of 30 days. B. REMEDIES. Upon the occurrence of any Event of Default in the case of Article II(A)(i), above, Payee may, by notice to Maker, declare the unpaid principal balance hereunder (with accrued interest thereon) and all other amounts owing under this Note to be due and payable forthwith, whereupon the same shall immediately become due and payable. Upon the occurrence of any Event of Default in the case of Articles I(A)(ii) or II(A)(iii) above, the unpaid principal balance hereunder (with accrued interest thereon) and all other amounts owing under this Note shall automatically immediately become due and payable. Except as expressly provided in this Article II(B), presentment, demand, protest and all other notices of any kind are hereby expressly waived. 2 3 ARTICLE III GENERAL CONDITIONS A. METHOD OF PAYMENT. All payments under this Note shall be made, without setoff, counterclaim or other defense, by check to Payee at his address set forth above, or by any other method or to any other place or account hereafter designated by Payee in writing. B. APPLICATION OF PAYMENTS RECEIVED. Except as otherwise provided in this Note, all payments received by Payee on this Note shall be applied by Payee as follows: FIRST, to the payment of delinquency charges, if any; SECOND, to accrued and unpaid interest then due and owing; and THIRD, to the reduction of principal of this Note. C. DEFAULT INTEREST. If all or a portion of the principal of or interest on this Note shall not be paid when due (whether at stated maturity, by acceleration or otherwise), such overdue amount shall bear interest at a rate per annum which is equal to the Interest Rate plus two percent (2%), from the date of such non-payment until such overdue amount is paid in full; provided, however, that if any such default interest is in excess of the amount permitted to be charged to Maker under applicable federal or state law Payee shall be entitled to collect default interest at the highest rate permitted by such law. D. COST AND EXPENSES ON DEFAULT. If an Event of Default shall have occurred, Payee shall be entitled to collect, in addition to principal, interest and delinquency charges hereunder, all costs of collection, including without limitation, reasonable attorneys' fees, incurred in connection with any of Payee's collection efforts, whether or not suit on this Note or any foreclosure proceeding is filed. E. NO WAIVER BY PAYEE. No failure on the part of Payee to exercise any right or remedy hereunder, whether before or after the occurrence of an Event of Default, shall constitute a waiver thereof, and no waiver of any past default shall constitute a waiver of any future default or of any other default. No failure to accelerate the debt evidenced hereby by reason of default hereunder, acceptance of a past due installment, or indulgence granted from time to time, shall be construed to be a waiver of the right to insist upon prompt payment thereafter or to impose delinquency charges retroactively or prospectively, shall be deemed to be a novation of this Note, shall be construed as a reinstatement of the debt evidence hereby, as a waiver of Payee's right of acceleration or as a waiver of any other right, or shall be construed so as to preclude the exercise of any right which Payee may have, whether by law, by agreement or otherwise; and Maker and each endorser or guarantor hereby expressly waives the benefit of any statute or rule 3 4 of law or equity which would produce a result contrary to or in conflict with the foregoing. The terms and provisions of this Note may not be amended orally, but only by an agreement in writing signed by the parties hereto. F. WAIVER BY MAKER. Maker hereby waives presentment, protest, demand, diligence, notice of dishonor and of nonpayment. G. SUCCESSORS AND ASSIGNS. This Note shall be binding upon and inure to the benefit of Payee, Maker and their respective successors, assigns, heirs and estates, except that Payee may not assign or transfer any of his rights or obligations under this Note without the prior written consent of Maker, which consent shall not be unreasonably withheld. ARTICLE IV SUBORDINATION A. NOTE SUBORDINATED TO SENIOR DEBT. (i) Maker, for itself and its successors, and Payee, by his acceptance of this Note, agrees that all payments under this Note ("Subordinated Obligations") are subordinated, to the extent and in the manner provided in this Article IV, to the prior payment in full in cash of all Senior Debt. (ii) This Article IV shall constitute a continuing offer to all persons who, in reliance upon such provisions, become holders of, or continue to hold, Senior Debt, and such provisions are made for the benefit of the holders of Senior Debt, and such holders are made obligees hereunder and any one or more of them may enforce such provisions. The provisions of this Article IV shall be reinstated if at any time any payment of the Senior Debt is rescinded or must otherwise be returned by any holder thereof or any representative of such holder upon the insolvency, bankruptcy or reorganization of Maker. (a) For purposes hereof, "Senior Debt" means all indebtedness other than such indebtedness specified as junior or pari passu, for the purposes of priority, to this Note; and (b) "Senior Debtholders" means the holders from time to time of any of the Senior Debt. B. NOTE SUBORDINATED TO PRIOR PAYMENT OF ALL SENIOR DEBT ON DISSOLUTION, LIQUIDATION OR REORGANIZATION. Upon any payment or distribution of properties of Maker or any successor in any dissolution, winding up, liquidation or reorganization of Maker (including in bankruptcy, insolvency or receivership proceedings or upon any assignment for the benefit of creditors, whether voluntary or involuntary): 4 5 (i) The holders of all Senior Debt shall first be entitled to receive payments in full of all amounts due on or with respect to Senior Debt, including the principal, premium, and interest, fees, expenses and costs due thereon or relating thereto, including any interest accruing subsequent to a bankruptcy or other similar proceeding at the rate specified in the applicable Senior Debt whether or not such interest is an allowed claim enforceable against Maker in any such proceeding, before Payee is entitled to receive any payment or distribution in cash, securities or other property on account of the Subordinated Obligations (other than any payment or distribution in the form of securities, the payment of which (a) is subordinated in right of payment to all Senior Debt that may at the time be outstanding to the same extent as or to a greater extent than, the Subordinated Obligations are subordinate to the Senior Debt as provided in this Article and (b) is not payable prior to the payment in full of the Senior Debt). (ii) Any payment or distribution, whether in cash, cash equivalents, property or securities, to which Payee would be entitled except for the provisions of this Article IV, shall be paid by the liquidating trustee or agent or other person making such a payment or distribution, directly to the holders of Senior Debt (or their representative) ratably according to the respective amounts of Senior Debt held or represented by each, to the extent necessary to make payment in full in cash of all Senior Debt remaining unpaid after giving effect to any concurrent payment or distribution or provision therefor to the holders of such Senior Debt. (iii) In the event that, notwithstanding the foregoing, any payment or distribution, whether in cash, cash equivalents property or securities (other than any payment or distribution in the form of securities, the payment of which (a) is subordinated in right of payment to all Senior Debt that may at the time be outstanding to the same extent as, or to a greater extent than, the Subordinated Obligations are subordinate to the Senior r represented by each, for application to the payment of all Senior Debt remaining unpaid to the extent necessary to indefeasibly pay all Senior Debt in full in accordance with its terms, after giving effect to any concurrent payment or distribution or provision therefor to or for the Senior Debtholders. C. PAYMENTS OTHERWISE PERMITTED. Nothing contained herein shall prevent Maker, at any time except during any dissolution, liquidation, winding up, or reorganization of Maker referred to in Article IV(B), above, or under the conditions described in Article IV(B), above, from making payments at any time with respect to the Subordinated Obligations in accordance with terms hereof (including, without limitation, Article IV(G)). 5 6 D. SUBROGATION. Subject to the payment in full in cash of all Senior Debt, Payee shall be subrogated to the rights of the Senior Debtholders to receive payments or distributions of properties of Maker applicable to the Senior Debt until all amounts due and payable on the Subordinated Obligations shall be paid in full. For the purpose of such subrogation, no payments or distributions to the Senior Debtholders by or on behalf of Maker, or by or on behalf of Payee by virtue of this Article IV(D) , which otherwise would have been made to Payee shall, as between Maker, its creditors other than the Senior Debtholders and Payee, be deemed to be payment by Maker to or on account of the Senior Debt, it being understood that the provisions of this Article IV(D) are, and are intended, solely for the purpose of defining the relative rights of Payee, on the one hand, and Senior Debtholders, on the other hand. E. OBLIGATIONS OF MAKER UNCONDITIONAL. Nothing contained in this Article IV or elsewhere in this Note is intended to or shall impair, as between Maker, its creditors (other than the Senior Debtholders) and Payee the obligations of Maker, which are absolute and unconditional, to pay to Payee the Subordinated Obligations when the same become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of Payee and creditors of Maker other than the Senior Debtholders, nor shall anything herein or therein prevent Payee from exercising all remedies otherwise permitted by applicable law upon default hereunder, subject to the rights, if any, and the limitations on remedies provided in this Article IV of the holders of Senior Debt. Notwithstanding anything herein to the contrary, upon any distribution of properties of Maker referred to in this Article IV, Payee shall be entitled to rely upon any judgment made by any court of competent jurisdiction in which such dissolution, winding up, liquidation or reorganization proceedings are pending, or a certificate of the liquidating trustee or agent or other person making any distribution to Payee, for the purpose of ascertaining the persons entitled to participate in such distribution, the Senior Debtholders and other obligations of Maker, the amount thereof or payable thereon, the amount or amounts paid or distributed heron and all other facts pertinent thereto or to this Article IV. F. NOTICE TO PAYEE. Notwithstanding the provisions of this Article IV or any other provisions of this Note, Payee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment in respect of the Subordinated Obligations, unless and until Payee shall have actual knowledge thereof; and, prior to the receipt of any written notice thereof from Maker or a Senior Debtholder or from any trustee, fiduciary or agent therefor, Payee shall be entitled in all respects to assume that no such facts exist. Payee shall be entitled to rely on the delivery to it of a written notice by any person or entity representing itself to be a Senior Debtholder (or trustee, fiduciary or agent therefor). In the event that Payee determines in good faith that further evidence is required with respect to the right of any person or entity as a Senior Debtholder may request such person or entity to furnish evidence to the reasonable satisfaction of Payee to participate in any payment or distribution pursuant to this Article IV, Payee may request such person or entity to furnish evidence to the reasonable satisfaction of Payee as to the amount of Senior Debt held by such person or entity, the extent to which such person or entity is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such person or entity under this Article IV and if such evidence is 6 7 not furnished, Payee may defer any payment to such person or entity pending judicial determination as to the right of such person or entity to receive such payment. G. NO PAYMENT ON NOTE IN CERTAIN CIRCUMSTANCES. (i) In the event that any payment of principal of, or interest on, the Senior Debt is not paid when due, whether at stated maturity, by mandatory prepayment, by acceleration or otherwise (each a "Senior Debt Payment Default"), and the holders of Senior Debt or their agent shall have given written notice to Maker and Payee of such non-payment (a "Payment Default Notice"), then no payment shall be made by Maker, or accepted by Payee, on account of the Subordinated Obligations unless and until such payment shall have been made or such Senior Debt Payment Default is waived in accordance with the terms of the applicable documents or instruments evidencing the Senior Debt (the "Senior Credit Documents"). (ii) In the event that any default under or in respect of the Senior Debt that entitles any holders of any Senior Debt to accelerate the maturity of such Senior Debt outstanding thereunder (other than a Senior Debt Payment Default) (each, a "Senior Debt Non-Payment Default") shall have occurred and be continuing and Maker and Payee shall have received written notice of such Senior Debt Non-Payment Default from the holders of any Senior Debt or any agent of such holder (a "Payment Blockage Notice"), then no payment shall be made by Maker, or accepted by Payee, on account of the Subordinated Obligations during the period (a "Payment Blockage Period") commencing on the date Maker and Payee received such Payment Blockage Notice and ending on the earlier of (a) the date one hundred and twenty (120) days thereafter and (b) the date on which the Senior Debt Non-Payment Default giving rise to the Payment Blockage Period is cured or waived in accordance with the terms of the applicable Senior Credit Documents; provided that no Senior Debt Non-Payment default or event which, with the giving of notice and/or the lapse of time, would become a Senior Debt Non-Payment Default which existed on the date of the commencement of any such blockage period may be used as the basis for any subsequent Payment Blockage Notice unless such Senior Debt Non-Payment Default or event, as the case may be, shall in the interim have been cured or waived for a period of not less than ninety (90) consecutive days. (iii) The failure to make any payment with respect to the Subordinated Obligations by reason of the provisions of Article IV(G)(i) or Article IV(G)(ii), shall not be construed as preventing the occurrence of an Event of Default hereunder or impairing the right to declare due and payable the principal amount of and premium on this Note, plus accrued but unpaid interest, subject to Article IV(G)(v). (iv) In the event that, notwithstanding the foregoing provisions of this Article IV(G), any payment on account of principal of, premium, interest on this Note shall be made by or on behalf of Maker and received by Payee at a time when such 7 8 payment was prohibited by the provisions of this Article IV(G), then, unless and until such payment is no longer prohibited by this Article IV(G), such payment shall be received and held in trust by Payee for the benefit of, and, if any of the Senior Debt remains outstanding, shall be immediately paid over to, either Maker or the Senior Debtholders (or their representatives) ratably according to the respective amounts of Senior Debt held or represented by each, for application to the payment of all Senior Debt remaining unpaid to the extent necessary to indefeasibly pay all Senior Debt in full in accordance with its terms, after giving effect to any concurrent payment or distribution or provision therefor to or for the Senior Debtholders. The provisions of this Article IV(G)(iv) shall not apply to any payment with respect to which Article IV(G)(v) would be applicable. (v) Notwithstanding anything contained herein to the contrary, during any period commencing on the date of receipt of a Payment Default Notice under Article IV(G)(i) or a Payment Blockage Notice under Article IV(G)(ii) and ending on the earlier of (X) the date the default that is the subject of such Payment Default Notice or Payment Blockage Notice, as the case may be, is cured or waived or (Y) ninety (90) days after receipt by Maker of such Payment Default Notice or one hundred and eighty (180) days after the receipt by Payee of such Payment Blockage Notice, Payee shall not (i) accelerate this Note as provided in Article II(B), (ii) initiate any judicial proceeding or action to collect this Note or (iii) initiate any case, proceeding or other action in respect of Maker of the type referred to in clause (ii) or (iii) of Article II(A) unless, prior to the expiration of such period, (A) any holder of the Senior Debt or its agent shall take any action of the type referred to in clauses (i), (ii) and (iii) above in respect of Senior Debt or (B) any Senior Debt shall have become automatically due and payable in accordance with its terms. (vi) Prior to taking any action of the type referred to in clauses (i), (ii) and (ii) of Article IV(G)(v), Maker shall give the agent for the holders of any Senior Debt of which it is actually aware not less than five Business Days' notice of Maker's intent to take any such action (which notice may be given during the continuation of any period during which Payee is blocked from receiving payments under this Article IV(G)). H. GOVERNING LAW; SUBMISSION TO JURISDICTION. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED UNDER THE LAWS OF THE STATE OF NEW YORK (THE "STATE"). MAKER HEREBY SUBMITS TO PERSONAL JURISDICTION IN THE STATE FOR THE ENFORCEMENT OF MAKER'S OBLIGATIONS HEREUNDER, AND WAIVES ANY AND ALL PERSONAL RIGHTS UNDER THE LAW OF ANY OTHER STATE TO OBJECT TO JURISDICTION WITHIN THE STATE FOR THE PURPOSES OF LITIGATION TO ENFORCE SUCH OBLIGATIONS OF MAKER. IN THE EVENT SUCH LITIGATION IS COMMENCED, MAKER AGREES THAT SERVICE OF PROCESS MAY BE MADE, AND PERSONAL JURISDICTION OVER MAKER OBTAINED, BY MAILING A COPY OF THE SUMMONS, COMPLAINT AND OTHER PLEADINGS REQUIRED TO COMMENCE SUCH LITIGATION TO MAKER AT ITS ADDRESS LISTED ABOVE. 8 9 I. AMENDMENT AND RESTATEMENT. This Note amends and restates that certain Promissory Note made by Maker in favor of Payee, dated January 1, 1997 (the "Existing Note"), in the amount of $10,210,000, and is given as a continuation and rearrangement of, and not a novation, release or satisfaction of, the Existing Note. IN WITNESS WHEREOF, Maker has caused this instrument to be duly executed as of the date first above written. NATIONAL NETWORK TECHNOLOGIES INC. By /s/ Hugh O'Kane, Jr. --------------------------- Name: Hugh O'Kane, Jr. Title: President 9 EX-10.6 11 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.6 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of July 21, 1998 ("Agreement"), between NATIONAL NETWORK TECHNOLOGIES INC., a Delaware corporation ("NNTI"; together with its subsidiaries and affiliates, the "Company"), having a place of business at 88 White Street, New York, New York 10013, and HUGH J. O'KANE, JR. (the "Executive"), having an address at 190 Piping Rock Road, Locust Valley, New York 11560. W I T N E S S E T H: WHEREAS, the Company wishes to continue to employ the Executive in connection with its business; and WHEREAS, the Executive wishes to continue to be employed by the Company. NOW, THEREFORE, in consideration of the mutual undertakings and obligations set forth herein, the Company and the Executive agrees as follows: 1. Employment and Term. Subject to the terms and conditions of this Agreement, and unless earlier terminated as provided for herein, the Company agrees to employ the Executive, and the Executive hereby accepts employment by the Company, for the period commencing on the date hereof for a period of five (5) years, (the "Initial Term"). After the end of the Initial Term, this Agreement shall automatically renew for successive periods of one year each (the "Renewal Terms") unless either party gives at least 90 days' notice, prior to the end of the Initial Term, or any such Renewal Term, that it does not intend to renew this Agreement (the "Initial Term," together with all Renewal Terms referred to as the "Term"). 2. Duties. During the Term, the Executive shall serve the Company as President and Chief Operating Officer, and shall perform such services and other duties for the Company, as may reasonably be requested from time to time by the Board of Directors of NNTI (the "Board"). During the Term, the Executive shall devote his business time, attention and energies, on a full-time basis, to the Company and shall not accept any other employment or engage in any other business activity during the Term. 3. Compensation. (a) During the Term, the Company shall compensate the Executive in accordance with the Company's compensation policies for the Executives as set forth from time to time by senior management of the Company. Such compensation shall be paid in the form of base salary and bonus earned in accordance with such policies. Base salary shall be paid on a bi-weekly basis in accordance with the Company's normal payroll practices, which practices are 2 subject to change at the discretion of the Board. Any earned bonus shall be based on performance and shall be paid to the Executive on or prior to April 30 of the following calendar year. (b) In accordance with the foregoing, the Executive shall be paid a base salary at the rate of at least $265,000 per calendar year during the Term (the "Base Salary"), subject to annual review by the Executive and the Board. In addition, Executive shall receive an annual bonus of $250,000 (the "Bonus"), subject to the performance and profitability of the Company and the prior review and approval of the Board, and pro-rated as to actual periods of employment for each calendar year of the Term. 4. Benefits. (a) The Executive shall be entitled to participate in all benefit plans, including medical, health, retirement, short- and long-term disability, stock incentive and other such plans established by the Company from time to time for executives or employees of the Company generally. (b) The Executive shall be entitled to reimbursement for all normal and reasonable travel, entertainment and other expenses necessarily incurred by the Executive in the performance of his duties hereunder. The Executive shall submit on a timely basis such back-up documentation for reimbursement purposes as the Company may require under its established policies and procedures and in accordance with IRS regulations. (c) The Executive shall be entitled to four (4) weeks paid vacation in each calendar year of the Term, pro-rated as to actual periods of employment during the Term. Unused vacation time in one year may be carried over into succeeding years with the approval of the Board. 5. Termination on Disability, Death or Notice, or for Cause. (a) In the event that the Executive, due to physical or mental disability or incapacity, is unable to perform substantially the his duties hereunder for a period of four (4) consecutive months, or for a total period of six (6) months in any eighteen-month consecutive period, the Company shall have the right to terminate this Agreement, and the Executive's employment hereunder, upon thirty (30) days' prior written notice. In the event of a termination under this Section 5(a), the Executive shall be entitled to be paid the Base Salary through the effective date of the termination, together with a pro-rated share of the Bonus, but shall not be entitled to any other payments or accrued benefits. (b) If the Executive dies during the Term, this Agreement shall thereupon immediately terminate. In the event of a termination under this Section 5(b), the Executive's personal representative shall be entitled to be paid the Base Salary through the effective date of 2 3 the termination, together with a pro-rated share of the Bonus, but shall not be entitled to any other payments or accrued benefits. (c) The Company, with the approval of the Board in accordance with the Company's bylaws, may terminate this Agreement and the Executive's employment hereunder at any time during the Term upon ninety (90) days written notice. Upon any such termination pursuant to this Section 5(c), the Executive shall be entitled to a severance payment consisting of the Base Salary through the end of the Term, together with a pro-rated share of the Bonus through the effective date of the termination. (d) The Company may terminate this Agreement, and the Executive's employment hereunder, at any time during the Term, if the Executive (i) shall have been convicted of a felony, (ii) shall have been convicted of a criminal act against the Company or any shareholder, subsidiary or affiliate thereof, (iii) shall have committed an act of moral turpitude, or an act constituting common law fraud, (iv) shall be in material breach of the Executive's obligations hereunder, and if such breach is curable, such breach shall remain uncured five business days after the Executive's receipt of written notice of such breach from the Company, or (v) shall consistently fail to follow the reasonable directions and policies of the Board, and such failure shall continue for five business days after the Executive's receipt of written notice of such failure by the Board. In the event of any termination pursuant to this Section 5(d), the Executive shall be entitled to receive only the Base Salary as of and through the effective date of the termination, and shall not be entitled to any other payments of any kind whatsoever. 6. Confidentiality. (a) The Executive understands and acknowledges that, as a result of the Executive's employment by the Company, he will become informed of and be in possession of confidential and proprietary information of the Company. During the Term, and for a period of three (3) years thereafter, the Executive shall not use or disclose to any person or entity except as required by law or judicial process, any Confidential Information, for any reason or purpose whatsoever, nor shall he make use of any of the Confidential Information for his own purposes or for the benefit of any person or entity except the Company or any direct or indirect subsidiary of the Company. For purposes of this Agreement, "Confidential Information" shall mean all industrial and intellectual property of the Company, or any direct or indirect subsidiary of the Company, including, without limitation, (a) patents, patent applications, patent rights, trademarks, trademark applications, copyrights, copyright applications, know-how, certificates of public convenience and necessity, franchises, licenses, proprietary processes and formulae, layouts, processes, inventions, and (b) all proprietary rights pertaining to any product or service manufactured, sold, distributed or marketed, or used, employed or exploited in the development, manufacture, license, sale, distribution, marketing or maintenance thereof, and all documentation and media constituting, describing or relating to the foregoing, and all information of a proprietary or confidential nature relating to any of them and/or their business, financial condition or results or operations (other than information that is in the public domain at the time of receipt thereof by the 3 4 Executive, or otherwise becomes public other than as a result of the breach by the Executive of his agreement hereunder or is rightfully received from a third party without any obligation of confidentiality to the Company or is independently developed by the Executive). Upon the termination of this Agreement or cessation of the Executive's employment by the Company for any reason, the Executive shall promptly deliver to the Company all files, records, documents and other materials relating to the Company which are in the Executive's possession or control. 7. Developments. (a) The Executive shall disclose promptly and fully to the Company all ideas, devices, inventions, improvements, developments, computer software, product marks and designations, technical information and know-how, whether or not patentable, copyrightable or otherwise protestable, relating in any way to the Company's business, which the Executive conceived or made or may conceive or make, whether solely or jointly with others. All of such work product required to be disclosed to the Company are referred to herein as the "Proprietary Developments." The Executive confirms that all of the Proprietary Developments made by the Executive are "works-made-for-hire" for the Company and further, that all of the Executive's right, title and interest in and to the Proprietary Developments shall be deemed to be held by the Executive in a fiduciary capacity and solely for the Company's benefit and shall be the sole and exclusive property of the Company. (b) The Executive, when requested to do so, either during or after the Executive's employment by the Company, shall, for no additional compensation (except as contemplated by subsection (d) below): (i) assign and convey to the Company in writing the Executive's entire right, title and interest in and to the Proprietary Developments to the extent not owned by the Company as a matter of law from the time of their creation; (ii) execute, acknowledge and deliver all such instruments of assignment, transfer and conveyance, and any such further instruments and documents, in form and substance satisfactory to the Company, as the Company shall reasonably deem necessary or advisable; (iii) assist the Company and its designated representatives and agents in preparing patent, copyright or other applications, domestic and foreign, covering the same, and sign and deliver all such applications and assignments thereof to the Company; and (iv) generally give all information and testimony, sign all papers and do all things which may be needed or reasonably requested by the Company to the end that 4 5 the Company may obtain, extend, reissue, maintain and enforce United States and foreign patents or copyrights or other rights or registrations covering the Proprietary Developments. (c) hereby irrevocably nominates and appoints the Company as the Executive's attorney-in-fact to sign and deliver all such papers, and perform all such acts under this Section 7, in the event of the Executive's absence, unavailability, refusal or death, such nomination and appointment hereby being granted with full authority and with a valuable interest vested in the Company. (d) The Company shall bear all expenses which it causes to be incurred in obtaining, extending, reissuing, maintaining and enforcing such patents, copyrights or other rights or registrations and investing and perfecting title thereto in the Company, and shall pay the Executive reasonable compensation for any time which it may reasonably require of the Executive therefor subsequent to his employment by the Company. (e) In the event of the unenforceability of all or part of the foregoing provisions of this Section 7, as determined by a court of competent jurisdiction, the Executive hereby transfers and assigns to the Company such lesser interests in the Proprietary Developments as may be determined by such a court to be a reasonable grant of interests under the circumstances, but, in any event, the Executive shall be deemed to have granted to the Company not less than an irrevocable, non-exclusive license (with the right to sub-license) of such Proprietary Developments, without payment of any royalty. 8. Non-Competition; Non-Interference; Non-Solicitation. The Executive agrees that for the period commencing on the date hereof and ending two (2) years after the termination or cessation of his employment by the Company for any reason, the Executive shall not, (i) directly or indirectly engage, whether such engagement shall be as an officer, director, partner, shareholder, affiliate or other participant, in any business that competes with the Subject Business (a "Competitive Business") or represent in any way any Competitive Business, whether such engagement or representation shall be for profit or not (provided, that nothing contained herein shall prevent the Executive from holding up to 1% of the outstanding voting capital stock of any publicly traded company), (ii) interfere with, disrupt or attempt to disrupt the relationship, contractual or otherwise, between the Company and any third party, including, without limitation, any licensee, licensor, customer, supplier, consultant or employee of the Company or any direct or indirect subsidiary of the Company, (iii) affirmatively assist or induce others to engage in any Competitive Business in any manner described in the foregoing clause (i) and (ii), or (iv) solicit or attempt to solicit for any business endeavor any employee of the Company. As used herein, the term "Subject Business" means and includes any business located anywhere in the United States of America that provides electrical contracting, engineering and/or cable laying or maintenance services. 5 6 9. Acknowledgment; Remedies and Survival. The Executive acknowledges that he will have a position of trust and managerial responsibility for the Company; that his services are unique to the Company; and that, accordingly, the restrictions contained in Sections 6, 7 and 8 hereof are reasonable under the circumstances. Because the Company does not have an adequate remedy at law, the Company shall be entitled to injunctive relief, in addition to any other legal remedies, in the event of any breach of Sections 6, 7 or 8 of this Agreement. The provisions of Sections 6, 7 and 8, and this Section 9, shall survive any termination or cessation of the Executive's employment by the Company. 10. Entire Agreement. This Agreement sets forth the entire understanding of the parties hereto with respect to its subject matter, merges and supersedes any prior or contemporaneous agreements or understandings with respect to its subject matter, and shall not be modified or amended except by another instrument in writing executed by the Company and the Executive. Failure of a party to enforce any provision of this Agreement or to require at any time performance of any of the obligations hereunder shall not be construed to be a waiver, nor to in any way affect the validity of this Agreement. 11. Severability. If any provision of this Agreement is held to be invalid or unenforceable by any court or tribunal of competent jurisdiction, the remainder of this Agreement shall not be affected by such judgment, and such provision shall be carried out as nearly as possible according to its original terms and intent to eliminate such invalidity or unenforceability. 12. Successors and Assigns. Neither party shall have the right to assign this personal services Agreement, nor any rights or obligations hereunder, without the written consent of the other party; provided, that, upon the sale, transfer or reorganization of all or substantially all of the business assets or stock ownership of the Company, this Agreement shall inure to the benefit of, and be binding upon, both the Executive and the Company's successor, in the same manner and to the same extent as though such successor were the Company. Subject to the foregoing, this Agreement shall inure to the benefit of, and bind, the parties hereto and their legal representatives, heirs, successors and assigns. 13. Notices. All notices to either party hereunder required to be in writing shall be deemed to have been duly given at the time when mailed in any United States post office enclosed in a registered or certified postage-paid envelope to the address of such party set forth in the introductory paragraph hereof. 14. Construction; Counterparts. The headings contained in this Agreement are for convenience only and shall in no way restrict or otherwise affect the construction of the provisions hereof. This Agreement may be executed in multiple counterparts, each of which shall be an original and all of which together shall constitute one and the same instrument. 15. Governing Law. This Agreement shall be governed by the laws of the State of New York applicable to agreements made and fully to be performed therein. Any claim 6 7 arising out of or in connection with this Agreement, or any other agreement relating in any way to the Executive's employment by the Company or the termination or cessation thereof, must be brought in a court of competent jurisdiction in New York, New York. [SIGNATURE PAGE FOLLOWS] 7 8 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written. NATIONAL NETWORK TECHNOLOGIES INC. By /s/ KEVIN M. O'KANE ------------------------------------- Name: Kevin M. O'Kane Title: Vice President /s/HUGH J. O'KANE, JR. ------------------------------------------ Hugh J. O'Kane, Jr. 8 9 AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT AMENDMENT NO. 1, dated as of February 14, 2000 to the Employment Agreement, dated as of July 21, 1998 (the "Employment Agreement") by and between Lexent Inc. f/k/a National Network Technologies, Inc., a Delaware corporation (the "Company"), and Hugh J. O'Kane, Jr. ("Executive"). WHEREAS, the Company and the Executive wish to amend the terms of the Executive's employment with the Company. NOW THEREFORE, in consideration of the premises and the mutual covenants contained herein, the parties agree that the Employment Agreement shall be amended as follows: SECTION 1 . Employment and Term. The first sentence of Section 1 of the Employment Agreement is hereby amended and restated to read in its entirety as follows: "Subject to the terms and conditions of this Agreement, and unless earlier terminated as provided for herein, the Company agrees to employ the Executive, and the Executive hereby accepts employment by the Company, for the period commencing on the date hereof and ending February 17, 2005 (the "Initial Term")." SECTION 2. Duties. The first sentence of Section 2 of the Employment Agreement is hereby amended and restated to read in its entirety as follows: "During the Term, the Executive shall serve the Company as Chairman of the Board of Directors, and shall perform such services and other duties for the Company, as may reasonably be requested from time to time by the Board of Directors (the "Board")." SECTION 3. Compensation. (a) Section 3(b) of the Employment Agreement is hereby amended and restated to read in its entirety as follows: "In accordance with the foregoing, the Executive shall be paid a base salary at the rate of at least $265,000 per calendar year during the Term (the "Base Salary"), subject to the annual review by the Executive and the Board. In any event, the Base Salary will be increased five percent (5%) each calendar year beginning January 1, 2001." (b) A Section 3(c) of the Employment Agreement is hereby added to read in its entirety as follows: 10 "In addition, the Executive shall receive an annual bonus targeted at $300,000 (the "Bonus"), subject to the performance and profitability of the Company and the prior review and approval of the Board, and pro-rated as to actual periods of employment for each calendar year of the Term. In any event, the targeted amount of the Bonus will increased five percent (5%) each calendar year beginning January 1, 2001." SECTION 4. Other Provisions. Except as expressly modified by this Amendment No. 1, all provisions of the Employment Agreement shall remain in full force and effect. SECTION 5. Counterparts. This Amendment No. 1 may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. SECTION 6. Governing Law. This Amendment No. 1 shall be governed by and construed in accordance with the laws of the State of New York, without reference to the conflicts of laws provisions thereof. * * * * * 11 IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1 as of the day and year first above written. LEXENT INC. By /s/ Alf T. Hansen -------------------------- Alf T. Hansen President and Chief Executive Officer /s/ Hugh J. O'Kane, Jr. -------------------------- Hugh J. O'Kane, Jr. EX-10.7 12 EMPLOYMENT AGREEMENT 1 Exhibit 10.7 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of July 21, 1998 ("Agreement"), between NATIONAL NETWORK TECHNOLOGIES INC., a Delaware corporation ("NNTI"; together with its subsidiaries and affiliates, the "Company"), having a place of business at 88 White Street, New York, New York 10013, and KEVIN M. O'KANE (the "Executive"), having an address at 153 South Mountain Avenue, Montclair, New Jersey 07042. W I T N E S S E T H: WHEREAS, the Company wishes to continue to employ the Executive in connection with its business; and WHEREAS, the Executive wishes to continue to be employed by the Company. NOW, THEREFORE, in consideration of the mutual undertakings and obligations set forth herein, the Company and the Executive agrees as follows: 1. Employment and Term. Subject to the terms and conditions of this Agreement, and unless earlier terminated as provided for herein, the Company agrees to employ the Executive, and the Executive hereby accepts employment by the Company, for the period commencing on the date hereof for a period of five (5) years, (the "Initial Term"). After the end of the Initial Term, this Agreement shall automatically renew for successive periods of one year each (the "Renewal Terms") unless either party gives at least 90 days' notice, prior to the end of the Initial Term, or any such Renewal Term, that it does not intend to renew this Agreement (the "Initial Term", together with all Renewal Terms referred to as the "Term"). 2. Duties. During the Term, the Executive shall serve the Company as Executive Vice President, and shall perform such services and other duties for the Company, as may reasonably be requested from time to time by the Board of Directors of NNTI (the "Board"). During the Term, the Executive shall devote his business time, attention and energies, on a full-time basis, to the Company and shall not accept any other employment or engage in any other business activity during the Term. 3. Compensation. (a) During the Term, the Company shall compensate the Executive in accordance with the Company's compensation policies for the Executives as set forth from time to time by senior management of the Company. Such compensation shall be paid in the form of base salary and bonus earned in accordance with such policies. Base salary shall be paid on a bi-weekly basis in accordance with the Company's normal payroll practices, which practices are subject to change at the discretion 2 of the Board. Any earned bonus shall be based on performance and shall be paid to the Executive on or prior to April 30 of the following calendar year. (b) In accordance with the foregoing, the Executive shall be paid a base salary at the rate of at least $265,000 per calendar year during the Term (the "Base Salary"), subject to annual review by the Executive and the Board. In addition, Executive shall receive an annual bonus of $250,000 (the "Bonus"), subject to the performance and profitability of the Company and the prior review and approval of the Board, and pro- rated as to actual periods of employment for each calendar year of the Tenn. 4. Benefits. (a) The Executive shall be entitled to participate in all benefit plans, including medical, health, retirement, short- and long-term disability, stock incentive and other such plans established by the Company from time to time for executives or employees of the Company generally. (b) The Executive shall be entitled to reimbursement for all normal and reasonable travel, entertainment and other expenses necessarily incurred by the Executive in the performance of his duties hereunder. The Executive shall submit on a timely basis such back-up documentation for reimbursement purposes as the Company may require under its established policies and procedures and in accordance with IRS regulations. (c) The Executive shall be entitled to four (4) weeks paid vacation in each calendar year of the Term, pro-rated as to actual periods of employment during the Term. Unused vacation time in one year may be carried over into succeeding years with the approval of the Board. 5. Termination on Disability, Death or Notice, or for Cause. (a) In the event that the Executive, due to physical or mental disability or incapacity, is unable to perform substantially his duties hereunder for a period of four (4) consecutive months, or for a total period of six (6) months in any eighteen-month consecutive period, the Company shall have the right to terminate this Agreement, and the Executive's employment hereunder, upon thirty (30) days' prior written notice. In the event of a termination under this Section 5(a), the Executive shall be entitled to be paid the Base Salary through the effective date of the termination, together with a pro-rated share of the Bonus, but shall not be entitled to any other payments or accrued benefits. (b) If the Executive dies during the Term, this Agreement shall thereupon immediately terminate. In the event of a termination under this Section 5(b), the Executive's personal representative shall be entitled to be paid the Base Salary through the effective date of the termination, together with a pro-rated share of the Bonus, but shall not be entitled to any other payments or accrued benefits. -2- 3 (c) The Company, with the approval of the Board in accordance with the Company's bylaws, may terminate this Agreement and the Executive's employment hereunder at any time during the Term upon ninety (90) days written notice. Upon any such termination pursuant to this Section 5(c), the Executive shall be entitled to a severance payment consisting of the Base Salary through the end of the Term, together with a pro-rated share of the Bonus through the effective date of the termination. (d) The Company may terminate this Agreement, and the Executive's employment hereunder, at any time during the Term, if the Executive (i) shall have been convicted of a felony, (ii) shall have been convicted of a criminal act against the Company or any shareholder, subsidiary or affiliate thereof, (iii) shall have committed an act of moral turpitude, or an act constituting common law fraud, (iv) shall be in material breach of the Executive's obligations hereunder, and if such breach is curable, such breach shall remain uncured five business days after the Executive's receipt of written notice of such breach from the Company, or (v) shall consistently fail to follow the reasonable directions and policies of the Board, and such failure shall continue for five business days after the Executive's receipt of written notice of such failure by the Board. In the event of any termination pursuant to this Section 5(d), the Executive shall be entitled to receive only the Base Salary as of and through the effective date of the termination, and shall not be entitled to any other payments of any kind whatsoever. 6. Confidentiality. (a) The Executive understands and acknowledges that, as a result of the Executive's employment by the Company, he will become informed of and be in possession of confidential and proprietary information of the Company. During the Term, and for a period of three (3) years thereafter, the Executive shall not use or disclose to any person or entity except as required by law or judicial process, any Confidential Information, for any reason or purpose whatsoever, nor shall he make use of any of the Confidential Information for his own purposes or for the benefit of any person or entity except the Company or any direct or indirect subsidiary of the Company. For purposes of this Agreement, "Confidential Information" shall mean all industrial and intellectual property of the Company, or any direct or indirect subsidiary of the Company, including, without limitation, (a) patents, patent applications, patent rights, trademarks, trademark applications, copyrights, copyright applications, know-how, certificates of public convenience and necessity, franchises, licenses, proprietary processes and formulae, layouts, processes, inventions, and (b) all proprietary rights pertaining to any product or service manufactured, sold, distributed or marketed, or used, employed or exploited in the development, manufacture, license, sale, distribution, marketing or maintenance thereof, and all documentation and media constituting, describing or relating to the foregoing, and all information of a proprietary or confidential nature relating to any of them and/or their business, financial condition or results or operations (other than information that is in the public domain at the time of receipt thereof by the Executive, or otherwise becomes public other than as a result of the breach by the Executive of his agreement hereunder or is rightfully received from a third party without any obligation of confidentiality to the Company or is independently developed by the Executive). -3- 4 (b) Upon the termination of this Agreement or cessation of the Executive's employment by the Company for any reason, the Executive shall promptly deliver to the Company all files, records, documents and other materials relating to the Company which are in the Executive's possession or control. 7. Developments. (a) The Executive shall disclose promptly and fully to the Company all ideas, devices, inventions, improvements, developments, computer software, product marks and designations, technical information and know-how, whether or not patentable, copyrightable or otherwise protestable, relating in any way to the Company's business, which the Executive conceived or made or may conceive or make, whether solely or jointly with others. All of such work product required to be disclosed to the Company are referred to herein as the "Proprietary Developments." The Executive confirms that all of the Proprietary Developments made by the Executive are "works-made-for-hire" for the Company and further, that all of the Executive's right, title and interest in and to the Proprietary Developments shall be deemed to be held by the Executive in a fiduciary capacity and solely for the Company's benefit and shall be the sole and exclusive property of the Company. (b) The Executive, when requested to do so, either during or after the Executive's employment by the Company, shall, for no additional compensation (except as contemplated by sub- section (d) below): (i) assign and convey to the Company in writing the Executive's entire right, title and interest in and to the Proprietary Developments to the extent not owned by the Company as a matter of law from the time of their creation; (ii) execute, acknowledge and deliver all such instruments of assignment, transfer and conveyance, and any such further instruments and documents, in form and substance satisfactory to the Company, as the Company shall reasonably deem necessary or advisable; (iii) assist the Company and its designated representatives and agents in preparing patent, copyright or other applications, domestic and foreign, covering the same, and sign and deliver all such applications and assignments thereof to the Company; and (iv) generally give all information and testimony, sign all papers and do all things which may be needed or reasonably requested by the Company to the end that the Company may obtain, extend, reissue, maintain and enforce United States and foreign patents or copyrights or other rights or registrations covering the Proprietary Developments. (c) hereby irrevocably nominates and appoints the Company as the Executive's attorney-in-fact to sign and deliver all such papers, and perform all such acts under this Section 7, in the event of the Executive's absence, unavailability, refusal or death, such nomination and -4- 5 appointment hereby being granted with full authority and with a valuable interest vested in the Company. (d) The Company shall bear all expenses which it causes to be incurred in obtaining, extending, reissuing, maintaining and enforcing such patents, copyrights or other rights or registrations and investing and perfecting title thereto in the Company, and shall pay the Executive reasonable compensation for any time which it may reasonably require of the Executive therefor subsequent to his employment by the Company. (e) In the event of the unenforceability of all or part of the foregoing provisions of this Section 7, as determined by a court of competent jurisdiction, the Executive hereby transfers and assigns to the Company such lesser interests in the Proprietary Developments as may be determined by such a court to be a reasonable grant of interests under the circumstances, but, in any event, the Executive shall be deemed to have granted to the Company not less than an irrevocable, non-exclusive license (with the right to sub-license) of such Proprietary Developments, without payment of any royalty. 8. Non-Competition; Non-Interference; Non- Solicitation. The Executive agrees that for the period commencing on the date hereof and ending two (2) years after the termination or cessation of his employment by the Company for any reason, the Executive shall not, (i) directly or indirectly engage, whether such engagement shall be as an officer, director, partner, shareholder, affiliate or other participant, in any business that competes with the Subject Business (a "Competitive Business") or represent in any way any Competitive Business, whether such engagement or representation shall be for profit or not (provided, that nothing contained herein shall prevent the Executive from holding up to 1% of the outstanding voting capital stock of any publicly traded company), (ii) interfere with, disrupt or attempt to disrupt the relationship, contractual or otherwise, between the Company and any third party, including, without limitation, any licensee, licensor, customer, supplier, consultant or employee of the Company or any direct or indirect subsidiary of the Company, (iii) affirmatively assist or induce others to engage in any Competitive Business in any manner described in the foregoing clause (i) and (ii), or (iv) solicit or attempt to solicit for any business endeavor any employee of the Company. As used herein, the term "Subject Business" means and includes any business located anywhere in the United States of America that provides electrical contracting, engineering and/or cable laying or maintenance services. 9. Acknowledgment; Remedies and Survival. The Executive acknowledges that he will have a position of trust and managerial responsibility for the Company; that his services are unique to the Company; and that, accordingly, the restrictions contained in Sections 6, 7 and 8 hereof are reasonable under the circumstances. Because the Company does not have an adequate remedy at law, the Company shall be entitled to injunctive relief, in addition to any other legal remedies, in the event of any breach of Sections 6, 7 or 8 of this Agreement. The provisions of Sections 6, 7 and 8, and this Section 9, shall survive any termination or cessation of the Executive's employment by the Company. -5- 6 10. Entire Agreement. This Agreement sets forth the entire understanding of the parties hereto with respect to its subject matter, merges and supersedes any prior or contemporaneous agreements or understandings with respect to its subject matter, and shall not be modified or amended except by another instrument in writing executed by the Company and the Executive. Failure of a party to enforce any provision of this Agreement or to require at any time performance of any of the obligations hereunder shall not be construed to be a waiver, nor to in any way affect the validity of this Agreement. 11. Severability. If any provision of this Agreement is held to be invalid or unenforceable by any court or tribunal of competent jurisdiction, the remainder of this Agreement shall not be affected by such judgment, and such provision shall be carried out as nearly as possible according to its original terms and intent to eliminate such invalidity or unenforceability. 12. Successors and Assigns. Neither party shall have the night to assign this personal services Agreement, nor any rights or obligations hereunder, without the written consent of the other party; provided, that, upon the sale, transfer or reorganization of all or substantially all of the business assets or stock ownership of the Company, this Agreement shall inure to the benefit of, and be binding upon, both the Executive and the Company's successor, in the same manner and to the same extent as though such successor were the Company. Subject to the foregoing, this Agreement shall inure to the benefit of, and bind, the parties hereto and their legal representatives, heirs, successors and assigns. 13. Notices. All notices to either party hereunder required to be in writing shall be deemed to have been duly given at the time when mailed in any United States post office enclosed in a registered or certified postage-paid envelope to the address of such party set forth in the introductory paragraph hereof. 14. Construction; Counterparts. The headings contained in this Agreement are for convenience only and shall in no way restrict or otherwise affect the construction of the provisions hereof. This Agreement may be executed in multiple counterparts, each of which shall be an original and all of which together shall constitute one and the same instrument. 15. Governing Law. This Agreement shall be governed by the laws of the State of New York applicable to agreements made and fully to be performed therein. Any claim arising out of or in connection with this Agreement, or any other agreement relating in any way to the Executive's employment by the Company or the termination or cessation thereof, must be brought in a court of competent jurisdiction in New York, New York. [SIGNATURE PAGE FOLLOWS] -6- 7 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written. NATIONAL NETWORK TECHNOLOGIES INC. By /s/ Hugh J. O'Kane, Jr. -------------------------------- Name: Hugh O'Kane, Jr. Title: President /s/ Kevin M. O'Kane ---------------------------------- Kevin M. O'Kane -7- 8 AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT AMENDMENT NO. 1, dated as of February 14, 2000 to the Employment Agreement, dated as of July 21, 1998 (the "Employment Agreement") by and between Lexent Inc. f/k/a National Network Technologies, Inc., a Delaware corporation (the "Company"), and Kevin M. O'Kane ("Executive"). WHEREAS, the Company and the Executive wish to amend the terms of the Executive's employment with the Company NOW THEREFORE, in consideration of the premises and the mutual covenants contained herein, the parties agree that the Employment Agreement shall be amended as follows: SECTION 1. Employment and Term. The first sentence of Section 1 of the Employment Agreement is hereby amended and restated to read in its entirety as follows: "Subject to the terms and conditions of this Agreement, and unless earlier terminated as provided for herein, the Company agrees to employ the Executive, and the Executive hereby accepts employment by the Company, for the period commencing on the date hereof and ending February 17, 2005 (the "Initial Term")." SECTION 2. Duties. The first sentence of Section 2 of the Employment Agreement is hereby amended and restated to read in its entirety as follows: "During the Term, the Executive shall serve the Company as Vice Chairman of the Board of Directors, Chief Operating Officer, Secretary and Assistant Treasurer and shall perform such services and other duties for the Company, as may reasonably be requested from time to time by the Board of Directors (the "Board")." SECTION 3. Compensation. (a) Section 3(b) of the Employment Agreement is hereby amended and restated to read in its entirety as follows: "In accordance with the foregoing, the Executive shall be paid a base salary at the rate of at least $265,000 per calendar year during the Term (the "Base Salary"), subject to the annual review by the Executive and the Board. In any event, the Base Salary will be increased five percent (5%) each calendar year beginning January 1, 2001." (b) A Section 3(c) of the Employment Agreement is hereby added to read in its entirety as follows: "In addition, the Executive shall receive an annual bonus targeted at $300,000 (the "Bonus"), subject to the performance and profitability of the Company and the prior review and approval of the Board, and pro-rated as to actual periods of employment for each calendar year of the Term. In any event, 9 the targeted amount of the Bonus will increased five percent (5%) each calendar year beginning January 1, 2001." SECTION 4. Other Provisions. Except as expressly modified by this Amendment No. 1, all provisions of the Employment Agreement shall remain in full force and effect. SECTION 5. Counterparts. This Amendment No. 1 may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. SECTION 6. Governing Law. This Amendment No. 1 shall be governed by and construed in accordance with the laws of the State of New York, without reference to the conflicts of laws provisions thereof. * * * * * 10 IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1 as of the day and year first above written. LEXENT INC. By /s/ Alf T. Hansen ____________________________________ Alf T. Hansen President and Chief Executive Officer /s/ Kevin M. O'Kane ____________________________________ Kevin M. O'Kane EX-10.8 13 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.8 ----------------------------------- National Network Technologies, Inc. ----------------------------------- 26 Broadway, Suite 400 New York, New York 10004 Phone (212) 837-7770 - Fax (212) 837-7817 August 20, 1998 Mr. Jonathan H. Stern 57 Springhouse Road Woodcliff Lake, NJ 07675 Dear Jon: We are delighted to extend to you our offer of employment to join National Network Technologies as our Chief Financial Officer. We are confident that you will make an outstanding contribution to the growth and development of our firm as we become a much larger and geographically diverse corporation. The terms of our offer of employment are as follows: * Your base salary will be $205,100 per year. * In addition, you will be eligible for the achievement of a $50,000 targeted bonus award that will be paid in mid-January following the fiscal year closing. This targeted bonus will be measured by the establishment of mutually agreed upon, formal objectives which compromise 75% of the award. The remainder of the bonus award will be based on more subjective criteria and will carry a weight of 25%. For calendar year 1998, your bonus will be prorated and determined by more subjective criteria as well as our evaluation of your performance for the remaining months of the year. * As our Chief Financial Officer, you will receive Incentive Stock Options to purchase 220,000 common shares of stock at $.50 per share (approximately 1% of current outstanding shares). The Incentive Stock Options will have the following vesting schedule: - After the first 12 months, 20% of the 220,000 share Incentive Stock Option will be vested. - Thereafter, 1.67% of the remaining shares will vest each month for the remaining 48 months. 2 - In the event that our company undergoes a change of control, you will be automatically vested in 50% of the shares that are not as yet vested. Vesting Example (A): Assume that a change of control takes place between the 24th and 25th month. You will have the following number of shares vested. 1. 20% of 220,000 shares or 44,000 shares would be vested after the first 12 months. 2. Additional 44,000 shares would vest in the ensuing 12 months. 3. 50% of the remaining shares, or 66,000, would qualify for accelerated vesting. Therefore, the total number of shares vested after the first 2 years would be 154,000 or 70% of your Incentive Stock Options. Vesting Example (B): Assume that a change of control takes place between the 48th and 49th month. You will have the following number of shares vested: 1. After 12 months, you would be vested in 44,000 shares. 2. For the ensuing 36 months, you would be vested in 132,000 shares. 3. 50% of the remaining shares or 27,000. Accelerated vesting would give you another 22,000 of vested shares. Therefore, the total shares vested after 48 months of employment would be 198,000 or 90% of your Incentive Stock Options. - In the event the company undergoes a change of control after 30 months and you are terminated without cause, your remaining unvested shares will automatically vest to 100% of the shares that are not yet vested. - - You and your family will be covered by our Blue Cross/Blue Shield medical and dental plans at no cost to you. - - You will receive three weeks vacation each year. - - We are in the process of establishing a 401(k) plan and discontinuing our Defined Benefit Plan and our Supplemental Employee Retirement Plan (Money Purchase Plan). All employees will be eligible to participate in the 401(k) plan. Our company does not anticipate providing any matching funds to an employee's election to participate in the 401(k) plan. We hope that this offer of employment meets with your approval. We look forward to a long and successful relationship with you as the Chief Financial Officer. As you requested, we will provide you with a prearranged severance of six months continuation and benefit coverage in the event you are terminated without cause. Cause is to be defined as an act of dishonesty or disloyalty to the company. 3 If the above meets with your approval, please sign in the space provided below and return the signed offer of employment to us. Very truly yours, /s/Hugh O'Kane, Jr. - -------------------- Hugh O'Kane, Jr. Chairman and Chief Executive Officer Acceptance of Offer of Employment Signed by: /s/ Jonathan H. Stern --------------------------------- Date: 8/24/98 --------------------------------- 4 AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT AMENDMENT NO. 1, dated as February 14, 2000 to the Employment Agreement, dated as of August 20, 1998 (as amended hereby, the "Employment Agreement") by and between Lexent Inc. f/k/a National Network Technologies, Inc., a Delaware corporation (the "Company"), and Jonathan H. Stern ("Executive"). WHEREAS, the Company and the Executive wish to amend the terms of the Executive's employment with the Company. NOW THEREFORE, in consideration of the premises and the mutual covenants contained herein, the parties agree that the Employment Agreement shall be amended as follows: SECTION 1. Duties. The Executive's position appearing in first sentence of the first paragraph of the Employment Agreement is hereby amended to read "Executive Vice President and Chief Financial Officer." SECTION 2. Bonus. The paragraph after the second bullet point of the Employment Agreement is hereby amended and restated to read in its entirety as follows: "In addition, you will be eligible to receive bonus compensation in respect of each fiscal year (or portion thereof) occurring during your employment with us in an amount targeted at 40% of your base salary if our company achieves the target performance objectives established by the Compensation Committee of the Board of Directors with respect to such fiscal year. You will also be eligible to receive additional bonus compensation in respect of each fiscal year (or portion thereof) occurring during your employment with us in an amount targeted at 60% of your base salary (prorated for any portion of a fiscal year) for exceptional performance as may be determined by the Compensation Committee in its sole discretion." SECTION 3. Other Provisions. Except as expressly modified by this Amendment No. 1, all provisions of the Employment Agreement shall remain in full force and effect. SECTION 4. Counterparts. This Amendment No. 1 may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. SECTION 5. Governing Law. This Amendment No. 1 shall be governed by and construed in accordance with the laws of the State of New York, without reference to the conflicts of laws provisions thereof. ***** 5 IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1 as of the day and year first above written. LEXENT INC. By /s/ Alf T. Hansen ------------------------------------------ Alf T. Hansen President and Chief Executive Officer /s/ Jonathan H. Stern ------------------------------------------ Jonathan H. Stern EX-10.9 14 EMPLOYMENT AGREEMENT 1 Exhibit 10.9 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of December 13, 1999, by and between LEXENT INC., a Delaware corporation (the "Company"), and JOSEPH HAINES (the "Employee"). W I T N E S S E T H: WHEREAS the Company desires to induce the Employee to enter into employment with the Company for the period provided in this Agreement, and the Employee is willing to accept such employment with the Company on a full-time basis, all in accordance with the terms and conditions set forth below; NOW, THEREFORE, for and in consideration of the premises hereof and the mutual covenants contained herein, the parties hereto hereby covenant and agree as follows: 1. Employment. (a) The Company hereby agrees to employ the Employee, and the Employee hereby agrees to accept such employment with the Company, commencing on December 13, 1999 (the "Commencement Date") and continuing for the period set forth in Section 2 hereof, all upon the terms and conditions hereinafter set forth. (b) The Employee affirms and represents that as of the commencement of his employment by the Company on the Commencement Date, he will be under no obligation to any former employer or other party which is in any way inconsistent with, or which imposes any restriction upon, the Employee's acceptance of employment hereunder with the Company, the employment of the Employee by the Company, or the Employee's undertakings under this Agreement. 2. Term of Employment. Unless earlier terminated as provided in this Agreement, the term of the Employee's employment under this Agreement shall be for a period beginning on the Commencement Date and ending on December 31, 2003. The period from the Commencement Date until December 31, 2003, or, in the event that the Employee's employment hereunder is earlier terminated as provided herein, such shorter period, is hereinafter called the "Employment Term"(the "Employment Term"). 3. Duties. The Employee shall be employed as Executive Vice President of the Company and President of the Company's wholly-owned subsidiary, Hugh O'Kane Datacom, LLC, a Delaware limited liability company ("HOK"), shall faithfully perform and discharge such 2 duties as inhere in the positions of Executive Vice President of the Company and President of HOK as may be specified in the By-laws of the Company or the Limited Liability Company Agreement of HOK with respect to such positions, and shall also perform and discharge such other duties and responsibilities consistent with such position as the Board of Directors of the Company (the "Board of Directors") shall from time to time determine. The Employee shall report to the Chief Executive Officer of the Company. The Employee shall perform his duties principally at offices of the Company in New York City, New York, with such travel to such other locations from time to time as the Chief Executive Officer may reasonably prescribe. Except as may otherwise be approved in advance by the Board of Directors, and except during vacation periods and reasonable periods of absence due to sickness, personal injury or other disability, the Employee shall devote his full business time throughout the Employment Term to the services required of him hereunder. The Employee shall render his business services exclusively to the Company and its subsidiaries during the Employment Term and shall use his best efforts, judgment and energy to improve and advance the business and interests of the Company and its subsidiaries in a manner consistent with the duties of his positions. 4. Compensation. (a) Salary. As compensation for the performance by the Employee of the services to be performed by the Employee hereunder during the Employment Term, the Company shall pay the Employee a base salary at the annual rate of Two Hundred and Forty Thousand Dollars ($240,000) (said amount, together with any increases thereto as may be determined from time to time by the Board of Directors in its sole discretion, being hereinafter referred to as "Salary"). Any Salary payable hereunder shall be paid in regular intervals in accordance with the Company's payroll practices from time to time in effect. (b) Bonus. The Employee shall be eligible to receive bonus compensation from the Company in respect of each fiscal year (or portion thereof) occurring during the Employment Term in an amount targeted at 40% of his Salary (pro rated for any portion of a fiscal year occurring during the Employment Term) if the Company achieves the target performance objectives established by the Compensation Committee of the Board of Directors (the "Compensation Committee") with respect to such fiscal year. The Employee shall also be eligible to receive additional bonus compensation from the Company in respect of each fiscal year (or portion thereof) occurring during the Employment Term for exceptional performance as may be determined by the Compensation Committee in its sole discretion. In any event, the Employee shall be entitled to receive an aggregate bonus (in addition to the Initial Payment discussed in (c) below) of not less than $115,000 in respect of the fiscal year ending December 31, 2000 (pro rated as aforesaid if the Employment Term ends prior to December 31, 2000). (c) Initial Payment. In connection with the execution and delivery by the Employee of this Agreement, the Company shall pay the Employee a one-time bonus in 2 3 the amount of $50,000 (the "Initial Payment") in respect of the fiscal year ending December 31, 2000 on or before January 31, 2000. The Employee shall not receive any bonus in respect of the fiscal year ending December 31, 1999. 5. Other Benefits; Options. (a) General. During the Employment Term, the Employee shall: (i) be eligible to participate in employee fringe benefits and pension and/or profit sharing plans that may be provided by the Company for its senior executive employees in accordance with the provisions of such plans, as the same may be in effect from time to time; (ii) be eligible to participate in any medical and health plans or other employee welfare benefit plans that may be provided by the Company for its senior executive employees in accordance with the provisions of any such plans, as the same may be in effect from time to time; (iii) be entitled to the number of paid vacation days in each calendar year determined by the Company from time to time for its senior executive officers, provided that such number of paid vacation days in each calendar year shall not be less than fifteen (15) work days (three calendar weeks); the Employee shall also be entitled to all paid holidays given by the Company to its senior executive officers; (iv) be entitled to sick leave, sick pay and disability benefits in accordance with any Company policy that may be applicable to senior executive employees from time to time; and (v) be entitled to reimbursement for all reasonable and necessary out-of-pocket business expenses incurred by the Employee in the performance of his duties hereunder in accordance with the Company's normal policies from time to time in effect. (b) Grant of Initial Options. In connection with the execution and delivery of this Agreement by the Employee, the Company is granting to the Employee options ("Initial Options") to purchase 350,000 shares of Company Common Stock, $.001 par value ("Common Stock"), at a purchase price of $10.00 per share, of which options to purchase 100,000 shares of Common Stock shall vest immediately and options to purchase the remaining 250,000 shares of Common Stock will vest in thirty-six equal increments over the thirty-six month period beginning on the first anniversary of the Commencement Date, all as provided in the Stock Option Agreements of even date herewith between the Company and the Employee. 3 4 (c) Grant of Subsequent Options. In connection with his continued employment by the Company, on the first anniversary of the Commencement Date, and on each of the subsequent anniversaries thereof during the Employment Term, the Company agrees to grant the Employee options ("Subsequent Options") to purchase 15,000 shares of Common Stock at a purchase price equal to the Fair Market Value (as defined in (d) below) of the Common Stock on the date of grant, which options shall vest in twenty-five percent increments over a four-year period with the first twenty-five percent to vest on the first anniversary of the date of grant. Each grant of these Subsequent Options shall be pursuant to specific terms set forth in a stock option agreement between the Company and the Employee. (d) Fair Market Value. "Fair Market Value" means as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in Common Stock) on the last market trading day prior to the day of grant of the particular Subsequent Options and as reported in the Wall Street Journal or such other source as the Compensation Committee deems reliable; (ii) If the Common Stock is quoted on the NASDAQ System (but not on the National Market System thereof) or is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a share of Common Stock shall be the average between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of grant of the particular Subsequent Options and as reported in the Wall Street Journal or such other source as the Compensation Committee deems reliable; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Compensation Committee. 6. Confidential Information. The Employee hereby covenants, agrees and acknowledges as follows: (a) The Employee has and will have access to and will participate in the development of or be acquainted with confidential or proprietary information and trade secrets related to the business of the Company and any present or future subsidiaries or affiliates of the Company (collectively with the Company, the "Companies"), including but 4 5 not limited to (i) customer lists; related records and compilations of information; the identity, lists or descriptions of any new customers, referral sources or organizations; financial statements; cost reports or other financial information; contract proposals or bid ding information; business plans; training and operations methods and manuals; personnel records; software programs; reports and correspondence; and management systems, policies or procedures, including related forms and manuals; (ii) information pertaining to future developments such as future marketing or acquisition plans or ideas, and potential new business locations and (iii) all other tangible and intangible property, which are used in the business and operations of the Companies but not made public. The information and trade secrets relating to the business of the Companies described hereinabove in this paragraph (a) are hereinafter referred to collectively as the "Confidential Information", provided that the term Confidential Information shall not include any information (A) that is or becomes generally publicly available (other than as a result of violation of this Agreement by the Employee), (B) that the Employee receives on a nonconfidential basis from a source (other than the Companies or their representatives) that is not known by him to be bound by an obligation of secrecy or confidentiality to any of the Companies or (C) that was in the possession of the Employee prior to disclosure by the Companies. (b) The Employee shall not disclose, use or make known for his or another's benefit any Confidential Information or use such Confidential Information in any way except as is in the best interests of the Companies in the performance of the Employee's duties under this Agreement. The Employee may disclose Confidential Information when required by a third party and applicable law or judicial process, but only after providing immediate notice to the Company of any third party's request for such information, which notice shall include the Employee's intent to disclose any Confidential Information with respect to such request. (c) The Employee acknowledges and agrees that a remedy at law for any breach or threatened breach of the provisions of this Section 6 would be inadequate and, therefore, agrees that the Companies shall be entitled to seek injunctive relief in addition to any other available rights and remedies in case of any such breach or threatened breach by the Employee; provided, however, that nothing contained herein shall be construed as prohibiting the Companies from pursuing any other rights and remedies available for any such breach or threatened breach. (d) The Employee agrees that upon termination of his employment with the Company for any reason, the Employee shall forthwith return to the Company all Confidential Information in whatever form maintained (including, without limitation, computer discs and other electronic media). 5 6 (e) The obligations of the Employee under this Section 6 shall, except as otherwise provided herein, survive the termination of the Employment Term and the expiration or termination of this Agreement. (f) Without limiting the generality of Section 12 hereof, the Employee hereby expressly agrees that the foregoing provisions of this Section 6 shall be binding upon the Employee's heirs, successors and legal representatives. 7. Termination of Employment. (a) The Employee's employment hereunder shall be terminated upon the occurrence of any of the following: (i) death of the Employee; (ii) the Employee's inability to perform his duties on account of disability or incapacity for a period of one hundred eighty (180) or more days, whether or not consecutive, within any period of twelve (12) consecutive months; (iii) the Company giving written notice, at any time, to the Employee that the Employee's employment is being terminated for "Cause" (as defined in (b) below); (iv) the Company giving written notice, at any time, to the Employee that the Employee's employment is being terminated or is not being renewed, other than pursuant to clause (i), (ii) or (iii) above ("Without Cause"); (v) the Employee terminates his employment hereunder because the Company, solely due to an Executive Management Stockholder Block (as defined in (c) below), fails to consummate an initial public offering of its Common Stock within one (1) year of the Commencement Date; or (vi) the Employee terminates his employment hereunder for any reason whatsoever (whether by reason of retirement, resignation or otherwise), other than in accordance with (v) above ("Without Good Reason"). (b) Cause. The following actions, failures and events by or affecting the Employee shall constitute "Cause" for termination within the meaning of clause (iii) of Section 7 (a) above: (i) an indictment for or conviction of the Employee of, or the entering of a plea of nolo contendere by the Employee with respect to, having committed a felony; 6 7 (ii) abuse of controlled substances or alcohol or acts of dishonesty or moral turpitude by the Employee that are detrimental to one or more of the Companies; (iii) acts or omissions by the Employee that the Employee knew were likely to damage the business of one or more of the Companies; (iv) negligence by the Employee in the performance of, or disregard by the Employee of, his material obligations under this Agreement or otherwise relating to his employment, which negligence or disregard continue unremedied for a period of fifteen (15) days after written notice thereof to the Employee; or (v) failure by the Employee to obey the reasonable and lawful orders and policies of the Board of Directors that are consistent with the provisions of this Agree ment. (c) Executive Management Stockholder Block. For purposes of this Agreement, an "Executive Management Stockholder Block" means the decision by the Company's Executive Management Stockholders (as that term is defined in the Stockholders Agreement, dated as of July 23, 1998, among the Company and the stockholders party thereto, as the same may be amended or modified from time to time) to not consent to an initial public offering by the Company of its Common Stock; provided, however, that an Executive Management Stockholder Block shall not be deemed to have occurred if a decision or action by the Board of Directors or the holders of the Company's Series A Convertible Preferred Stock, $.001 par value, prevents the consummation of such an initial public offering. 8. Payments Upon Termination. (a) Termination Without Cause. In the event that the Employee's employment is terminated by the Company Without Cause during the period between the Commencement Date and the date six months following the Commencement Date (the "Initial Period"), then the Company shall pay to the Employee, as severance pay or liquidated damages or both, monthly payments at the rate per annum of his Salary at the time of such termination for a period of: (i) eighteen (18) months after such termination if such termination occurs in the first month of the Initial Period; (ii) seventeen (17) months after such termination if such termination occurs in the second month of the Initial Period; 7 8 (iii) sixteen (16) months after such termination if such termination occurs in the third month of the Initial Period; (iv) fifteen (15) months after such termination if such termination occurs in the fourth month of the Initial Period; (v) fourteen (14) months after such termination if such termination occurs in the fifth month of the Initial Period; (vi) thirteen (13) months after such termination if such termination occurs in the sixth month of the Initial Period; and (vii) twelve (12) months after such termination if such termination occurs after the end of the Initial Period. (b) Termination by the Employee due to an Executive Management Stockholder Block. In the event that the Employee's employment is terminated by the Employee pursuant to clause (v) of Section 7(a) above during the ninety (90) day period following the date of such Executive Management Stockholder Block, then: (i) the Company shall pay to the Employee, as severance pay or liquidated damages or both, monthly payments at the rate per annum of his Salary at the time of such termination for a period of twenty-four (24) months after such termination; and (ii) the Company shall, upon the request therefor by the Employee as described below, purchase up to 100,000 shares of Common Stock acquired by the Employee pursuant to the exercise of Initial Options upon the following terms and conditions (the "Employee's Put"): (1) The Employee's Put may be exercised by Employee at any time during the thirty (30) day period following the Employee's termination by giving written notice thereof ("Put Notice") to the Company specifying the amount of shares (up to the maximum referred to above) of Common Stock the Employee wishes to sell to the Company (the "Put Securities"). The date of exercise of the Employee's Put shall be the date of the Put Notice. (2) Within 30 days following receipt of the Put Notice, the Company shall deliver to the Employee a notice (the "Company Notice") stating the purchase price per share of the Put Securities determined in accordance with clause (4) hereof and a date and place for closing of the purchase (the 8 9 "Put Closing"), which date shall be within ninety (90) days after the date the Company receives the Put Notice or, in the event an appraiser is hired pursuant to clause (4) hereof, within ninety (90) days after receipt of such appraiser's determination of the purchase price of the Put Securities. (3) At the Put Closing, the Company shall pay to the Employee the purchase price of the Put Securities by check or wire transfer. At such Put Closing, the Employee shall execute and deliver to the Company such stock powers and such other instruments of transfer as counsel for the Company deems necessary to validly and effectively transfer title to the Put Securities to the Company, free and clear of any lien, claim or encumbrance. (4) The purchase price per share of the Put Securities shall be the Fair Market Value (as defined in Section 5(d) above) of the Common Stock on the date of exercise of the Employee's Put. In the event that such Fair Market Value was determined by the Compensation Committee as described in Section 5(d)(iii) above, the Employee shall have the right to disagree with such determination and elect, within ten (10) days of receipt of the Company Notice, to have the Company select a recognized business appraiser to calculate the purchase price of the Put Securities which shall be the fair market value thereof. The determination of the purchase price by such appraiser will be binding on both parties. All costs and expenses of the appraisal, including, without limitation, all fees of the appraiser, shall be borne by the Company. (c) Payments Limited. Notwithstanding anything to the contrary expressed or implied herein, except as required by applicable law and except as set forth in Sections 8(a) and (b) above, neither the Company nor any of its affiliates shall be obligated to make any payments to the Employee or on his behalf of whatever kind or nature by reason of the Employee's cessation of employment (including, without limitation, by reason of termination of the Employee's employment by the Company's for Cause, Without Cause or otherwise), other than (i) such amounts, if any, of his Salary as shall have accrued and remained unpaid as of the date of said cessation and (ii) such other amounts, if any, which may be then otherwise payable to the Employee pursuant to the terms of the Company's benefits plans or pursuant to clause (v) of Section 5(a) above. (d) Interest. No interest shall accrue on or be paid with respect to any portion of any payments under this Section 8. 9 10 9. Non-Assignability. (a) Neither this Agreement nor any right or interest hereunder shall be assignable by the Employee or his beneficiaries or legal representatives without the Company's prior written consent; provided, however, that nothing in this Section 9(a) shall preclude the Employee from designating a beneficiary to receive any benefit payable hereunder upon his death or incapacity. This Agreement may not be assigned by the Company except with the Employee's prior written consent, provided, however, that the Company may assign this Agreement to an affiliate of the Company with the financial resources to fulfill the Company's obligations hereunder. (b) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or to exclusion, attachment, levy or similar process or to assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. 10. Restrictive Covenants. (a) Competition. During the Employment Term and, in the event the Employee's employment is terminated, during the period (the "Applicable Continuation Period") following such termination and continuing until (i) the last payment is made to the Employee pursuant to Section 8(a) or (b) hereof, as the case may be, or (ii) in the case of a termination of the Employee's employment pursuant to Section 7(a)(iii) or (vi) hereof, the first anniversary of the date of such termination, the Employee will not directly or indirectly (as a director, officer, executive employee, manager, consultant, independent contractor, advisor or otherwise) engage in competition with, or own any interest in, perform any services for, participate in or be connected with any business or organization which engages in competition with any of the Companies within the meaning of Section 10(d), provided, however, that the provisions of this Section 10(a) shall not be deemed to prohibit the Employee's ownership of not more than two percent (2%) of the total shares of all classes of stock outstanding of any publicly held company, or ownership, whether through direct or indirect stock holdings or otherwise, of not more than one percent (1%) of any other business. (b) Non-Solicitation. During the Employment Term and during the Applicable Continuation Period, the Employee, without the prior written consent of the Company, will not directly or indirectly induce or attempt to induce any employee of any of the Companies to leave the employ of the Company or such subsidiary or affiliate, or in any way interfere with the relationship between any of the Companies and any employee thereof. 10 11 (c) Non-Interference. During the Employment Term and during the Applicable Continuation Period, the Employee, without the prior written consent of the Company, will not directly or indirectly hire, engage, send any work to, place orders with, or in any manner be associated with any supplier, contractor, subcontractor or other business relation of any of the Companies if such action by him would have an adverse effect on the business, assets or financial condition of any of the Companies, or materially interfere with the relationship between any such person or entity and any of the Companies. (d) Certain Definitions. (i) For purposes of this Section 10, a person or entity (including, without limitation, the Employee) shall be deemed to be a competitor of one or more of the Companies, or a person or entity (including, without limitation, the Employee) shall be deemed to be engaging in competition with one or more of the Companies, if such person or entity conducts, or, to the knowledge of the Employee, plans to conduct, the Specified Business (as hereinafter defined) as a significant portion of its business in any of the markets served by the Companies or, in the case of a person or entity pursuing a business strategy of providing telecommunications infrastructure services, anywhere in the continental United States. Notwithstanding the foregoing, a Competitive Local Exchange Carrier ("CLEC") shall not be deemed to be a competitor of, or engaging in competition with, one or more of the Companies, unless such CLEC, directly or indirectly, conducts, or, to the knowledge of the Employee, plans to conduct, the Specified Business. (ii) For purposes of this Agreement, "Specified Business" means (A)(1) providing outsourced telecommunications infrastructure services to local or long distance telecommunications providers or (2) engaging in any business conducted by the Company at the time of termination of the Employee's employment with the Company other than business of a CLEC that is not, directly or indirectly, engaged in the business described in clause (A)(1) or (B) conducting, operating, carrying out or engaging in the business of managing any entity described in clause (A). (e) Certain Representations of the Employee. In connection with the foregoing provisions of this Section 10, the Employee represents that his experience, capabilities and circumstances are such that such provisions will not prevent him from earning a livelihood. The Employee further agrees that the limitations set forth in this Section 10 (including, without limitation, time and territorial limitations) are reasonable and properly required for the adequate protection of the current and future businesses of the Companies. It is understood and agreed that the covenants made by the Employee in this Section 10 (and in Section 6 hereof) shall survive the expiration or termination of this Agreement. (f) Injunctive Relief. The Employee acknowledges and agrees that a remedy at law for any breach or threatened breach of the provisions of Section 10 hereof would be 11 12 inadequate and, therefore, agrees that the Company and any of its subsidiaries or affiliates shall be entitled to seek injunctive relief in addition to any other available rights and remedies in cases of any such breach or threatened breach; provided, however, that nothing contained herein shall be construed as prohibiting the Company or any of its affiliates from pursuing any other rights and remedies available for any such breach or threatened breach. 11. Representations and Warranties. The Employee represents and warrants that he is not subject to or a party to any agreement, contract, covenants, order or other restriction which in any way prohibits, restricts or impairs the Employee's ability to enter into this Agreement and carry out his duties and obligations hereunder. Each party hereto represents and warrants to the other that (i) each has the full legal right and power and all authority and approvals required to enter into, execute and deliver this Agreement and to perform fully all of his or its obligations hereunder; and (ii) this Agreement has been duly executed and delivered and constitutes a valid and binding obligation of each party, enforceable in accordance with its terms. 12. Binding Effect. Without limiting or diminishing the effect of Section 9 hereof, this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, successors, legal representatives and assigns. 13. Notices. All notices which are required or may be given pursuant to the terms of this Agreement shall be in writing and shall be sufficient in all respects if given in writing and (i) delivered personally, (ii) mailed by certified or registered mail, return receipt requested and postage prepaid, (iii) sent via a nationally recognized overnight courier or (iv) sent via facsimile confirmed in writing to the recipient, if to the Company at the Company's principal place of business, and if to the Employee, at his home address most recently filed with the Company, or to such other address or addresses as either party shall have designated in writing to the other party hereto, provided, however, that any notice sent by certified or registered mail shall be deemed delivered on the date of delivery as evidenced by the return receipt. 14. Law Governing. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 15. Severability. The Employee agrees that in the event that any court of competent jurisdiction shall finally hold that any provision of Section 6 or 10 hereof is void or constitutes an unreasonable restriction against the Employee, the provisions of such Section 6 or 10 shall not be rendered void but shall apply with respect to such extent as such court may judicially determine constitutes a reasonable restriction under the circumstances. If any part of this Agreement other than Section 6 or 10 is held by a court of competent jurisdiction to be invalid, illegible or incapable of being enforced in whole or in part by reason of any rule of law or public policy, such part shall be deemed to be severed from the remainder of this Agreement for the purpose only of the particular legal proceedings in question and all other covenants and provisions 12 13 of this Agreement shall in every other respect continue in full force and effect and no covenant or provision shall be deemed dependent upon any other covenant or provision. 16. Waiver. Failure to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a waiver or relinquishment of such right or power at any other time or times. 17. Entire Agreement; Modifications. This Agreement constitutes the entire and final expression of the agreement of the parties with respect to the subject matter hereof and supersedes all prior agreements, oral and written, between the parties hereto with respect to the subject matter hereof. This Agreement may be modified or amended only by an instrument in writing signed by both parties hereto. 18. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 13 14 IN WITNESS WHEREOF, the Company and the Employee have duly executed and delivered this Agreement as of the day and year first above written. LEXENT INC. By: /s/ Kevin O'Kane ---------------------------------- Name: Kevin O'Kane Title: C.O.O. /s/ Joseph Haines ------------------------------------- Joseph Haines 14 EX-10.10 15 EMPLOYMENT AGREEMENT 1 Exhibit 10.10 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of December 23, 1999, by and between LEXENT INC., a Delaware corporation (the "Company"), and RIF K. HAFFAR (the "Employee"). W I T N E S S E T H: WHEREAS the Company desires to induce the Employee to enter into employment with the Company for the period provided in this Agreement, and the Employee is willing to accept such employment with the Company on a full-time basis, all in accordance with the terms and conditions set forth below; NOW, THEREFORE, for and in consideration of the premises hereof and the mutual covenants contained herein, the parties hereto hereby covenant and agree as follows: 1. Employment. (a) The Company hereby agrees to employ the Employee, and the Employee hereby agrees to accept such employment with the Company, commencing on January 17, 1999 (the "Commencement Date") and continuing for the period set forth in Section 2 hereof, all upon the terms and conditions hereinafter set forth. (b) The Employee affirms and represents that as of the commencement of his employment by the Company on the Commencement Date, he will be under no obligation to any former employer or other party which is in any way inconsistent with, or which imposes any restriction upon, the Employee's acceptance of employment hereunder with the Company, the employment of the Employee by the Company, or the Employee's undertakings under this Agreement. The Company acknowledges that the Employee and WinStar Wireless, Inc. have entered into a certain Separation and General Release Agreement, dated October 16, 1999, pursuant to which the Employee has agreed to perform those services set forth in Schedule 1 hereto and the Company agrees that the Employee may provide such services so long as the performance thereof shall not violate any provision of this Agreement. 2. Term of Employment. Unless earlier terminated as provided in this Agreement, the term of the Employee's employment under this Agreement shall be for a period beginning on the Commencement Date and ending on January 17, 2004. The period from the Commencement Date until January 17, 2004, or, in the event that the Employee's employment hereunder is earlier terminated as provided herein, such shorter period, is hereinafter called the "Employment Term"(the "Employment Term"). 3. Duties. The Employee shall be employed as Executive Vice President of the Company and Executive Vice President - Marketing & Business Development of the Company's wholly-owned subsidiary, National Network Technologies, LLC, a Delaware limited liability company ("NNT"), shall faithfully perform and discharge such duties as inhere in the positions of Executive Vice President of the Company and Executive Vice President - Marketing & Business Development of NNT as may be specified in the By-laws of the Company or the Limited Liability Company Agreement of NNT with respect to such positions, and shall also perform and discharge such other duties and responsibilities consistent with such position as the Board of Directors of the Company (the "Board of Directors") shall from time to time determine. The Employee shall report to the Chief Executive Officer of the Company. The 2 Employee shall perform his duties principally at offices of the Company in New York City, New York, with such travel to such other locations from time to time as the Chief Executive Officer may reasonably prescribe. Except as may otherwise be approved in advance by the Board of Directors, and except during vacation periods and reasonable periods of absence due to sickness, personal injury or other disability, the Employee shall devote his full business time throughout the Employment Term to the services required of him hereunder. The Employee shall render his business services exclusively to the Company and its subsidiaries during the Employment Term and shall use his best efforts, judgment and energy to improve and advance the business and interests of the Company and its subsidiaries in a manner consistent with the duties of his positions. 4. Compensation. (a) Salary. As compensation for the performance by the Employee of the services to be performed by the Employee hereunder during the Employment Term, the Company shall pay the Employee a base salary at the annual rate of Two Hundred and Forty Thousand Dollars ($240,000) (said amount, together with any increases thereto as may be determined from time to time by the Board of Directors in its sole discretion, being hereinafter referred to as "Salary"). Any Salary payable hereunder shall be paid in regular intervals in accordance with the Company's payroll practices from time to time in effect. (b) Bonus. The Employee shall be eligible to receive bonus compensation from the Company in respect of each fiscal year (or portion thereof) occurring during the Employment Term in an amount targeted at 40% of his Salary (pro rated for any portion of a fiscal year occurring during the Employment Term) if the Company achieves the target performance objectives established by the Compensation Committee of the Board of Directors (the "Compensation Committee") with respect to such fiscal year. The Employee shall also be eligible to receive additional bonus compensation from the Company in respect of each fiscal year (or portion thereof) occurring during the Employment Term in an amount targeted at 60% of his Salary (prorated for any portion of a fiscal year occurring during the Employment Term) for exceptional performance as may be determined by the Compensation Committee in its sole discretion. In any event, the Employee shall be entitled to receive an aggregate bonus (not including the Relocation Payments referred to in (c) below) of not less than $100,000 in respect of the fiscal year ending December 31, 2000 (pro rated as aforesaid if the Employment Term ends prior to December 31, 2000). (c) Relocation Payments. In addition to the compensation referred to in (a) and (b) above, the Employee shall also be eligible to receive one-time payments (the "Relocation Payments") consisting of (i) up to $24,000 for reimbursement of the Employee's expenses relating to his renting of an apartment in the New York City area for the first six months of the Employment Term, (ii) up to $10,000 for reimbursement of other reasonable expenses relating to the Employee's move to the New York City area and (iii) up to $10,000 for reimbursement of reasonable closing costs relating to the Employee's purchase of a home in the New York City area, in each case to be paid by the Company against submission of appropriate documentation by the Employee in accordance with the Company's standard policies. 2 3 5. Other Benefits; Options. (a) General. During the Employment Term, the Employee shall: (i) be eligible to participate in employee fringe benefits and pension and/or profit sharing plans that may be provided by the Company for its senior executive employees in accordance with the provisions of such plans, as the same may be in effect from time to time; (ii) be eligible to participate in any medical and health plans or other employee welfare benefit plans that may be provided by the Company for its senior executive employees in accordance with the provisions of any such plans, as the same may be in effect from time to time; (iii) be entitled to the number of paid vacation days in each calendar year determined by the Company from time to time for its senior executive officers, provided that such number of paid vacation days in each calendar year shall not be less than fifteen (15) work days (three calendar weeks); the Employee shall also be entitled to all paid holidays given by the Company to its senior executive officers; (iv) be entitled to sick leave, sick pay and disability benefits in accordance with any Company policy that may be applicable to senior executive employees from time to time; and (v) be entitled to reimbursement for all reasonable and necessary out-of-pocket business expenses incurred by the Employee in the performance of his duties hereunder in accordance with the Company's normal policies from time to time in effect. (b) Grant of Initial Options. In connection with the execution and delivery of this Agreement by the Employee, the Company is granting to the Employee options ("Initial Options") to purchase 250,000 shares of Company Common Stock, $.001 par value ("Common Stock"), at a purchase price of $10.00 per share, of which options to purchase 62,500 shares of Common Stock shall vest immediately and options to purchase the remaining 187,500 shares of Common Stock will vest in thirty-six equal increments over the thirty-six month period beginning on the first anniversary of the Commencement Date, all as provided in the Stock Option Agreements of even date herewith between the Company and the Employee. (c) Grant of Subsequent Options. In connection with his continued employment by the Company, on the first anniversary of the Commencement Date, and on each of the subsequent anniversaries thereof during the Employment Term, the Company agrees to grant the Employee options ("Subsequent Options") to purchase 10,000 shares of Common Stock at a purchase price equal to the Fair Market Value (as defined in (d) below) of the Common Stock on the date of grant, which options shall vest in twenty-five percent increments over a four-year period with the first twenty-five percent to vest on the first anniversary of the date of grant. Each grant of these Subsequent Options shall be pursuant to specific terms set forth in a stock option agreement between the Company and the Employee. (d) Fair Market Value. "Fair Market Value" means as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the 3 4 National Market System of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in Common Stock) on the last market trading day prior to the day of grant of the particular Subsequent Options and as reported in the Wall Street Journal or such other source as the Compensation Committee deems reliable; (ii) If the Common Stock is quoted on the NASDAQ System (but not on the National Market System thereof) or is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a share of Common Stock shall be the average between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of grant of the particular Subsequent Options and as reported in the Wall Street Journal or such other source as the Compensation Committee deems reliable; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Compensation Committee. 6. Confidential Information. The Employee hereby covenants, agrees and acknowledges as follows: (a) The Employee has and will have access to and will participate in the development of or be acquainted with confidential or proprietary information and trade secrets related to the business of the Company and any present or future subsidiaries or affiliates of the Company (collectively with the Company, the "Companies"), including but not limited to (i) customer lists; related records and compilations of information; the identity, lists or descriptions of any new customers, referral sources or organizations; financial statements; cost reports or other financial information; contract proposals or bid ding information; business plans; training and operations methods and manuals; personnel records; software programs; reports and correspondence; and management systems, policies or procedures, including related forms and manuals; (ii) information pertaining to future developments such as future marketing or acquisition plans or ideas, and potential new business locations and (iii) all other tangible and intangible property, which are used in the business and operations of the Companies but not made public. The information and trade secrets relating to the business of the Companies described hereinabove in this paragraph (a) are hereinafter referred to collectively as the "Confidential Information", provided that the term Confidential Information shall not include any information (A) that is or becomes generally publicly available (other than as a result of violation of this Agreement by the Employee), (B) that the Employee receives on a nonconfidential basis from a source (other than the Companies or their representatives) that is not known by him to be bound by an obligation of secrecy or confidentiality to any of the Companies or (C) that was in the possession of the Employee prior to disclosure by the Companies. (b) The Employee shall not disclose, use or make known for his or another's benefit any Confidential Information or use such Confidential Information in any way except as is in the best interests of the Companies in the performance of the Employee's duties under this Agreement. The Employee may disclose Confidential Information when required by a third party and applicable law or judicial process, but only after providing immediate notice to the Company of any third party's request for such information, which notice shall include the Employee's 4 5 intent to disclose any Confidential Information with respect to such request. (c) The Employee acknowledges and agrees that a remedy at law for any breach or threatened breach of the provisions of this Section 6 would be inadequate and, therefore, agrees that the Companies shall be entitled to seek injunctive relief in addition to any other available rights and remedies in case of any such breach or threatened breach by the Employee; provided, however, that nothing contained herein shall be construed as prohibiting the Companies from pursuing any other rights and remedies available for any such breach or threatened breach. (d) The Employee agrees that upon termination of his employment with the Company for any reason, the Employee shall forthwith return to the Company all Confidential Information in whatever form maintained (including, without limitation, computer discs and other electronic media). (e) The obligations of the Employee under this Section 6 shall, except as otherwise provided herein, survive the termination of the Employment Term and the expiration or termination of this Agreement. (f) Without limiting the generality of Section 12 hereof, the Employee hereby expressly agrees that the foregoing provisions of this Section 6 shall be binding upon the Employee's heirs, successors and legal representatives. 7. Termination of Employment. (a) The Employee's employment hereunder shall be terminated upon the occurrence of any of the following: (i) death of the Employee; (ii) the Employee's inability to perform his duties on account of disability or incapacity for a period of one hundred eighty (180) or more days, whether or not consecutive, within any period of twelve (12) consecutive months; (iii) the Company giving written notice, at any time, to the Employee that the Employee's employment is being terminated for "Cause" (as defined in (b) below); (iv) the Company giving written notice, at any time, to the Employee that the Employee's employment is being terminated or is not being renewed, other than pursuant to clause (i), (ii) or (iii) above ("Without Cause"); (v) the Employee terminates his employment hereunder because the Company, solely due to an Executive Management Stockholder Block (as defined in (c) below), fails to consummate an initial public offering of its Common Stock within one (1) year of the Commencement Date; or (vi) the Employee terminates his employment hereunder for any reason whatsoever (whether by reason of retirement, resignation or otherwise), other than in accordance with (v) above ("Without Good Reason"). (b) Cause. The following actions, failures and events by or affecting the Employee shall constitute "Cause" for termination within the meaning of clause (iii) of Section 7 (a) above: 5 6 (i) an indictment for or conviction of the Employee of, or the entering of a plea of nolo contendere by the Employee with respect to, having committed a felony; (ii) abuse of controlled substances or alcohol or acts of dishonesty or moral turpitude by the Employee that are detrimental to one or more of the Companies; (iii) acts or omissions by the Employee that the Employee knew were likely to damage the business of one or more of the Companies; (iv) negligence by the Employee in the performance of, or disregard by the Employee of, his material obligations under this Agreement or otherwise relating to his employment, which negligence or disregard continue unremedied for a period of fifteen (15) days after written notice thereof to the Employee; or (v) failure by the Employee to obey the reasonable and lawful orders and policies of the Board of Directors that are consistent with the provisions of this Agree ment. (c) Executive Management Stockholder Block. For purposes of this Agreement, an "Executive Management Stockholder Block" means the decision by the Company's Executive Management Stockholders (as that term is defined in the Stockholders Agreement, dated as of July 23, 1998, among the Company and the stockholders party thereto, as the same may be amended or modified from time to time) to not consent to an initial public offering by the Company of its Common Stock; provided, however, that an Executive Management Stockholder Block shall not be deemed to have occurred if a decision or action by the Board of Directors or the holders of the Company's Series A Convertible Preferred Stock, $.001 par value, prevents the consummation of such an initial public offering. 8. Payments Upon Termination. (a) Termination Without Cause. In the event that the Employee's employment is terminated by the Company Without Cause during the period between the Commencement Date and the date six months following the Commencement Date (the "Initial Period"), then the Company shall pay to the Employee, as severance pay or liquidated damages or both, monthly payments at the rate per annum of his Salary at the time of such termination for a period of: (i) eighteen (18) months after such termination if such termination occurs in the first month of the Initial Period; (ii) seventeen (17) months after such termination if such termination occurs in the second month of the Initial Period; (iii) sixteen (16) months after such termination if such termination occurs in the third month of the Initial Period; (iv) fifteen (15) months after such termination if such termination occurs in the fourth month of the Initial Period; (v) fourteen (14) months after such termination if such termination occurs in the fifth month of the Initial Period; (vi) thirteen (13) months after such termination if such 6 7 termination occurs in the sixth month of the Initial Period; and (vii) twelve (12) months after such termination if such termination occurs after the end of the Initial Period. (b) Termination by the Employee due to an Executive Management Stockholder Block. In the event that the Employee's employment is terminated by the Employee pursuant to clause (v) of Section 7(a) above during the ninety (90) day period following the date of such Executive Management Stockholder Block, then: (i) the Company shall pay to the Employee, as severance pay or liquidated damages or both, monthly payments at the rate per annum of his Salary at the time of such termination for a period of twenty-four (24) months after such termination; and (ii) the Company shall, upon the request therefor by the Employee as described below, purchase up to 62,500 shares of Common Stock acquired by the Employee pursuant to the exercise of Initial Options upon the following terms and conditions (the "Employee's Put"): (1) The Employee's Put may be exercised by Employee at any time during the thirty (30) day period following the Employee's termination by giving written notice thereof ("Put Notice") to the Company specifying the amount of shares (up to the maximum referred to above) of Common Stock the Employee wishes to sell to the Company (the "Put Securities"). The date of exercise of the Employee's Put shall be the date of the Put Notice. (2) Within 30 days following receipt of the Put Notice, the Company shall deliver to the Employee a notice (the "Company Notice") stating the purchase price per share of the Put Securities determined in accordance with clause (4) hereof and a date and place for closing of the purchase (the "Put Closing"), which date shall be within ninety (90) days after the date the Company receives the Put Notice or, in the event an appraiser is hired pursuant to clause (4) hereof, within ninety (90) days after receipt of such appraiser's determination of the purchase price of the Put Securities. (3) At the Put Closing, the Company shall pay to the Employee the purchase price of the Put Securities by check or wire transfer. At such Put Closing, the Employee shall execute and deliver to the Company such stock powers and such other instruments of transfer as counsel for the Company deems necessary to validly and effectively transfer title to the Put Securities to the Company, free and clear of any lien, claim or encumbrance. (4) The purchase price per share of the Put Securities shall be the Fair Market Value (as defined in Section 5(d) above) of the Common Stock on the date of exercise of the Employee's Put. In the event that such Fair Market Value was determined by the Compensation Committee as described in Section 5(d)(iii) above, the Employee shall have the right to disagree with such determination and elect, within ten (10) days of receipt of the Company 7 8 Notice, to have the Company select a recognized business appraiser to calculate the purchase price of the Put Securities which shall be the fair market value thereof. The determination of the purchase price by such appraiser will be binding on both parties. All costs and expenses of the appraisal, including, without limitation, all fees of the appraiser, shall be borne by the Company. (c) Payments Limited. Notwithstanding anything to the contrary expressed or implied herein, except as required by applicable law and except as set forth in Sections 8(a) and (b) above, neither the Company nor any of its affiliates shall be obligated to make any payments to the Employee or on his behalf of whatever kind or nature by reason of the Employee's cessation of employment (including, without limitation, by reason of termination of the Employee's employment by the Company's for Cause, Without Cause or otherwise), other than (i) such amounts, if any, of his Salary as shall have accrued and remained unpaid as of the date of said cessation and (ii) such other amounts, if any, which may be then otherwise payable to the Employee pursuant to the terms of the Company's benefits plans or pursuant to clause (v) of Section 5(a) above. (d) Interest. No interest shall accrue on or be paid with respect to any portion of any payments under this Section 8. 9. Non-Assignability. (a) Neither this Agreement nor any right or interest hereunder shall be assignable by the Employee or his beneficiaries or legal representatives without the Company's prior written consent; provided, however, that nothing in this Section 9(a) shall preclude the Employee from designating a beneficiary to receive any benefit payable hereunder upon his death or incapacity. This Agreement may not be assigned by the Company except with the Employee's prior written consent, provided, however, that the Company may assign this Agreement to an affiliate of the Company with the financial resources to fulfill the Company's obligations hereunder. (b) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or to exclusion, attachment, levy or similar process or to assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. 10. Restrictive Covenants. (a) Competition. During the Employment Term and, in the event the Employee's employment is terminated, during the period (the "Applicable Continuation Period") following such termination and continuing until (i) the last payment is made to the Employee pursuant to Section 8(a) or (b) hereof, as the case may be, or (ii) in the case of a termination of the Employee's employment pursuant to Section 7(a)(iii) or (vi) hereof, the first anniversary of the date of such termination, the Employee will not directly or indirectly (as a director, officer, executive employee, manager, consultant, independent contractor, advisor or otherwise) engage in competition with, or own any interest in, perform any services for, participate in or be connected with any business or organization which engages in competition with any of the Companies within the meaning of Section 10(d), provided, however, that the provisions of this Section 10(a) shall not be deemed to 8 9 prohibit the Employee's ownership of not more than two percent (2%) of the total shares of all classes of stock outstanding of any publicly held company, or ownership, whether through direct or indirect stock holdings or otherwise, of not more than one percent (1%) of any other business. (b) Non-Solicitation. During the Employment Term and during the Applicable Continuation Period, the Employee will not directly or indirectly induce or attempt to induce any employee of any of the Companies to leave the employ of the Company or such subsidiary or affiliate, or in any way interfere with the relationship between any of the Companies and any employee thereof. (c) Non-Interference. During the Employment Term and during the Applicable Continuation Period, the Employee will not directly or indirectly hire, engage, send any work to, place orders with, or in any manner be associated with any supplier, contractor, subcontractor or other business relation of any of the Companies if such action by him would have an adverse effect on the business, assets or financial condition of any of the Companies, or materially interfere with the relationship between any such person or entity and any of the Companies. (d) Certain Definitions. (i) For purposes of this Section 10, a person or entity (including, without limitation, the Employee) shall be deemed to be a competitor of one or more of the Companies, or a person or entity (including, without limitation, the Employee) shall be deemed to be engaging in competition with one or more of the Companies, if such person or entity conducts, or, to the knowledge of the Employee, plans to conduct, the Specified Business (as hereinafter defined) as a significant portion of its business in any of the markets served by the Companies or, in the case of a person or entity pursuing a business strategy of providing telecommunications infrastructure services anywhere in the continental United States. (ii) For purposes of this Agreement, "Specified Business" means (A) providing outsourced telecommunications infrastructure services to local or long distance telecommunications providers or engaging in any business conducted by the Company at the time of termination of the Employee's employment with the Company or (B) conducting, operating, carrying out or engaging in the business of managing any entity described in clause (A). (e) Certain Representations of the Employee. In connection with the foregoing provisions of this Section 10, the Employee represents that his experience, capabilities and circumstances are such that such provisions will not prevent him from earning a livelihood. The Employee further agrees that the limitations set forth in this Section 10 (including, without limitation, time and territorial limitations) are reasonable and properly required for the adequate protection of the current and future businesses of the Companies. It is understood and agreed that the covenants made by the Employee in this Section 10 (and in Section 6 hereof) shall survive the expiration or termination of this Agreement. (f) Injunctive Relief. The Employee acknowledges and agrees that a remedy at law for any breach or threatened breach of the provisions of Section 10 hereof would be inadequate and, therefore, agrees that the Company and any of its subsidiaries or affiliates shall be entitled to seek injunctive relief in addition to any other available 9 10 rights and remedies in cases of any such breach or threatened breach; provided, however, that nothing contained herein shall be construed as prohibiting the Company or any of its affiliates from pursuing any other rights and remedies available for any such breach or threatened breach. 11. Representations and Warranties. The Employee represents and warrants that he is not subject to or a party to any agreement, contract, covenants, order or other restriction which in any way prohibits, restricts or impairs the Employee's ability to enter into this Agreement and carry out his duties and obligations hereunder. Each party hereto represents and warrants to the other that (i) each has the full legal right and power and all authority and approvals required to enter into, execute and deliver this Agreement and to perform fully all of his or its obligations hereunder; and (ii) this Agreement has been duly executed and delivered and constitutes a valid and binding obligation of each party, enforceable in accordance with its terms. 12. Binding Effect. Without limiting or diminishing the effect of Section 9 hereof, this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, successors, legal representatives and assigns. 13. Notices. All notices which are required or may be given pursuant to the terms of this Agreement shall be in writing and shall be sufficient in all respects if given in writing and (i) delivered personally, (ii) mailed by certified or registered mail, return receipt requested and postage prepaid, (iii) sent via a nationally recognized overnight courier or (iv) sent via facsimile confirmed in writing to the recipient, if to the Company at the Company's principal place of business, and if to the Employee, at his home address most recently filed with the Company, or to such other address or addresses as either party shall have designated in writing to the other party hereto, provided, however, that any notice sent by certified or registered mail shall be deemed delivered on the date of delivery as evidenced by the return receipt. 14. Law Governing. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 15. Severability. The Employee agrees that in the event that any court of competent jurisdiction shall finally hold that any provision of Section 6 or 10 hereof is void or constitutes an unreasonable restriction against the Employee, the provisions of such Section 6 or 10 shall not be rendered void but shall apply with respect to such extent as such court may judicially determine constitutes a reasonable restriction under the circumstances. If any part of this Agreement other than Section 6 or 10 is held by a court of competent jurisdiction to be invalid, illegible or incapable of being enforced in whole or in part by reason of any rule of law or public policy, such part shall be deemed to be severed from the remainder of this Agreement for the purpose only of the particular legal proceedings in question and all other covenants and provisions of this Agreement shall in every other respect continue in full force and effect and no covenant or provision shall be deemed dependent upon any other covenant or provision. 16. Waiver. Failure to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a waiver or relinquishment of such right or power at any other time or times. 17. Entire Agreement; Modifications. This Agreement constitutes the entire and final expression of the agreement of the parties with respect to the subject matter hereof and supersedes all prior agreements, oral and 10 11 written, between the parties hereto with respect to the subject matter hereof. This Agreement may be modified or amended only by an instrument in writing signed by both parties hereto. 18. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 11 12 IN WITNESS WHEREOF, the Company and the Employee have duly executed and delivered this Agreement as of the day and year first above written. LEXENT INC. By: /s/ Kevin O'Kane ----------------------------------- - ------------- Name: Kevin O'Kane Title: C.O.O /s/ Rif K. Haffar -------------------------------------- - ------------- Rif K. Haffar 12 13 SCHEDULE 1 The Separation and General Release Agreement between the Employee and WinStar Wireless, Inc. ("WinStar") requires that the Employee for the period through and including October 31, 2000 make himself reasonably available upon WinStar's request to assist WinStar and its affiliates' management in network or other operational matters and to respond to information and other similar requests by WinStar. If such activities require travel to out-of-state locations (the state being Virginia), such assistance shall be arranged at times mutually convenient to both the Employee and WinStar. If the Employee obtains full-time employment prior to October 31, 2000, the Employee must continue to make himself available, upon WinStar's reasonable request, to respond to information and other similar requests by WinStar through October 31, 2000. 13 EX-10.11 16 EMPLOYMENT AGREEMENT 1 Ex 10.11 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of December 20, 1999, by and between LEXENT INC., a Delaware corporation (the "Company"), and VICTOR P. DEJOY, SR. (the "Employee"). W I T N E S S E T H: WHEREAS the Company desires to induce the Employee to enter into employment with the Company for the period provided in this Agreement, and the Employee is willing to accept such employment with the Company on a full-time basis, all in accordance with the terms and conditions set forth below; NOW, THEREFORE, for and in consideration of the premises hereof and the mutual covenants contained herein, the parties hereto hereby covenant and agree as follows: 1. Employment. (a) The Company hereby agrees to employ the Employee, and the Employee hereby agrees to accept such employment with the Company, commencing on December 20, 1999 (the "Commencement Date") and continuing for the period set forth in Section 2 hereof, all upon the terms and conditions hereinafter set forth. (b) The Employee affirms and represents that as of the commencement of his employment by the Company on the Commencement Date, he will be under no obligation to any former employer or other party which is in any way inconsistent with, or which imposes any restriction upon, the Employee's acceptance of employment hereunder with the Company, the employment of the Employee by the Company, or the Employee's undertakings under this Agreement. 2. Term of Employment. Unless earlier terminated as provided in this Agreement, the term of the Employee's employment under this Agreement shall be for a period beginning on the Commencement Date and ending on December 31, 2003. The period from the Commencement Date until December 31, 2003, or, in the event that the Employee's employment hereunder is earlier terminated as provided herein, such shorter period, is hereinafter called the "Employment Term"(the "Employment Term"). 3. Duties. The Employee shall be employed as Executive Vice President of the Company and President of the Company's wholly-owned subsidiary, National Network Technologies, LLC, a Delaware limited liability company ("NNT"), shall faithfully perform and discharge 2 such duties as inhere in the positions of Executive Vice President of the Company and President of NNT as may be specified in the By-laws of the Company or the Limited Liability Company Agreement of NNT with respect to such positions, and shall also perform and discharge such other duties and responsibilities consistent with such position as the Board of Directors of the Company (the "Board of Directors") shall from time to time determine. The Employee shall report to the Chief Executive Officer of the Company. The Employee shall perform his duties principally at offices of the Company in New York City, New York, with such travel to such other locations from time to time as the Chief Executive Officer may reasonably prescribe. Except as may otherwise be approved in advance by the Board of Directors, and except during vacation periods and reasonable periods of absence due to sickness, personal injury or other disability, the Employee shall devote his full business time throughout the Employment Term to the services required of him hereunder. The Employee shall render his business services exclusively to the Company and its subsidiaries during the Employment Term and shall use his best efforts, judgment and energy to improve and advance the business and interests of the Company and its subsidiaries in a manner consistent with the duties of his positions. 4. Compensation. (a) Salary. As compensation for the performance by the Employee of the services to be performed by the Employee hereunder during the Employment Term, the Company shall pay the Employee a base salary at the annual rate of Two Hundred and Forty Thousand Dollars ($240,000) (said amount, together with any increases thereto as may be determined from time to time by the Board of Directors in its sole discretion, being hereinafter referred to as "Salary"). Any Salary payable hereunder shall be paid in regular intervals in accordance with the Company's payroll practices from time to time in effect. (b) Bonus. The Employee shall be eligible to receive bonus compensation from the Company in respect of each fiscal year (or portion thereof) occurring during the Employment Term in an amount targeted at 40% of his Salary (pro rated for any portion of a fiscal year occurring during the Employment Term) if the Company achieves the target performance objectives established by the Compensation Committee of the Board of Directors (the "Compensation Committee") with respect to such fiscal year. The Employee shall also be eligible to receive additional bonus compensation from the Company in respect of each fiscal year (or portion thereof) occurring during the Employment Term for exceptional performance as may be determined by the Compensation Committee in its sole discretion. In any event, the Employee shall be entitled to receive an aggregate bonus (in addition to the Initial Payment discussed in (c) below) of not less than $115,000 in respect of the fiscal year ending December 31, 2000 (pro rated as aforesaid if the Employment Term ends prior to December 31, 2000). (c) Initial Payment. In connection with the execution and delivery by the Employee of this Agreement, the Company shall pay the Employee a one-time bonus in 2 3 the amount of $50,000 (the "Initial Payment") in respect of the fiscal year ending December 31, 2000 on January 15, 2000. The Employee shall not receive any bonus in respect of the fiscal year ending December 31, 1999. 5. Other Benefits; Options. (a) General. During the Employment Term, the Employee shall: (i) be eligible to participate in employee fringe benefits and pension and/or profit sharing plans that may be provided by the Company for its senior executive employees in accordance with the provisions of such plans, as the same may be in effect from time to time; (ii) be eligible to participate in any medical and health plans or other employee welfare benefit plans that may be provided by the Company for its senior executive employees in accordance with the provisions of any such plans, as the same may be in effect from time to time; (iii) be entitled to the number of paid vacation days in each calendar year determined by the Company from time to time for its senior executive officers, provided that such number of paid vacation days in each calendar year shall not be less than fifteen (15) work days (three calendar weeks); the Employee shall also be entitled to all paid holidays given by the Company to its senior executive officers; (iv) be entitled to sick leave, sick pay and disability benefits in accordance with any Company policy that may be applicable to senior executive employees from time to time; and (v) be entitled to reimbursement for all reasonable and necessary out-of-pocket business expenses incurred by the Employee in the performance of his duties hereunder in accordance with the Company's normal policies from time to time in effect. (b) Grant of Initial Options. In connection with the execution and delivery of this Agreement by the Employee, the Company is granting to the Employee options ("Initial Options") to purchase 350,000 shares of Company Common Stock, $.001 par value ("Common Stock"), at a purchase price of $10.00 per share, of which options to purchase 100,000 shares of Common Stock shall vest immediately and options to purchase the remaining 250,000 shares of Common Stock will vest in thirty-six equal increments over the thirty-six month period beginning on the first anniversary of the Commencement Date, all as provided in the Stock Option Agreements of even date herewith between the Company and the Employee. 3 4 (c) Grant of Subsequent Options. In connection with his continued employment by the Company, on the first anniversary of the Commencement Date, and on each of the subsequent anniversaries thereof during the Employment Term, the Company agrees to grant the Employee options ("Subsequent Options") to purchase at least 15,000 shares of Common Stock at a purchase price equal to the Fair Market Value (as defined in (d) below) of the Common Stock on the date of grant, which options shall vest in twenty-five percent increments over a four-year period with the first twenty-five percent to vest on the first anniversary of the date of grant. Each grant of these Subsequent Options shall be pursuant to specific terms set forth in a stock option agreement between the Company and the Employee. (d) Fair Market Value. "Fair Market Value" means as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in Common Stock) on the last market trading day prior to the day of grant of the particular Subsequent Options and as reported in the Wall Street Journal or such other source as the Compensation Committee deems reliable; (ii) If the Common Stock is quoted on the NASDAQ System (but not on the National Market System thereof) or is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a share of Common Stock shall be the average between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of grant of the particular Subsequent Options and as reported in the Wall Street Journal or such other source as the Compensation Committee deems reliable; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Compensation Committee. 6. Confidential Information. The Employee hereby covenants, agrees and acknowledges as follows: (a) The Employee has and will have access to and will participate in the development of or be acquainted with confidential or proprietary information and trade secrets related to the business of the Company and any present or future subsidiaries or affiliates of the Company (collectively with the Company, the "Companies"), including but 4 5 not limited to (i) customer lists; related records and compilations of information; the identity, lists or descriptions of any new customers, referral sources or organizations; financial statements; cost reports or other financial information; contract proposals or bidding information; business plans; training and operations methods and manuals; personnel records; software programs; reports and correspondence; and management systems, policies or procedures, including related forms and manuals; (ii) information pertaining to future developments such as future marketing or acquisition plans or ideas, and potential new business locations and (iii) all other tangible and intangible property, which are used in the business and operations of the Companies but not made public. The information and trade secrets relating to the business of the Companies described hereinabove in this paragraph (a) are hereinafter referred to collectively as the "Confidential Information", provided that the term Confidential Information shall not include any information (A) that is or becomes generally publicly available (other than as a result of violation of this Agreement by the Employee), (B) that the Employee receives on a nonconfidential basis from a source (other than the Companies or their representatives) that is not known by him to be bound by an obligation of secrecy or confidentiality to any of the Companies or (C) that was in the possession of the Employee prior to disclosure by the Companies. (b) The Employee shall not disclose, use or make known for his or another's benefit any Confidential Information or use such Confidential Information in any way except as is in the best interests of the Companies in the performance of the Employee's duties under this Agreement. The Employee may disclose Confidential Information when required by a third party and applicable law or judicial process, but only after providing immediate notice to the Company of any third party's request for such information, which notice shall include the Employee's intent to disclose any Confidential Information with respect to such request. (c) The Employee acknowledges and agrees that a remedy at law for any breach or threatened breach of the provisions of this Section 6 would be inadequate and, therefore, agrees that the Companies shall be entitled to seek injunctive relief in addition to any other available rights and remedies in case of any such breach or threatened breach by the Employee; provided, however, that nothing contained herein shall be construed as prohibiting the Companies from pursuing any other rights and remedies available for any such breach or threatened breach. (d) The Employee agrees that upon termination of his employment with the Company for any reason, the Employee shall forthwith return to the Company all Confidential Information in whatever form maintained (including, without limitation, computer discs and other electronic media). 5 6 (e) The obligations of the Employee under this Section 6 shall, except as otherwise provided herein, survive the termination of the Employment Term and the expiration or termination of this Agreement. (f) Without limiting the generality of Section 11 hereof, the Employee hereby expressly agrees that the foregoing provisions of this Section 6 shall be binding upon the Employee's heirs, successors and legal representatives. 7. Termination of Employment. (a) The Employee's employment hereunder shall be terminated upon the occurrence of any of the following: (i) death of the Employee; (ii) the Employee's inability to perform his duties on account of disability or incapacity for a period of one hundred eighty (180) or more days, whether or not consecutive, within any period of twelve (12) consecutive months; (iii) the Company giving written notice, at any time, to the Employee that the Employee's employment is being terminated for "Cause" (as defined in (b) below); (iv) the Company giving written notice, at any time, to the Employee that the Employee's employment is being terminated or is not being renewed, other than pursuant to clause (i), (ii) or (iii) above ("Without Cause"); (v) the Employee terminates his employment hereunder because the Company, solely due to an Executive Management Stockholder Block (as defined in (c) below), fails to consummate an initial public offering of its Common Stock within one (1) year of the Commencement Date; or (vi) the Employee terminates his employment hereunder for any reason whatsoever (whether by reason of retirement, resignation or otherwise), other than in accordance with (v) above ("Without Good Reason"). (b) Cause. The following actions, failures and events by or affecting the Employee shall constitute "Cause" for termination within the meaning of clause (iii) of Section 7 (a) above: (i) an indictment for or conviction of the Employee of, or the entering of a plea of nolo contendere by the Employee with respect to, having committed a felony; 6 7 (ii) abuse of controlled substances or alcohol or acts of dishonesty or moral turpitude by the Employee that are detrimental to one or more of the Companies; (iii) acts or omissions by the Employee that the Employee knew were likely to damage the business of one or more of the Companies; (iv) negligence by the Employee in the performance of, or disregard by the Employee of, his material obligations under this Agreement or otherwise relating to his employment, which negligence or disregard continue unremedied for a period of fifteen (15) days after written notice thereof to the Employee; or (v) failure by the Employee to obey the reasonable and lawful orders and policies of the Board of Directors that are consistent with the provisions of this Agreement. (c) Executive Management Stockholder Block. For purposes of this Agreement, an "Executive Management Stockholder Block" means the decision by the Company's Executive Management Stockholders (as that term is defined in the Stockholders Agreement, dated as of July 23, 1998, among the Company and the stockholders party thereto, as the same may be amended or modified from time to time) to not consent to an initial public offering by the Company of its Common Stock; provided, however, that an Executive Management Stockholder Block shall not be deemed to have occurred if a decision or action by the Board of Directors or the holders of the Company's Series A Convertible Preferred Stock, $.001 par value, prevents the consummation of such an initial public offering. 8. Payments Upon Termination. (a) Termination Without Cause. In the event that the Employee's employment is terminated by the Company Without Cause during the period between the Commencement Date and the date six months following the Commencement Date (the "Initial Period"), then the Company shall pay to the Employee, as severance pay or liquidated damages or both, monthly payments at the rate per annum of his Salary at the time of such termination for a period of: (i) eighteen (18) months after such termination if such termination occurs in the first month of the Initial Period; (ii) seventeen (17) months after such termination if such termination occurs in the second month of the Initial Period; 7 8 (iii) sixteen (16) months after such termination if such termination occurs in the third month of the Initial Period; (iv) fifteen (15) months after such termination if such termination occurs in the fourth month of the Initial Period; (v) fourteen (14) months after such termination if such termination occurs in the fifth month of the Initial Period; (vi) thirteen (13) months after such termination if such termination occurs in the sixth month of the Initial Period; and (vii) twelve (12) months after such termination if such termination occurs after the end of the Initial Period. (b) Termination by the Employee due to an Executive Management Stockholder Block. In the event that the Employee's employment is terminated by the Employee pursuant to clause (v) of Section 7(a) above during the ninety (90) day period following the date of such Executive Management Stockholder Block, then: (i) the Company shall pay to the Employee, as severance pay or liquidated damages or both, monthly payments at the rate per annum of his Salary at the time of such termination for a period of twenty-four (24) months after such termination; and (ii) the Company shall, upon the request therefor by the Employee as described below, purchase up to 100,000 shares of Common Stock acquired by the Employee pursuant to the exercise of Initial Options upon the following terms and conditions (the "Employee's Put"): (1) The Employee's Put may be exercised by Employee at any time during the thirty (30) day period following the Employee's termination by giving written notice thereof ("Put Notice") to the Company specifying the amount of shares (up to the maximum referred to above) of Common Stock the Employee wishes to sell to the Company (the "Put Securities"). The date of exercise of the Employee's Put shall be the date of the Put Notice. (2) Within 30 days following receipt of the Put Notice, the Company shall deliver to the Employee a notice (the "Company Notice") stating the purchase price per share of the Put Securities determined in accordance with clause (4) hereof and a date and place for closing of the purchase (the 8 9 "Put Closing"), which date shall be within ninety (90) days after the date the Company receives the Put Notice or, in the event an appraiser is hired pursuant to clause (4) hereof, within ninety (90) days after receipt of such appraiser's determination of the purchase price of the Put Securities. (3) At the Put Closing, the Company shall pay to the Employee the purchase price of the Put Securities by check or wire transfer. At such Put Closing, the Employee shall execute and deliver to the Company such stock powers and such other instruments of transfer as counsel for the Company deems necessary to validly and effectively transfer title to the Put Securities to the Company, free and clear of any lien, claim or encumbrance. (4) The purchase price per share of the Put Securities shall be the Fair Market Value (as defined in Section 5(d) above) of the Common Stock on the date of exercise of the Employee's Put. In the event that such Fair Market Value was determined by the Compensation Committee as described in Section 5(d)(iii) above, the Employee shall have the right to disagree with such determination and elect, within ten (10) days of receipt of the Company Notice, to have the Company select a recognized business appraiser to calculate the purchase price of the Put Securities which shall be the fair market value thereof. The determination of the purchase price by such appraiser will be binding on both parties. All costs and expenses of the appraisal, including, without limitation, all fees of the appraiser, shall be borne by the Company. (c) Payments Limited. Notwithstanding anything to the contrary expressed or implied herein, except as required by applicable law and except as set forth in Sections 8(a) and (b) above, neither the Company nor any of its affiliates shall be obligated to make any payments to the Employee or on his behalf of whatever kind or nature by reason of the Employee's cessation of employment (including, without limitation, by reason of termination of the Employee's employment by the Company for Cause, Without Cause or otherwise), other than (i) such amounts, if any, of his Salary as shall have accrued and remained unpaid as of the date of said cessation and (ii) such other amounts, if any, which may be then otherwise payable to the Employee pursuant to the terms of the Company's benefits plans or pursuant to clause (v) of Section 5(a) above. (d) Interest. No interest shall accrue on or be paid with respect to any portion of any payments under this Section 8. 9 10 9. Non-Assignability. (a) Neither this Agreement nor any right or interest hereunder shall be assignable by the Employee or his beneficiaries or legal representatives without the Company's prior written consent; provided, however, that nothing in this Section 9(a) shall preclude the Employee from designating a beneficiary to receive any benefit payable hereunder upon his death or incapacity. This Agreement may not be assigned by the Company except with the Employee's prior written consent, provided, however, that the Company may assign this Agreement to an affiliate of the Company with the financial resources to fulfill the Company's obligations hereunder. (b) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or to exclusion, attachment, levy or similar process or to assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. 10. Restrictive Covenants. (a) Competition. During the Employment Term and, in the event the Employee's employment is terminated, during the period (the "Applicable Continuation Period") following such termination and continuing until (i) the last payment is made to the Employee pursuant to Section 8(a) or (b) hereof, as the case may be, or (ii) in the case of a termination of the Employee's employment pursuant to Section 7(a)(iii) or (vi) hereof, the first anniversary of the date of such termination, the Employee will not directly or indirectly (as a director, officer, executive employee, manager, consultant, independent contractor, advisor or otherwise) engage in competition with, or own any interest in, perform any services for, participate in or be connected with any business or organization which engages in competition with any of the Companies within the meaning of Section 10(d), provided, however, that the provisions of this Section 10(a) shall not be deemed to prohibit the Employee's ownership of not more than two percent (2%) of the total shares of all classes of stock outstanding of any publicly held company, or ownership, whether through direct or indirect stock holdings or otherwise, of not more than one percent (1%) of any other business. (b) Non-Solicitation. During the Employment Term and during the Applicable Continuation Period, the Employee will not directly or indirectly induce or attempt to induce any employee of any of the Companies to leave the employ of the Company or such subsidiary or affiliate, or in any way interfere with the relationship between any of the Companies and any employee thereof. 10 11 (c) Non-Interference. During the Employment Term and during the Applicable Continuation Period, the Employee will not directly or indirectly hire, engage, send any work to, place orders with, or in any manner be associated with any supplier, contractor, subcontractor or other business relation of any of the Companies if such action by him would have an adverse effect on the business, assets or financial condition of any of the Companies, or materially interfere with the relationship between any such person or entity and any of the Companies. (d) Certain Definitions. (i) For purposes of this Section 10, a person or entity (including, without limitation, the Employee) shall be deemed to be a competitor of one or more of the Companies, or a person or entity (including, without limitation, the Employee) shall be deemed to be engaging in competition with one or more of the Companies, if such person or entity conducts, or, to the knowledge of the Employee, plans to conduct, the Specified Business (as hereinafter defined) as a significant portion of its business in any of the markets served by the Companies or, in the case of a person or entity pursuing a business strategy of providing telecommunications infrastructure services anywhere in the continental United States. (ii) For purposes of this Agreement, "Specified Business" means (A) providing outsourced telecommunications infrastructure services to local or long distance telecommunications providers or engaging in any business conducted by the Company at the time of termination of the Employee's employment with the Company or (B) conducting, operating, carrying out or engaging in the business of managing any entity described in clause (A). (e) Certain Representations of the Employee. In connection with the foregoing provisions of this Section 10, the Employee represents that his experience, capabilities and circumstances are such that such provisions will not prevent him from earning a livelihood. The Employee further agrees that the limitations set forth in this Section 10 (including, without limitation, time and territorial limitations) are reasonable and properly required for the adequate protection of the current and future businesses of the Companies. It is understood and agreed that the covenants made by the Employee in this Section 10 (and in Section 6 hereof) shall survive the expiration or termination of this Agreement. (f) Injunctive Relief. The Employee acknowledges and agrees that a remedy at law for any breach or threatened breach of the provisions of Section 10 hereof would be inadequate and, therefore, agrees that the Company and any of its subsidiaries or affiliates shall be entitled to seek injunctive relief in addition to any other available rights and remedies in cases of any such breach or threatened breach; provided, however, that nothing contained herein shall be construed as prohibiting the Company or any of its 11 12 affiliates from pursuing any other rights and remedies available for any such breach or threatened breach. 11. Binding Effect. Without limiting or diminishing the effect of Section 9 hereof, this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, successors, legal representatives and assigns. 12. Notices. All notices which are required or may be given pursuant to the terms of this Agreement shall be in writing and shall be sufficient in all respects if given in writing and (i) delivered personally, (ii) mailed by certified or registered mail, return receipt requested and postage prepaid, (iii) sent via a nationally recognized overnight courier or (iv) sent via facsimile confirmed in writing to the recipient, if to the Company at the Company's principal place of business, and if to the Employee, at his home address most recently filed with the Company, or to such other address or addresses as either party shall have designated in writing to the other party hereto, provided, however, that any notice sent by certified or registered mail shall be deemed delivered on the date of delivery as evidenced by the return receipt. 13. Law Governing. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 14. Severability. The Employee agrees that in the event that any court of competent jurisdiction shall finally hold that any provision of Section 6 or 10 hereof is void or constitutes an unreasonable restriction against the Employee, the provisions of such Section 6 or 10 shall not be rendered void but shall apply with respect to such extent as such court may judicially determine constitutes a reasonable restriction under the circumstances. If any part of this Agreement other than Section 6 or 10 is held by a court of competent jurisdiction to be invalid, illegible or incapable of being enforced in whole or in part by reason of any rule of law or public policy, such part shall be deemed to be severed from the remainder of this Agreement for the purpose only of the particular legal proceedings in question and all other covenants and provisions of this Agreement shall in every other respect continue in full force and effect and no covenant or provision shall be deemed dependent upon any other covenant or provision. 15. Waiver. Failure to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a waiver or relinquishment of such right or power at any other time or times. 16. Entire Agreement; Modifications. This Agreement constitutes the entire and final expression of the agreement of the parties with respect to the subject matter hereof and supersedes all prior agreements, oral and written, between the parties hereto with respect to the subject matter hereof. This Agreement may be modified or amended only by an instrument in writing signed by both parties hereto. 12 13 17. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 13 14 IN WITNESS WHEREOF, the Company and the Employee have duly executed and delivered this Agreement as of the day and year first above written. LEXENT INC. By: /s/ Kevin O'Kane -------------------------------------- Name: Title: /s/ Victor P. DeJoy, Sr. -------------------------------------- Victor P. DeJoy, Sr. 14 EX-10.12 17 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.12 EMPLOYMENT AGREEMENT AGREEMENT by and between LEXENT INC., a Delaware corporation (the "Company"), and ALF T. HANSEN (the "Executive"), dated as of the 9th day of January, 2000. 1. Employment Period. (a) The Company hereby agrees to employ the Executive, and the Executive hereby agrees to remain in the employ of the Company, pursuant to the terms and conditions set forth in this Agreement, for the period commencing February 1, 2000 (the "Commencement Date") and ending on the third anniversary of the Commencement Date, unless the Executive's employment terminates earlier pursuant to Section 4 of this Agreement (the "Employment Period"). (b) The Contract shall be automatically extended for successive one year periods unless either party gives one hundred and twenty (120) days advance written notice prior to the end of the original Employment Period or any extension thereof. 2. Position and Duties. (a) During the Employment Period, the Executive shall be employed as the President and Chief Executive Officer ("CEO") of the Company. In addition, the Executive shall be nominated to the Board of Directors of the Company. The Executive shall have such powers and perform such duties as are customary for a CEO at the Company and from the Commencement Date shall report solely to the Chairman and the Board of Directors. Executive's job description is attached hereto as Exhibit A together with a list of employees who will report to Executive. 2 (b) During the Employment Period, and excluding any periods of vacation, holiday, personal leave and sick leave to which the Executive is entitled, the Executive shall devote the Executive's full business time, attention and ability to the business and affairs of the Company and shall use the Executive"s best efforts to carry out the Executive"s responsibilities faithfully and efficiently in a professional manner. It shall not be considered a violation of the foregoing for the Executive to (a) serve on corporate or civic boards approved in writing by the Company (which approval shall not be unreasonably withheld) or on charitable boards or committees (b) deliver lectures or fulfill speaking engagements and (c) manage personal investments, so long as the activities referred to in clauses (a) through (c) above do not substantially interfere with the performance of the Executive's responsibilities as CEO of the Company in accordance with this Agreement. (c) The Executive's primary office shall be located in New York; provided, that the Executive's primary office may be relocated in connection with the relocation of the Company's headquarters within Connecticut, New Jersey, or New York, subject to reimbursement for all of Executive's reasonable expenses in connection with any move he is required to make. In addition, the Executive shall be reimbursed for all reasonable moving expenses, approved in writing, in connection with any relocation from New Jersey to New York. Unless and until Executive relocates the Company shall provide at its expense suitable living accommodations in Manhattan and shall reimburse Executive for meals and related expenses. 2 3 3. Compensation. (a) Base Salary. During the first year of the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary") of $300,000, payable pursuant to the Company's normal payroll practices. Effective as of the first anniversary date of Employment and each succeeding anniversary date, the Annual Base Salary then in effect shall be reviewed by the Compensation Committee of the Board of Directors of the Company ("Compensation Committee") and increased (but not decreased) in its sole discretion based upon the performance of the Executive and the Company and the base salary (and raises) paid by comparable companies to the CEO (the "peer executives"). In any event Executive"s base salary shall be increased as of any anniversary date by a minimum of 5% per annum. (b) Annual Bonus. For each fiscal year or part thereof of the Company during the Employment Period, if the target performance goals communicated in writing by the Chairman to the Executive for the Company's fiscal year are met, the Executive's annual target bonus shall be equal to 100% of the Annual Base Salary paid during such fiscal year (the "Target Bonus") and shall be reduced and increased in accordance with an appropriate payout curve (established annually by the Compensation Committee after consultation with the Executive) if such target performance goals are not met or are exceeded. After the first full fiscal year of the Company during the Employment Period, the Executive's Target Bonus shall be reviewed and set by the Compensation Committee in light of performance goals determined in good faith by the Compensation Committee, communicated in writing by the Committee to the Executive and in accordance with the principals set forth in Section 3 (a) above for salary increases. 3 4 The Executive shall receive on the Commencement Date a sign on bonus of $300,000. This bonus shall be returned to the Company on a ratable basis if the Executive's employment is terminated by him without Good Reason, or by the Company for Cause as those latter terms are hereinafter defined, within the first twelve (12) months of the Employment Term. (c) Benefit Plans. The Executive shall be treated in the same manner as, and shall be entitled to such benefits and other perquisites and terms and conditions of employment no less favorable than those provided to the peer senior executives as determined by the Compensation Committee. (d) Long-Term Incentives. (i) The Executive shall receive an initial grant of a Company stock option to purchase 830,000 shares of Company common stock, subject to Rule 144 of the Securities and Exchange Act, as amended (the "Act") on the Commencement Date ("Initial Option Grant"). The exercise price shall be equal to $10.00 per share. Such Initial Option Grant shall vest as follows: A. 315,416 shares of such grant shall vest immediately, B. The remaining shares of such grant shall vest 21,441 shares per month for 24 months commencing on the month coterminous with the first anniversary of the Commencement Date. (ii) On the first and second anniversaries of the Commencement Date, the Company shall make additional option grants commensurate with that of the other peer senior executives as determined by the Compensation Committee ("Additional Option Grants"), provided, however, that each such grant shall be for not less than 200,000 shares if the Fair 4 5 Market Value of the Company's common stock is then less than $30 per share (adjusted equitably for stock splits, combinations and the like), shall be restricted by Rule 144 of the Act, and shall be at a purchase price equal to the then Fair Market Value of the Company's common stock on the date of grant. Such Additional Option Grants shall vest in the same time manner as provided above for the Initial Option Grant unless the Compensation Committee shall provide a shorter vesting period. Each grant of stock options shall be designated as incentive stock options to the maximum extent permitted by the Internal Revenue Code of 1986, as amended, and the Company's 1998 Stock Option Plan, as amended, and the remainder shall be designated as non-qualified stock option. For purposes of this Agreement, "Fair Market Value" means as of any date the value of the Common Stock determined as follows: A. If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, the Fair Market Value of a share of Common Stock shall be the average of the opening and closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in Common Stock) on the last market trading day prior to the day of grant of the particular Additional Option Grants and as reported in the Wall Street Journal or such other source as the Compensation Committee deems reliable; 5 6 B. If the Common Stock is quoted on the NASDAQ System (but not on the National Market System thereof) or is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a share of Common Stock shall be the average between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of grant of the particular Additional Option Grants and as reported in the Wall Street Journal or such other source as the Compensation Committee deems reliable; or C. In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Compensation Committee, based upon the advice of a neutral appraiser if the Executive so requests. (e) Expenses. During the Employment Period, the Executive shall be entitled to receive reimbursement for all reasonable business expenses incurred by the Executive in carrying out the Executive's duties under this Agreement in accordance with the policies of the Company, provided that the Executive complies with the policies of the Company for submission of expense reports, receipts, or similar documentation of such expenses as promulgated from time to time by the Company. (f) Vacation. During the Employment Period, the Executive shall be entitled to paid vacation equal to that of peer senior executives as set by the Compensation Committee from time to time but in no event less than five (5) weeks. 4. Termination of Employment. (a) Death or Disability. The Executive"s employment shall terminate automatically upon the Executive"s death during the Employment Period. The Executive"s 6 7 employment under this Agreement shall terminate for "Disability" if, during the Employment Term Executive, in the reasonable and good faith judgment of the Compensation Committee, has failed to perform all his duties under this Agreement on account of illness or physical or mental incapacity, and such illness or incapacity continues for a period of more than six (6) consecutive months. (b) By the Company. The Company may terminate the Executive"s employment during the Employment Period for Cause or without Cause. For purposes of this Agreement, "Cause" shall mean the Executive's (i) conviction of or plea of nolo contendere to a felony; (ii) willful misconduct that is materially injurious to the Company; (iii) failure to undertake communicated directives on material business matters despite written instruction to do so by the Board of Directors or the Chairman of the Company; or (iv) any willful material breach of this Agreement which has resulted in material injury to the Company. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause without (a) no less than ten (10) days prior written notice to the Executive setting forth the reasons for the Company"s intention to terminate for Cause, (b) an opportunity for the Executive to be heard (together with comments of counsel) before the Board of Directors of the Company and (c) delivery to the Executive of a notice of termination from the Board of Directors of the Company stating its opinion that the Executive was guilty of the conduct set forth above and specifying the particulars thereof. (c) Good Reason. The Executive may terminate employment for Good Reason. "Good Reason" means, without the Executive's written consent: (i) a material adverse change in the Executive's title or the assignment of duties to the Executive materially and 7 8 adversely inconsistent with the Executive's position; (ii) any material failure by the Company to comply with Section 3 or other material provisions of this Agreement; or (iii) any requirement by the Company that the Executive's primary office location be other than in the states of New York, New Jersey, or Connecticut. In the event the Executive determines that Good Reason exists, the Executive must notify the Company of such determination in writing, within sixty (60) days following the Executive's actual knowledge of the event which the Executive determines constitutes Good Reason, or such event shall not constitute Good Reason under this Agreement. Following receipt of such notice, if the Company remedies such event within twenty (20) days following notice, the Executive may not terminate employment for Good Reason as a result of such event. (d) Executive Management Stockholder Block. The Executive may terminate employment because the Company, solely due to an Executive Management Stockholder Block, fails to consummate an initial public offering of its common stock within one (1) year of the Commencement Date. For purposes of this Agreement, an "Executive Management Stockholder Block" means the decision by the Company"s Executive Management Stockholders (as that term is defined in the Stockholders Agreement, dated as of July 23, 1998, among the Company and the stockholders party thereto, as the same may be amended or modified from time to time) to not consent to an initial public offering by the Company of its Common Stock; provided, however, that an Executive Management Stockholder Block shall not be deemed to have occurred if a decision or action by the Board of Directors or the holders of the Company"s Series A 8 9 Convertible Preferred Stock, $.001 par value, prevents the consummation of such an initial public offering. (e) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company or by the Executive (other than for death or Disability), the tenth (10th) day after the mailing of the Notice of Termination or any later date specified therein, or (ii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the date of the determination of Disability as set forth heretofore, as the case may be. 5. Obligations of the Company upon Termination. (a) Other Than for Cause, Death or Disability, Good Reason or Executive Management Stockholder Block. If, during the Employment Period, the Company terminates the Executive"s employment, other than for Cause, death or Disability, or if the Executive terminates employment for Good Reason: (i) the Company shall pay the Executive, in one lump cash sum the sum of 100% of the Executive"s Annual Base Salary; ii) within thirty (30) days following the Date of Termination, the Company shall pay the Executive his Annual Base Salary through the Date of Termination, or any earned bonus to the extent not yet paid; iii) at the time annual bonuses for the fiscal year in which the Date of Termination occurs are paid, the Company shall pay the Executive a pro rata annual bonus based upon actual performance under the annual bonus plan for such fiscal year, to the extent not otherwise paid; 9 10 iv) any unvested Company stock options or other stock grants held by the Executive as of the Date of Termination will vest as if Executive had remained employed by the Company; v) to the extent vested and exercisable, any Company stock option will remain exercisable in accordance with their original term; vi) the Executive shall continue to receive employee benefits for a period of six (6) months following the Date of Termination and the Executive"s eligible dependents will continue to be eligible to participate in the Company"s medical dental, life and other welfare insurance plans (subject to the Executive continuing to make any required contributions to such plans) for a period of six (6) months following the Date of Termination (or the Company shall provide equivalent benefits for such period); provided, that such continued benefits shall cease upon the Executive becoming eligible for comparable benefits from a subsequent employer; and vii) other benefits, if applicable, shall be paid to the Executive in accordance with applicable plans and programs of the Company. (b) Death or Disability. If the Executive"s employment is terminated by reason of the Executive"s death or Disability during the Employment Period: (i) the Company shall pay the Executive (or the Executive"s survivors, if applicable) the Executive"s Annual Base Salary through the Date of Termination, to the extent not yet paid; and (ii) all Company stock options and stock awards will vest, and such stock options shall remain exercisable until the original term of the stock option. 10 11 (c) Cause; Other than Good Reason. If the Executive"s employment is terminated by the Company for Cause during the Employment Period or the Executive terminates employment during the Employment Period (other than for Good Reason), the Company shall pay to the Executive the Executive's Annual Base Salary through the Date of Termination and any earned bonus to the extent not yet paid, and any vested Company stock options will remain exercisable in accordance with the original term of the stock option. The Company shall have no further obligations under this Agreement. (d) Executive Management Stockholder Block. In the event that the Executive's employment is terminated by the Executive pursuant to clause (d) of Section 4 above during the ninety (90) day period following the date of such Executive Management Stockholder Block, then: i) the Company shall pay the Executive the sum of 100% of the Executive's Annual Base Salary in twelve equal monthly installments; and ii) all Company stock options and stock awards will vest and such stock options shall remain exercisable until the original term of the stock option. 6. Change of Control. If there is a Change of Control of the Company (as defined below) all unvested stock options or stock awards shall become 100% vested. In addition, the Executive may elect within six (6) months following such Change of Control to terminate his employment and such termination shall be treated as a termination for Good Reason and the Executive shall receive the benefits provided in Section 5 (a) above for such Termination. As used hereinafter, "Change of Control" means the occurrence of any of the following: (i) the Company consolidates with or merges with or into another person pursuant to the transaction in 11 12 which the outstanding securities of the Company are converted into or exchanged for cash or other property or for securities possessing less than 50% of the voting power of the outstanding securities of the person surviving such merger or consolidation; (ii) the Company sells, assigns, conveys, transfers, leases or otherwise disposes of all or substantially all of its assets to any person; or (iii) any "person" or "group" (as such terms are used in Sections 13(d) and 14 (d) of the Act), other than the holders of the securities of the Company as of the date hereof shall, by virtue of ownership of securities or by agreement or otherwise, be entitled to elect a majority of the directors of the Company. 7. Right to Purchase Shares. During the first 90 days of the Employment Period the Executive shall have the right to purchase common shares of the Company up to a maximum of 215,000 shares at the fair market value of the common stock, which the Compensation Committee has determined is $10.00 as of the date of this Agreement. The Executive shall pay for any such purchase in cash. The Executive agrees to make such representations and agree to such restrictions on transfer of such shares as the Company may reasonably request to ensure compliance with all applicable securities laws or agreements with equity investors. 8. Right to Require Purchase. If for any reason the Company is not a public company, after the Executive"s employment ends the Executive, in his sole discretion, may require the Company to purchase the stock acquired by the Executive in accordance with Sections 3, 4 or Section 7 hereof at its fair market value as determined by an independent appraiser selected by the parties; provided, however, that if at the time the Company is required to purchase stock pursuant to this Section 8, the Board determines in good faith that purchasing the shares for cash would be 12 13 a material financial hardship for the Company, the Company may pay for the stock over three years with interest accruing on any unpaid amounts at the prime rate of a national bank selected by the Compensation Committee. 9. Non-Competition. The Executive hereby agrees that for a period of three (3) years after the date hereof, such Executive will not, singly, jointly, or as an employee, agent or partner of any partnership or as an officer, agent, employee, director, stockholder (except of not more than one percent (1%) of the outstanding stock of any company listed on a national securities exchange or actively traded in the over-the-counter market) or investor in any other corporation or entity, or as a consultant, advisor, or independent contractor to any such partnership, corporation or entity, or in any other capacity, directly, indirectly or beneficially, own, manage, operate, join, control, or participate in the ownership, management, operation, or control of, or work for (as an employee, agent, consultant, advisor or independent contractor), or permit the use of his name by, or provide financial or other assistance to, any person, partnership, corporation, or entity which is in competition with the business as conducted by the Company on the date hereof. 10. Confidential Information. The Executive agrees that he will not at any time during or after the Executive's employment with the Company for any reason, directly or indirectly, disclose to any person any confidential information of the Company, other than information that is already known to the public, except as may be required in the ordinary course of business of the Company or as may be required by law. Promptly upon the termination of this Agreement for any reason, the Executive agrees to return to the Company any and all documents, memoranda, drawings, notes and other papers and items (including all copies thereof, whether 13 14 electronic or otherwise) embodying any confidential information of the Company which are in the possession or control of the Executive. 11. Intangible Assets and Non-Solicitation. (a) The Executive shall not at any time have or claim any right, title or interest in any trade name, trademark, copyright, or other similar rights belonging to or used by the Company and shall not have or claim any rights, title or interest in any material or matter of any sort prepared for or used in connection with the business of the Company or promotion of the Company, whether produced, prepared or published in whole or in part by the Executive. (b) Hire or attempt to hire for employment any person who is employed by the Company or attempt to influence any such person to terminate employment with the Company, except to the extent the Executive is acting on behalf of the Company in good faith; provided, however, that nothing herein shall prohibit the Executive from general advertising for personnel not specifically targeting any employee or other personnel of the Company. 12. Release. Effective upon the Date of Termination pursuant to the provisions of Sections 4(a), (b), (c) or (d) of this Agreement in consideration of the payments to be made to the Executive pursuant to Sections 5(a), (b), (c) or (d) of this Agreement and as a condition to the payment thereof, the Executive acknowledges that all such payments, if made in accordance with the terms of this Agreement shall constitute complete satisfaction of all obligations owed by the Company to the Executive and shall further constitute the Executive"s sole remedy against the Company. 13. Arbitration. Any dispute, controversy, or question arising under, out of, or relating to this Agreement (or the breach thereof) or, Executive"s employment with the Company 14 15 or termination thereof, shall be referred for arbitration in the State of New York to a neutral arbitrator selected by the Executive and the Company and this shall be the exclusive and sole means for resolving such dispute. The arbitration proceeding shall be governed by the Employment Rules of the American Arbitration Association then in effect or such rules last in effect (in the event such Association is no longer in existence) and shall be governed by the rule of law. Such right to submit a dispute arising hereunder to arbitration and the decision of the neutral arbitrator shall be final, conclusive and binding on all parties and interested persons and no action at law or in equity shall be instituted or, if instituted, further prosecuted by either party other than to compel arbitration or enforce the award of the neutral arbitrator. The arbitrator shall take submissions and hear testimony, if necessary, and shall render a written decision as promptly as possible. The arbitrator may require any form of discovery (e.g., depositions) in making his decision. In connection with any arbitration, the Company will reimburse the Executive for all reasonable attorneys' fees and disbursements as incurred in connection therewith following the receipt of invoices for such fees and disbursements. If the Company prevails on all substantial claims in the dispute submitted for arbitration then the Executive will reimburse the Company for such legal fees. The arbitrator may determine and may award costs and attorneys' fees as part of his decision. 14. Assignment; Successors. (a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive. This Agreement shall inure to the benefit of and be enforceable by the Executive's heirs, executors and administrators. 15 16 (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns, provided that the Company may not assign this Agreement except in connection with the assignment or disposition of all or substantially all of the assets or stock of the Company, or by law as a result of a merger or consolidation. In the event of such assignment a failure by the successor to specifically assume in writing, delivered to the Executive, the obligations and liabilities of the Company hereunder shall be deemed a material breach of this Agreement. (c) The Company shall require any successor or assignee to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would have been required to perform it if no such assignment had taken place. 15. Indemnification. In addition to any rights to indemnification to which Executive is entitled to under the Corporation's Articles of Incorporation and Bylaws, Company shall indemnify Executive at all times during and after the term of this Agreement to the maximum extent permitted under Delaware Business Corporation Act or any successor provision thereof and any other applicable state law, and shall pay Executive's expenses in defending any civil action suit, or proceeding in advance of the final disposition of such action, suit or proceeding, to the maximum extent permitted under such applicable state laws for Executive's action or inaction on behalf of the Company under the terms of this Agreement. In connection herewith, if the Company has or obtains directors or officers insurance, so-called, Executive shall be covered by such policy to the same extent as the peer senior executives. 16. Miscellaneous. 16 17 (a) This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, without reference to its conflict of law rules. (b) The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. (c) This Agreement may not be amended or modified except by a written agreement executed by the parties hereto or their respective successors and legal representatives. (d) All notices and other communications under this Agreement shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Alf T. Hansen 1 Greenbrier Court Skillman, New Jersey 08558 If to the Company: Lexent Inc. Three New York Plaza, 11th Floor New York, New York 10003 Attention: Chairman or to such other address as either party furnishes to the other in writing in accordance with this paragraph. Notices and communications shall be effective when actually received by the addressee or three (3) days after the initiation of delivery. (e) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. If any provision of this Agreement shall be held invalid or unenforceable in part, the remaining portion of such 17 18 provision, together with all other provisions of this Agreement, shall remain valid and enforceable and continue in full force and effect to the fullest extent consistent with law. (f) Notwithstanding any other provision of this Agreement, the Company may withhold from amounts payable under this Agreement all federal, state, local and foreign taxes that are required to be withheld by applicable laws or regulations. (g) The Executive's or the Company's failure to insist upon strict compliance with any provision of, or to assert any right under, this Agreement shall not be deemed to be a waiver of such provision or right or of any other provision of or right under this Agreement. (h) Except as provided herein, the Executive and the Company acknowledge that this Agreement constitutes the entire agreement between the parties and supersedes any prior agreement between the Executive and the Company concerning the subject matter hereof. (i) This Agreement may be executed in several counterparts, each of which shall be deemed an original, and said counterparts shall constitute but one and the same instrument. (j) The parties hereto shall execute and deliver all documents, provide all information and take or forbear from all such action as may be necessary or appropriate to achieve the purposes of the Agreement. (k) If any provision of this Agreement, or the application of such provision to any person or circumstance, shall be held invalid, the remainder of this Agreement, or the application of such provision to persons or circumstances other than those as to which it is held invalid, shall not be affected thereby. (l) If any excise tax is imposed upon the Executive under the Internal Revenue 18 19 Code by reason of payments or vesting made on a Change of Control the Company shall gross up the payments to make the Executive whole for such excise tax. (m) The Company shall reimburse Executive for all reasonable fees and expenses of Executive's attorneys and accountants incurred in connection with the negotiation and preparation of this Agreement. (n) The Executive affirms and represents to the best of his knowledge and belief that as of the commencement of his employment by the Company on the Commencement Date, he will be under no obligation to any former employer or other party which imposes any restriction upon, the Executive's acceptance of the employment hereunder with the Company, the employment of the Executive by the Company, or the Executive's undertakings under this Agreement. 19 20 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization of its Board of Directors, the Company has caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written. LEXENT INC. By /s/ Hugh O'Kane, Jr. ------------------------------- Hugh O'Kane, Jr. Chairman By /s/ Alf T. Hansen ------------------------------- Alf T. Hansen CEO and President 20 EX-11.1 18 STATEMENT REGARDING COMPUTATION P/SHARE EARNINGS 1 EXHIBIT 11.1 Lexant Inc. Computation of Earnings Per Share (Dollars in thousands except per share amounts)
For the year ended December 31, 1997 For the year ended December 31, 1998 ------------------------------------ ------------------------------------ Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- --------- ----------- ------------- --------- Net Income $ 2,189 $ 3,828 Less: Preferred Stock Dividends -- (301) -------------------------- -------------------------- NET INCOME PER SHARE - BASIC: Income available to common shareholders 2,189 15,144 $ 0.14 3,527 15,144 $ 0.23 ========= ======= EFFECT OF DILUTIVE SECURITIES: Convertible preferred stock -- -- 301 2,448 Common stock options -- -- -- -- -------------------------- -------------------------- NET INCOME PER SHARE - DILUTED: Income available to common shareholders plus assumed conversions $ 2,189 15,144 $ 0.14 $ 3,828 17,593 $ 0.22 ==============================================================================
For the year ended December 31, 1999 ------------------------------------ Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- --------- Net Income $ 9,256 Less: Preferred Stock Dividends (690) -------------------------- NET INCOME PER SHARE - BASIC: Income available to common shareholders 8,566 15,147 $ 0.57 ========= EFFECT OF DILUTIVE SECURITIES: Convertible preferred stock 690 5,827 Common stock options -- 888 -------------------------- NET INCOME PER SHARE - DILUTED: Income available to common shareholders plus assumed conversions $ 9,256 21,862 $ 0.42 =====================================
EX-21.1 19 SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21.1 The subsidiaries of the Registrant are: 1. National Network Technologies LLC, a Delaware limited liability company; and 2. Hugh O'Kane Electric Co., LLC d/b/a/ Hugh O'Kane Datacom, a Delaware limited liability company. EX-23.1 20 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-1 of our report dated February 1, 2000 relating to the financial statements of Lexent, Inc., which appear in such Registration Statement. We also consent to the references to us under the headings "Experts" in such Registration Statement. PricewaterhouseCoopers LLP New York, NY February 17, 2000 EX-27.1 21 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 1,158 0 52,350 3,602 0 52,810 9,659 3,479 59,535 27,957 0 12,491 0 16 2,855 59,535 150,862 150,862 120,750 132,500 27 0 1,104 17,231 7,975 9,256 0 0 0 9,256 0.57 0.42 WEIGHTED AVERAGE COMMON SHARES INCLUDES PREFERRED SHARES CONVERTIBLE INTO COMMON SHARES UPON THE COMPLETION OF THIS OFFERING.
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