-----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, TN+EsGiAcsPjYVR0Xkw4KLq73Li0AFKALLrrQ31ViDMS/KVJiOv7KROSMwRTv9/Q o2LtKsX/dxyNJsoLyYkwMQ== 0000950123-00-002853.txt : 20000411 0000950123-00-002853.hdr.sgml : 20000411 ACCESSION NUMBER: 0000950123-00-002853 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEXENT INC CENTRAL INDEX KEY: 0001105503 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-TELEPHONE INTERCONNECT SYSTEMS [7385] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-30660 FILM NUMBER: 581816 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/A 1 AMENDMENT NO. 1 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 29, 2000. REGISTRATION NO. 333-30660 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO 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.......... 6,670,000 shares $14.00 $93,380,000 - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- - --------------------------------------- ---------------------- - --------------------------------------- ---------------------- TITLE OF EACH CLASS OF AMOUNT OF SECURITIES TO BE REGISTERED REGISTRATION FEE - --------------------------------------- ---------------------- Common stock, $.001 par value.......... $24,653(3) - -------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------
(1) Includes 870,000 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. (3) Includes $1,883 paid herewith in connection with an increase in the proposed maximum offering price. The remaining $22,770 was paid in connection with the initial filing. ------------------------ 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 MARCH 29, 2000 5,800,000 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 $12.00 and $14.00 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 870,000 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 AN INDEPENDENT PROVIDER OF LOCAL TELECOM OUTSOURCING SOLUTIONS [photographs of company employees with the text: plan, build, run] [LOGO] 4 ----------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 3 Risk Factors.......................... 7 Special Note Regarding Forward-Looking Statements.......................... 14 Use of Proceeds....................... 15 Dividend Policy....................... 15 Capitalization........................ 16 Dilution.............................. 17 Selected Consolidated Financial Data................................ 18 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 20 Business.............................. 28 Management............................ 36
PAGE ---- Certain Relationships and Related Transactions........................ 44 Principal Stockholders................ 46 Description of Capital Stock.......... 48 Shares Eligible for Future Sale....... 51 Underwriting.......................... 53 Notice to Canadian Residents.......... 55 Legal Matters......................... 56 Experts............................... 56 Where You Can Find Additional Information About Us................ 56 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. 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. LEXENT INC. Lexent Inc. is an independent 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. We generated at least $3.5 million from each of these customers during 1999. 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 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, including Atlanta, Chicago, Dallas, Los Angeles, Miami and San Jose. 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 local access network, commonly known as 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 a broad range of 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 3 7 believe results in repeat 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 infrastructure 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 networks, local 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 networks 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 connections 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 a leading provider of outsourced local telecommunications network services in major metropolitan markets for competitive local exchange carriers, or CLECs, Internet service providers and wholesale providers of broadband services, commonly referred to as 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.................. 5,800,000 shares Common stock to be outstanding after this offering......................... 73,185,072 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 March 27, 2000 and gives effect to the automatic conversion of all outstanding shares of redeemable convertible preferred stock into 19,629,248 shares of common stock. This number excludes: - 9,936,876 shares subject to options outstanding as of March 27, 2000, at a weighted average exercise price of $1.97 per share; and - 870,000 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; and - a three-for-one stock split that occurred on March 28, 2000. 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.................................................. $ 0.05 $ 0.08 $ 0.19 ======= ======= ======== Diluted................................................ $ 0.05 $ 0.07 $ 0.14 ======= ======= ======== Weighted average shares: Basic.................................................. 45,433 45,433 45,442 ======= ======= ======== Diluted................................................ 45,433 52,778 65,591 ======= ======= ======== PRO FORMA INFORMATION (UNAUDITED): Pro forma net income(1).................................. $ 1,287 $ 2,864 ======= ======= Pro forma net income per share(2): Basic.................................................. $ 0.03 $ 0.05 $ 0.14 ======= ======= ======== Diluted................................................ $ 0.03 $ 0.05 $ 0.14 ======= ======= ======== Pro forma weighted average shares: Basic.................................................. 45,433 54,048 65,071 ======= ======= ======== Diluted................................................ 45,433 54,048 67,739 ======= ======= ========
AS OF DECEMBER 31, 1999 ---------------------------------- ACTUAL AS ADJUSTED(3) --------------- --------------- CONSOLIDATED BALANCE SHEET DATA: Cash........................................................ $ 1,158 $ 62,749 Working capital............................................. 24,853 86,444 Total assets................................................ 59,535 121,126 Total debt.................................................. 18,812 11,971 Total stockholders' equity.................................. 2,871 83,794
- --------------- (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 3.54417 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 $13.00 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 and payment of preferred dividends accrued from January 1, 1999 through December 31, 1999. 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. 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. 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 results of operations will be negatively affected. 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 may fluctuate 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. 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 7 11 - 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. IF THE CONTINUED TREND TOWARD OUTSOURCING TELECOMMUNICATIONS NETWORK SERVICES DOES NOT CONTINUE, OUR REVENUES MAY BE NEGATIVELY IMPACTED. 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. IF THE CURRENT GROWTH IN THE DEPLOYMENT OF TELECOMMUNICATIONS NETWORKS, WIRELESS SYSTEMS AND THE INTERNET DOES NOT CONTINUE, OUR REVENUES MAY DECLINE. 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 revenues may decline. 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. MANY OF OUR SERVICE AGREEMENTS MAY BE CANCELED ON SHORT NOTICE, AND WE MAY BE UNSUCCESSFUL IN REPLACING OUR SERVICE AGREEMENTS WHEN THEY EXPIRE; FAILURE TO REPLACE THOSE SERVICE AGREEMENTS MAY CAUSE OUR REVENUES TO DECLINE. 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. 8 12 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 AND A DECLINE IN THE WORK OUR CUSTOMERS ASSIGN TO US UNDER THESE AGREEMENTS COULD CAUSE A SIGNIFICANT DECREASE IN OUR REVENUES. 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. INCREASED REGULATION OF THE TELECOMMUNICATIONS INDUSTRY COULD NEGATIVELY AFFECT OUR RESULTS OF OPERATIONS. 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. 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. We cannot assure you that we will not be liable for any contamination at the numerous sites leased by us in connection with our operations or that any liabilities in connection with this contamination will not have a material adverse effect on our results of operations. 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 cause a significant decrease in our revenues. 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 9 13 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. 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. 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, Jr., 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 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 10 14 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 RESULTS OF OPERATIONS MAY BE NEGATIVELY AFFECTED 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 negatively affect our results of operations. 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, WHICH COULD NEGATIVELY AFFECT OUR RESULTS OF OPERATIONS. 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 negatively affect our results of operations. THE CONSOLIDATION OF CLECS AND INTERNET SERVICE PROVIDERS COULD IMPACT OUR BUSINESS BY CREATING COMPETITIVE PRESSURES THAT COULD REDUCE OUR REVENUES. 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 broad range 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 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. 11 15 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. OUR EXECUTIVE OFFICERS AND DIRECTORS AND THEIR AFFILIATES WILL CONTROL 88.27% 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 88.27% of our outstanding common stock (excluding any shares that Allegra Capital Partners IV, L.P. may purchase in this offering). 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 57.36% 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. 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, 12 16 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 $11.82 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 73,185,072 shares of common stock. Of these shares, 67,385,072 shares will be eligible for sale in the public market beginning 180 days after the date of this prospectus subject to compliance with Rules 144, 144(k) or 701. After this offering we also intend to register up to approximately 17,400,000 additional shares of our common stock issued or issuable upon the exercise of stock options granted under our stock option and restricted stock purchase plan. 13 17 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. 14 18 USE OF PROCEEDS We expect to receive net proceeds of approximately $69.1 million from the sale of the 5,800,000 shares of common stock, or approximately $79.6 million if the underwriters' exercise their over-allotment option in full, assuming an initial public offering price of $13.00 per share and after deducting the estimated underwriting discounts and commissions and offering expenses payable by us. We plan to use approximately $6.8 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." 15 19 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 19,629,248 shares of common stock; 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 $13.00 per share, and the application of the net proceeds as described under "Use of Proceeds," including the cash payment of preferred dividends accrued from January 1, 1999 through December 31, 1999. 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 $ 1,158 $62,749 ======= ======= ======= Long-term debt, including current portion(1): Revolving credit facility................................ $ 8,841 $ 8,841 $ 2,000 Subordinated notes payable to stockholders............... 7,115 7,115 7,115 Other debt............................................... 2,856 2,856 2,856 ------- ------- ------- Total long-term debt, including current portion:...... 18,812 18,812 11,971 ------- ------- ------- 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)........................................... 12,491 690 -- ------- ------- ------- Stockholders' Equity: Common stock, $.001 par value, 94,461,542 shares authorized, 45,838,200 shares outstanding(3).......... 46 66 71 Additional paid-in capital............................... 2,496 14,277 83,394 Retained earnings........................................ 329 329 329 ------- ------- ------- Total stockholders' equity............................ 2,871 14,672 83,794 ------- ------- ------- Total capitalization....................................... $34,174 $34,174 $95,765 ======= ======= =======
- --------------- (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 balance of $690 in the pro forma column represents the accrued dividends to be paid in cash upon sale of common stock in this offering. The conversion ratio of 3.54417 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 7,144,500 shares subject to options outstanding as of December 31, 1999 at a weighted average exercise price of $1.18 per share and does not include 4,005,000 options to purchase common stock granted since December 31, 1999 at a weighted average exercise price of $3.48 per share. 16 20 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 $0.23 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 redeemable convertible preferred stock into 19,629,248 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 $13.00 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 $84.2 million, or $1.18 per share. This represents an immediate increase in pro forma net tangible book value of $0.95 per share to existing stockholders and an immediate dilution of $11.82 per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price per share............. $13.00 Pro forma net tangible book value per share at December 31, 1999.............................................. $0.23 Increase per share attributable to new investors....... 0.95 ----- Pro forma net tangible book value per share after this offering.................................................. 1.18 ------ Dilution per share to new investors......................... $11.82 ======
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 5,800,000 shares of common stock at an assumed initial public offering price of $13.00 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.................. 65,467,448 91.9% $14,672,000 16.3% $ 0.22 New investors.......................... 5,800,000 8.1% $75,400,000 83.7% $13.00 ---------- ----- ----------- ----- Total.................................. 71,267,448 100.0% $90,072,000 100.0% ========== ===== =========== =====
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 7,144,500 shares of common stock, with a weighted average exercise price of $1.18 per share. If holders exercise these outstanding options there will be further dilution. An additional 4,005,000 options to purchase shares of common stock were granted at a weighted average exercise price of $3.48 per share since December 31, 1999. See "Description of Capital Stock" and Note 11 of Notes to Consolidated Financial Statements. 17 21 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................................ $25,618 $48,989 $53,718 $70,959 $150,862 Cost of revenues........................ 20,444 38,959 43,226 56,497 120,750 General, administrative and marketing expenses.............................. 4,291 4,988 6,992 7,945 11,750 ------- ------- ------- ------- -------- Operating income........................ 883 5,042 3,500 6,517 18,362 Interest expense........................ 289 620 1,151 1,143 1,104 Other expense (income), net............. (12) -- 9 166 27 ------- ------- ------- ------- -------- Income before income taxes.............. 606 4,422 2,340 5,208 17,231 Provision for income taxes.............. 163 470 151 1,380 7,975 ------- ------- ------- ------- -------- Net income.............................. 443 $ 3,952 $ 2,189 $ 3,828 $ 9,256 ======= ======= ======= ======= ======== Net income per share: Basic................................. $ 0.01 $ 0.09 $ 0.05 $ 0.08 $ 0.19 ======= ======= ======= ======= ======== Diluted............................... $ 0.01 $ 0.09 $ 0.05 $ 0.07 $ 0.14 ======= ======= ======= ======= ======== Weighted average shares: Basic................................. 45,433 45,433 45,433 45,433 45,442 ======= ======= ======= ======= ======== Diluted............................... 45,433 45,433 45,433 52,778 65,587 ======= ======= ======= ======= ======== PRO FORMA INFORMATION (UNAUDITED): Income before income taxes.............. $ 606 $ 4,422 $ 2,340 $ 5,208 Pro forma provision for income taxes(1).............................. 273 1,990 1,053 2,344 ------- ------- ------- ------- Pro forma net income(2)................. $ 333 $ 2,432 $ 1,287 $ 2,864 ======= ======= ======= ======= Pro forma net income per share(3): Basic................................. $ 0.01 $ 0.05 $ 0.03 $ 0.05 $ 0.14 ======= ======= ======= ======= ======== Diluted............................... $ 0.01 $ 0.05 $ 0.03 $ 0.05 $ 0.14 ======= ======= ======= ======= ======== Pro forma weighted average shares: Basic................................. 45,433 45,433 45,433 54,048 65,071 ======= ======= ======= ======= ======== Diluted............................... 45,433 45,433 45,433 54,048 67,739 ======= ======= ======= ======= ========
18 22
AS OF DECEMBER 31, --------------------------------------------------- 1995 1996 1997 1998 1999 ------- ------- ------- ------- ------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash..................................... $ 1,270 $ 1,526 $ 2,312 $ 1,495 $ 1,158 Working capital.......................... 143 2,847 2,516 10,691 24,853 Total assets............................. 11,496 18,417 18,212 32,309 59,535 Total debt............................... 2,272 4,970 15,460 13,985 18,812 Total stockholders' equity (deficit)..... 743 3,795 (4,676) (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 3.54417 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. 19 23 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. 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 20 24 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 $20.0 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 2003. 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 21 25 an engineering, procurement and construction contract with a customer, or the EPC contract, under which we recorded approximately $34.6 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. The costs of increased technical personnel are comprised of wages, related benefits, and payroll-based insurance premiums. In addition, we expanded our operations into new geographic regions in 1999, incurring costs for new facilities, supervisory and support personnel. We also increased our fleet of specialty vehicles during 1999. Costs of approximately $31.0 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 $2.0 million for additional salaries and related benefits for new administrative personnel required to support our increased level of revenues, an increase of $0.7 million in the provision for incentive compensation, 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. Interest Expense. Interest expense was approximately $1.1 million for both years 1998 and 1999. Interest on notes payable to banks increased in the year 1999 because of a higher average level of bank debt outstanding during the year 1999 resulting from additional borrowings under our new revolving credit line obtained in June 1999, offset by lower interest expense on subordinated notes payable because of a lower average level of such subordinated notes as a result repayments of $1.6 million during 1999. 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 46% 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. If we had been a C corporation for the entire year 1998, our provision for income taxes would have been $2.3 million, and our net income would have been $2.9 million. Our effective tax rate is approximately 46% 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. The costs of increased technical personnel are comprised of wages, related benefits and payroll-based insurance premiums. In addition, we expanded our operations into new geographic regions in 1998, incurring costs for new facilities, supervisory and support personnel. We also increased our fleet of specialty vehicles during 1998. 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 22 26 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. Interest Expense. Interest expense was approximately $1.1 million for both years 1997 and 1998. Interest on notes payable to bank and installment note obligations increased in 1998 as a result of higher average borrowings outstanding in 1998, offset by lower interest expense paid to related parties, as a result of repayments of notes payable to related parties during 1998. 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. If we had been a C corporation for the entire years 1998 and 1997, our provision for income taxes would have been $2.3 million and $1.1 million, respectively, and our net income would have been $2.9 million and $1.3 million, respectively. 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.......................... $13,149 $16,939 $19,406 $21,465 $20,165 $29,357 $46,020 $55,320 Cost of revenues.................. 10,678 14,047 15,492 16,280 16,227 24,749 36,733 43,041 General, administrative and marketing expenses.............. 1,680 1,653 1,997 2,615 1,922 2,509 3,283 4,036 ------- ------- ------- ------- ------- ------- ------- ------- Operating income.................. 791 1,239 1,917 2,570 2,016 2,099 6,004 8,243 Interest expense.................. 251 248 261 383 224 238 290 352 Other expense (income), net....... -- -- 166 -- -- -- 39 (12) ------- ------- ------- ------- ------- ------- ------- ------- Income before income taxes........ 540 991 1,490 2,187 1,792 1,861 5,675 7,903 Provision for income taxes........ 52 96 250 982 828 860 2,622 3,665 ------- ------- ------- ------- ------- ------- ------- ------- Net income........................ $ 488 $ 895 $ 1,240 $ 1,205 $ 964 $ 1,001 $ 3,053 $ 4,238 ======= ======= ======= ======= ======= ======= ======= =======
23 27
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.................. 81.2 82.9 79.8 75.8 80.5 84.3 79.8 77.8 General, administrative and marketing expenses.............. 12.8 9.8 10.3 12.2 9.5 8.5 7.1 7.3 ------- ------- ------- ------- ------- ------- ------- ------- Operating income.................. 6.0 7.3 9.9 12.0 10.0 7.1 13.0 14.9 Interest expense.................. 1.9 1.5 1.3 1.8 1.1 0.8 0.6 0.6 Other expense (income), net....... -- -- 0.9 -- -- -- 0.1 -- ------- ------- ------- ------- ------- ------- ------- ------- Income before income taxes........ 4.1 5.9 7.7 10.2 8.9 6.3 12.3 14.3 Provision for income taxes........ 0.4 0.6 1.3 4.6 4.1 2.9 5.7 6.6 ------- ------- ------- ------- ------- ------- ------- ------- Net income........................ 3.7% 5.3% 6.4% 5.6% 4.8% 3.4% 6.6% 7.7% ======= ======= ======= ======= ======= ======= ======= =======
EIGHT QUARTERS ENDED DECEMBER 31, 1999 Revenues. Over the eight quarters ended December 31, 1999, our quarterly revenues increased from $13.1 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 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 and then to $20.0 million in March 2000. This credit facility is to be used for general corporate purposes including working capital. The credit facility initially was set to expire in June 2002, but has been extended to June 2003 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. 24 28 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. Upon consummation of this offering, the restriction on acquisitions will be removed and the personal guarantees will be released. 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 1999, our primary use of cash was to finance higher receivables, which increased by $24.2 million as a result of our increased revenues. This use of cash was offset in part by increases in accounts payable, accrued liabilities and income taxes payable. We invoice our customers for large projects on a monthly basis as work is performed and/or when milestones are achieved. Unattained milestones would result in a delay in billing the customers, which would in turn result in a delay in cash receipts. For certain projects, customers may hold back 10% until the project is completed. As of December 31, 1999, such hold-backs aggregated $1.2 million. If revenues increase in future years, we expect that we would be required to carry an increased level of working capital, primary comprised of higher levels of accounts receivable. 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. Net cash provided from financing activities in 1999 was $2.6 million, comprised of $8.8 million borrowed under our new revolving credit agreement and $0.4 million borrowed from related parties, offset by repayment of our previous bank loan of $4.5 million, payments of $1.6 million on a subordinated note payable to a stockholder, and $0.7 million repayments of equipment loans and capital leases. Net cash provided from 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 and proceeds from subordinated notes payable to stockholders, offset by $5.1 million of dividends to common stockholders, repayment of $1.9 million on a subordinated note payable to a stockholder, repayments of $0.6 million to related parties, and $0.4 million repayments of equipment loans and capital leases. Net cash used by financing activities in 1997 was $3.4 million, comprised primarily of repayments to related parties. Until we entered into our new revolving credit facility in June 1999, our principal common stockholders periodically advanced funds to us for our operating needs, and we periodically made repayments of such advances. There were no formal agreements relating to such advances and repayments. We do not anticipate the need for our principal common stockholders to make additional advances to us in the future. 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 25 29 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. If this offering is consummated, we expect to raise approximately $69.1 million in new equity funds, after underwriting discounts and expenses. We expect to use approximately $6.8 million of those funds to reduce outstanding borrowings under our revolving credit facility, and approximately $0.9 million 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 the balance of the funds will be used for working capital, general corporate purposes and potential strategic acquisitions. Also, if the offering is consummated, our bank credit agreement will permit us to prepay our subordinated notes payable, subject to compliance with covenant tests contained in the credit agreement. Upon consummation of this offering, the 5,538,458 shares of redeemable convertible preferred stock outstanding will automatically convert into 19,629,248 shares of common stock. Conversion of the preferred stock will have the effect of decreasing earnings per share because of the additional common shares that will be outstanding. 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 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 an independent 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 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. We generated at least $3.5 million in revenues from each of these customers during 1999. 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, including Atlanta, Chicago, Dallas, Los Angeles, Miami and San Jose. Lexent was incorporated in Delaware in January 1998. Our wholly owned subsidiaries, Hugh O'Kane Electric Co. LLC and National Network Technologies LLC were formed in June 1998 and August 1998, respectively. In July 1998, Hugh O'Kane Electric Co., Inc., our predecessor company, merged into Lexent and Lexent issued 45,433,200 shares of common stock to the stockholders of our predecessor. Following the merger, all of our assets were contributed to our subsidiary Hugh O'Kane Electric Co. LLC, and that entity also assumed all of the obligations of Lexent, including those of our predecessor company. 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 or end-to-end 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 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 28 32 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 connection to end users in the local access network. This connection is commonly known as the last mile. 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 fiber multiplexing systems, which are systems that increase the capacity of local networks. 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 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 a 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 29 33 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 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. 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. 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 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. 30 34 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 International Data Corporation, the market for broadband fixed wireless access services in the United States alone is expected to generate $7.4 billion in revenue by 2003. 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. 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 incumbent local exchange carriers, thereby avoiding the accompanying access fees and the reliance on the incumbent local exchange carriers 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 telecommunications companies and new technologies has created an environment where speed to market is a critical component of a telecommunication company's success. Telecommunication companies 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 telecommunications companies. Telecommunication companies 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. 31 35 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 complete end-to-end 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. 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 networks 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 the conduits between floors of a building designed to hold telecommunication and utility cables. 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 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, which is the part of a network that joins local area networks together, as well as local rings, which are more localized paths of fiber connecting buildings to a network. We also install specialized equipment, including fiber multiplexing systems, which increase the capacity of local networks, fixed wireless systems, which provide broadband connections to networks using wireless technology, as well as digital subscriber line and digital loop carrier equipment, which also enhance the 32 36 capacity of standard network connections. In addition, we install other equipment which otherwise connects and supports networks, including digital cross connect systems, routers, power distribution systems and telemetry monitoring systems. We provide daily circuit testing of high capacity broadband connections including DS0, DS1 and DS3 services provided by the incumbent local exchange carriers 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 incumbent local exchange carriers, which allow telecommunications traffic to be exchanged between their networks. The equipment we install is typically selected and paid for by our customers. 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 provided by our customers to handle the additional capacity. We also upgrade equipment and reconfigure the network as the technology 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. We generated at least $3.5 million in revenues from each of these 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 responsible for cultivating 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. 33 37 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 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 in the cities where we operate 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. For example, in some cities we compete with companies including Bechtel Group and Fluor Daniel for program management services. We also compete with other independent vendors, including EMCOR Group and ComPlus Data Services, and telecommunications equipment manufacturers, including Lucent Technologies and Nortel Networks, 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. 34 38 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 owned by Hugh J. O'Kane, Jr., our Chairman, Kevin M. O'Kane, our Vice Chairman and Chief Operating Officer, and Denis J. O'Kane, a stockholder and brother of each of Hugh and Kevin O'Kane. 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. 35 39 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 III(2).......... 54 Director Richard L. Schwob................. 53 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 36 40 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. 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 III 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. 37 41 Richard L. Schwob has been a Director since March 2000. He has served as Vice President, Sales and Marketing of Marconi Communications, an international supplier of high performance broadband solutions, since November 1999. Prior to that, he held various positions with Marconi, most recently as Vice President, General Manager for the Power and Outside Plant business units. Mr. Schwob holds a BS from Drake University and completed the Advanced Management Program at Harvard University Graduate School of Business. He has held board positions with the Alliance for Telecommunications Industry Solutions and is currently an advisory board member for the International Engineering Consortium. 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, 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. CLASSIFIED BOARD OF DIRECTORS At the first annual meeting of stockholders following the closing of our initial public offering, our board of directors will be divided into three classes, to serve staggered three-year terms: - Class I, whose term will expire at the annual meeting of stockholders to be held in 2002; - Class II, whose term will expire at the annual meeting of stockholders to be held in 2003; and - Class III, whose term will expire at the annual meeting of stockholders to be held in 2004. Upon expiration of the term of a class of directors, the directors for that class will be elected for three-year terms at the annual meeting of stockholders in the year in which their term expires. Each director's term is subject to the election and qualification of his or her successor, or his or her earlier death, resignation or removal. 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 of these directors received a fee of $1,500 per quarter for each quarter served as a member of the board. In addition, each of these directors received $750 for each board meeting attended in person and $500 for each attended meeting of a committee on which the director 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. 38 42 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 served as a member of our board and options to purchase shares upon each of these 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 150,000 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." 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(#) ($) - --------------------------- --------- -------- ------------ ------------ ------------ Hugh J. O'Kane, Jr..................... 265,000 400,000 4,800 -- -- Chairman, President and Chief Executive Officer Kevin M. O'Kane........................ 265,000 400,000 4,800 -- -- Chief Operating Officer Jonathan H. Stern...................... 205,100 50,000 4,800 -- -- Executive Vice President and Chief Financial Officer
- --------------- (1) Compensation in this column reflects contributions made by us to our 401(k) plan on behalf of each of the named executive officers. 39 43 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth, with respect to each of the named executive officers, information regarding the number and value of securities underlying unexercised options held by the named executive officers as of December 31, 1999. None of our named executive officers exercised options in 1999.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT AT FISCAL YEAR-END(#) FISCAL YEAR-END($) ------------------------------ ------------------------------ NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ----------- ------------- ----------- ------------- Hugh J. O'Kane, Jr.................. -- -- -- -- Kevin M. O'Kane..................... -- -- -- -- Jonathan H. Stern................... 220,000 440,000 $2,823,000 $5,647,000
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 $13.00 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, Jr. and Kevin O'Kane. Under such agreements, Hugh O'Kane, Jr. 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 case in any 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 a 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 120,000 shares of common stock at an exercise price of $3.67 per share. In the event either individual is terminated without cause, that 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 660,000 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. Each of these 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 1,050,000, 1,050,000 and 750,000 shares, respectively, of our common stock at an exercise price of $3.33 per share upon 40 44 execution of their respective agreements. These options vested as to the first 300,000, 300,000 and 187,500 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 45,000, 45,000 and 30,000 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, that 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. This 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 2,490,000 shares of common stock at an exercise price of $3.33 per share. These options vested as to the first 946,248 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 600,000 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 645,000 shares of our common stock at $3.33 per share. Mr. Hansen exercised this option on March 20, 2000 and transferred the shares to a trust for the benefit of his children on that day. 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 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 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 17,400,000 shares of our common stock, either in the form of incentive stock options intended to meet the requirements of Section 422 of the Internal Revenue 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. 41 45 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 Internal Revenue Code, or non-qualified stock options and restricted stock purchase awards, both of which are not intended to meet the requirements of Internal Revenue 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 Internal Revenue Code, the administering committee as to those grants must consist of entirely "outside directors" within the meaning of the Internal Revenue 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 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. The options granted to these directors will be non-qualified stock options. These 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. 42 46 401(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 - 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. 43 47 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 3.54417 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 330,000 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 330,000 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 150,000 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 75,000 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 810,000 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. 44 48 On January 21, 2000, we issued non-qualified options to purchase 75,000 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 60,000 shares of our common stock at a purchase price of $3.33 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. On March 15, 2000, we issued non-qualified options to purchase 75,000 shares of our common stock to Richard L. Schwob, 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. These options were issued with an exercise price of $10.00 per share. 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 4,200,000 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, New York 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, New Jersey 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." 45 49 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 67,385,072 shares of common stock outstanding as of March 27, 2000, as adjusted to reflect the conversion of all outstanding shares of preferred stock upon the closing of this offering and 73,185,072 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 870,000 additional shares of our common stock, and up to 74,055,072 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)........................................ 25,211,077 37.39% 34.43% Hugh J. O'Kane, Jr.(3).................................... 21,011,077 31.16 28.69 Abbott Capital 1330 Investors I, L.P.(4).................. 13,655,128 20.26 18.66 1330 Avenue of the Americas, Suite 2800 New York, New York 10019 Allegra Capital Partners III, L.P.(5)..................... 6,874,120 10.20 9.39 515 Madison Avenue -- 29th Floor New York, New York 10022 Alf T. Hansen(6).......................................... 1,591,248 2.35 2.16 Jonathan H. Stern(7)...................................... 275,000 * * Walter C. Teagle III(8)................................... 735,000 1.08 1.00 Peter O. Crisp(9)......................................... 97,500 * * Thomas W. Hallagan(10).................................... 13,655,128 20.26 18.66 L. White Matthews III(11)................................. 91,667 * * Richard L. Schwob(12)..................................... 37,500 * * Richard W. Smith(13)...................................... 6,874,720 10.20 9.39 All current directors and executive officers as a group (12 persons)(14)........................................ 66,166,818 95.67% 88.27%
- --------------- * 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. 46 50 (2) Includes 38,190 shares subject to options exercisable within 60 days of March 27, 2000, an aggregate 1,200,000 shares held in trust for Kevin O'Kane's children for which Mr. O'Kane is co-trustee and 4,200,000 shares held in trust for Hugh O'Kane's family for which Mr. O'Kane is co-trustee. (3) Includes 38,190 shares subject to options exercisable within 60 days of March 27, 2000, an aggregate 1,200,000 shares held in trust for Hugh O'Kane's children for which Mr. O'Kane is co-trustee and 4,200,000 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 682,500 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. Does not include any shares Allegra Capital Partners IV, L.P. may purchase in this offering. (6) Includes 451,248 shares subject to options exercisable within 60 days of March 27, 2000 and 645,000 shares held in trust for Mr. Hansen's children for which Mr. Hansen's wife is co-trustee. (7) All shares subject to options exercisable within 60 days of March 27, 2000. (8) Includes 405,000 shares subject to options exercisable within 60 days of March 27, 2000 and 237,000 shares held in trust for Mr. Teagle's children. (9) Includes 37,500 shares subject to options exercisable within 60 days of March 27, 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 16,667 shares subject to options exercisable within 60 days of March 27, 2000. (12) All shares subject to options exercisable within 60 days of March 27, 2000. (13) Includes 6,191,620 shares held by Allegra Capital Partners III, L.P. and 682,500 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. Does not include any shares Allegra Capital Partners IV, L.P. may purchase in this offering. (14) Includes 1,774,795 shares subject to options exercisable within 60 days of March 27, 2000. 47 51 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 120,000,000 shares of common stock, $0.001 par value per share, and 5,000,000 shares of preferred stock, $0.001 par value per share. As of March 27, 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 67,385,072 shares of common stock held of record by 29 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. PREFERRED STOCK Upon the closing of this offering, all outstanding shares of preferred stock will be converted into 19,629,248 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 5,000,000 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 19,846,748 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 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 48 52 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 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 49 53 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 American Stock Transfer & Trust Company. 50 54 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 73,185,072 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 67,385,072 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, these restricted shares will be available for sale in the public market subject to compliance with Rules 144, 144(k) or 701. 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 731,850 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. 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 19,846,728 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 51 55 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. Following this offering, we intend to file a registration statement under the Securities Act covering approximately 17,400,000 shares issued or issuable upon the exercise of stock options granted under 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. 52 56 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..................................................... 5,800,000 =========
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 870,000 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 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. 53 57 The underwriters have reserved for sale, at the initial public offering price, up to 290,000 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. In addition, at our request, the underwriters have reserved for sale, at the initial public offering price, up to 384,615 shares of common stock to Allegra Capitol Partners IV, L.P., which has expressed an interest in purchasing common stock. 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. A prospectus in electronic format may be made available on web sites maintained by one or more of the underwriters participating in this offering. The representatives may agree to allocate a number of shares to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the representatives of the underwriters on the same basis as other allocations. 54 58 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. 55 59 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 as of December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999 included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. 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. 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. 56 60 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 61 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 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 except for Note 14, as to which the date is March 28, 2000 F-2 62 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, 94,461,542 shares authorized, 45,433,200 and 45,838,200 shares outstanding at 1998 and 1999, respectively............. 45 46 Additional paid-in capital................................ 1,804 2,496 Retained earnings (accumulated deficit)................... (8,237) 329 ------- ------- 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 63 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..................................................... $ 0.05 $ 0.08 $ 0.19 ======= ======= ======== Diluted................................................... $ 0.05 $ 0.07 $ 0.14 ======= ======= ======== Weighted average common shares outstanding: Basic..................................................... 45,433 45,433 45,442 ======= ======= ======== Diluted................................................... 45,433 52,778 65,591 ======= ======= ======== 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..................................................... $ 0.03 $ 0.05 $ 0.14 ======= ======= ======== Diluted................................................... $ 0.03 $ 0.05 $ 0.14 ======= ======= ======== Pro forma weighted average common shares outstanding: Basic..................................................... 45,433 54,048 65,071 ======= ======= ======== Diluted................................................... 45,433 54,048 67,739 ======= ======= ========
See accompanying notes to consolidated financial statements. F-4 64 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: Receivables.......................................... 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................. -- 55 -- 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 65 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.... -- $ -- $100 $ -- $ 3,786 $ (91) $ 3,795 Purchase of common stock (43.5 shares)............ -- -- -- -- -- (1,483) (8,727) (10,210) Distributions to common stockholders............. -- -- -- -- -- (450) -- (450) Net income................. -- -- -- -- -- 2,189 -- 2,189 ------ ------- ------ ---- ------ ------- ------- -------- Balance at December 31, 1997..................... -- $ -- $100 $ -- $ 4,042 $(8,818) $ (4,676) Conversion of Hugh O'Kane Electric Co. Inc. common shares into Lexent Inc. common shares............ -- -- 45,433-- (55) -- 55 -- -- 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 45,433 $ 45 $1,804 $(8,237) $ -- $ (6,388) Issuance of 405,000 common shares................... -- -- 405 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 45,838 $ 46 $2,496 $ 329 $ -- $ 2,871 ====== ======= ====== ==== ====== ======= ======= ========
See accompanying notes to consolidated financial statements. F-6 66 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 45,433,200 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 Design and engineering services are generally performed on a unit price basis or on a time and materials basis. Program management services are generally performed on a cost-plus-fee basis. Network deployment services are generally performed on a unit price or fixed price basis. Network upgrade and maintenance services are generally performed on a unit price basis or on a time and materials basis. For projects whose duration is 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. F-7 67 LEXENT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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, revenues are recognized in each period based on a comparison of the costs incurred for each project to the currently estimated 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. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Fair value is determined using current market prices or anticipated cash flows discounted at a rate commensurate with the risks involved. The Company capitalizes the costs of purchased software and 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 basis of assets and liabilities and their financial reporting amounts at each year-end based F-8 68 LEXENT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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 F-9 69 LEXENT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) preferred stock or the beginning of the fiscal period presented at the conversion rates that would have been in effect at such dates (and without deducting from net income dividends accrued on preferred stock), and by including the dilutive effect of outstanding stock options in the weighted average number of common shares outstanding for each period. 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......................... 45,433 45,433 45,442 ====== ====== ====== Net Income per share -- basic............................ $ 0.05 $ 0.08 $ 0.19 ====== ====== ====== NET INCOME PER SHARE -- DILUTED: Net Income............................................... $2,189 $3,828 $9,256 ====== ====== ====== Weighted average shares outstanding...................... 45,433 45,433 45,442 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.................................................. -- 7,344 17,481 Dilutive effect of stock options......................... -- -- 2,668 ------ ------ ------ Weighted average shares -- diluted....................... 45,433 52,778 65,591 ====== ====== ====== Net income per share -- diluted.......................... $ 0.05 $ 0.07 $ 0.14 ====== ====== ======
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 F-10 70 LEXENT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) initial public offering at the conversion rate of 3.54417 shares of common stock for each share of redeemable convertible preferred stock. The pro forma basic and diluted weighted average share 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......................... 45,433 45,433 45,442 Assumed conversion of preferred stock at 3.54417 common shares for each share of redeemable convertible preferred stock........................................ -- 8,616 19,629 ------ ------ ------ Pro forma weighted average shares -- basic............... 45,433 54,048 65,071 ====== ====== ====== Pro forma net income per share -- basic.................. $ 0.03 $ 0.05 $ 0.14 ====== ====== ====== PRO FORMA NET INCOME PER SHARE -- DILUTED: Adjustments to basic weighted average shares for outstanding options.................................... -- -- 2,668 ------ ------ ------ Pro forma weighted average shares -- diluted............. 45,433 54,048 67,739 ====== ====== ====== Pro forma net income per share -- diluted................ $ 0.03 $ 0.05 $ 0.14 ====== ====== ======
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. F-11 71 LEXENT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Amounts retained by customers related to projects which are progress-billed may be outstanding for periods that exceed one year. 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 1,033 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 72 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 73 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 1999. 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) (2,335) ------ ------- ------ 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 Company's change in tax status, the allowance for uncollectible amounts, depreciation and amortization, deferred costs on uncompleted projects and certain accrued liabilities. F-14 74 LEXENT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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................ 2.39 3.69 0.88 Effect on income from S corporation years......... (41.33) (22.65) -- ------ ------ ----- Total tax provision............................... 6.45% 26.5% 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 (including 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 75 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 3.54417 shares common share for each share of preferred stock. F-16 76 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 17,400,000 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 330,000 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 150,000 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..................................... 1,140,000 $0.17 $0.17 Exercised or canceled....................... -- -- Outstanding at December 31, 1998.............. 1,140,000 $0.17 Granted..................................... 6,409,500 $1.30 $1.30 Exercised................................... (405,000) $0.17 Canceled.................................... -- -- --------- Outstanding at December 31, 1999.............. 7,144,500 $1.18 =========
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 - --------------- ----------- -------------- -------------- ----------- -------------- $0.17 - $0.51 5,044,500 9.1 $0.28 1,131,250 $0.25 $3.33 2,100,000 10.0 $3.33 600,000 $3.33 --------- --------- 7,144,500 $1.18 1,731,250 $1.32 ========= =========
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 77 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...................................... $ 0.19 Diluted.................................... $ 0.14 Basic and diluted pro forma net income per share: Basic...................................... $ 0.18 Diluted.................................... $ 0.14
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 78 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. 14. SUBSEQUENT EVENT Common Stock Split On March 28, 2000, the Company effected a 3-for-1 stock split of the Company's common stock with no change in par value. Accordingly, the stock split has been recognized by reclassifying $30,289, the par value of the additional shares resulting from the split, from retained earnings to common stock. Retained earnings, common stock, per share and shares outstanding data in the Consolidated Financial Statements and Notes to the Consolidated Financial Statements have been retroactively restated to reflect this stock split. On March 28, 2000 the Company filed an amendment to its Restated Certificate of Incorporation. Among other things, the restated certificate increased the shares of authorized common stock from 44,461,542 to 94,461,542 shares. Financing Arrangement On March 8, 2000, the Company amended their $12.5 million collateralized revolving credit facility. The credit facility was increased to $20 million and its expiration date was extended to June 2003. In addition, the amendment also provides for the release of the following, upon consummation of an initial public offering: restriction on payment of cumulative dividends on preferred stock; personal guarantees of the Company's stockholders and restriction on making acquisitions of other businesses in excess of $250,000 in any calendar year. F-19 79 [LEXENT LOGO] 80 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 81 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 45,433,200 shares of common stock to three former shareholders of Hugh O'Kane Electric Co., Inc. These issuances were effected in reliance on the exemptions from registration provided by Section 4(2) of the Securities Act. 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. These issuances were effected in reliance on the exemptions from registration provided by Section 4(2) of the Securities Act. 3. On February 17, 2000, pursuant to a common stock purchase agreement dated January 21, 2000, the Company issued 60,000 shares of common stock to a director of the Company for $200,000. This issuance was effected in reliance on the exemptions from registration provided by Section 4(2) of the Securities Act. 4. On March 20, 2000, pursuant to a right under his employment agreement, the Company issued 645,000 shares of common stock to Alf T. Hansen for $2,150,000. This issuance was effected in reliance on the exception from registration provided in Section 4(2) of the Securities Act. 5. During the period from July 23, 1998 through March 27, 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 11,554,500 shares of the Company's common stock. Pursuant to these grants, the Company has issued 1,617,624 shares of common stock upon the exercise thereof. These issuances were effected in reliance on the exemption from registration provided by Rule 701 promulgated under Section 3(b) of the Securities Act. 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. II-2 82 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
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 Registrant 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. 10.13 -- Second Amendment to Credit Agreement, dated as of March 8, 2000, by and among Registrant and European American Bank, as Administrative Agent, and the Lenders party thereto.
II-3 83
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 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 Registrant. 23.1 -- Consent of independent accountants, PriceWaterhouseCoopers LLP. 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. ** Previously filed. (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 84 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 March 27, 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 ---------- ----- ---- * President and Chief Executive March 27, 2000 - --------------------------------------------------- Officer (Principal Alf T. Hansen executive officer); Director * Executive Vice President and March 27, 2000 - --------------------------------------------------- Chief Financial Officer Jonathan H. Stern (Principal financial and accounting officer) * Chairman of the Board of March 27, 2000 - --------------------------------------------------- Directors Hugh J. O'Kane, Jr. * Vice Chairman and Chief March 27, 2000 - --------------------------------------------------- Operating Officer Kevin M. O'Kane * Executive Vice President and March 27, 2000 - --------------------------------------------------- Director Walter C. Teagle III
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SIGNATURES TITLE DATE ---------- ----- ---- * Director March 27, 2000 - --------------------------------------------------- Peter O. Crisp * Director March 27, 2000 - --------------------------------------------------- Thomas W. Hallagan * Director March 27, 2000 - --------------------------------------------------- L. White Matthews III /s/ RICHARD L. SCHWOB Director March 27, 2000 - --------------------------------------------------- Richard L. Schwob * Director March 27, 2000 - --------------------------------------------------- Richard W. Smith * /s/ HUGH J. O'KANE, JR. - --------------------------------------------------- Hugh J. O'Kane, Jr., individually and as Attorney-in-Fact
II-6 86 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 Registrant 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. 10.13 -- Second Amendment to Credit Agreement, dated as of March 8, 2000, by and among Registrant and European American Bank, as Administrative Agent, and the Lenders party thereto.
87
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 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 Registrant. 23.1 -- Consent of independent accountants, PriceWaterhouseCoopers LLP. 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. ** Previously filed. EX-3.2 2 FORM OF SECOND AMENDED AND RESTATED CERTIFICATE 1 EXHIBIT 3.2 SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF LEXENT INC. LEXENT INC., a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), hereby certifies as follows: 1. The name of the Corporation is LEXENT INC. The Corporation was originally incorporated under the name NATIONAL NETWORK SERVICES CORP., and the original Certificate of Incorporation of the Corporation was filed with the Secretary of State of Delaware on January 26, 1998. 2. The following resolution declaring advisable the second amendment and restatement of the Certificate of Incorporation of the Corporation was duly adopted by the Board of Directors of the Corporation. The resolution is as follows: RESOLVED that the second amendment and restatement of the Certificate of Incorporation of the Corporation is hereby declared advisable, and that such Certificate of Incorporation be, and it hereby is, amended and restated to read in its entirety as follows: "FIRST: The name of the Corporation is LEXENT INC. SECOND: The address of the registered office of the Corporation in the State of Delaware is 1013 Centre Road, in the City of Wilmington, County of New Castle. The name of the Corporation's registered agent at such address is Corporation Service Company. THIRD: The purpose for which the Corporation is formed is to engage in any lawful act or activity for which corporations may be organized under the Delaware General Corporation Law. FOURTH: The total number of shares of all classes of stock which the Corporation shall have authority to issue is 125,000,000 shares, consisting of 5,000,000 2 shares of Preferred Stock, $.001 par value ("Preferred Stock") and 120,000,000 shares of Common Stock, $.001 par value ("Common Stock"). The following is a statement of the designations, and the powers, preferences and rights, and the qualifications, limitations or restrictions thereof, in respect of each class of stock of the Corporation: A. PREFERRED STOCK The Board of Directors is authorized to provide for the issuance of the shares of Preferred Stock in series and, by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof. The authority of the Board of Directors with respect to the Preferred Stock shall include, but not be limited to, determination of the following: 1. The number of shares constituting that series and the distinctive designation of that series; 2. The dividend rate on the shares of that series, whether dividends shall be cumulative, and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on share of that series; 3. Whether that series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights; 4. Whether that series shall have conversion privileges, and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate in such events as the Board of Directors shall determine; 5. Whether or not the shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including the date or dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; 6. Whether that series shall have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of such sinking fund; 2 3 7. The rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation, and the relative rights of priority, if any, of payment of shares of that series; and 8. Any other relative rights, preferences and limitations of that series. All cross-references in each subdivision of this Article FOURTH refer to other paragraphs in such subdivision unless otherwise indicated. B. COMMON STOCK All shares of Common Stock shall be identical and shall entitle the holders thereof to the same rights and privileges: 1. Dividends. When and as dividends are declared upon the Common Stock, whether payable in cash, in property or in shares of stock of the Corporation, the holders of Common Stock shall be entitled to share equally, share for share, in such dividends. 2. Voting Rights. Each holder of Common Stock shall be entitled to one vote per share. FIFTH: 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 and empowered to make, alter or repeal the By-laws of the Corporation, subject to the power of the stockholders of the Corporation to alter or repeal any By-law made by the Board of Directors. SIXTH: The Corporation reserves the right at any time and from time to time to amend, alter, change or repeal any provisions contained in this Second Amended and Restated Certificate of Incorporation; and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted, in the manner now or hereafter prescribed by law; and all rights, preferences and privileges of whatsoever nature conferred upon stockholders, directors or any other persons whomsoever by and pursuant to this Second Amended and Restated Certificate of Incorporation in its present form or as hereafter amended are granted subject to the right reserved in this Article. SEVENTH: No person shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided, however, that the foregoing shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing 3 4 violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware or (iv) for any transaction from which the director derived an improper personal benefit. EIGHTH: Every person now or hereafter serving as a director or officer of the Corporation and every such director or officer serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall be indemnified by the Corporation in accordance with and to the fullest extent permitted by law for the defense of, or in connection with, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, arising out of or in connection with such service. Expenses incurred by any person so entitled to indemnification in defending a civil or criminal action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board of Directors in the specific case upon receipt of an undertaking by or on behalf of such director or officer to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the Corporation as authorized in this Article. NINTH: This Article Ninth of the Second Amended and Restated Certificate of Incorporation is inserted for the management of the business and for the conduct of the affairs of the Corporation. A. Election of Directors. Except as otherwise provided by law, Directors shall be elected at the annual meeting of stockholders. Acceptance of the office of Director may be expressed orally or in writing, and attendance at the organization meeting shall constitute such acceptance. B. Number of Directors. The number of Directors shall be such number as shall be determined from time to time by the Board of Directors. C. Term of Directors. The Directors shall be classified in accordance with the By-laws of the Corporation with respect to time for which they shall severally hold office by dividing them into three classes, each consisting of one-third, or as equal in number as possible, of the whole number of the Board of Directors, and all Directors shall hold office until their successors are chosen and qualified, or until their earlier death, resignation, or removal. D. Quorum and Manner of Acting. Unless otherwise provided by law, the presence of 50% of the whole Board of Directors (or any committee thereof) shall be necessary to constitute a quorum for the transaction of business. In the absence of a quorum, a majority of the Directors present may adjourn the meeting from time to time until a quorum shall be present. Notice of any adjourned meeting need not be given. At 4 5 all meetings of Directors, a quorum being present, all matters shall be in accordance with the By-laws of the Corporation. E. Removal of Directors. Any Director or Directors may be removed, with or without cause, at any time, in accordance with the By-laws of the Corporation. F. Vacancies on Board. Any vacancies on the Board of Directors resulting from death, resignation, removal or other cause shall only be filled by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors, or by a sole remaining director, and newly created directorships resulting from any increase in the number of directors shall be filled by the Board of Directors, or if not so filled, in accordance with the By-laws of the Corporation. G. Nominations; Introduction of Business, Etc. Advance notice of stockholder nominations for election of directors and other business to be brought by stockholders before a meeting of stockholders shall be given in the manner provided in the By-laws of the Corporation. H. Special Meetings of Stockholders. Except as otherwise required by law, special meetings of the stockholders for any purpose or purposes may be called only by the Chairman of the Board, the President, or a majority of the entire Board of Directors. Only such business as is specified in the notice of any special meeting of the stockholders shall come before such meeting. I. Stockholder Action by Written Consent. Any action required to be taken at any annual or special meeting of stockholders must be taken at such a meeting of stockholders. Stockholders of the Corporation are not entitled to take corporate action without a meeting held in accordance with the By-laws of the Corporation." 3. The foregoing resolutions were duly adopted by the holders of a majority of the outstanding stock of the Corporation entitled to vote thereon, by written consent pursuant to Section 228 of the General Corporation Law of the State of Delaware, and have been duly adopted pursuant to the requirements of Sections 242 and 245 of said General Corporation Law. 4. The capital of the Corporation will not be reduced under, or by reason of, the foregoing Second Amended and Restated Certificate of Incorporation of the Corporation. * * * * * 5 6 IN WITNESS WHEREOF, the Corporation has caused this Second Amended and Restated Certificate of Incorporation to be signed by Alf T. Hansen, its President and Chief Executive Officer, this day of , 2000. -------------------------------- Alf T. Hansen President and Chief Executive Officer 6 EX-3.4 3 FORM OF AMENDED AND RESTATED BY-LAWS 1 EXHIBIT 3.4 =============================================================================== SECOND AMENDED AND RESTATED BY-LAWS OF LEXENT INC. ------------- Incorporated under the Laws of the State of Delaware ------------- Adopted as of , 2000 ------------ =============================================================================== 2 TABLE OF CONTENTS
Page ---- ARTICLE I Offices...........................................................1 ARTICLE II Meetings of Stockholders..........................................1 Section 1 Place of Meetings.................................................1 Section 2 Annual Meeting....................................................1 Section 3 Special Meetings..................................................2 Section 4 Notice of Meetings................................................2 Section 5 List of Stockholders..............................................2 Section 6 Quorum............................................................3 Section 7 Voting............................................................3 Section 8 Proxies...........................................................3 ARTICLE III Board of Directors................................................4 Section 1 Powers............................................................3 Section 2 Election and Term.................................................4 Section 3 Number............................................................4 Section 4 Notification of Nominations.......................................4 Section 5 Quorum and Manner of Acting.......................................4 Section 6 Organization Meeting..............................................5 Section 7 Regular Meetings..................................................5 Section 8 Special Meetings; Notice..........................................5 Section 9 Removal of Directors..............................................5 Section 10 Resignations......................................................6 Section 11 Vacancies.........................................................6 Section 12 Compensation of Directors.........................................6 Section 13 Action Without a Meeting..........................................6 Section 14 Telephonic Participation in Meetings..............................6 Section 15 Committees........................................................7 ARTICLE IV Officers..........................................................7 Section 1 Principal Officers................................................7 Section 2 Election and Term of Office.......................................7 Section 3 Other Officers....................................................7 Section 4 Removal...........................................................7 Section 5 Resignations......................................................7
-2- 3 Section 6 Vacancies........................................................7 Section 7 Chairman of the Board............................................8 Section 8 President........................................................8 Section 9 Vice President...................................................8 Section 10 Treasurer........................................................8 Section 11 Secretary........................................................8 Section 12 Salaries.........................................................8 ARTICLE V Indemnification..................................................9 Section 1 Right of Indemnification.........................................9 Section 2 Expenses.........................................................9 Section 3 Agreements.......................................................9 Section 4 Other Rights of Indemnification..................................9 Section 5 Indemnification of Employees and Agents..........................9 Section 6 Insurance........................................................9 ARTICLE VI Shares and Their Transfer.......................................10 Section 1 Certificate for Stock...........................................10 Section 2 Stock Certificate Signature.....................................10 Section 3 Stock Ledger....................................................10 Section 4 Cancellation....................................................10 Section 5 Registrations of Transfers of Stock.............................10 Section 6 Regulations.....................................................10 Section 7 Lost, Stolen, Destroyed or Mutilated Certificates...............11 Section 8 Record Dates....................................................11 ARTICLE VII Miscellaneous Provisions........................................11 Section 1 Corporate Seal..................................................11 Section 2 Voting of Stocks Owned by the Corporation.......................11 Section 3 Dividends.......................................................11 ARTICLE VIII Amendments......................................................12
-3- 4 SECOND AMENDED AND RESTATED BY-LAWS OF LEXENT INC. (a Delaware corporation) -------------- ARTICLE I OFFICES The registered office of the Corporation in the State of Delaware shall be located in the City of Wilmington, County of New Castle. The Corporation may establish or discontinue, from time to time, such other offices within or without the State of Delaware as may be deemed proper for the conduct of the Corporation's business. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. Place of Meetings. All meetings of stockholders shall be held at such place or places, within or without the State of Delaware, as may from time to time be fixed by the Board of Directors, or as shall be specified in the respective notices, or waivers of notice, thereof. Section 2. Annual Meeting. (a) The annual meeting of stockholders for the election of Directors and the transaction of other business shall be held on such date and at such place as may be designated by the Board of Directors. At each annual meeting the stockholders entitled to vote shall elect a Board of Directors and may transact such other proper business as may come before the meeting. (b) To be properly brought before an annual meeting, business must be (i) specified in the notice of the meeting (or any supplement thereto) given by or at the direction of the Chairman of the meeting or the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Chairman of the meeting or the Board of Directors or (iii) otherwise properly brought before the meeting by a stockholder. For business to be properly 5 brought before an annual meeting by a stockholder, the stockholder must have given written notice thereof, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the Corporation, not more than 120 days or less than 90 days in advance of the anniversary date of the immediately preceding annual meeting. Any such notice 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 meeting and the reasons for conducting such business at the meeting, and in the event that such business includes a proposal to amend either the Certificate of Incorporation or By-laws of the Corporation, the language of the proposed amendment; (ii) the name and address of the stockholder proposing such business; (iii) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such business; (iv) any material interest of the stockholder in such business; and (v) if the stockholder intends to solicit proxies in support of such stockholder's proposal, a representation to that effect. No business shall be conducted at an annual meeting of stockholders except in accordance with this Section 2(b), and the Chairman of the meeting may refuse to permit any business to be brought before an annual meeting without compliance with the foregoing procedures or the stockholder solicits proxies in support of such stockholder's proposal without such stockholder having made the representation required by clause (v) of the preceding sentence. Section 3. Special Meetings. Except as otherwise required by law, special meetings of the stockholders for any purpose or purposes may be called only by the Chairman of the Board, the President, or a majority of the entire Board of Directors. Only such business as is specified in the notice of any special meeting of the stockholders shall come before such meeting. Section 4. Notice of Meetings. Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by law, the written notice of any meeting shall be given not less than ten nor more than sixty days before the date of the meeting to each stockholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail, postage prepaid, directed to the stockholder at such stockholder's address as it appears on the records of the Corporation. Notice shall not be required to be given to any stockholder who shall waive such notice in writing, whether prior to or after such meeting, or who shall attend such meeting in person or by proxy unless such attendance is for the express purpose of objecting, at the beginning of such meeting, to the transactions of any business because the meeting is not lawfully called or convened. Section 5. List of Stockholders. It shall be the duty of the Secretary or other officer of the Corporation who shall have charge of the stock ledger (or a transfer agent or similar entity appointed to perform such duty) to prepare and make, at least ten days before every meeting of the stockholders, a complete list of the stockholders entitled to vote thereat, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in his name. 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 -2- 6 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 be kept and produced at the time and place of the meeting during the whole time thereof and subject to the inspection of any stockholder who may be present. The original or duplicate ledger shall be the only evidence as to who are the stockholders entitled to examine such list or the books of the Corporation or to vote in person or by proxy at such meeting. Section 6. Quorum. At each meeting of the stockholders, the holders of record of a majority of the issued and outstanding stock of the Corporation entitled to vote at such meeting, present in person or by proxy, shall constitute a quorum for the transaction of business, except where otherwise provided by law, the Certificate of Incorporation or these By-laws. In the absence of a quorum, any officer entitled to preside at, or act as Secretary of, such meeting shall have the power to adjourn the meeting from time to time until a quorum shall be constituted. Section 7. Voting. Every stockholder of record who is entitled to vote shall at every meeting of the stockholders be entitled to one vote for each share of stock held by him on the record date; except, however, that shares of its own stock be1onging to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held by the Corporation, shall neither be entitled to vote nor counted for quorum purposes. Nothing in this Section shall be construed as limiting the right of the Corporation to vote its own stock held by it in a fiduciary capacity. At all meetings of the stockholders, a quorum being present, all matters shall be decided by majority vote of the shares of stock entitled to vote held by stockholders present in person or by proxy, except as otherwise required by law or the Certificate of Incorporation. Unless demanded by a stockholder of the Corporation present in person or by proxy at any meeting of the stockholders and entitled to vote thereat or so directed by the chairman of the meeting or required by law, the vote thereat 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 in his name by his proxy, if there be such proxy, and shall state the number of shares voted by him and the number of votes to which each share is entitled. Section 8. Proxies. Each stockholder entitled to vote at a meeting of stockholders or to express consent to corporate action in writing without a meeting may authorize another person or persons to act for him by proxy. A proxy acting for any stockholder shall be duly appointed by an instrument in writing subscribed by such stockholder. No proxy shall be valid after the expiration of three years from the date thereof unless the proxy provides for a longer period. ARTICLE III BOARD OF DIRECTORS Section 1. Powers. The business and affairs of the Corporation shall be managed under the direction of the Board of Directors. -3- 7 Section 2. Election. Except as otherwise provided by law, Directors shall be elected at the annual meeting of stockholders. Acceptance of the office of Director may be expressed orally or in writing, and attendance at the organization meeting shall constitute such acceptance. Section 3. Number. The number of Directors shall be such number as shall be determined from time to time by the Board of Directors but initially shall be eight. Section 4. Term. The Directors shall be classified with respect to time for which they shall severally hold office by dividing them into three classes, each consisting of one-third, or as equal in number as possible, of the whole number of the Board of Directors, and all Directors shall hold office until their successors are chosen and qualified, or until their earlier death, resignation, or removal. At the first meeting held for election of the Board of Directors following adoption of these By-laws, Directors of the first class ("Class I Directors") shall be elected for a term of one-year; Directors of the second class ("Class II Directors") shall be elected for a term of two-years; Directors of the third class ("Class III Directors") shall be elected for a term of three years; and at each annual election thereafter, successors to the class of Directors whose terms shall expire that year shall be elected to hold office for a term of three years, so that the term of office of one class of Directors shall expire in each year. Any Director may resign by delivering his written resignation to the Corporation at its principal office or to the President or Secretary, except that no Director shall resign by delivering such resignation to himself. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. Section 5. Notification of Nominations. Nominations for the election of directors may be made by the Board of Directors or by any stockholder entitled to vote for the election of directors. Any stockholder entitled to vote for the election of directors at a meeting may nominate persons for election as directors only if written notice of such stockholder's intent to make such nomination is given, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the Corporation (i) with respect to an election to be held at an annual meeting of stockholders, not more than 120 days or less than 90 days in advance of the anniversary date of the immediately preceding annual meeting, and (ii) with respect to an election to be held at a special meeting of stockholders for the election of directors, not later than the close of business on the seventh day following the date on which notice of such meeting is first given to stockholders. Each such notice shall set forth (a) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (d) such other information regarding each nominee proposed by such stockholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each nominee been nominated, or intended to be nominated, by the Board of Directors; (e) the consent of each nominee to serve as a director of the corporation if so -4- 8 elected; and (f) if the stockholder intends to solicit proxies in support of such stockholder's nominee(s), a representation to that effect. The Chairman of the meeting may refuse to acknowledge the nomination of any person which was not made in accordance with the foregoing procedure or if the stockholder nominating such person(s) solicits proxies in support of such stockholder's nominee(s) without such stockholder having made the representation required by clause (f) of the preceding sentence. Section 6. Quorum and Manner of Acting. Unless otherwise provided by law, the presence of 50% of the whole Board of Directors (or any committee thereof) shall be necessary to constitute a quorum for the transaction of business. In the absence of a quorum, a majority of the Directors present may adjourn the meeting from time to time until a quorum shall be present. Notice of any adjourned meeting need not be given. At all meetings of Directors, a quorum being present, all matters shall be decided by the affirmative vote of a majority of the Directors present, except as otherwise required by law. The Board of Directors (or any committee thereof) may hold its meetings at such place or places within or without the State of Delaware as the Board of Directors may from time to time determine or as shall be specified in the respective notices, or waivers of notice, thereof. Section 7. Organization Meeting. Immediately after each annual meeting of stockholders for the election of Directors the Board of Directors shall meet at the place of the annual meeting of stockholders for the purpose of organization, the election of officers and the transaction of other business. Notice of such meeting need not be given. If such meeting is held at any other time or place, notice thereof must be given as hereinafter provided for special meetings of the Board of Directors, subject to the execution of a waiver of the notice thereof signed by, or the attendance at such meeting of, all Directors who may not have received such notice. Section 8. Regular Meetings. Regular meetings of the Board of Directors will be held quarterly, as regularly scheduled, and may be held at such place, within or without the State of Delaware, as shall from time to time be determined by the Board of Directors. After there has been such determination, and notice thereof has been once given to each member of the Board of Directors as hereinafter provided for special meetings, regular meetings may be held without further notice being given. Section 9. Special Meetings; Notice. Special meetings of the Board of Directors (or any committee thereof) shall be held whenever called by the Chairman of the Board, if any, the President or by a majority of the Directors. Notice of each such meeting shall be mailed to each Director, addressed to him at his residence or usual place of business, at least five days before the date on which the meeting is to be held, or shall be sent to him at such place by telegraph, cable, radio or wireless, or be delivered personally or by telephone, not later than the day before the day on which such meeting is to be held; provided, however, that any such notice relating to a meeting of a committee of the Board of Directors need only be sent to each Director serving on such committee. Each such notice shall state the time and place of the meeting and, as may be required, the purposes thereof. Notice of any meeting of the Board of Directors (or any committee thereof) need not be given to any Director if he shall sign a written waiver thereof either before or after the time stated therein for such meeting, or if he shall be present at the -5- 9 meeting. Unless limited by law, the Company's Certificate of Incorporation, these By-laws or the terms of the notice thereof, any and all business may be transacted at any meeting without the notice thereof having specifically identified the matters to be acted upon. Section 10. Removal of Directors. Any Director or Directors may be removed, with or without cause, at any time, by action of the holders of record of the majority of the issued and outstanding stock of the Corporation (a) present in person or by proxy at a meeting of holders of such stock and entitled to vote thereon or (b) by a consent in writing in the manner contemplated in Section 9 of Article II, and the vacancy or vacancies in the Board of Directors caused by any such removal may be filled by action of such a majority at such meeting or at any subsequent meeting or by consent. Section 11. Resignations. Any Director of the Corporation may resign at any time by giving written notice to the Chairman of the Board, if any, the President, the Vice President or the Secretary of the Corporation. The resignation of any Director shall take effect upon receipt of notice thereof or at such later time as shall be specified in such notice; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 12. Vacancies. Any vacancies on the Board of Directors resulting from death, resignation, removal or other cause shall only be filled by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors, or by a sole remaining director, and newly created directorships resulting from any increase in the number of directors shall be filled by the Board of Directors, or if not so filled, by the stockholders at the next annual meeting thereof or at a special meeting called for that purpose in accordance with Article II, Section 3 of these By-laws. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of such director and until such director's successor shall have been elected and qualified. Section 13. Compensation of Directors. Directors, as such, may receive a stated salary for their services as declared by resolution of the Board of Directors. In addition, Directors may receive a specific sum fixed by the Board of Directors plus expenses for attendance at each regular or special meeting of the Board or any committee thereof; provided, that nothing herein contained shall be construed to preclude any Director from serving the Corporation or any parent or subsidiary corporation thereof in any other capacity and receiving compensation in such capacity. Section 13. Action Without a Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors (or any committee thereof) may be taken without a meeting if a written consent thereto is signed by all members of the Board (or such committee), and such written consent is filed with the minutes or proceedings of the Board. Section 14. Telephonic Participation in Meetings. Members of the Board of Directors (or any committee thereof) may participate in a meeting of the Board (or such committee) by means of conference telephone or similar communications equipment by means of which -6- 10 all persons participating in the meeting can hear each other, and such participation shall constitute presence in person at such meeting. Section 15. Committees. The Board of Directors may appoint such committees of the Board of Directors as it may deem appropriate, and such committees shall exercise the authority delegated to them. The membership of any such committee shall consist of such Directors as the Board of Directors may deem advisable from time to time to serve. The Board of Directors may fill in any vacancies on any committee as they occur. Each committee shall meet as often as its business may require. ARTICLE IV OFFICERS Section 1. Principal Officers. The Board of Directors shall elect a President, a Secretary and a Treasurer, and may in addition elect a Chairman of the Board, Vice Chairman, one or more Vice Presidents and such other officers as it deems fit; the President, the Secretary, the Treasurer, the Chairman of the Board, if any, Vice Chairman, if any, and the Vice Presidents, if any, being the principal officers of the Corporation. One person may hold, and perform the duties of, any two or more of said offices. Section 2. Election and Term of Office. The principal officers of the Corporation shall be elected annually by the Board of Directors at the organization meeting thereof. Each such officer shall hold office until his successor shall have been elected and shall qualify, or until his earlier death, resignation or removal. Section 3. Other Officers. In addition, the Board may elect, or the Chairman of the Board, if any, or the President may appoint, such other officers as they deem fit. Any such other officers chosen by the Board of Directors shall be subordinate officers and shall hold office for such period, have such authority and perform such duties as the Board of Directors, the Chairman of the Board, if any, or the President may from time to time determine. Section 4. Removal. Any officer may be removed, either with or without cause, at any time, by resolution adopted by the Board of Directors at any regular meeting of the Board, or at any special meeting of the Board called for that purpose, at which a quorum is present. Section 5. Resignations. Any officer may resign at any time by giving written notice to the Chairman of the Board, if any, the President, the Secretary or the Board of Directors. Any such resignation shall take effect upon receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. -7- 11 Section 6. Vacancies. A vacancy in any office may be filled for the unexpired portion of the term in the manner prescribed in these By-laws for election or appointment to such office for such term. Section 7. Chairman of the Board. The Chairman of the Board of Directors if one be elected, shall preside, if present, at all meetings of the Board of Directors and he shall have and perform such other duties as from time to time may be assigned to him by the Board of Directors. Section 8. Vice Chairman of the Board. The Vice Chairman of the Board of Directors if one be elected, shall, in the absence of the Chairman, preside, if present, at all meetings of the Board of Directors and he shall have and perform such other duties as from time to time may be assigned to him by the Board of Directors. Section 9. President. The President shall be the chief executive officer of the Corporation (unless such an officer shall be specifically appointed by the Board of Directors) and shall have the general powers and duties of supervision and management usually vested in the office of president of a corporation. He shall preside at all meetings of the stockholders if present thereat, and in the absence or non-election of a Chairman or Vice Chairman of the Board of Directors, at all meetings of the Board of Directors, and shall have general supervision, direction and control of the business of the Corporation. Except as the Board of Directors shall authorize the execution thereof in some other manner, he shall execute bonds, mortgages, and other contracts on behalf of the Corporation, and shall cause the seal to be affixed to any instrument requiring it and when so affixed the seal shall be attested by the signature of the Secretary or the Treasurer. Section 10. Vice President. Each Vice President shall have such powers and shall perform such duties as shall be assigned to him by the directors. Section 11. Treasurer. The Treasurer shall have charge and custody of, and be responsible for, all funds and securities of the Corporation. He shall exhibit at all reasonable times his books of account and records to any of the Directors of the Corporation upon application during business hours at the office of the Corporation where such books and records shall be kept; when requested by the Board of Directors, he shall render a statement of the condition of the finances of the Corporation at any meeting of the Board or at the annual meeting of stockholders; he shall receive, and give receipt for, moneys due and payable to the Corporation from any source whatsoever; in general, he shall perform all the duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him by the Chairman of the Board of Directors, the President or the Board of Directors. The Treasurer shall give such bond, if any, for the faithful discharge of his duties as the Board of Directors may require. Section 12. Secretary. The Secretary, if present, shall act as secretary at all meetings of the Board of Directors and of the stockholders and keep the minutes thereof in a book or books to be provided for that purpose; he shall see that all notices required to be given by the Corporation are duly given and served; he shall have charge of the stock records of the Corporation; he shall see that all reports, statements and other documents required by law are -8- 12 properly kept and filed; and in general he shall perform all the duties incident to the office of Secretary and such other duties as from time to time may be assigned to him by the President or the Board of Directors. Section 13. Salaries. The salaries of the principal officers shall be fixed from time to time by the Board of Directors, and the salaries of any other officers may be fixed by the President. ARTICLE V INDEMNIFICATION Section 1. Right of Indemnification. Every person now or hereafter serving as a director or officer of the Corporation and every such director or officer serving at the request of the Corporation as a director, officer, employee or agent of another corporation, limited liability company, partnership, joint venture, trust or other enterprise, shall be indemnified by the Corporation in accordance with and to the fullest extent permitted by law for the defense of, or in connection with, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative. Section 2. Expenses. Expenses incurred in defending a civil or criminal action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board of Directors in the specific case upon receipt of an undertaking by or on behalf of such director or officer to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the Corporation as authorized in this Article V. Section 3. Agreements. The Company is authorized to enter into indemnification agreements with any of its directors or officers subject to the provisions of this Article V. Section 4. Other Rights of Indemnification. The right of indemnification herein provided shall not be deemed exclusive of any other rights to which any such director or officer may now or hereafter be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such person. Section 5. Indemnification of Employees and Agents. The rights of indemnification provided to directors and officers in this Article V may be applicable, at the discretion of the Company, to its employees and agents. Section 6. Insurance. The Company is authorized to purchase insurance on behalf of any person whom it is required or permitted to indemnify according to this Article V. -9- 13 ARTICLE VI SHARES AND THEIR TRANSFER Section 1. Certificate for Stock. Every stockholder of the Corporation shall be entitled to a certificate or certificates, to be in such form as the Board of Directors shall prescribe, certifying the number of shares of the capital stock of the Corporation owned by him. No certificate shall be issued for partly paid shares. Section 2. Stock Certificate Signature. The certificates for such stock shall be numbered in the order in which they shall be issued and shall be signed by the President or any Vice President and the Secretary or Treasurer of the Corporation and its seal shall be affixed thereto. If such certificate is countersigned (1) by a transfer agent other than the Corporation or its employee, or, (2) by a registrar other than the Corporation or its employee, the signatures of such officers of the Corporation may be facsimiles. In case any Officer of the Corporation who has signed, or whose facsimile signature has been placed upon, any such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the date of issue. Section 3. Stock Ledger. A record shall be kept by the Secretary or by any other officer, employee or agent designated by the Board of Directors of the name of each person, firm or corporation holding capital stock of the Corporation, the number of shares represented by, and the respective dates of, each certificate for such capital stock, and in case of cancellation of any such certificate, the respective dates of cancellation. Section 4. Cancellation. Every certificate surrendered to the Corporation for exchange or registration of transfer shall be canceled, and no new certificate or certificates shall be issued in exchange for any existing certificate until such existing certificate shall have been so canceled, except, subject to Section 7 of this Article VI, in cases provided for by applicable law. Section 5. Registrations of Transfers of Stock. Registrations of transfers of shares of the capital stock of the Corporation shall be made on the books of the Corporation by the registered holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the Corporation or with a transfer clerk or a transfer agent appointed as in Section 6 of this Article VI provided, and on surrender of the certificate or certificates for such shares properly endorsed and the payment of all taxes thereon. The person in whose name shares of stock stand on the books of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation; provided, however, that whenever any transfer of shares shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of the transfer if, when the certdicates are presented to the Corporation for transfer, both the transferor and the transferee request the Corporation to do so. Section 6. Regulations. The Board of Directors may make such rules and regulations as it may deem expedient, not inconsistent with the Certificate of Incorporation or -10- 14 these By-laws, concerning the issue, transfer and registration of certificates for shares of the stock of the Corporation. It may appoint, or authorize any principal officer or officers to appoint, one or more transfer clerks or one or more transfer agents and one or more registrars, and may require all certificates of stock to bear the signature or signatures of any of them. Section 7. Lost, Stolen, Destroyed or Mutilated Certificates. Before any certificates for stock of the Corporation shall be issued in exchange for certificates which shall become mutilated or shall be lost, stolen or destroyed, proper evidence of such loss, theft, mutilation or destruction shall be procured for the Board of Directors, if it so requires. Section 8. Record Dates. For the purpose of determining the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, 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 date as a record date for any such determination of stockholders. Such record date shall not be more than sixty or less than ten days before the date of such meeting, or more than sixty days prior to any other action. If a record date is not fixed by the Board of Directors as aforesaid, (i) the date for determination of stockholders entitled to notice of or to vote at a meeting of stockholders shall be the close of business on the day next preceding the day on which notice is given, or if no notice is given, the day next preceding the day on which the meeting is he1d, and (ii) the record date for determining stockholders for any purpose other than that specified in clause (i) shall be the close of business on the day on which the resolution of the Board of Directors relating thereto is adopted. ARTICLE VII MISCELLANEOUS PROVISIONS Section 1. Corporate Seal. The Board of Directors shall provide a corporate seal, which shall be in the form of a circle and shall bear the name of the Corporation and words and figures showing that it was incorporated in the State of Delaware in the year 1998. The Secretary shall be the custodian of the seal. The Board of Directors may authorize a duplicate seal to be kept and used by any other officer. Section 2. Voting of Stocks Owned by the Corporation. The Board of Directors may authorize any person on behalf of the Corporation to attend, vote and grant proxies to be used at any meeting of stockholders of any corporation (except the Corporation) in which the Corporation may hold stock. Section 3. Dividends. Subject to the provisions of the Certificate of Incorporation, the Board of Directors may, out of funds legally available therefor, at any regular or special meeting declare dividends upon the capital stock of the Corporation as and when they deem expedient. Before declaring any dividend there may be set apart out of any funds of the Corpora- -11- 15 tion available for dividends such sum or sums as the Directors from time to time in their discretion deem proper for working capital or as a reserve fund to meet contingencies or for equalizing dividends or for such other purposes as the Board of Directors shall deem conducive to the interests of the Corporation. ARTICLE VIII AMENDMENTS These By-laws of the Corporation may be altered, amended or repealed by the Board of Directors at (a) any regular or special meeting of the Board of Directors, provided, however, that the Board of Directors may alter, amend or repeal the provisions of these By-laws relating to the number of Directors only if all the members of the Board of Directors consent thereto in writing, or (b) by the affirmative vote of the holders of record of a majority of the issued and outstanding stock of the Corporation (i) present in person or by proxy at a meeting of holders of such stock and entitled to vote thereon or (ii) by a consent in writing in the manner contemplated in Section 9 of Article II, provided, however, that notice of the proposed alteration, amendment or repeal is contained in the notice of such meeting. By-laws, whether made or altered by the stockholders or by the Board of Directors, shall be subject to alteration or repeal by the stockholders as in this Article VII above provided. -12- EX-10.1 4 AMENDED AND RESTATED STOCK OPTION PLAN 1 Exhibit 10.1 LEXENT INC. AND ITS SUBSIDIARIES AMENDED AND RESTATED STOCK OPTION AND RESTRICTED STOCK PURCHASE PLAN Section 1. Purpose. The purpose of Lexent Inc. and its Subsidiaries Stock Option and Restricted Stock Purchase Plan, as amended from time to time (the "Plan"), is to promote the interests of Lexent Inc., a Delaware corporation (the "Company"), and any Subsidiary thereof and the interests of the Company's stockholders by providing an opportunity to selected employees and other persons providing services for the Company or any Subsidiary thereof, including, without limitation, officers and directors, as of the date of the adoption of the Plan or at any time thereafter to purchase Common Stock of the Company. By encouraging such stock ownership, the Company seeks to attract, retain and motivate such employees and other persons and to encourage such employees and other persons to devote their best efforts to the business and financial success of the Company. It is intended that this purpose will be effected by the granting of "non-qualified stock options" and/or "incentive stock options" to acquire the Common Stock of the Company and/or by the granting of rights to purchase the Common Stock of the Company on a "restricted stock" basis. Under the Plan, except for automatic grants to Outside Directors, the Committee shall have the authority (in its sole discretion) to grant "incentive stock options" within the meaning of Section 422(b) of the Code, "non-qualified stock options" as described in Treasury Regulation Section 1.83-7 or any successor regulation thereto, or "restricted stock" awards. No grant of "incentive stock options" shall be made under this Plan unless such Plan is approved by the stockholders of the Company within 12 months of the date of the adoption of such Plan. Section 2. Definitions. For purposes of the Plan, the following terms used herein shall have the following meanings, unless a different meaning is clearly required by the context: 2.1. "Award shall mean an award of the right to purchase Common Stock granted under the provisions of Section 7 of the Plan. 2.2. "Board of Directors" shall mean the Board of Directors of the Company. 2 2.3. "Change in Control" shall mean (i) a merger or consolidation in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly-owned subsidiary, a reincorporation of the Company in a different jurisdiction, or other transaction in which there is no substantial change in the stockholders of the Company or their relative stock holdings and the Awards and/or Options are assumed, converted or rep1aced by the successor corporation), (ii) a merger in which the Company is the surviving corporation but after which the stockholders of the Company immediately prior to such merger (other than any stockholder that merges, or which owns or controls another corporation that merges, with the Company in such merger) cease to own their shares or other equity interest in the Company, (iii) the sale of all or substantially all of the assets of the Company, or (iv) the acquisition, sale or transfer of more than 50% of the outstanding shares of the Company by tender offer or similar transaction. 2.4. "Code" shall mean the Internal Revenue Code of 1986, as amended. 2.5. "Committee" shall mean the committee or committees of the Board of Directors referred to in Section 5 hereof; provided, that if no such committee or committees are appointed by the Board of Directors, the Board of Directors shall have all of the authority and obligations of the Committee under the Plan. 2.6. "Common Stock" shall mean the Common Stock, $.001 par value, of the Company. 2.7. "Director Option" shall mean a Non-Qualified Option granted to an Outside Director pursuant to an Initial Grant or a Suceeding Grant. 2.8. "Employee" shall mean (i) with respect to an ISO, any person, including, without limitation, an officer of the Company, who, at the time an ISO is granted to such person hereunder, is employed by the Company or any Parent or Subsidiary of the Company, and (ii) with respect to a Non-Qualified Option and/or an Award, any person employed by, or performing services for, the Company or any Parent or Subsidiary of the Company, including, without limitation, officers, directors and Outside Directors. 2.9. "ISO" shall mean an Option granted to a Participant pursuant to the Plan that constitutes and shall be treated as an "incentive stock option" as defined in Section 422(b) of the Code. 3 2.10. "Non-Qualified Option" shall mean an Option granted to a Participant pursuant to the Plan that is intended to be, and qualifies as, a "non-qualified stock option" as described in Treasury Regulation Section 1.83-7 or any successor regulation thereto and that shall not constitute or be treated as an ISO. 2.11. "Option" shall mean any ISO or Non-Qualified Option granted to an Employee pursuant to the Plan. 2.12. "Outside Director" shall mean a member of the Board of Directors who is not an employee of the Company or any Parent, Subsidiary or affiliate of the Company. 2.13. "Participant" shall mean any Employee to whom an Award and/or an Option is granted under the Plan. 2.14. "Parent" of the Company shall have the meaning set forth in Section 424(e) of the Code. 2.15. "Subsidiary" of the Company shall have the meaning set forth in Section 424(f) of the Code. Section 3. "Eligibility". Awards and/or Options may be granted to any Employee. Except for automatic grants to Outside Directors pursuant to Section 6.3 hereof, the Committee shall have the sole authority to select the persons to whom Awards and/or Options are to be granted hereunder, and to determine whether a person is to be granted a Non-Qualified Option, an ISO or an Award or any combination thereof. Outside Directors shall only be eligible to receive grants of Non-Qualified Options pursuant to Section 6.3 hereof. No person shall have any right to participate in the Plan. Any person selected by the Committee for participation during any one period will not by virtue of such participation have the right to be selected as a Participant for any other period. The maximum number of shares of Common stock which may be the subject of Options and/or Awards granted to one Employee under the Plan during any calendar year shall be Two Million (2,000,000) shares. Section 4. Common Stock Subject to the Plan. 4.1. Number of Shares. The total number of shares of Common Stock for which Options and/or Awards may be granted, under the Plan shall not exceed in the aggregate Five Million Eight Hundred Thousand (5,800,000) shares of Common Stock (subject to adjustment as provided in Section 8 hereof). 4.2. Reissuance. The shares of Common Stock that may be subject to Options and/or Awards granted under the Plan may be either authorized and unissued shares or shares reacquired at any time and now or hereafter held as treasury stock as the Committee 3 4 may determine. In the event that any outstanding Option expires or is terminated for any reason, the shares allocable to the unexercised portion of such Option may again be subject to an Option and/or Award granted under the Plan. If any shares of Common Stock issued or sold pursuant to an Award or the exercise of an Option shall have been repurchased by the Company, then such shares may again be subject to an Option and/or Award granted under the Plan. 4.3 Special ISO Limitations. (a) The aggregate fair market value (determined as of the date an ISO is granted) of the shares of Common Stock with respect to which ISOs are exercisable for the first time by an Employee during any calendar year (under all incentive stock option plans of the Company or any Parent or Subsidiary of the Company) shall not exceed $100,000. (b) No ISO shall be granted to an Employee who, at the time the ISO is granted, owns (actually or constructively under the provisions of Section 424(d) of the Code) stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary of the Company, unless (i) the option price is at least 110% of the fair market value (determined as of the time the ISO is granted) of the shares of Common Stock subject to the ISO and (ii) the ISO by its terms is not exercisable more than five years from the date it is granted. 4.4 Limitations Not Applicable to Non-Qualified Options or Awards. Notwithstanding any other provision of the Plan, the provisions of Sections 4.3 (a) and (b) shall not apply, nor shall be construed to apply, to any Non-Qualified Option or Award granted under the Plan. Section 5. Administration of the Plan. 5.1. Administration. Subject to the proviso in Section 2.5 hereof, the Plan may be administered by one or more committees of the Board of Directors each consisting of no less than two persons (collectively, the "Committee"). To the extent that the Board of Directors determines it desirable to qualify transactions hereunder as exempt under the Rule 16b-3 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), each member of the Committee administering the Plan as to such transactions shall be a "Non-Employee Director" within the meaning of Rule 16b-3 promulgated under the Exchange Act. To the extent that the Board of Directors determines it desirable to qualify Options granted hereunder as "performance-based compensation" within the meaning of Section 162(m) of the Code, 4 5 each member of the Committee administering the Plan as to such Options shall be an "outside director" within the meaning of Treasury regulation Section 1.162-27(e)(3). The Committee shall be appointed from time to time by, and shall serve at the pleasure of, the Board of Directors. 5.2. Grant of Options/Awards. (a) Options. Except for automatic grants to Outside Directors pursuant to Section 6.3 hereof, the Committee shall have the sole authority and discretion under the Plan (i) to select the Employees who are to be granted Options hereunder; (ii) to designate whether any Option to be granted hereunder is to be an ISO or a Non-Qualified Option; (iii) to establish the number of shares of Common Stock that may be subject to each Option; (iv) to determine the time and the conditions subject to which Options may be exercised in whole or in part; (v) to determine the amount (not less than the par value per share) and the form of the consideration that may be used to purchase shares of Common Stock upon exercise of any Option (including, without limitation, the circumstances under which issued and outstanding shares of Common Stock owned by a Participant may be used by the Participant to exercise an Option); (vi) to impose restrictions and/or conditions with respect to shares of Common Stock acquired upon exercise of an Option; (vii) to determine the circumstances under which shares of Common Stock acquired upon exercise of any Option may be subject to repurchase by the Company; (viii) to determine the circumstances and conditions subject to which shares acquired upon exercise of an Option may be sold or otherwise transferred, including, without limitation, the circumstances and conditions subject to which a proposed sale of shares of Common Stock acquired upon exercise of an Option may be subject to the Company's right of first refusal (as will as the terms and conditions of any such right of first refusal); (ix) to establish a vesting provision for any Option relating to the time when (or the circumstances under which) the Option may be exercised by a Participant, including, without limitation, vesting provisions that may be contingent upon (A) the Company's meeting specified financial goals, (B) a change of control of the Company or (C) the occurrence of other specified events; (x) to accelerate the time when outstanding Options may be exercised, provided, however, that any ISOs shall be deemed "accelerated" within the meaning of Section 424(h) of the Code; and (xi) to establish any other terms, restrictions and/or conditions applicable to any Option not inconsistent with the provisions of the Plan. (b) Awards. The Committee shall have the sole authority and discretion under the Plan (i) to select the Employees who are to be granted Awards hereunder; (ii) to determine the amount to be paid by a Participant to acquire shares of Common Stock 5 6 pursuant to an Award, which amount may be equal to, more than, or less than 100% of the fair market value of such shares on the date the Award is granted (but in no event less than the par value of such shares); (iii) to determine the time or times and the conditions subject to which Awards may be made; (iv) to determine the time or times and the conditions subject to which the shares of Common Stock subject to an Award are to become vested and no longer subject to repurchase by the Company; (v) to establish transfer restrictions and the terms and conditions on which any such transfer restrictions with respect to shares of Common Stock subject to an Award, including, without limitation, vesting provisions which may be contingent upon (A) the Company's meeting specified financial goals, (B) a change of control of the Company or (C) the occurrence of other specified events; (vii) to determine the circumstances under which shares of Common Stock acquired pursuant to an Award maybe subject to repurchase by the Company; (viii) to determine the circumstances and conditions subject to which any shares of Common Stock acquired pursuant to an Award may be sold or otherwise transferred, including, without limitation, the circumstances and conditions subject to which a proposed sale of shares of Common Stock acquired pursuant to an Award may be subject to the Company's right of first refusal (as well as the terms and conditions of any such right of first refusal); (ix) to determine the form of consideration that may be used to purchase shares of Common Stock pursuant to an Award (including, without limitation, the circumstances under which issued and outstanding shares of Common Stock owned by a Participant may be used by the Participant to purchase the Common Stock subject to an Award); (x) to accelerate the time at which any or all restrictions imposed with respect to any shares of Common Stock subject to an Award will lapse; and (xi) to establish any other terms, restrictions and/or conditions applicable to any Award not inconsistent with the provisions of the Plan. 5.3 Interpretation. The Committee shall be authorized to interpret the Plan and may, from time to time, adopt such rules and regulations, not inconsistent with the provisions of the Plan, as it may deem advisable to carry out the purposes of the Plan. 5.4. Finality. The interpretation and construction by the Committee of any provision of the Plan, any Option and/or Award granted hereunder or any agreement evidencing any such Option and/or Award shall be final and conclusive upon all parties. 6 7 5.5. Expenses, Etc. All expenses and liabilities incurred by the Committee in the administration of the Plan shall be borne by the Company. The Committee may employ attorneys, consultants, accountants or other persons in connection with the administration of the Plan. The Company, and its officers and directors, shall be entitled to rely upon the advice, opinions or valuations of any such persons. No member of the Committee shall be liable for any action, determination or interpretation taken or made in good faith with respect to the Plan or any Option and/or Award granted hereunder. Section 6. Terms and Conditions of Options. 6.1. ISOs. The terms and conditions of each ISO granted under the Plan shall be specified by the Committee and shall be set forth in an ISO agreement between the Company and the Participant in such form as the Committee shall approve. The terms and conditions of each ISO shall be such that each ISO issued hereunder shall constitute and shall be treated as an "incentive stock option" as defined in Section 422(b) of the Code. The terms and conditions of any ISO granted hereunder need not be identical to those of any other ISO granted hereunder. The terms and conditions of each ISO shall include the following: (a) The option price shall be fixed by the Committee but shall in no event be less than 100% (or 110% in the case of an Employee referred to in Section 4.3(b) hereof) of the fair market value of the shares of Common Stock subject to the ISO on the date the ISO is granted. For purposes of the Plan, the fair market value per share of Common Stock as of any day shall mean the average of the closing prices of sales of shares of Common Stock on all national securities exchanges on which the Common Stock may at the time be listed or, if there shall have been no sales on any such day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on any day the Common Stock shall not be so listed, the average of the representative bid and asked prices quoted in the NASDAQ system as of 3:30 p.m., New York time, on such day, or, if on any day the Common Stock shall not be quoted in the NASDAQ system, the average of the high and low bid and asked prices on such day in the over-the-counter market as reported by National Quotation Bureau Incorporated, or any similar successor organization. If at any time the Common Stock is not listed on any national securities exchange or quoted in the NASDAQ system or the over-the-counter market, the fair market value of the shares of Common Stock subject to an Option on the date the ISO is granted shall be the fair market value thereof determined in good faith by the Board of Directors. 7 8 (b) ISOs, by their terms, shall not be transferable otherwise than by will or the laws of descent and distribution, and, during a Participant's lifetime, an ISO shall be exercisable only by the Participant. (c) The Committee shall fix the term of all ISOs granted pursuant to the Plan (including, without limitation, the date on which such ISO shall expire and terminate); provided, however, that such term shall in no event exceed ten years from the date on which such ISO is granted (or, in the case of an ISO granted to an Employee referred to in Section 4.3(b) hereof, such term shall in no event exceed five years from the date on which such ISO is granted). Each ISO shall be exercisable in such amount or amounts, under such conditions and at such times or intervals or in such installments as shall be determined by the Committee in its sole discretion. (d) To the extent that the Company or any Parent or Subsidiary of the Company is required to withhold any Federal, state or local taxes in respect of any compensation income realized by any Participant as a result of any "disqualifying disposition" of any shares of Common Stock acquired upon exercise of an ISO granted hereunder, the Company shall deduct from any payments of any kind otherwise due to such Participant the aggregate amount of such Federal, state or local taxes required to be so withheld or, if such payments are insufficient to satisfy such Federal, state or local taxes, such Participant will be required to pay to the Company, or make1 other arrangements satisfactory to the Company regarding payment to the Company of, the aggregate amount of any such taxes. 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. (e) The terms and conditions of each ISO may include the following provisions: (i) In the event a Participant's employment on a full-time basis by the Company or any Parent or Subsidiary of the Company shall be terminated for cause or shall be terminated by the Participant for any reason whatsoever other than as a result of the Participant's death or "disability" (within the meaning of Section 22(e)(3) of the Code), the unexercised portion of any ISO held by such Participant at that time may only be exercised within 15 days after the date on which the Participant ceased to be so employed, and only to the extent that the Participant could have otherwise exercised such ISO as of the date on which he ceased to be so employed. 8 9 (ii) In the event a Participant's employment on a full-time basis by the Company or any Parent or Subsidiary of the Company shall terminate for any reason other than (x) a termination specified in clause (i) above or (y) by reason of the Participant's death or "disability" (within the meaning of Section 22 (e)(3) of the Code), the unexercised portion of any ISO held by such Participant at that time may only be exercised within 30 days after the date on which the Participant ceased to be so employed, and only to the extent that the Participant could have other wise exercised such ISO as of the date on which he ceased to be so employed. (iii) In the event a Participant shall cease to be employed by the Company or any Parent or subsidiary of the Company on a full-time basis by reason of his "disability" (within the meaning of Section 22(e)(3) of the Code), the unexercised portion of any ISO held by such Participant at that time may only be exercised within 180 days after the date on which the Participant ceased to be so employed, and only to the extent that the Participant could have otherwise exercised such ISO as of the date on which he ceased to be so employed. (iv) In the event a Participant shall die while in the employ of the Company or a Parent or Subsidiary of the Company (or within a period of 15 day after ceasing to be an Employee for any reason other than his "disability" (within the meaning of Section 22(e)(4) of the Code) or within a period of 180 days after ceasing to be an Employee by reason of such "disability"), the unexercised portion of any ISO held by such Participant at the time of his death may only be exercised within 180 days after the date of such Participant's death, and only to the extent that the Participant could have otherwise exercised such ISO at the time of his death. In such event, such ISO may be exercised by the executor or administrator of the Participant's estate or by any person or persons who shall have acquired the ISO directly from the Participant by bequest or inheritance. 6.2. Non-Qualified Options. The terms and conditions of each Non-Qualified Option granted under the Plan shall be specified by the Committee, in its sole discretion, and shall be set forth in a written option agreement between the Company and the Participant in such form as the Committee shall approve. The terms and conditions of each Non-Qualified Option will be such (and each Non-Qualified Option agreement shall expressly so state) that each Non-Qualified Option issued hereunder shall not constitute nor be treated as an "incentive stock option" as defined in Section 422(b) of the Code, but will be a "non-qualified stock option" for Federal, state and local income tax purposes. The terms and conditions of any Non-Qualified Option 9 10 granted hereunder need not be identical to those of any other Non-Qualified Option granted hereunder. The terms and conditions of each Non-Qualified Option Agreement shall include the following: (a) The option (exercise) price shall be fixed by the Committee and may be equal to, more than or less than 100% of the fair market value of the shares of Common Stock subject to the Non-Qualified Option on the date such Non-Qualified Option is granted as determined in good faith by the Committee. (b) The Committee shall fix the term of all Non-Qualified Options granted pursuant to the Plan (including, without limitation, the date on which such Non Qualified Option shall expire and terminate). Such term may be more than ten years from the date on which such Non-Qualified Option is granted. Each Non-Qualified Option shall be exercisable in such amount or amounts, under such conditions (including, without limitation, provisions governing the rights to exercise such Non-Qualified Option), and at such times or interva1s or in such installments as shall be determined by the Committee in its sole discretion; provided, however, that in no event shall any Non-Qualified Option granted to any director or officer of the Company who is subject to Section 16 of the Exchange Act become exercisable, in whole or in part, prior to the date that is six months after the date such Non-Qualified Option is granted to such director or officer. (c) Non-Qualified Options shall not be transferable otherwise than by will or the laws of descent and distribution, and during a Participant's lifetime a Non-Qualified Option shall be exercisable only by the Participant. (d) The terms and conditions of each Non-Qualified Option may include the following provisions: (i) In the event a Participant's employment on a full-time basis by the Company or any Parent or Subsidiary of the Company shall be terminated for cause or shall be terminated by the Participant for any reason whatsoever other than as a result of the Participant's death or "disability" (within the meaning of Section 22(e)(3) of the Code), the unexercised portion of any Non-Qualified Option held by such Participant at that time may only be exercised within 15 days after the date on which the Participant ceased to be an Employee, and only to the extent that the Participant could have otherwise exercised such Non-Qualified Option as of the date on which he ceased to be an Employee. 10 11 (ii) In the event a Participant's employment on a full-time basis by the Company or any Parent or Subsidiary of the Company shall terminate for any reason other than (x) a termination specified in clause (i) above or (y) by reason of the Participant's death or "disability" (within the meaning of Section 22(e)(3) of the Code), the unexercised portion of any Non-Qualified Option held by such Participant at that time may only be exercised within 30 days after the date on which the Participant ceased to be an Employee, and only to the extent that the Participant could have otherwise exercised such Non-Qualified Option as of the date on which he ceased to be an Employee. (iii) In the event a Participant shall cease to be an Employee of the Company or any Parent or Subsidiary of the Company on a full-time basis by reason of his "disability" (within the meaning of Section 22(e)(3) of the Code), the unexercised portion of any Non-Qualified Option held by such Participant at that time may only be exercised within 180 days after the date on which the Participant ceased to be an Employee, and only to the extent that the Participant could have otherwise exercised such Non-Qualified Option as of the date on which he ceased to be an Employee. (iv) In the event a Participant shall die while an Employee of the Company or a Parent or Subsidiary of the Company (or within a period of 15 days after ceasing to be an Employee for any reason other than his "disability" (within the meaning of Section 22(e)(3) of the Code) or within a period of 180 days after ceasing to be an Employee by reason of such "disability"), the unexercised portion of any Non-Qualified Option held by such Participant at the time of his death may only be exercised within 180 days after the date of such Participant's death, and only to the extent that the Participant could have otherwise exercised such Non-Qualified Option at the time of his death. In such event, such Non-Qualified Option may be exercised by the executor or administrator of the Participant's estate or by any person or persons who shall have acquired the Non-Qualified Option directly from the Participant by bequest or inheritance. (e) To the extent that the Company is required to withhold any Federal, state or local taxes in respect of any compensation income realized by any Participant in respect of a Non-Qualified Option granted hereunder or in respect of any shares of Common Stock acquired upon exercise of a Non-Qualified Option, the Company shall deduct from any payments of any kind otherwise due to such Participant the aggregate amount of such Federal, state or local taxes required to be so withheld or, if such payments are insufficient to satisfy such Federal, state or 11 12 local taxes, or if no such payments are due or to become due to such Participant, then, such Participant will be required to pay to the Company, or make other arrangements satisfactory to the Company regarding payment to the Company of, the aggregate amount of any such taxes. 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 Committee, in its sole discretion. 6.3 Grants to Outside Directors. (a) Each Outside Director who first becomes a member of the Board of Directors on or after February 17, 2000 (the "Automatic Grant Effective Date") will be granted a Non-Qualified Option to purchase such number of shares of Common Stock ("Initial Grant") as the Committee shall determine on the next business day following the date such Outside Director first becomes a member of the Board of Directors, unless such Outside Director received Options prior to the Automatic Grant Effective Date. Each Outside Director who became a member of the Board of Directors prior to the Automatic Grant Effective Date and who did not receive a prior grant of Options will receive an Initial Grant on the next business day following the Automatic Grant Effective Date. (b) Immediately following each annual meeting of stockholders, each Outside Director will be granted a Non-Qualified Option to purchase such number of shares of Common Stock ("Succeeding Grant") as the Committee shall determine provided, however, that the Outside Director is a member of the Board of Directors on such date and has served continuously as a member of the Board of Directors for a period of at least one year since the date of such Outside Director's Initial Grant or the Automatic Grant Effective Date. Notwithstanding anything in this Section 6.3 to the contrary, the Board of Directors may make discretionary supplemental grants of Non-Qualified Options to an Outside Director, provided, however, that no Outside Director may receive more than Five Hundred Thousand (500,000) shares of Common Stock in any calendar year. (c) The exercise price of each Director Option will be 100% of the fair market value of the shares of Common Stock subject to the Director Option on the date such Director Option is granted. (d) Vesting. (i) Each Initial Grant will vest as determined by the Committee. 12 13 (ii) Notwithstanding any provision herein to the contrary, in the event of a dissolution, liquidation or Change in Control of the Company, the vesting of all Director Options will accelerate and such Director Options will become exercisable in full prior to the consummation of such event at such times and on such conditions as the Committee determines and must be exercised, if at all, within three-months of the consummation of said event. Any Director Options not exercised within such three-month period shall expire. (f) The exercise period of Director Options shall not exceed ten years from the date of grant, provided however, subject to the provisions of Section 6.3 (g), no Director Option may be exercised more than 90 days after the optionee ceases to serve as a member of the Board of Directors. (g) If an Outside Director dies or becomes disabled (within the meaning of Section 22(e)(3) of the Code or any successor provision thereto) while a member of the Board of Directors, Director Options may be exercised (to the extent otherwise exercisable on the date of disability or death) by such disabled member of the Board of Directors or, in the case of death, by the member of the Board of Directors' designated beneficiary, in each case within the period of one year after the date of disability or death. 7. Terms and Conditions of Awards. The terms and conditions of each Award granted under the Plan shall be specified by the Committee, in its sole discretion, and shall be set forth in a written agreement between the Participant and the Company, in such form as the Committee shall approve. The terms and provisions of any Award granted hereunder need not be identical to those of any other Award granted hereunder. The terms and conditions of each Award may include the following: (a) The amount to be paid by a Participant to acquire the shares of Common Stock pursuant to an Award shall be fixed by the Committee and may be equal to, more than or less than 100% of the fair market value of the shares of Common Stock subject to the Award on the date the Award is granted (but in no event less than the par value of such shares). (b) Each Award shall contain such vesting provisions, such transfer restrictions and such other restrictions and conditions as the Committee, in its sole discretion, may determine, including, without limitation, the circumstances under which the Company shall have the right and option to repurchase shares of Common Stock acquired pursuant to an Award. 13 14 (c) Stock certificates representing Common Stock acquired pursuant to an Award shall bear a legend referring to any restrictions imposed on such Stock and such other matters as the Committee may determine. (d) To the extent that the Company is required to withhold any Federal, state or local taxes in respect of any compensation income realized by the Participant in respect of an Award granted hereunder, in respect of any shares acquired pursuant to an Award, or in respect of the vesting of any such shares of Common Stock, then the Company shall deduct from any payments of any kind otherwise due to such Participant the aggregate amount of such Federal, state or local taxes required to be so withheld, or if such payments are insufficient to satisfy such Federal, state or local taxes, or if no such payments are due or to become due to such Participant, then such Participant will be required to pay to the Company, or make other arrangements satisfactory to the Company regarding payment to the Company of, the aggregate amount of any such taxes. 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 Committee, in its sole discretion. Section 8. Adjustments. (a) In the event that, after the adoption of the Plan by the Board of Directors, the outstanding shares of the Company's 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 entity 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 Committee in good faith shall, subject to the provisions of Section 8(c) below if the circumstances therein specified are applicable, appropriately adjust (i) the number of shares of Common Stock (and the option price per share) subject to the unexercised portion of any outstanding Option (to the nearest possible full share); provided, however, that the limitations of Section 424 of the Code shall apply with respect to adjustments made to ISOs, (ii) the number of shares of Common Stock to be acquired pursuant to an Award which have not become vested, and (iii) the number of shares of Common Stock for which Options and/or Awards may be granted under the Plan, as set forth in Section 4.1 hereof, and such adjustments shall be effective and binding for all purposes of the Plan. (b) If any capital reorganization or reclassification of the capital stock of the Company or any consolidation or merger of the Company with another entity, or the sale of all or substantially all its assets to another entity, shall be effected in such a way that holders of Common Stock shall be entitled to 14 15 receive stock, securities or assets with respect to or in exchange for Common Stock, then, subject to the provisions of Section 8 (c) below if the circumstances therein specified are applicable, each holder of an Option shall thereafter have the right to purchase, upon the exercise of the Option in accordance with the terms and conditions specified in the option agreement governing such Option and in lieu of the shares of Common Stock immediately theretofore receivable upon the exercise of such Option, such shares of stock, securities or assets (including, without limitation, 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 Common Stock immediately theretofore so receivable had such reorganization, reclassification, consolidation, merger or sale not taken place. (c) Notwithstanding Sections 8(a) and 8(b) hereof, in the event of (i) any offer to holders of the Company's Common Stock generally relating to the acquisition of all or substantially all of their shares, including, without limitation, through purchase, merger or otherwise, or (ii) any proposed transaction generally relating to the acquisition of substantially all of the assets or business of the Company (herein sometimes referred to as an "Acquisition"), the Board of Directors may, in its sole discretion, cancel any outstanding Options (provided, however, that the limitations of Section 424 of the Code shall apply with respect to adjustments made to ISO's) and pay or deliver, or cause to be paid or delivered, to the holder thereof an amount in cash or securities having a value (as determined by the Board of Directors acting in good faith) equal to the product of (A) the number of shares of Common Stock (the "Option Shares") that, as of the date of the consummation of such Acquisition, the holder of such Option had become entitled to purchase (and had not purchased) multiplied by (B) the amount, if any, by which (1) the formula or fixed price per share paid to holders of shares of Common Stock pursuant to such Acquisition exceeds (2) the option price applicable to such Option Shares. Section 9. Effect of the Plan on Employment Relationship. Neither the Plan nor any Option and/or Award granted hereunder to a Participant shall be construed as conferring upon such Participant any right to continue in the employ of (or otherwise provide services to) 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 such Participant's employment or other relationship with the Company or any Subsidiary or Parent, as the case may be, at any time. Section 10. Amendment of the Plan. The Board of Directors may amend the Plan from time to time as it deems desirable; provided, however, that, without the approval of the holders of a majority of the outstanding capital stock of the Company entitled to vote thereon or consent thereto, the Board of 15 16 Directors may not amend the Plan (i) to increase (except for increases due to adjustments in accordance with Section 8 hereof) the aggregate number of shares of Common Stock for which Options and/or Awards may be granted hereunder, (ii) to decrease the minimum exercise price specified by the Plan in respect of ISOs or (iii) to change the class of Employees eligible to receive ISOs under the Plan. Section 11. Termination of the Plan. The Board of Directors may terminate the Plan at any time. Unless the Plan shall theretofore have been terminated by the Board of Directors, the Plan shall terminate ten years after the date of its initial adoption by the Board of Directors. No Option and/or Award may be granted hereunder after termination of the Plan. The termination or amendment of the Plan shall not alter or impair any rights or obligations under any Option and/or Award theretofore granted under the Plan. Section 12. Effective Date of the Plan. The Plan shall be effective as of July 23, 1998, the date on which the Plan was adopted by the Board of Directors and approved by the requisite holders of outstanding capital stock of the Company. * * * * * 16 EX-10.13 5 SECOND AMENDMENT TO CREDIT AGREEMENT 1 EXHIBIT 10.13 SECOND AMENDMENT dated as of March 8, 2000 (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 certain provisions 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. AMENDMENTS. (a) The following defined terms are added to Section 1.01 in alphabetical order: "Permitted Acquisition" shall mean the acquisition by the Company or any Corporate Guarantor of the capital stock, membership interests or other ownership interests of a Person engaged in the same or similar business as the business of the Company or such Corporate Guarantor or the purchase of all or substantially all of the assets used by such Person in connection with such business or assets comprising a line of business or a division of such Person, provided in each case, (i) no Default or Event of Default shall have occurred and be continuing or would occur after giving effect to the acquisition, (ii) in the event of an acquisition of stock or of a membership interest of a Person, the Board of Directors or other governing body of such Person shall have recommended the sa1e by its shareholders or its members of their equity interest to the Company or the Corporate Guarantor, as the case may be, and (iii) Company shall have complied with the provisions of Section 6.13 hereof. "Qualifying IPO" shall mean an initial public offering of the Company's common stock pursuant to an effective registration statement on Form S-1 pursuant to which the Company has received proceeds, net of underwriting fees and reasonable out-of-pocket expenses incurred in connection therewith, of not less than $65,000,000. (b) The following defined terms are hereby amended and restated in their entirety to provide as follows: "Revolving Credit Commitment" shall mean with respect to each Lender the obligation of such Lender to make Revolving Credit Loans to the Company in aggregate amount not to exceed $6,000,000 with respect to SBLI and $14,000,000 with respect to EAB. "Revolving Credit Commitment Termination Date" shall mean June 30, 2003. 2 "Total Revolving Credit Commitments" shall mean, at any time, the aggregate of the Revolving Credit Commitments in effect at such time, which shall be initially $20,000,000. (c) Section 2.01(f) is hereby amended in its entirety to provide as follows: "(f) Intentionally Omitted." (d) Section 3.04(b) is hereby amended by deleting the reference to the phrase "1/8 of 1%" on the fifth line thereof and replacing it with the phrase "1/4 of 1%" in its place and stead. (e) Section 3.07 is hereby amended in its entirety to provide as follow: "PRO RATA TREATMENT AND PAYMENTS. Each borrowing by the Company from the Lenders shall be made by the Lenders as follows: (a) up to the first $12,000,000 of Revolving Credit Loans made by the Lenders shall be allocated between the Lenders as follows: (i) 50% to SBLI and (ii) 50% to EAB and (b) any requests for borrowings in excess of $12,000,000 shall be made solely by EAB. 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 that if the outstanding principal amount of the Revolving Credit Loans is greater than $12,000,000, then (a) that portion of the fee required to be paid pursuant to Section 3.04(b) which is allocable to that portion of the Revolving Credit Commitment which is in excess of $12,000,000 shall be paid solely to EAB for its account, with the balance of such such fee shared pro rata according the respective relevant Commitment Proportions of the Lenders and (b) any reduction of the Revolving Credit Commitment shall first reduce that portion of the Revolving Credit Commitment which is in excess of $12,000,000 and the balance thereof shall be be used to reduce the balance of the Revolving Credit 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, if the outstanding principal amount of the Revolving Credit Loans is in excess of $12,000,000, then (i) all payments of principal received in respect to the Revolving Credit Loans shall be applied first to those Revolving Credit Loans in excess of $12,000,000 which were made solely by EAB, until the principal amount of all such Revolving Credit Loans have been paid in full and (ii) all prepayments shall first be applied to those Revolving Credit Loans which are in excess of $12,000,000 and which were funded solely by EAB. 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 2 3 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 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. (f) Section 6.03 is hereby amended to redesignate clause (l) as clause (m) and to add a new clause (l) which shall read in its entirety as follows: "Notify the Agent and Lenders of the consummation of a Qualifying IPO on the date thereof." (g) Section 6.03 is further amended to insert the following text at the beginning of clause (i): "Prior to consummation of a Qualifying IPO," (h) Clause (j) of Section 6.03 is hereby amended and restated in its entirety to read as follows: "(j) (i) Prior to consummation of a Qualifying IPO, and after consummation of a Qualifying IPO if the aggregate principal amount of the Loans outstanding as of the end of the preceding month is equal to or greater than $5,000,000, 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 to the Lenders and, (ii) after consummation of a Qualifying IPO (but subject to clause (i)) as soon as available and in any event within twenty-one (21) days after the end of each fiscal quarter, detailed quarterly schedules of accounts receivable and accounts payables aging and a revenue summary, each in form and substance satisfactory to the Lenders." (i) Section 7.12 is hereby amended to delete all the text thereof commencing after the text "provided, however," and to add the text "the Company may consummate Permitted Acquisitions" in lieu thereof." (j) Section 7.14 is hereby amended to add the following text at the end thereof: "; provided, however, following the consummation of a Qualifying IPO the Company may prepay Subordinated Debt provided that after 3 4 giving effect to each such payment no Default or Event of Default shall have occurred and be continuing, including, without limitation, any Default or Event of Defau1t pursuant to Section 7.13." (k) Section 7.15 is hereby amended to add the following sentence at the end thereof: "Notwithstanding the foregoing, following consummation of a Qualifying IPO the Company may pay cumulative dividends with respect to its preferred stock accrued and unpaid for the period commencing January 1, 1999 through the date on which the Qualifying IPO is consummated provided no Default or Event of Default shall have occurred and be continuing or would occur after giving effect to such payment." (l) Section 8.01(k) is hereby amended to add the following text after the text "of record at least 51%": "or, following consummation of a Qualifying IPO, at least 40%," (m) Clauses (a), (b), (c), (d), (e) and (f) of Section 7.13 are hereby deleted in their entirety and the following new clauses (a),(b), (c) and (d) are added in lieu thereof: "(a) Minimum Consolidated EBITDA. Permit Consolidated EBITDA as of the last day of any calendar quarter to be less than the amount set forth below opposite the relevant calendar year:
Calendar Year Amount 2000 $15,500,000 2001 $20,000,000 2002 and each calendar year thereafter $21,000,000
(b) Consolidated Fixed Charge Ratio. Permit the Consolidated Fixed Charge Ratio as of the last day of any calendar quarter to be less than the amount set forth below opposite the relevant calendar year:
Calendar Year Ratio 2000 2.0:1.00 2001 2.75:1.00 2002 and each calendar year thereafter 2.75:1.00
(d) Consolidated Tangible Net Worth Plus Subordinated Debt. Prior to consummation of a Qualifying IPO, permit Consolidated Tangible Net Worth plus Subordinated Debt, as of the last day of any calendar 4 5 quarter, to be less than the amount set forth below opposite the relevant calendar year:
Calendar Year Amount 2000 $17,500,000 2001 $25,000,000 2002 and each calendar year thereafter $32,500,000
After consummation of a Qualifying IPO permit Consolidated Tangible Net Worth plus Subordinated Debt, as of the last day of any fiscal quarter, commencing with the fiscal quarter in which the Qualifying IPO occurs to be less than $75,000,000. (e) Consolidated Leverage Ratio. Prior to consummation of a Qualifying IPO, permit the Consolidated Leverage Ratio as of the last day of any fiscal quarter to exceed the ratio set forth opposite the relevant calendar year:
Calendar Year Ratio 2000 2.15:1.00 2001 1.85:1.00 2002 and each calendar year thereafter 1.45:1.00
After consummation of a Qualifying IPO, permit the Consolidated Leverage Ratio to exceed 1.0:1.0 as of the end of any fiscal quarter commencing with the fiscal quarter in which the Qualifying IPO occurs. (n) Article 10 is hereby amended to add a new Section 10.14 which shall read as follows: Section 10.14. RELEASE OF GUARANTEES. The Administrative Agent and the Lenders agree that provided no Default or Event of Default shall have occurred and be continuing as of the date of the consummation of a Qualifying IPO, effective upon the consummation of a Qualifying IPO the Individual Guarantors shall be released from their Individual Guaranties. Following such release, the Administrative Agent and the Lenders shall upon request of the Company deliver to the Company for the benefit of the Individual Guarantors a writing confirming that the Individual Guarantors are released from their obligations under their respective Individual Guarantees; (o) Exhibit A to the Credit Agreement is hereby amended and restated and is replaced with Exhibit A attached to this Amendment. 2. CONDITIONS TO EFFECTIVENESS. The amendments set forth herein are subject to satisfaction of the following conditions on the date hereof: 5 6 (a) The Administrative Agent shall have received a facility fee in the amount of $43,750, $13,125 of which shall be payable to SBLI and $30,625 of which shall be payable to EAB. (b) Each Lender shall have received an original Amended and Restated Note, in the applicable form attached hereto as Exhibit A, with the appropriate insertions and duly executed by the Company. (c) The Administrative Agent shall have been reimbursed for the reasonable legal fees of counsel incurred in connection with the preparation of the amendments. (d) The Administrative Agent shall have received the following: (i) UCC search results identifying the financing statements on file with respect to the Company; (ii) a certificate of the Secretary of the Borrower, (A) attesting to all corporate action taken by the Borrower, including resolutions of its Board of Directors authorizing the execution, delivery and performance of this Amendment and each other document to be delivered pursuant to this Amendment; (B) stating that, except as set forth in such certificate, the corporate documents previously delivered to the Lenders have not been amended, modified, revoked or rescinded as of the date of their prior certification and (C) certifying the names and true signatures of certain officers of the Borrower authorized to sign this Amendment and the other Loan Documents. (iii) a certificate of an Executive Officer of the Borrower stating that, except as set forth in such certificate with respect to a matter concerning the representations contained in clause (a) of Section 4.06 of the Credit Agreement, the representations and warranties in Article IV of the Credit Agreement are true and correct on such date as though made on and as of such date, unless such representation is as of a specific date, in which case, as of such date, and that no event has occurred as is continuing which constitutes a Default or Event of Default, (iv) such other documents, instruments, approvals, opinions and evidence as the Lenders may reasonably require. 3. MISCELLANEOUS. Capitalized terms used herein and not otherwise defined herein shall have the same meanings as defined in the Credit Agreement. 6 7 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) except as set forth in Schedule A hereto with respect to a matter concerning the representations contained in clause (a) of Section 4.06 of the Credit Agreement, 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 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. 7 8 IN WITNESS WHEREOF, the Company,the Administrative Agent and the 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 and as a Lender By: /s/ ANDREW CUNNINGHAM -------------------------- Name: Andrew Cunningham Title: Vice President STATE BANK OF LONG ISLAND, as a Lender By: /s/ MICHAEL SABALA ------------------------- Name: Michael Sabala Title: Vice President 8 9 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 J. O'Kane, Jr. /s/ KEVIN M. O'KANE ------------------ Kevin M. O'Kane 9 10 EXHIBIT A AMENDED AND RESTATED NOTE $6,000,000 New York, New York as of March , 2000 FOR VALUE RECEIVED, LEXENT INC. (f/k/a/ National Network Technologies, Inc.), a Delaware corporation (the "Company"), promises to pay to the order of STATE BANK OF LONG ISLAND (the "Lender"), on or before the Revolving Credit Commitment Termination Date, SIX MILLION DOLLARS ($6,000,000) or, if less, the unpaid principal amount of all Revolving Credit Loans made by the Lender to the Company under the Credit Agreement referred to below. The Company also promises to pay interest on the unpaid principal amount hereof from the date hereof until paid in full at the rates and at the times which shall be determined in accordance with the provisions of the Credit Agreement referred to below. This Note is the "Note" issued pursuant to and entitled to the benefits of the Credit Agreement dated as of June 29, 1999 by and among the Company, the Lender, European American Bank, as Agent for the Lenders and the Lenders referred to therein (as the same may be amended, modified or supplemented from time to time, the "Credit Agreement"), to which reference is hereby made for a more complete statement of the terms and conditions under which the Loan evidenced hereby was made and is to be repaid. Capitalized terms used herein without definition shall have the meanings set forth in the Credit Agreement. Each of the Lender and any subsequent holder of this Note agrees, by its acceptance hereof, that before transferring this Note, it shall record the date and amount of each payment or prepayment of principal of the Loan previously made hereunder on the grid schedule annexed to this Note; provided, however, that the failure of the Lender or holder to set forth the Loan, payments and other information on the attached grid schedule shall not in any manner affect the obligation of the Company to repay the Loan made by the Lender in accordance with the terms of this Note. This Note is subject to optional prepayments pursuant to Section 3.03 of the Credit Agreement. Upon the occurrence of an Event of Default, the unpaid balance of the principal amount of this Note, together with all accrued but unpaid interest thereon, may become, or may be declared to be, due and payable in the manner, upon the conditions and with the effect provided in the Credit Agreement. All payments of principal and interest in respect of this Note shall be made in lawful money of the United States of America in immediately available funds at the office of the Agent located at 335 Madison Avenue, New York, New York 10017, or at such other place as shall be designated in writing for such purpose in accordance with the terms of the Credit Agreement. This Note is an amendment and restatement of and is being issued in replacement of 10 11 and in substitution for, the Note, dated as of June 29, 1999, in the original principal amount of $5,000,000, issued by the Company to the order of the Lender (the "Original Note"); provided, however, that all principal unpaid and all interest accrued and unpaid under the Original Note shall be deemed to be evidenced by this Note and payable hereunder from and after the date hereof. The execution and delivery of this Note shall not be construed (i) to have constituted repayment of any principal or interest on the Original Note or (ii) to release, cancel, terminate or otherwise impair all or any part of the lien or security interest granted to the Lender as collateral security for the Original Note, all of which liens and security interests shall secure this Note. No reference herein to the Credit Agreement and no provision of this Note or the Credit Agreement shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this Note at the place, at the respective times, and in the currency herein prescribed. The Company and endorsers of this Note waive diligence, presentment, protest, demand, and notice of any kind in connection with this Note. THIS NOTE SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. IN WITNESS WHEREOF, the Company has caused this Note to be executed and delivered by its duly authorized officer as of the day and year and at the place first above written. LEXENT INC. (f/k/a National Network Technologies, Inc.) By ------------------------------------- Name: Jonathan Stern Title: Executive Vice President, CFO 11 12 SCHEDULE
Amount of Outstanding Type Applicable Amount of Notation Principal Principal of Interest Interest Principal Made Date Payment Balance Loan Rate Period Paid By - ---- ------- ------- ---- ---- ------ ---- --
12 13 AMENDED AND RESTATED NOTE $14,000,000 New York, New York as of March__, 2000 FOR VALUE RECEIVED, LEXENT INC. (f/k/a National Network Technologies, Inc.), a Delaware corporation (the "Company"), promises to pay to the order of EUROPEAN AMERICAN BANK (the "Lender"), on or before the Revolving Credit Commitment Termination Date, FOURTEEN MILLION DOLLARS ($14,000,000) or, if less, the unpaid principal amount of all Revolving Credit Loans made by the Lender to the Company under the Credit Agreement referred to below. The Company also promises to pay interest on the unpaid principal amount hereof from the date hereof until paid in full at the rates and at the times which shall be determined in accordance with the provisions of the Credit Agreement referred to below. This Note is the "Note" issued pursuant to and entitled to the benefits of the Credit Agreement dated as of June 29, 1999 by and among the Company, the Lender, European American Bank, as Agent for the Lenders and the Lenders referred to therein (as the same may be amended, modified or supplemented from time to time, the "Credit Agreement"), to which reference is hereby made for a more complete statement of the terms and conditions under which the Loan evidenced hereby was made and is to be repaid. Capitalized terms used herein without definition shall have the meanings set forth in the Credit Agreement. Each of the Lender and any subsequent holder of this Note agrees, by its acceptance hereof, that before transferring this Note, it shall record the date and amount of each payment or prepayment of principal of the Loan previously made hereunder on the grid schedule annexed to this Note; provided, however, that the failure of the Lender or holder to set forth the Loan, payments and other information on the attached grid schedule shall not in any manner affect the obligation of the Company to repay the Loan made by the Lender in accordance with the terms of this Note. This Note is subject to optional prepayments pursuant to Section 3.03 of the Credit Agreement. Upon the occurrence of an Event of Default, the unpaid balance of the principal amount of this Note, together with all accrued but unpaid interest thereon, may become, or may be declared to be, due and payable in the manner, upon the conditions and with the effect provided in the Credit Agreement. All payments of principal and interest in respect of this Note shall be made in lawful money of the United States of America in immediately available funds at the office of the Agent 13 14 located at 335 Madison Avenue, New York, New York 10017, or at such other place as shall be designated in writing for such purpose in accordance with the terms of the Credit Agreement. This Note is an amendment and restatement of and is being issued in replacement of and in substitution for, the Note, dated as of June 29, 1999, in the original principal amount of $7,500,000, issued by the Company to the order of the Lender (the "Original Note"); provided, however, that all principal unpaid and all interest accrued and unpaid under the Original Note shall be deemed to be evidenced by this Note and payable hereunder from and after the date hereof. The execution and delivery of this Note shall not be construed (i) to have constituted repayment of any principal or interest on the Original Note or (ii) to release, cancel, terminate or otherwise impair all or any part of the lien or security interest granted to the Lender as collateral security for the Original Note, all of which liens and security interests shall secure this Note. No reference herein to the Credit Agreement and no provision of this Note or the Credit Agreement shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this Note at the place, at the respective times, and in the currency herein prescribed. The Company and endorsers of this Note waive diligence, presentment, protest, demand, and notice of any kind in connection with this Note. THIS NOTE SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. IN WITNESS WHEREOF, the Company has caused this Note to be executed and delivered by its duly authorized officer as of the day and year and at the place first above written. LEXENT INC. (f/k/a National Network Technologies, Inc.) By ------------------------------------ Name: Jonathan Stern Title: Executive Vice President, CFO 14 15 SCHEDULE
Amount of Outstanding Type Applicable Amount of Notation Principal Principal of Interest Interest Principal Made Date Payment Balance Loan Rate Period Paid By - ---- ------- ------- ---- ---- ------ ---- --
15 16 SCHEDULE A In August 1999, a former employee of the Borrower filed a charge of employment discrimination against the Borrower with the New York State Division of Human Rights and the Equal Opportunity Commission and has been granted a right to sue in federal court. If suit is brought, management of the Borrower is prepared to defend any claims vigorously and believes that resolution of such claims should not have a Material Adverse Effect (as such term is defined in the Credit Agreement). However, although such former employee has not to date asserted any claims for a specified sum of money, any such claims, if asserted, could be for an amount in excess of $200,000. Furthermore, although management of the Borrower believes that any such claims should be covered by insurance (other than reasonable and customary deductibles), there is no assurance that such coverage will be available. 16 EX-11.1 6 STATEMENT RE COMPUTATION OF PER 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 45,433 $ 0.05 3,527 45,433 $ 0.08 ========= ======= EFFECT OF DILUTIVE SECURITIES: Convertible preferred stock -- -- 301 7,345 Common stock options -- -- -- -- -------------------------- -------------------------- NET INCOME PER SHARE - DILUTED: Income available to common shareholders plus assumed conversions $ 2,189 45,433 $ 0.05 $ 3,828 52,778 $ 0.07 ==============================================================================
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 45,442 $ 0.19 ========= EFFECT OF DILUTIVE SECURITIES: Convertible preferred stock 690 17,481 Common stock options -- 2,668 -------------------------- NET INCOME PER SHARE - DILUTED: Income available to common shareholders plus assumed conversions $ 9,256 65,591 $ 0.14 =====================================
EX-23.1 7 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 except for Note 14, as to which the date is March 28, 2000, relating to the financial statements of Lexent, Inc., and Subsidiaries which appears in such Registration Statement. We also consent to the reference to us under the headings "Experts" in such Registration Statement. PricewaterhouseCoopers LLP New York, NY March 28, 2000 -----END PRIVACY-ENHANCED MESSAGE-----