-----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, GUbWgwpaX2QnDiC5E1CTztXQ6gPYyFX0C1T7/LD1e4d+K6jyx7wK7lds3h+JGPx8 pj+DWmbbXCyj+aRvdA1uyg== /in/edgar/work/20000609/0000950123-00-005688/0000950123-00-005688.txt : 20000919 0000950123-00-005688.hdr.sgml : 20000919 ACCESSION NUMBER: 0000950123-00-005688 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 20000609 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEXENT INC CENTRAL INDEX KEY: 0001105503 STANDARD INDUSTRIAL CLASSIFICATION: [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: 652802 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 0001.txt AMENDMENT NO. 2 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 9, 2000. REGISTRATION NO. 333-30660 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 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. [ ] ------------------------ 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 JUNE 9, 2000 12,500,000 Shares [LEXENT 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 $5.50 and $6.50 per share. Our common stock has been approved for listing on The Nasdaq Stock Market's National Market under the symbol "LXNT." The underwriters have an option to purchase a maximum of 1,875,000 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] [LEXENT 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.............................. 29 Management............................ 37
PAGE ---- Certain Relationships and Related Transactions........................ 47 Principal Stockholders................ 50 Description of Capital Stock.......... 52 Shares Eligible for Future Sale....... 55 Underwriting.......................... 57 Notice to Canadian Residents.......... 59 Legal Matters......................... 60 Experts............................... 60 Where You Can Find Additional Information About Us................ 60 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 Level 3 Communications, Winstar Communications, MCI Worldcom, AT&T and Metromedia Fiber Network. We generated 25.7%, 13.2%, 8.3%, 7.8% and 5.0%, respectively, of our revenues 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 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 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 interconnec- 3 7 tions 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 nationwide provider of outsourced local telecommunications network services in major metropolitan markets for competitive local exchange carriers, 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.................. 12,500,000 shares Common stock to be outstanding after this offering......................... 79,885,072 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 June 8, 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: - 10,180,126 shares subject to options outstanding as of June 8, 2000, at a weighted average exercise price of $2.24 per share; and - 1,875,000 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
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------ ------------------ 1997 1998 1999 1999 2000 ------- ------- -------- ------- ------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF INCOME DATA: Revenues................................ $53,718 $70,959 $150,862 $20,165 $56,210 Operating income........................ 3,500 6,517 18,362 2,016 5,453 Net income.............................. $ 2,189 $ 3,828 $ 9,256 $ 964 $ 2,056 ======= ======= ======== ======= ======= Net income per share: Basic................................. $ 0.05 $ 0.08 $ 0.19 $ 0.02 $ 0.04 ======= ======= ======== ======= ======= Diluted............................... $ 0.05 $ 0.07 $ 0.14 $ 0.02 $ 0.03 ======= ======= ======== ======= ======= Weighted average shares: Basic................................. 45,433 45,433 45,442 45,433 46,563 ======= ======= ======== ======= ======= Diluted............................... 45,433 52,778 65,591 63,125 70,792 ======= ======= ======== ======= ======= 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 $ 0.02 $ 0.03 ======= ======= ======== ======= ======= Diluted............................... $ 0.03 $ 0.05 $ 0.14 $ 0.02 $ 0.03 ======= ======= ======== ======= ======= Pro forma weighted average shares: Basic................................. 45,433 54,048 65,071 62,914 66,192 ======= ======= ======== ======= ======= Diluted............................... 45,433 54,048 67,739 63,125 70,792 ======= ======= ======== ======= =======
AS OF MARCH 31, 2000 --------------------- AS ACTUAL ADJUSTED(3) ------- ----------- (UNAUDITED) CONSOLIDATED BALANCE SHEET DATA: Cash........................................................ $ 1,860 $ 62,779 Working capital............................................. 34,446 95,365 Total assets................................................ 72,609 133,528 Total debt.................................................. 18,766 11,625 Total stockholders' equity.................................. 13,733 94,456
- --------------- (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 and the (unaudited) three months ended March 31, 1999 and 2000 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 $6.00 per share), after deducting estimated underwriting discounts and commissions and estimated offering expenses and application of a portion of such proceeds to repay approximately $7.1 million of bank debt and payment of preferred dividends accrued from January 1, 1999 through March 31, 2000. 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. 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 March 31, 2000, we increased our number of employees from 415 to 861. 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, including: - 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; - telecommunications market conditions and economic conditions generally; - changes in the actual and estimated costs and timing to complete unit-price, time-certain projects; - the timing of expansion into new markets; and - the identification, timing and payments associated with possible acquisitions. 7 11 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 competitive local exchange carriers, 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 Charles Christ, our Executive Vice President in charge of sales and marketing, 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 861 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 COMPETITIVE LOCAL EXCHANGE CARRIERS 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 competitive local exchange carriers 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 competitive local exchange carriers 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 competitive local exchange carriers 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 81.03% 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 81.03% 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 52.55% 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 $4.81 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 79,885,072 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 20,400,000 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 $68.8 million from the sale of the 12,500,000 shares of common stock, or approximately $79.2 million if the underwriters exercise their over-allotment option in full, assuming an initial public offering price of $6.00 per share and after deducting the estimated underwriting discounts and commissions and offering expenses payable by us. We plan to use approximately $7.1 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 30, 2003. The prime rate was 9.0% as of March 31, 2000. We also intend to use approximately $1.0 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 March 31, 2000: - 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 $6.00 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 March 31, 2000. This information should be read together with our consolidated financial statements and related notes thereto included elsewhere in this prospectus.
AS OF MARCH 31, 2000 ----------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- --------- ----------- (IN THOUSANDS) (UNAUDITED) Cash....................................................... $ 1,860 $ 1,860 $ 62,779 ======= ======= ======== Long-term debt, including current portion(1): Revolving credit facility................................ $ 9,141 $ 9,141 $ 2,000 Subordinated notes payable to stockholders............... 6,719 6,719 6,719 Other debt............................................... 2,906 2,906 2,906 ------- ------- -------- Total long-term debt, including current portion:...... 18,766 18,766 11,625 ------- ------- -------- 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)........................................... 12,663 862 -- ------- ------- -------- Stockholders' Equity: Common stock, $.001 par value, 94,461,542 shares authorized, 47,755,824 shares outstanding(3).......... 48 67 80 Additional paid-in capital............................... 16,661 28,443 97,180 Deferred stock-based compensation........................ (5,189) (5,189) (5,189) Retained earnings........................................ 2,213 2,213 2,213 ------- ------- -------- Total stockholders' equity............................ 13,733 25,534 94,284 ------- ------- -------- Total capitalization....................................... $45,162 $45,162 $105,909 ======= ======= ========
- --------------- (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 $862 in the pro forma column represents the accrued dividends to be paid in cash upon the 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 (i) 9,936,876 shares subject to options outstanding as of March 31, 2000 at a weighted average exercise price of $1.97 per share, (ii) 857,000 options to purchase common stock granted since March 31, 2000 at a weighted average exercise price of $6.07 per share, (iii) 1,222,800 options to purchase common stock to be granted to some of our employees upon the closing of this offering at the offering price per share and (iv) subsequent to March 31, 2000, the expiration of 613,750 options at a weighted average price of $3.09. 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 March 31, 2000 was approximately $26.1 million, or $0.39 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 March 31, 2000, 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 $6.00 per share, and our receipt of the estimated net proceeds from the sale, our pro forma net tangible book value as of March 31, 2000 would have been approximately $95.2 million, or $1.19 per share. This represents an immediate increase in pro forma net tangible book value of $0.80 per share to existing stockholders and an immediate dilution of $4.81 per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price per share............. $6.00 Pro forma net tangible book value per share at March 31, 2000.............................................. $0.39 Increase per share attributable to new investors....... 0.80 ----- Pro forma net tangible book value per share after this offering.................................................. 1.19 ----- Dilution per share to new investors......................... $4.81 =====
The following table summarizes, on a pro forma basis as of March 31, 2000, 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 12,500,000 shares of common stock at an assumed initial public offering price of $6.00 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................. 67,385,072 84.4% $ 25,706,000 25.5% $0.38 New investors......................... 12,500,000 15.6% $ 75,000,000 74.5% $6.00 ---------- ----- ------------ ----- Total................................. 79,885,072 100.0% $100,706,000 100.0% ========== ===== ============ =====
The discussion and tables above assume no exercise of stock options outstanding as of March 31, 2000. As of March 31, 2000, there were options outstanding to purchase a total of 9,936,876 shares of common stock, with a weighted average exercise price of $1.97 per share. If holders exercise these outstanding options there will be further dilution. An additional (i) 857,000 options to purchase shares of common stock were granted at a weighted average exercise price of $6.07 per share since March 31, 2000, (ii) 1,222,800 options to purchase shares of common stock will be granted to some of our employees upon the closing of this offering at the offering price per share and (iii) subsequent to March 31, 2000, options for 613,750 shares with a weighted average exercise price of $3.09 expired. 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. The selected consolidated financial data as of March 31, 2000 and for the three months ended March 31, 1999 and 2000 are derived from our unaudited consolidated financial statements which appear elsewhere in this prospectus and, in our management's opinion, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of such data. 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.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ---------------------------------------------------- ------------------ 1995 1996 1997 1998 1999 1999 2000 ------- ------- ------- ------- -------- ------- ------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF INCOME DATA: Revenues..................... $25,618 $48,989 $53,718 $70,959 $150,862 $20,165 $56,210 Cost of revenues............. 20,444 38,959 43,226 56,497 120,750 16,227 42,655 General, administrative and marketing expenses......... 4,291 4,988 6,992 7,945 11,707 1,922 4,263 Non-cash stock-based compensation............... -- -- -- -- 43 -- 3,839 ------- ------- ------- ------- -------- ------- ------- Operating income............. 883 5,042 3,500 6,517 18,362 2,016 5,453 Interest expense............. 289 620 1,151 1,143 1,104 224 391 Other expense (income), net........................ (12) -- 9 166 27 -- (10) ------- ------- ------- ------- -------- ------- ------- Income before income taxes... 606 4,422 2,340 5,208 17,231 1,792 5,072 Provision for income taxes... 163 470 151 1,380 7,975 828 3,016 ------- ------- ------- ------- -------- ------- ------- Net income................... $ 443 $ 3,952 $ 2,189 $ 3,828 $ 9,256 $ 964 $ 2,056 ======= ======= ======= ======= ======== ======= ======= Net income per share: Basic...................... $ 0.01 $ 0.09 $ 0.05 $ 0.08 $ 0.19 $ 0.02 $ 0.04 ======= ======= ======= ======= ======== ======= ======= Diluted.................... $ 0.01 $ 0.09 $ 0.05 $ 0.07 $ 0.14 $ 0.02 $ 0.03 ======= ======= ======= ======= ======== ======= ======= Weighted average shares: Basic...................... 45,433 45,433 45,433 45,433 45,442 45,433 46,563 ======= ======= ======= ======= ======== ======= ======= Diluted.................... 45,433 45,433 45,433 52,778 65,591 63,125 70,792 ======= ======= ======= ======= ======== ======= ======= 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 ======= ======= ======= =======
18 22
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ---------------------------------------------------- ------------------ 1995 1996 1997 1998 1999 1999 2000 ------- ------- ------- ------- -------- ------- ------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) Pro forma net income per share(3): Basic...................... $ 0.01 $ 0.05 $ 0.03 $ 0.05 $ 0.14 $ 0.02 $ 0.03 ======= ======= ======= ======= ======== ======= ======= Diluted.................... $ 0.01 $ 0.05 $ 0.03 $ 0.05 $ 0.14 $ 0.02 $ 0.03 ======= ======= ======= ======= ======== ======= ======= Pro forma weighted average shares: Basic...................... 45,433 45,433 45,433 54,048 65,071 62,914 66,192 ======= ======= ======= ======= ======== ======= ======= Diluted.................... 45,433 45,433 45,433 54,048 67,739 63,125 70,792 ======= ======= ======= ======= ======== ======= =======
AS OF MARCH 31, 2000 ---------------------- AS OF DECEMBER 31, (UNAUDITED) --------------------------------------------------- PRO FORMA 1995 1996 1997 1998 1999 ACTUAL AS ADJUSTED ------- ------- ------- ------- ------- ------- ----------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash........................ $ 1,270 $ 1,526 $ 2,312 $ 1,495 $ 1,158 $ 1,860 $ 62,779 Working capital............. 143 2,847 2,516 10,691 24,853 34,446 95,365 Total assets................ 11,496 18,417 18,212 32,309 59,535 72,609 133,528 Total debt.................. 2,272 4,970 15,460 13,985 18,812 18,766 11,625 Total stockholders' equity (deficit)................. 743 3,795 (4,676) (6,388) 2,871 13,733 94,456
- --------------- (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 and the (unaudited) three months ended March 31, 1999 and 2000 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 and the (unaudited) three months ending March 31, 1999 and 2000, 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 March 31, 2000, we had approximately 740 employees working directly on projects and approximately 61 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 March 31, 2000, we had approximately 60 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 $9.1 million outstanding at March 31, 2000. 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. Non-cash stock-based compensation expense consists primarily of the amortization of deferred non-cash stock-based compensation resulting from the grant of stock options or sale of restricted stock at exercise or sale prices subsequently deemed, for financial reporting purposes, to be less than the fair value of the common stock on the grant or sale date. These deferred charges are being amortized to expense over the vesting periods of the options or restricted stock, ranging from immediately to up to four years. We recorded deferred non-cash stock-based compensation of $9.0 million in the first quarter of 2000 in connection with stock options granted and restricted stock issued during that period. Amortization of deferred non-cash stock-based compensation was $3.8 million for the first quarter of 2000, and we expect future amortization to be $1.2 million, $1.6 million, $1.6 million and $0.8 million for the last nine months of 2000 and the years 2001, 2002 and 2003, respectively. These amounts assume that all vesting periods are completed by all employees. To the extent that options are forfeited by an employee, previously recorded amortization will be credited to expense. Deferred tax benefits are recorded in connection with amortization of non-cash stock-based compensation expense related to non-qualified options, to the extent that we expect to realize such deferred tax benefits. These deferred tax benefits amounted to $1.0 million in the first quarter of 2000. 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. 21 25
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------- -------------- 1997 1998 1999 1999 2000 ----- ----- ----- ----- ----- CONSOLIDATED STATEMENT OF INCOME DATA: Revenues........................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues................................... 80.5 79.6 80.0 80.5 75.9 General, administrative and marketing expenses..... 13.0 11.2 7.8 9.5 7.6 Non-cash stock-based compensation.................. -- -- -- -- 6.8 Operating income................................... 6.5 9.2 12.2 10.0 9.7 Interest expense................................... 2.1 1.6 0.7 1.1 0.7 Other expense, net................................. -- 0.2 -- -- -- ----- ----- ----- ----- ----- Income before income taxes......................... 4.4 7.3 11.4 8.9 9.0 Provision for income taxes......................... 0.3 1.9 5.3 4.1 5.4 ----- ----- ----- ----- ----- Net income......................................... 4.1% 5.4% 6.1% 4.8% 3.7% ===== ===== ===== ===== =====
FIRST QUARTER 2000 COMPARED TO FIRST QUARTER 1999 Revenues. Our revenues increased by 179% to $56.2 million for the first quarter of 2000 from $20.2 million in the first quarter of 1999. The increase in revenues was primarily attributable to higher demand for our services from customers as they expanded their telecommunications networks. Cost of revenues. Our cost of revenues increased by 163% to $42.7 million for the first quarter of 2000 from $16.2 million in the first quarter of 1999. The increase was due in part to increased technical personnel in support of additional demand from customers for our services. The costs of technical personnel are comprised of wages, related benefits and payroll-based insurance premiums. We also increased our fleet of specialty vehicles in 2000. Cost of revenues declined to 75.9% of total revenues in the first quarter of 2000 from 80.5% in the same period of 1999, because an increased portion of our revenues was derived from higher-margin network upgrade and maintenance services this year. General, administrative and marketing expenses. Our general, administrative and marketing expenses increased 122% to $4.3 million for the first quarter of 2000 from $1.9 million in the first quarter of 1999. The increase was primarily due to $1.2 million for additional salaries and related benefits for new executive and administrative personnel required to support our increased revenues as well as a higher provision for unrealizable accounts receivable, which increased by $0.3 million in the first quarter of 2000 compared to the first quarter of 1999 as a result of our increased level of revenues. Non-cash stock-based compensation. We recorded amortization of non-cash stock-based compensation of $3.8 million in the first quarter of 2000 related to options and restricted stock granted during that period at exercise prices determined by our board of directors at dates of grant to be equal to the fair value of the underlying stock, but with respect to which, for financial reporting purposes, the exercise or sales prices were subsequently determined to be lower than the deemed fair values of the underlying common stock at dates of grant. Operating income. Operating income for the first quarter 2000 (before amortization of deferred non-cash stock-based compensation) was $9.3 million, compared with $2.0 million in the first quarter of 1999. After giving effect to amortization of deferred non-cash stock-based compensation, operating income in the first quarter of 2000 was $5.5 million. Interest expense. Interest expense increased to $0.3 million for the first quarter of 2000 from $0.2 million in the first quarter of 1999. The increase was due to a higher level of borrowings under our revolving credit line and increases in equipment and capital lease obligations. Provision for income taxes. Our effective tax rate is approximately 46% because a significant portion of our operations is currently concentrated in New York City, which subjects us to a local tax on income 22 26 derived in that jurisdiction. However, amortization of deferred non-cash stock-based compensation ($3.8 million in the first quarter of 2000) relates to both incentive stock options and nonqualified stock options, but tax benefits are not available for compensation expense recorded in connection with incentive stock options. Deferred tax benefits of $1.0 million were recorded in the first quarter of 2000 in connection with amortization of $2.3 million of non-cash stock-based compensation related to nonqualified stock options. The balance of $1.5 million of amortization of stock-based compensation in the first quarter of 2000 is not tax deductible because it relates to incentive stock options. As a result, our total effective tax rate for financial reporting purposes was 59% for the first quarter of 2000. 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 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 $11.7 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. 23 27 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 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 6% 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 nine quarters ended March 31, 2000. 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 nine quarterly periods cover each of our two most recently completed fiscal years and the interim period 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 24 28 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, MAR. 31, 1998 1998 1998 1998 1999 1999 1999 1999 2000 -------- -------- --------- -------- -------- -------- --------- -------- -------- (IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Revenues................. $13,149 $16,939 $19,406 $21,465 $20,165 $29,357 $46,020 $55,320 $56,210 Cost of revenues......... 10,678 14,047 15,492 16,280 16,227 24,749 36,733 43,041 42,655 General, administrative and marketing expenses............... 1,680 1,653 1,997 2,615 1,922 2,490 3,272 4,023 4,263 Non-cash stock-based compensation........... -- -- -- -- -- 19 11 13 3,839 ------- ------- ------- ------- ------- ------- ------- ------- ------- Operating income......... 791 1,239 1,917 2,570 2,016 2,099 6,004 8,243 5,453 Interest expense......... 251 248 261 383 224 238 290 352 391 Other expense (income), net.................... -- -- 166 -- -- -- 39 (12) (10) ------- ------- ------- ------- ------- ------- ------- ------- ------- Income before income taxes.................. 540 991 1,490 2,187 1,792 1,861 5,675 7,903 5,072 Provision for income taxes.................. 52 96 250 982 828 860 2,622 3,665 3,016 ------- ------- ------- ------- ------- ------- ------- ------- ------- Net income............... $ 488 $ 895 $ 1,240 $ 1,205 $ 964 $ 1,001 $ 3,053 $ 4,238 $ 2,056 ======= ======= ======= ======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF REVENUES: Revenues................. 100.0% 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 75.9 General, administrative and marketing expenses............... 12.8 9.8 10.3 12.2 9.5 8.5 7.1 7.3 7.6 Non-cash stock-based compensation........... -- -- -- -- -- 0.1 -- -- 6.8 ------- ------- ------- ------- ------- ------- ------- ------- ------- Operating income......... 6.0 7.3 9.9 12.0 10.0 7.1 13.0 14.9 9.7 Interest expense......... 1.9 1.5 1.3 1.8 1.1 0.8 0.6 0.6 0.7 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 9.0 Provision for income taxes.................. 0.4 0.6 1.3 4.6 4.1 2.9 5.7 6.6 5.4 ------- ------- ------- ------- ------- ------- ------- ------- ------- Net income............... 3.7% 5.3% 6.4% 5.6% 4.8% 3.4% 6.6% 7.7% 3.7% ======= ======= ======= ======= ======= ======= ======= ======= =======
NINE QUARTERS ENDED MARCH 31, 2000 Revenues. Over the nine quarters ended March 31, 2000, our quarterly revenues increased from $13.1 million to $56.2 million. Our quarterly revenues have grown in each of the nine quarters ended March 31, 2000 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. 25 29 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 March 31, 2000, we had cash of $1.9 million and $10.9 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 March 31, 2000, the prime rate was 9.0%. The line of credit is secured by substantially all of our business assets, including our membership interests and stock in our subsidiaries, and is senior to $6.7 million of subordinated indebtedness to our principal common stockholders. As of March 31, 2000, $9.1 million was outstanding under the credit facility. Under the terms of the credit facility, we are required to provide the banks with periodic financial statements and other reports, and we must meet specified thresholds with respect to profitability and a debt to net worth ratio. Additionally, covenants in the credit facility limit our ability to 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 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 used in operations was $2.7 million in the first quarter of 2000, $0.0 million in the year 1999 and $3.4 million in the year 1998. In the first quarter of 2000, our primary use of cash was to finance higher receivables, which increased by $10.0 million as a result of our increased revenues. This use of cash was offset in part by increases in accounts payable and accrued liabilities. 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 March 31, 2000, these hold-backs aggregated $0.9 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 $1.2 million in the first quarter of 2000 and $0.4 million, $0.9 million, and $2.9 million in the years 1997, 1998, and 1999, respectively. Investing activities consist primarily of capital expenditures to support our growth. Net cash provided from financing activities in the first quarter of 2000 was $4.6 million, comprised of $5.1 million in proceeds from exercises of stock options and sales of restricted stock, and borrowings under our revolving credit facility of $0.3 million, offset by payments of $0.4 million on a subordinated note payable to a stockholder, payments of $0.2 million to related parties and $0.3 million of repayments on equipment loans and capital leases. Net cash provided from financing activities in the year 1999 was $2.6 million, comprised of $8.8 million borrowed under our new revolving credit agreement and $0.4 million 26 30 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 the year 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 the year 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 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 $68.8 million in new equity funds, after underwriting discounts and expenses. We expect to use approximately $7.1 million of those funds to reduce outstanding borrowings under our revolving credit facility, and approximately $1.0 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 basic 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. 27 31 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 March 31, 2000, we had cash of $1.9 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. 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. 28 32 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 Level 3 Communications, Winstar Communications, MCI Worldcom, AT&T and Metromedia Fiber Network. We generated 25.7%, 13.2%, 8.3%, 7.8% and 5.0%, respectively, of our 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, National Network Technologies LLC and Lexent Services, Inc. were formed in June 1998, August 1998 and May 2000, 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 competitive local exchange carriers, 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 29 33 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. We have no contracts with any of these manufacturer 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 nationwide 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 30 34 consistently provide our customers with responsive, reliable and high quality service. We are committed to meeting the needs of our customers and strive to exceed their expectations in quality and speed to market. We believe we have been successful in developing customer loyalty and trust because of our high standards and responsiveness and the fact that a majority of our customers give us repeat business. Pursue Client-Driven Geographic Expansion in Major Metropolitan Areas. We have expanded our geographic presence with some of our key customers as they have grown their networks. This has allowed us to enter new markets with a customer base already in place. We believe that the major metropolitan areas in the U.S. represent a significant opportunity for future growth for us as competitive local exchange carriers, 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 with unbundled access to their local networks. Competitive local exchange carriers 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 competitive local exchange carriers' share of the growing local telecommunications market will increase significantly, resulting in a future competitive local exchange carrier market substantially larger than today. Competitive local exchange carriers 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, competitive local exchange carriers are able to provide 31 35 them with the broadband access that they increasingly need. The challenges of quickly building a complex local network, particularly over the last mile, require competitive local exchange carriers to allocate their resources efficiently. We believe this has increasingly led them to outsource network design, deployment, upgrades and maintenance. The demand for broadband Internet access and other enhanced data services is accelerating the adoption of new technologies. High speed fiber networks are being coupled with broadband wireless technologies to deliver enhanced telecommunications capabilities and applications to new customers and markets. According to 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. Competitive local exchange carriers 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 competitive local exchange carriers 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 competitive local exchange carriers 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, 32 36 posing system integration challenges. This situation is exacerbated by consolidation in the industry, which often entails the integration of distinct networks. The Need for Outsourcing We believe that telecommunications companies such as competitive local exchange carriers, 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 competitive local exchange carriers, 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. 33 37 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 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 competitive local exchange carriers, 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 competitive local exchange carriers, Internet service providers and carriers' carriers. Set forth below is a list of our largest customers and the percentage of our revenues generated by each of these customers during 1999. Level 3 Communications (25.7%) Winstar Communications (13.2%) MCI Worldcom (8.3%) AT&T (7.8%) Metromedia Fiber Network (5.0%) Nextlink Communications (4.2%) Network Plus (3.4%) Network Access Solutions (3.0%) Teligent (2.6%) 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 competitive local exchange carriers, 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 34 38 expertise with responsive, reliable and high quality service. We plan to implement this campaign through the use of selective advertising and promotional strategies, including the development of a web-based customer resource center. EMPLOYEES As of March 31, 2000, we had 861 employees, including 740 employees working directly on projects, 61 employees providing supervision and support to employees working directly on projects and 60 employees performing general and administrative work. Approximately 660 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 35 39 reputation in the industry, our knowledge of emerging technologies, as well as equipment from multiple vendors, and our highly trained workforce. FACILITIES We lease space at 20 separate locations throughout California, Florida, Georgia, Maryland, Massachusetts, New Jersey, New York and Pennsylvania. Of these locations, three are owned by entities owned by Hugh J. O'Kane, Jr., our Chairman, Kevin M. O'Kane, our Vice Chairman and Chief Operating Officer, and, for two of these three locations, also by 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, on or about March 31, 2000 a former employee, Italia Casella, filed a lawsuit against us in the U.S. District Court for the Southern District of New York, naming as defendants Lexent, Hugh O'Kane Electric Co., Hugh O'Kane Electric Co., LLC, National Network Technologies, LLC, and certain of our employees, officers and directors. Casella seeks, among other things, reinstatement with back and front pay, compensatory damages in excess of $5,050,000, punitive damages, costs and attorneys' fees based upon allegations of sexual harassment, employment discrimination and retaliation. Our management intends to defend this claim vigorously. As this litigation is still in its early stages, we are not yet able to determine whether the resolution of this matter will have a material adverse effect on our financial condition or results of operations. 36 40 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 Walter C. Teagle III.............. 50 Executive Vice President and Director Charles T. Christ................. 55 Executive Vice President, Sales and Marketing Sidney A. Sayovitz................ 51 Senior Vice President and General Counsel 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 Assistant 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 37 41 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. 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. Charles T. Christ has over 30 years experience in the telecommunications and computer industries. Prior to joining our company, he was the Western Region General Manager for AT&T since August 1998. From November 1992 to August 1998, Mr. Christ held various positions with TCG, most recently as its Vice President and Western Region General Manager. Mr. Christ holds a BS in Economics from Fordham University. Sidney A. Sayovitz has approximately 20 years experience representing publicly traded telecommunications companies, and has been General Counsel and a Senior Vice President of our company since April 2000. Prior to joining our company, he was a partner at Schenck, Price, Smith & King, LLP and served as the co-chairman of that law firm's corporate department. Prior to that position, Mr. Sayovitz was the Managing Partner of Young, Dimiero & Sayovitz. Mr. Sayovitz holds a BS from the City College of New York and a JD from the University of Pennsylvania Law 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. 38 42 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. 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 39 43 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. 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." 40 44 EXECUTIVE COMPENSATION The following table summarizes the compensation for services rendered to us during 1999 by our Chief Executive Officer and each of our other executive officers who earned more than $100,000 in salary and bonus during the last fiscal year. These individuals are referred to as the named executive officers. The compensation described in this table does not include medical or other benefits that are available generally to all of our salaried employees or certain perquisites or other personal benefits received that do not exceed the lesser of $50,000 or 10% of any such officer's salary and bonus. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION -------------------------------------------------- LONG-TERM COMPENSATION AWARDS OTHER ANNUAL SECURITIES ALL OTHER COMPENSATION UNDERLYING COMPENSATION NAME AND PRINCIPAL POSITION SALARY($) BONUS($) ($)(1) OPTIONS(#) ($) - --------------------------- --------- -------- ------------ ------------ ------------ Hugh J. O'Kane, Jr..................... 265,000 400,000 4,800 -- -- Chairman, President and Chief Executive Officer Kevin M. O'Kane........................ 265,000 400,000 4,800 -- -- Chief Operating Officer Jonathan H. Stern...................... 205,100 50,000 4,800 -- -- Executive Vice President and Chief Financial Officer
- --------------- (1) Compensation in this column reflects contributions made by us to our 401(k) plan on behalf of each of the named executive officers. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth, with respect to each of the named executive officers, information regarding the number and value of securities underlying unexercised options held by the named executive officers as of December 31, 1999. None of our named executive officers exercised options in 1999.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT AT FISCAL YEAR-END(#) FISCAL YEAR-END($) ------------------------------ ------------------------------ NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ----------- ------------- ----------- ------------- Hugh J. O'Kane, Jr. ................ -- -- -- -- Kevin M. O'Kane..................... -- -- -- -- Jonathan H. Stern................... 220,000 440,000 $1,283,000 $2,567,000
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 $6.00 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. 41 45 OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth, with respect to each of the named executive officers, information concerning grants of stock options and restricted stock in 2000. None of our named executive officers received options or stock in 1999.
POTENTIAL REALIZABLE VALUE AT ASSUMED NUMBER OF $ OF TOTAL ANNUAL RATES OF STOCK SECURITIES OPTIONS PRICE APPRECIATION FOR UNDERLYING GRANTED TO EXERCISE OR OPTION TERM($)(3) OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ----------------------- NAME GRANTED(#)(1) FISCAL YEAR(2) ($/SHARE) DATE 5% 10% ---- ------------- -------------- ----------- ---------- --------- ----------- Hugh J. O'Kane, Jr. ......... 120,000 4,862,000 3.67 2/14/10 452,400 1,147,200 Kevin M. O'Kane.............. 120,000 4,862,000 3.67 2/14/10 452,400 1,147,200 Jonathan H. Stern............ -- -- -- -- -- --
- ------------------------ (1) These options were granted on February 14, 2000. For each recipient, options to purchase 38,190 shares of our common stock were immediately vested as of the date of grant. The remainder of these options vest in equal monthly increments for the thirty-six months beginning on the first anniversary of the date of grant. (2) Does not include options to purchase an aggregate 1,066,600 shares of our common stock to be granted to some of our employees upon the closing of this offering at the offering price per share. (3) In accordance with the rules of the Commission, these amounts assume that the value of our common stock was $6.00 per share on the date the option was granted. The potential realizable values under such options are shown based on assumed rates of annual compound stock price appreciation of 5% and 10% over the full option term from the date the option was granted. These rates represent assumed rates of appreciation only. Actual gains, if any, on stock option exercises will depend upon the future performance of our common stock. 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, subject to periodic increases as approved by the compensation committee, 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, subject to periodic increases as approved by the compensation committee, 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. 42 46 In December 1999, we entered into substantially similar employment agreements with each of Messrs. Haines and DeJoy in which each agreed to serve as an Executive Vice President through December 2003. 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 and DeJoy are each paid compensation in amounts not less than $240,000 per year, subject to periodic increases as approved by the compensation committee, 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 and DeJoy each received options to purchase 1,050,000 shares, of our common stock at an exercise price of $3.33 per share upon execution of their respective agreements. These options vested as to the first 300,000 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 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, subject to periodic increases as approved by the compensation committee, 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 in March 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. In March 2000, we entered into an employment agreement with Mr. Sayovitz in which he agreed to serve as a Senior Vice President and our General Counsel through April 2004. Under this agreement, Mr. Sayovitz is paid compensation in amounts not less than $225,000 per year, subject to periodic increases as approved by the compensation committee, and in the event we achieve targeted performance standards, is entitled to receive a bonus of at least 40% of his base salary. In addition, Mr. Sayovitz received options to purchase 250,000 shares of our common stock at an exercise price equal to the initial public offering price per share. These options vest as to the first 41,667 shares in December 2000, the next 20,833 shares on the first anniversary of the date of grant and as to the balance in equal monthly installments over the 36 months thereafter. In the event Mr. Sayovitz is terminated without cause under this agreement, he is entitled to severance payments equal to 100% of his base salary for varying periods up but not exceeding 18 months. In June 2000, we entered into an employment agreement with Mr. Christ in which he agreed to serve as an Executive Vice President through May 2004. Under this agreement, Mr. Christ is paid compensation 43 47 in amounts not less than $240,000 per year, subject to periodic increases as approved by the compensation committee and in the event we achieve targeted performance standards, is entitled to receive a bonus of at least 40% of his base salary. In addition, Mr. Christ received options to purchase an additional 600,000 shares of our common stock at an exercise price of $6.00 per share. These options vested as to the first 150,000 shares on the date of grant and as to the balance in equal monthly installments over the 36 months after the first anniversary of the date of grant. Also, Mr. Christ is eligible to receive options to purchase at least 10,000 shares 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 Mr. Christ is terminated without cause under this agreement, he is entitled to severance payments equal to 100% of his base salary for varying periods up to but not exceeding 18 months. 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. 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 44 48 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. 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. 45 49 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. 46 50 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 an individual 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 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. 47 51 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. In May 2000, these options were amended to provide for an exercise price of $5.00 per share. In April 2000, we entered into a consulting agreement with Frank P. DeJoy, father of Victor P. DeJoy, an Executive Vice President. Under this agreement, Mr. DeJoy will provide consulting services for our company over the next year. As compensation for such services, Mr. DeJoy is entitled to $6,000 per month and various amounts of stock (up to 5,000 shares) depending on the revenues we receive from business he generates for our company. 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. As of March 31, 2000, 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 three of our facilities from entities owned by Hugh and Kevin O'Kane and for two of such facilities, also by 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. On May 1, 2000, we entered into a ten-year lease for a garage and warehouse facility in Long Island City, New York. The lease payments are $0.5 million per year commencing May 1, 2000. 48 52 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." 49 53 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 June 8, 2000, as adjusted to reflect the conversion of all outstanding shares of preferred stock upon the closing of this offering and 79,885,072 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 1,875,000 additional shares of our common stock, and up to 81,760,072 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% 31.54% Hugh J. O'Kane, Jr.(3).................................... 21,011,077 31.16 26.29 Abbott Capital 1330 Investors I, L.P.(4).................. 13,655,128 20.26 17.09 1330 Avenue of the Americas, Suite 2800 New York, New York 10019 Allegra Capital Partners III, L.P.(5)..................... 6,874,120 10.20 8.61 515 Madison Avenue -- 29th Floor New York, New York 10022 Alf T. Hansen(6).......................................... 1,591,248 2.35 1.98 Jonathan H. Stern(7)...................................... 302,500 * * Walter C. Teagle III(8)................................... 735,000 1.08 * Peter O. Crisp(9)......................................... 97,500 * * Thomas W. Hallagan(10).................................... 13,655,128 20.26 17.09 L. White Matthews III(11)................................. 95,883 * * Richard L. Schwob(12)..................................... 37,500 * * Richard W. Smith(13)...................................... 6,874,720 10.20 8.61 All current directors and executive officers as a group (14 persons)(14)........................................ 66,160,984 95.67% 81.03%
- --------------- * 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. 50 54 (2) Includes 38,190 shares subject to options exercisable within 60 days of June 8, 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 June 8, 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 June 8, 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 are subject to options exercisable within 60 days of June 8, 2000. (8) Includes 405,000 shares subject to options exercisable within 60 days of June 8, 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 June 8, 2000. (10) All shares are 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 20,883 shares subject to options exercisable within 60 days of June 8, 2000. (12) All shares are subject to options exercisable within 60 days of June 8, 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 that Allegra Capital Partners IV, L.P. may purchase in this offering. (14) Includes 1,768,961 shares subject to options exercisable within 60 days of June 8, 2000. 51 55 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 June 8, 2000, after giving effect to the conversion of all outstanding redeemable convertible preferred stock into common stock but before giving effect to this offering, there were outstanding 67,385,072 shares of common stock held of record by 33 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 52 56 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 change 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 53 57 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 Our common stock has been approved for listing on The Nasdaq Stock Market's 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. 54 58 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 79,885,072 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 798,850 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 55 59 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. 56 60 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..................................................... 12,500,000 ==========
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 1,875,000 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. 57 61 The underwriters have reserved for sale, at the initial public offering price, up to 625,000 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 833,333 shares of common stock to Allegra Capital 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. Our common stock has been approved for listing on The Nasdaq Stock Market's 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 Stock Market's 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. 58 62 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. 59 63 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. 60 64 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 and March 31, 2000 (unaudited).............................. F-3 Consolidated Statements of Income for the Years Ended December 31, 1997, 1998 and 1999 and the (unaudited) three months ended March 31, 1999 and 2000........................ F-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1998 and 1999 and the (unaudited) three months ended March 31, 1999 and 2000........................ F-5 Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the Years Ended December 31, 1997, 1998 and 1999 and the (unaudited) three months ended March 31, 2000........................................................ F-6 Notes to Consolidated Financial Statements.................. F-7
F-1 65 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 66 LEXENT INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, DECEMBER 31, MARCH 31, 1998 1999 2000 ------------ ------------ ----------- (UNAUDITED) ASSETS: Current Assets: Cash................................................. $ 1,495 $ 1,158 $ 1,860 Receivables, net..................................... 26,342 48,748 58,490 Prepaid expenses and other assets.................... 535 156 406 Deferred tax asset, net.............................. 1,696 2,748 3,791 ------- ------- ------- Total current assets.............................. 30,068 52,810 64,547 ------- ------- ------- Property and equipment, net............................ 2,087 6,180 7,046 Other assets........................................... 154 545 1,016 ------- ------- ------- Total assets...................................... $32,309 $59,535 $72,609 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT): Current Liabilities: Accounts payable..................................... $ 5,369 $ 8,434 $ 8,926 Accrued liabilities.................................. 4,149 9,613 10,657 Income taxes payable................................. 3,076 5,798 4,783 Billings in excess of costs and estimated earnings on uncompleted projects.............................. 306 1,084 2,821 Notes payable to bank................................ 4,500 -- -- Subordinated notes payable to stockholder............ 1,582 1,582 1,582 Equipment and capital lease obligations.............. 384 1,014 1,072 Due to related parties............................... 11 432 260 ------- ------- ------- Total current liabilities......................... 19,377 27,957 30,101 ------- ------- ------- Subordinated notes payable to stockholders............. 7,114 5,533 5,137 Notes payable to banks................................. -- 8,841 9,141 Equipment and capital lease obligations................ 405 1,842 1,834 ------- ------- ------- Total liabilities................................. 26,896 44,173 46,213 ------- ------- ------- Commitments and contingencies Redeemable convertible preferred stock at stated liquidation preference of $2.131 per share at 1998, $2.2553 per share at 1999, and $2.2864 per share at 2000, $.001 par value, 5,538,458 shares authorized, issued and outstanding............................... 11,801 12,491 12,663 ------- ------- ------- Stockholders' equity (deficit): Common stock, $.001 par value, 94,461,542 shares authorized, 45,433,200, 45,838,200 and 47,755,824 shares outstanding at 1998, 1999 and 2000, respectively...................................... 45 46 48 Additional paid-in capital........................... 1,804 2,532 16,661 Deferred stock-based compensation.................... -- (36) (5,189) Retained earnings (accumulated deficit).............. (8,237) 329 2,213 ------- ------- ------- Total stockholders' equity (deficit).............. (6,388) 2,871 13,733 ------- ------- ------- Total liabilities and stockholders' equity........ $32,309 $59,535 $72,609 ======= ======= =======
See accompanying notes to consolidated financial statements. F-3 67 LEXENT INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ---------------------------- ------------------- 1997 1998 1999 1999 2000 ------- ------- -------- -------- -------- (UNAUDITED) Revenues.................................... $53,718 $70,959 $150,862 $20,165 $56,210 Cost of revenues............................ 43,226 56,497 120,750 16,227 42,655 General, administrative and marketing expenses.................................. 6,992 7,945 11,707 1,922 4,263 Non-cash stock-based compensation........... -- -- 43 -- 3,839 ------- ------- -------- ------- ------- Operating income............................ 3,500 6,517 18,362 2,016 5,453 Interest expense............................ 1,151 1,143 1,104 224 391 Other expense, net.......................... 9 166 27 -- (10) ------- ------- -------- ------- ------- Income before income taxes.................. 2,340 5,208 17,231 1,792 5,072 Provision for income taxes.................. 151 1,380 7,975 828 3,016 ------- ------- -------- ------- ------- Net income.................................. $ 2,189 $ 3,828 $ 9,256 $ 964 $ 2,056 ======= ======= ======== ======= ======= Net income per share: Basic..................................... $ 0.05 $ 0.08 $ 0.19 $ 0.02 $ 0.04 ======= ======= ======== ======= ======= Diluted................................... $ 0.05 $ 0.07 $ 0.14 $ 0.02 $ 0.03 ======= ======= ======== ======= ======= Weighted average common shares outstanding: Basic..................................... 45,433 45,433 45,442 45,433 46,563 ======= ======= ======== ======= ======= Diluted................................... 45,433 52,778 65,591 63,125 70,792 ======= ======= ======== ======= ======= 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 $ 0.02 $ 0.03 ======= ======= ======== ======= ======= Diluted................................... $ 0.03 $ 0.05 $ 0.14 $ 0.02 $ 0.03 ======= ======= ======== ======= ======= Pro forma weighted average common shares outstanding (unaudited): Basic..................................... 45,433 54,048 65,071 62,914 66,192 ======= ======= ======== ======= ======= Diluted................................... 45,433 54,048 67,739 63,125 70,792 ======= ======= ======== ======= =======
See accompanying notes to consolidated financial statements. F-4 68 LEXENT INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------------- ------------------ 1997 1998 1999 1999 2000 ------- -------- -------- ------- -------- (UNAUDITED) Cash flows from operating activities: Net income............................................ $ 2,189 $ 3,828 $ 9,256 $ 964 $ 2,056 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for uncollectible amounts, net............ (102) 1,096 1,812 241 498 Depreciation and amortization....................... 510 779 1,495 198 658 Loss on disposition of assets....................... -- 42 71 -- 7 Stock option compensation expense................... -- -- 43 -- 3,839 Provision for deferred taxes........................ -- (1,696) (1,052) 511 (1,043) Changes in working capital items: Receivables....................................... 1,924 (13,854) (24,218) 2,936 (10,240) Prepaid expenses and other assets................. (244) (1) (12) 59 (721) Accounts payable.................................. 962 658 3,065 (545) 492 Accrued liabilities............................... 433 2,613 5,464 (865) 1,044 Income taxes payable.............................. (147) 3,012 3,304 (1,655) (1,015) Billings in excess of costs and estimated earnings on uncompleted projects........................ (947) 110 778 129 1,737 ------- -------- -------- ------- -------- Net cash provided by (used in) operating activities................................... 4,578 (3,413) 6 1,973 (2,688) ------- -------- -------- ------- -------- Cash flows from investing activities: Acquisitions of property, plant and equipment, net of equipment loans and capital leases.................. (414) (910) (2,908) (522) (1,221) Net cash used in investing activities.......... (414) (910) (2,908) (522) (1,221) ------- -------- -------- ------- -------- Cash flows from financing activities: Proceeds from issuance of convertible preferred stock............................................... -- 11,500 -- -- -- Proceeds from exercise of stock options and sales of restricted stock.................................... -- -- 68 -- 5,139 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) (395) (396) Borrowings under revolving credit agreement........... 100 -- 8,841 -- 300 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 (40) (172) Repayment of equipment loans and capital leases....... (243) (404) (684) (110) (260) ------- -------- -------- ------- -------- Net cash provided by (used in) financing activities................................... (3,377) 3,506 2,565 (545) 4,611 ------- -------- -------- ------- -------- Net increase (decrease) in cash......................... 787 (817) (337) 906 702 Cash at beginning of year............................... 1,525 2,312 1,495 1,495 1,158 ------- -------- -------- ------- -------- Cash at end of year..................................... $ 2,312 $ 1,495 $ 1,158 $ 2,401 $ 1,860 ======= ======== ======== ======= ======== Supplemental cash flow information: Cash paid for: Interest............................................ $ 518 $ 1,626 $ 1,009 $ 225 $ 356 Income taxes........................................ 288 252 3,532 1,958 5,071 Supplemental disclosures of noncash investing and financing activities: Property, plant and equipment additions financed by equipment loans and capital leases.................. $ 423 $ 443 $ 2,751 $ 45 $ 310 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................. -- 301 690 172 172 Tax benefit from exercise of nonqualified stock options............................................. -- -- 582 -- --
See accompanying notes to consolidated financial statements. F-5 69 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 DEFERRED PREFERRED PREFERRED COMMON COMMON PAID-IN (ACCUMULATED STOCK-BASED STOCK STOCK STOCK STOCK CAPITAL DEFICIT) COMPENSATION ----------- ----------- -------- ------ ---------- ------------ ------------ Balance January 1, 1997............ -- $ -- $100 $ -- $ 3,786 -- Purchase of common stock (43.5 shares).......................... -- -- -- -- -- (1,483) -- Distributions to common stockholders..................... -- -- -- -- -- (450) -- Net income......................... -- -- -- -- -- 2,189 -- ------ ------- ------ ---- ------- ------- ------- Balance at December 31, 1997....... -- $ -- $100 $ -- $ 4,042 $ -- 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) -- Dividends declared to common stockholders..................... -- -- -- -- -- (4,900) -- Net income January 1, 1998 through July 23, 1998.................... -- -- -- -- -- 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) -- Dividends accrued on preferred shares........................... -- 301 -- -- -- (301) -- Net income July 24, 1998 through December 31, 1998................ -- -- -- -- -- 2,024 -- ------ ------- ------ ---- ------- ------- ------- Balance at December 31, 1998....... 5,538 $11,801 45,433 $ 45 $ 1,804 $(8,237) $ -- Issuance of 405,000 common shares........................... -- -- 405 1 67 -- -- Tax benefit from exercise of nonqualified stock options....... -- -- -- -- 582 -- -- Deferred stock-based compensation..................... -- -- -- -- 79 -- (79) Amortization of deferred stock-based compensation......... -- -- -- -- -- -- 43 Dividends accrued on preferred shares........................... -- 690 -- -- -- (690) -- Net income......................... -- -- -- -- -- 9,256 -- ------ ------- ------ ---- ------- ------- ------- Balance at December 31, 1999....... 5,538 $12,491 45,838 $ 46 $ 2,532 $ 329 $ (36) Issuance of 1,917,624 common shares (unaudited)...................... -- -- 1,918 2 5,137 -- -- Deferred stock-based compensation (unaudited)...................... -- -- -- -- 8,992 -- (8,992) Amortization of deferred stock-based compensation (unaudited)...................... -- -- -- -- -- -- 3,839 Dividends accrued on preferred shares (unaudited)............... -- 172 -- -- -- (172) -- Net Income (unaudited)............. -- -- -- -- -- 2,056 ------ ------- ------ ---- ------- ------- ------- Balance at March 31, 2000 (unaudited)...................... 5,538 $12,663 47,756 $ 48 $16,661 $ 2,213 $(5,189) ====== ======= ====== ==== ======= ======= ======= STOCKHOLDERS' EQUITY ------------------------ TREASURY TOTAL STOCK, STOCKHOLDERS' AT COST EQUITY -------- ------------- Balance January 1, 1997............ $ (91) $ 3,795 Purchase of common stock (43.5 shares).......................... (8,727) (10,210) Distributions to common stockholders..................... -- (450) Net income......................... -- 2,189 ------- -------- Balance at December 31, 1997....... $(8,818) $ (4,676) Conversion of Hugh O'Kane Electric Co. Inc. common shares into Lexent Inc. common shares........ -- -- Cancellation of treasury stock due to merger of Hugh O'Kane Electric Co. Inc. into Lexent Inc......... 8,818 -- Dividends declared to common stockholders..................... -- (4,900) Net income January 1, 1998 through July 23, 1998.................... -- 1,804 Transfer of undistributed retained earnings to additional paid-in capital upon termination of S Corporation election............. -- -- Issuance of 5,538,458 redeemable convertible preferred shares at $2.07639 per share............... -- -- Cost of issuing preferred shares... -- (339) Dividends accrued on preferred shares........................... -- (301) Net income July 24, 1998 through December 31, 1998................ -- 2,024 ------- -------- Balance at December 31, 1998....... $ -- $ (6,388) Issuance of 405,000 common shares........................... -- 68 Tax benefit from exercise of nonqualified stock options....... -- 582 Deferred stock-based compensation..................... -- -- Amortization of deferred stock-based compensation......... -- 43 Dividends accrued on preferred shares........................... -- (690) Net income......................... -- 9,256 ------- -------- Balance at December 31, 1999....... $ -- $ 2,871 Issuance of 1,917,624 common shares (unaudited)...................... -- $ 5,139 Deferred stock-based compensation (unaudited)...................... -- -- Amortization of deferred stock-based compensation (unaudited)...................... -- 3,839 Dividends accrued on preferred shares (unaudited)............... -- (172) Net Income (unaudited)............. 2,056 ------- -------- Balance at March 31, 2000 (unaudited)...................... $ -- $ 13,733 ======= ========
See accompanying notes to consolidated financial statements. F-6 70 LEXENT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000) 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. UNAUDITED INTERIM FINANCIAL INFORMATION The interim financial statements of the Company for the three months ended March 31, 2000 and 1999, included herein, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations relating to interim financial statements. In the opinion of management, the accompanying unaudited statements reflect all F-7 71 LEXENT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000) adjustments, consisting of normal recurring adjustments, considered necessary to present fairly the financial position of the Company at March 31, 2000, and the results of their operations and their cash flows for the three months ended March 31, 2000 and 1999. 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. 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. F-8 72 LEXENT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000) 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 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. Deferred non-cash stock-based compensation is recorded when the exercise price of an option or the sale price of restricted stock is lower than the fair market value of the underlying stock on the grant or sale date. For certain options and restricted stock granted in the first quarter of 2000, the exercise or sale prices were determined by the Board of Directors at dates of grant to be equal to the fair value of the underlying stock; however such exercise or sale prices were subsequently determined to be lower than the deemed fair values for financial reporting purposes of the underlying common stock on the date of grant. Accordingly, for those options and restricted stock grants, the Company has recorded deferred non-cash stock-based compensation. Amortization of deferred non-cash stock-based compensation is recorded over the vesting periods of the options or restricted stock, ranging from immediately to up to four years. Deferred tax benefits are recorded in connection with amortization of deferred non-cash stock-based compensation related to non-qualified options, to the extent that the Company expects to realize such tax benefits. 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 F-9 73 LEXENT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000) rates comparable to current terms offered to the Company for instruments of similar risk. The carrying amounts reported for the notes payable to banks approximate fair value because the interest rate on such notes fluctuates with the prime rate. The fair values of subordinated notes payable to stockholders are not estimable due to their related party nature. SEGMENT REPORTING All of the Company's business activities are aggregated into one reportable segment given the similarities of economic characteristics between the activities and the common nature of the Company's services and customers. RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, which requires entities to capitalize certain cost related to internal-use software once certain criteria have been met. In April 1998, the same committee issued Statement of Position 98-5, Reporting on the Costs of Start-Up Activities. These standards are effective for the first quarter of the year 1999. The adoption of these standards did not have a material effect on our consolidated financial statements. NET INCOME PER SHARE Basic net income per share is computed by dividing net income (after deducting dividends accrued on preferred stock) by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of other securities by assuming the redeemable convertible preferred stock had been converted into common stock as of the later of the date of issuance of the preferred stock or the beginning of the fiscal period presented at the conversion rates that would have been in effect at such dates (and without deducting from net income dividends accrued on preferred stock), and by including the dilutive effect of outstanding stock options in the weighted average number of common 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:
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------ --------------- 1997 1998 1999 1999 2000 ------ ------ ------ ------ ------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NET INCOME PER SHARE -- BASIC: Net Income.................................... $2,189 $3,828 $9,256 $ 964 $2,056 Less: preferred dividends..................... -- (301) (690) (172) (172) ------ ------ ------ ------ ------ Net income available to common shareholders... $2,189 $3,527 $8,566 $ 792 $1,884 ====== ====== ====== ====== ====== Weighted average shares -- basic.............. 45,433 45,433 45,442 45,433 46,563 ====== ====== ====== ====== ====== Net Income per share -- basic................. $ 0.05 $ 0.08 $ 0.19 $ 0.20 $ 0.40 ====== ====== ====== ====== ======
F-10 74 LEXENT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000)
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------ --------------- 1997 1998 1999 1999 2000 ------ ------ ------ ------ ------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NET INCOME PER SHARE -- DILUTED: Net Income.................................... $2,189 $3,828 $9,256 $ 964 $2,056 ====== ====== ====== ====== ====== Weighted average shares outstanding........... 45,433 45,433 45,442 45,433 46,563 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 17,481 19,629 Dilutive effect of stock options.............. -- -- 2,668 211 4,600 ------ ------ ------ ------ ------ Weighted average shares -- diluted............ 45,433 52,778 65,591 63,125 70,792 ====== ====== ====== ====== ====== Net income per share -- diluted............... $ 0.05 $ 0.07 $ 0.14 $ 0.02 $ 0.03 ====== ====== ====== ====== ======
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 and the (unaudited) three months ended March 31, 2000 and 1999, reflects the pro forma effect of the conversion of redeemable convertible preferred stock into common stock upon the consummation of the Company's initial public offering at the conversion rate of 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 F-11 75 LEXENT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000) 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:
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, -------------------------------- -------------------- 1997 1998 1999 1999 2000 -------- -------- -------- -------- -------- (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 $ 964 $2,056 ====== ====== ====== ====== ====== Weighted average shares -- actual..... 45,433 45,433 45,442 45,433 46,563 Assumed conversion of preferred stock at 3.54417 common shares for each share of redeemable convertible preferred stock..................... -- 8,616 19,629 17,481 19,629 ------ ------ ------ ------ ------ Pro forma weighted average shares -- basic..................... 45,433 54,048 65,071 62,914 66,192 ====== ====== ====== ====== ====== Pro forma net income per share -- basic...................... $ 0.03 $ 0.05 $ 0.14 $ 0.02 $ 0.03 ====== ====== ====== ====== ====== PRO FORMA NET INCOME PER SHARE -- DILUTED: Adjustments to basic weighted average shares for outstanding options...... -- -- 2,668 211 4,600 ------ ------ ------ ------ ------ Pro forma weighted average shares -- diluted............................. 45,433 54,048 67,739 63,125 70,792 ====== ====== ====== ====== ====== Pro forma net income per share -- diluted.................... $ 0.03 $ 0.05 $ 0.14 $ 0.02 $ 0.03 ====== ====== ====== ====== ======
2. RECEIVABLES, NET
DECEMBER 31, DECEMBER 31, MARCH 31, 1998 1999 2000 ------------ ------------ --------- (IN THOUSANDS) Accounts receivable -- billed to customers...... $18,567 $30,226 $37,586 Unbilled receivables on completed projects accounted for under the completed contract method........................................ 3,883 4,908 8,700 Costs and estimated earnings in excess of billings on projects accounted for under the percentage-of-completion method............... 1,832 3,858 1,867 Unbilled receivables on cost-plus contracts..... -- 6,066 6,341 Costs of uncompleted projects accounted for under the completed contract method........... 3,116 6,138 7,119 Retainage....................................... 734 1,154 977 ------- ------- ------- 28,132 52,350 62,590 Less: allowance for uncollectible amounts....... (1,790) (3,602) (4,100) ------- ------- ------- $26,342 $48,748 $58,490 ======= ======= =======
For the years ended December 31, 1997, 1998, 1999 and the (unaudited) three months ended March 31, 2000, the Company's provision for uncollectible amounts were $0.5 million, $1.6 million, $2.4 million and $1.2 million, respectively. The amounts written off against the provision for those years were $0.6 million, $0.5 million, $0.6 million and $0.7 million, respectively. Amounts retained by customers related to projects which are progress-billed may be outstanding for periods that exceed one year. F-12 76 LEXENT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000) 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-13 77 LEXENT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000) 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. F-14 78 LEXENT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000) 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 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. On May 1, 2000, the Company entered into a ten-year lease for a garage and warehouse facility in Long Island City, New York. The lease payments are $0.5 million per year commencing May 1, 2000. The facility is leased from an entity which is owned by the Company's two principal common stockholders. 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 ====== ======= ======
F-15 79 LEXENT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000) 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. 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, on or about March 31, 2000 a former employee filed a lawsuit against the Company and certain of the Company's employees, officers and directors in the U.S. District Court for the Southern District of New York, seeking, among other things, reinstatement with back and front pay, compensatory damages in excess of $5,050,000, punitive damages, costs and attorneys' fees based upon allegations of sexual harassment, employment discrimination and retaliation. The Company intends to defend this claim vigorously. As this litigation is still in its early stages, the Company is not yet able to determine whether the resolution of this matter will have a material adverse effect on the Company's financial condition or results of operations. F-16 80 LEXENT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000) 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 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 and the (unaudited) three months ended March 31, 2000, dividends have been accrued as additional value of preferred stock in the amounts of $0.3 million, $0.7 million and $0.2 million, respectively, offset by a charge to retained earnings (accumulated deficit). F-17 81 LEXENT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000) 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. 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 Granted.................................... 4,005,000 $3.07 $4.80 Exercised.................................. (1,212,624) $2.30 Canceled................................... -- -- ---------- Outstanding at March 31, 2000................ 9,936,876 $1.97 ==========
F-18 82 LEXENT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000) 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 ========= =========
The following table summarizes options outstanding and exercisable at March 31, 2000:
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 4,638,876 8.9 $ 0.28 1,516,055 $ 0.25 $3.33 4,983,000 8.4 $ 3.33 1,409,852 $ 3.33 $3.67 240,000 9.8 $ 3.67 76,380 $ 3.67 $10.00 75,000 9.8 $10.00 37,500 $10.00 --------- --------- 9,936,876 $ 1.97 3,039,787 $ 1.89 ========= =========
During the three months ended March 31, 2000, the Company granted options to purchase 4,005,000 shares of common stock at exercise prices ranging from $3.33 to $10.00 per share and issued rights to purchase 705,000 shares of restricted stock at $3.33 per share. During the three months ended March 31, 2000, options were exercised to purchase 1,212,624 shares of common stock at prices ranging from $0.24 to $3.33 per share, and the Company issued 705,000 shares of restricted stock at $3.33 per share. For certain options and restricted stock granted in the first quarter of 2000, the exercise or sale prices were determined by the Board of Directors at dates of grant to be equal to the fair value of the underlying stock, however such exercise or sale prices were subsequently determined to be lower than the deemed fair values for financial reporting purposes of the underlying common stock on the date of grant. Accordingly, for those options and restricted stock grants, the Company recorded deferred non-cash stock-based compensation of $9.0 million in the first quarter of 2000. Amortization of such deferred non-cash stock-based compensation in the first quarter of 2000 was $3.8 million. Deferred tax benefits of $1.0 million were recorded in the first quarter of 2000 in connection with amortization of deferred non-cash stock-based compensation related to non-qualified options, to the extent that the Company expects to realize such tax benefits. 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, through December 31, 1999 the Company was 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 F-19 83 LEXENT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000) pricing methodology, the 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 F-20 84 LEXENT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000) establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information. 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 released the restriction on acquisition of other businesses in excess of $250,000 in any calendar year, and also provides for the release of the following, upon consummation of an initial public offering: restriction on payment of cumulative dividends on preferred stock and personal guarantees of the Company's stockholders. F-21 85 [Lexent Logo] 86 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......................................... 95,000 Legal Fees and Expenses..................................... * Blue Sky Fees and Expenses.................................. 10,500 Accounting Fees and Expenses................................ * Printing and Engraving...................................... 200,000 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 87 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 June 8, 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 12,411,500 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 88 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. 3.5 -- Certificate of Amendment to Amended and Restated Certificate of Incorporation of Registrant. 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. 10.11** -- 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. 10.14+ -- Engineer, Procure and Construct Contract, dated December 28, 1998, between Level 3 Communications, LLC and Registrant. 10.15 -- Employment Agreement, dated March 30, 2000, between Sidney A. Sayovitz and Registrant.
II-3 89
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.16 -- Employment Agreement, dated June 1, 2000 between Charles T. Christ 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. + Portions of this exhibit have been filed confidentially with the Commission pursuant to a confidential treatment request filed by the Registrant. (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 90 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 June 8, 2000. LEXENT INC. By: /s/ HUGH J. O'KANE, JR. ------------------------------------ Hugh J. O'Kane, Jr. Chairman of the Board of Directors 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 June 8, 2000 - --------------------------------------------------- Officer (Principal Alf T. Hansen executive officer); Director * Executive Vice President and June 8, 2000 - --------------------------------------------------- Chief Financial Officer Jonathan H. Stern (Principal financial and accounting officer) * Chairman of the Board of June 8, 2000 - --------------------------------------------------- Directors Hugh J. O'Kane, Jr. * Vice Chairman and Chief June 8, 2000 - --------------------------------------------------- Operating Officer Kevin M. O'Kane * Executive Vice President and June 8, 2000 - --------------------------------------------------- Director Walter C. Teagle III * Director June 8, 2000 - --------------------------------------------------- Peter O. Crisp * Director June 8, 2000 - --------------------------------------------------- Thomas W. Hallagan * Director June 8, 2000 - --------------------------------------------------- L. White Matthews III
II-5 91
SIGNATURES TITLE DATE ---------- ----- ---- * Director June 8, 2000 - --------------------------------------------------- Richard L. Schwob * Director June 8, 2000 - --------------------------------------------------- Richard W. Smith * /s/ HUGH J. O'KANE, JR. - --------------------------------------------------- Hugh J. O'Kane, Jr., individually and as Attorney-in-Fact
II-6 92 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. 3.5 -- Certificate of Amendment to Amended and Restated Certificate of Incorporation of Registrant. 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. 10.11** -- 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.
93
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.14+ -- Engineer, Procure and Construct Contract, dated December 28, 1998, between Level 3 Communications, LLC and Registrant. 10.15 -- Employment Agreement, dated March 30, 2000, between Sidney A. Sayovitz and Registrant. 10.16 -- Employment Agreement, dated June 1, 2000 between Charles T. Christ 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. + Portions of this exhibit have been filed confidentially with the Commission pursuant to a confidential treatment request filed by Registrant. EX-1.1 2 0002.txt FORM OF UNDERWRITING AGREEMENT 1 Exhibit 1.1 12,500,000 Shares LEXENT INC. COMMON STOCK, PAR VALUE $.001 PER SHARE UNDERWRITING AGREEMENT June __, 2000 CREDIT SUISSE FIRST BOSTON CORPORATION CHASE SECURITIES INC. RAYMOND JAMES & ASSOCIATES, INC. As Representatives of the Several Underwriters, c/o Credit Suisse First Boston Corporation, Eleven Madison Avenue, New York, N.Y. 10010-3629 Dear Sirs: 1. Introductory. Lexent Inc., a Delaware corporation ("COMPANY"), proposes to issue and sell 12,500,000 shares ("FIRM SECURITIES") of its Common Stock, par value $.001 per share ("SECURITIES") and also proposes to issue and sell to the Underwriters, at the option of the Underwriters, an aggregate of not more than 1,875,000 additional shares ("OPTIONAL SECURITIES") of its Securities as set forth below. The Firm Securities and the Optional Securities are herein collectively called the "OFFERED SECURITIES". As part of the offering contemplated by this Agreement, Credit Suisse First Boston Corporation (the "DESIGNATED UNDERWRITER") has agreed to reserve out of the Firm Securities purchased by it under this Agreement, up to 674,615 shares, for sale to the Company's directors, officers, employees and other parties associated with the Company (collectively, "PARTICIPANTS"), as set forth in the Prospectus (as defined herein) under the heading "Underwriting" (the "DIRECTED SHARE PROGRAM"). The Firm Securities to be sold by the Designated Underwriter pursuant to the Directed Share Program (the "DIRECTED SHARES") will be sold by the Designated Underwriter pursuant to this Agreement at the public offering price. Any Directed Shares not subscribed for by the end of the business day on which this Agreement is executed will be offered to the public by the Underwriters as set forth in the Prospectus. The Company hereby agrees with the several Underwriters named in Schedule A hereto ("UNDERWRITERS") as follows: 2. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with, the several Underwriters that: 2 2 (a) A registration statement (No. 333-30660) relating to the Offered Securities, including a form of prospectus, has been filed with the Securities and Exchange Commission ("COMMISSION") and either (i) has been declared effective under the Securities Act of 1933 ("ACT") and is not proposed to be amended or (ii) is proposed to be amended by amendment or post-effective amendment. If such registration statement ("INITIAL REGISTRATION STATEMENT") has been declared effective, either (i) an additional registration statement ("ADDITIONAL REGISTRATION STATEMENT") relating to the Offered Securities may have been filed with the Commission pursuant to Rule 462(b) ("RULE 462(b)") under the Act and, if so filed, has become effective upon filing pursuant to such Rule and the Offered Securities all have been duly registered under the Act pursuant to the initial registration statement and, if applicable, the additional registration statement or (ii) such an additional registration statement is proposed to be filed with the Commission pursuant to Rule 462(b) and will become effective upon filing pursuant to such Rule and upon such filing the Offered Securities will all have been duly registered under the Act pursuant to the initial registration statement and such additional registration statement. If the Company does not propose to amend the initial registration statement or if an additional registration statement has been filed and the Company does not propose to amend it, and if any post-effective amendment to either such registration statement has been filed with the Commission prior to the execution and delivery of this Agreement, the most recent amendment (if any) to each such registration statement has been declared effective by the Commission or has become effective upon filing pursuant to Rule 462(c) ("RULE 462(c)") under the Act or, in the case of the additional registration statement, Rule 462(b). For purposes of this Agreement, "EFFECTIVE TIME" with respect to the initial registration statement or, if filed prior to the execution and delivery of this Agreement, the additional registration statement means (i) if the Company has advised the Representatives that it does not propose to amend such registration statement, the date and time as of which such registration statement, or the most recent post-effective amendment thereto (if any) filed prior to the execution and delivery of this Agreement, was declared effective by the Commission or has become effective upon filing pursuant to Rule 462(c), or (ii) if the Company has advised the Representatives that it proposes to file an amendment or post-effective amendment to such registration statement, the date and time as of which such registration statement, as amended by such amendment or post-effective amendment, as the case may be, is declared effective by the Commission. If an additional registration statement has not been filed prior to the execution and delivery of this Agreement but the Company has advised the Representatives that it proposes to file one, "EFFECTIVE TIME" with respect to such additional registration statement means the date and time as of which such registration statement is filed and becomes effective pursuant to Rule 462(b). "EFFECTIVE DATE" with respect to the initial registration statement or the additional registration statement (if any) means the date of the Effective Time thereof. The initial registration statement, as amended at its Effective Time, including all information contained in the additional registration statement (if any) and deemed to be a part of the initial registration statement as of the Effective Time of the additional registration statement pursuant to the General Instructions of the Form on which it is filed and including all information (if any) deemed to be a part of the initial registration statement as of its Effective Time pursuant to Rule 430A(b) ("RULE 430A(b)") under the Act, is hereinafter referred to as the "INITIAL REGISTRATION 3 3 STATEMENT". The additional registration statement, as amended at its Effective Time, including the contents of the initial registration statement incorporated by reference therein and including all information (if any) deemed to be a part of the additional registration statement as of its Effective Time pursuant to Rule 430A(b), is hereinafter referred to as the "ADDITIONAL REGISTRATION STATEMENT". The Initial Registration Statement and the Additional Registration Statement are herein referred to collectively as the "REGISTRATION STATEMENTS" and individually as a "REGISTRATION STATEMENT". The form of prospectus relating to the Offered Securities, as first filed with the Commission pursuant to and in accordance with Rule 424(b) ("RULE 424(b)") under the Act or (if no such filing is required) as included in a Registration Statement, is hereinafter referred to as the "PROSPECTUS". No document has been or will be prepared or distributed in reliance on Rule 434 under the Act. (b) If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement: (i) on the Effective Date of the Initial Registration Statement, the Initial Registration Statement conformed in all material respects to the requirements of the Act and the rules and regulations of the Commission ("RULES AND REGULATIONS") and did not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) on the Effective Date of the Additional Registration Statement (if any), each Registration Statement conformed, or will conform, in all material respects to the requirements of the Act and the Rules and Regulations and did not include, or will not include, any untrue statement of a material fact and did not omit, or will not omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading and (iii) on the date of this Agreement, the Initial Registration Statement and, if the Effective Time of the Additional Registration Statement is prior to the execution and delivery of this Agreement, the Additional Registration Statement each conforms, and at the time of filing of the Prospectus pursuant to Rule 424(b) or (if no such filing is required) at the Effective Date of the Additional Registration Statement in which the Prospectus is included, each Registration Statement and the Prospectus will conform, in all material respects to the requirements of the Act and the Rules and Regulations, and neither of such documents includes, or will include, any untrue statement of a material fact or omits, or will omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. If the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement: on the Effective Date of the Initial Registration Statement, the Initial Registration Statement and the Prospectus will conform in all material respects to the requirements of the Act and the Rules and Regulations, neither of such documents will include any untrue statement of a material fact or will omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and no Additional Registration Statement has been or will be filed. The two preceding sentences do not apply to statements in or omissions from a Registration Statement or the Prospectus based upon written information furnished to the Company by any Underwriter through the Representatives specifically for use therein, it being understood and agreed that the only such information is that described as such in Section 7(b) hereof. 4 4 (c) The Company has been duly incorporated and is an existing corporation in good standing under the laws of the State of Delaware, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus; and the Company is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the condition (financial or other), business, properties or results of operations of the Company and its subsidiaries taken as a whole (a "MATERIAL ADVERSE EFFECT"). (d) Each subsidiary of the Company has been duly organized and is an existing limited liability company in good standing under the laws of the jurisdiction of its incorporation, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus; and each subsidiary of the Company is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification, except where the failure to be so qualified would not have a Material Adverse Effect; and all of the issued and outstanding ownership interests of each subsidiary of the Company has been duly authorized and validly issued; and all the ownership interests of each subsidiary are owned directly by the Company free from liens, encumbrances and defects. (e) The Offered Securities and all other outstanding shares of capital stock of the Company have been duly authorized; all outstanding shares of capital stock of the Company are, and, when the Offered Securities have been delivered and paid for in accordance with this Agreement on each Closing Date (as defined below), such Offered Securities will have been, validly issued, fully paid and nonassessable and will conform to the description thereof contained in the Prospectus; and the stockholders of the Company have no preemptive rights arising by operation of law, under the Company's certificate of incorporation or by-laws or otherwise with respect to the Securities. (f) Except as disclosed in the Prospectus, there are no contracts, agreements or understandings between the Company and any person that would give rise to a valid claim against the Company or any Underwriter for a brokerage commission, finder's fee or other like payment in connection with this offering. (g) Except for the Registration Rights Agreement, dated as of July 23, 1998, between the Company and the investors named therein, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to a Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Act. 5 5 (h) The Offered Securities have been approved for listing on the Nasdaq Stock Market's National Market. (i) No consent, approval, authorization, or order of, or filing with, any governmental agency or body or any court is required for the consummation of the transactions contemplated by this Agreement in connection with the issuance and sale of the Offered Securities by the Company, except such as have been obtained and made under the Act or as may be required under state securities laws. (j) The execution, delivery and performance of this Agreement, and the issuance and sale of the Offered Securities will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, any statute, any rule, regulation or order of any governmental agency or body or any court, domestic or foreign, having jurisdiction over the Company or any subsidiary of the Company or any of their properties, or any agreement or instrument to which the Company or any such subsidiary is a party or by which the Company or any such subsidiary is bound or to which any of the properties of the Company or any such subsidiary is subject, or the charter or by-laws of the Company or certificate of formation or limited liability company agreement of any such subsidiary, and the Company has full power and authority to authorize, issue and sell the Offered Securities as contemplated by this Agreement. (k) This Agreement has been duly authorized, executed and delivered by the Company. (l) Except as disclosed in the Prospectus, the Company and its subsidiaries have good and marketable title to all real properties and all other properties and assets owned by them, in each case free from liens, encumbrances and defects that would materially affect the value thereof or materially interfere with the use made or to be made thereof by them; and except as disclosed in the Prospectus, the Company and its subsidiaries hold any leased real or personal property under valid and enforceable leases with no exceptions that would materially interfere with the use made or to be made thereof by them. (m) The Company and its subsidiaries possess adequate certificates, authorities or permits issued by appropriate governmental agencies or bodies necessary to conduct the business now operated by them and have not received any notice of proceedings relating to the revocation or modification of any such certificate, authority or permit that, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a Material Adverse Effect. (n) No labor dispute with the employees of the Company or any subsidiary exists or, to the knowledge of the Company, is imminent that might have a Material Adverse Effect. (o) The Company and its subsidiaries own, possess or can acquire on reasonable terms, adequate trademarks, trade names and other rights to inventions, know-how, patents, copyrights, confidential information and other intellectual property (collectively, 6 6 "INTELLECTUAL PROPERTY RIGHTS") necessary to conduct the business now operated by them, or presently employed by them, and have not received any notice of infringement of or conflict with asserted rights of others with respect to any intellectual property rights that, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a Material Adverse Effect. (p) Except as disclosed in the Prospectus, neither the Company nor any of its subsidiaries is in violation of any statute, any rule, regulation, decision or order of any governmental agency or body or any court, domestic or foreign, relating to the use, disposal or release of hazardous or toxic substances or relating to the protection or restoration of the environment or human exposure to hazardous or toxic substances (collectively, "ENVIRONMENTAL LAWS"), owns or operates any real property contaminated with any substance that is subject to any environmental laws, is liable for any off-site disposal or contamination pursuant to any environmental laws, or is subject to any claim relating to any environmental laws, which violation, contamination, liability or claim would individually or in the aggregate have a Material Adverse Effect; and the Company is not aware of any pending investigation which might lead to such a claim. (q) Except as disclosed in the Prospectus, there are no pending actions, suits or proceedings against or affecting the Company, any of its subsidiaries or any of their respective properties that, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a Material Adverse Effect, or would materially and adversely affect the ability of the Company to perform its obligations under this Agreement, or which are otherwise material in the context of the sale of the Offered Securities; and no such actions, suits or proceedings are threatened or, to the Company's knowledge, contemplated. (r) The financial statements included in each Registration Statement and the Prospectus present fairly the financial position of the Company and its consolidated subsidiaries as of the dates shown and their results of operations and cash flows for the periods shown, and such financial statements have been prepared in conformity with the generally accepted accounting principles in the United States applied on a consistent basis; and the assumptions used in preparing the pro forma financial statements included in each Registration Statement and the Prospectus provide a reasonable basis for presenting the significant effects directly attributable to the transactions or events described therein, the related pro forma adjustments give appropriate effect to those assumptions, and the pro forma columns therein reflect the proper application of those adjustments to the corresponding historical financial statement amounts. (s) Except as disclosed in the Prospectus, since the date of the latest audited financial statements included in the Prospectus there has been no material adverse change, nor any development or event involving a prospective material adverse change, in the condition (financial or other), business, properties or results of operations of the Company and its subsidiaries taken as a whole, and, except as disclosed in or contemplated by the Prospectus, there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock. 7 7 (t) Furthermore, the Company represents and warrants to the Underwriters that (i) the Registration Statement, the Prospectus and any preliminary prospectus comply, and any further amendments or supplements thereto will comply, with any applicable laws or regulations of foreign jurisdictions in which the Prospectus or any preliminary prospectus, as amended or supplemented, if applicable, are distributed in connection with the Directed Share Program, and that (ii) no authorization, approval, consent, license, order, registration or qualification of or with any government, governmental instrumentality or court, other than such as have been obtained, is necessary under the securities law and regulations of foreign jurisdictions in which the Directed Shares are offered outside the United States. (u) The Company has not offered, or caused the Underwriters to offer, any Offered Securities to any person pursuant to the Directed Share Program with the specific intent to unlawfully influence (i) a customer or supplier of the Company to alter the customer's or supplier's level or type of business with the Company or (ii) a trade journalist or publication to write or publish favorable information about the Company or its products. (v) The Company has the authorized, issued and outstanding capitalization as of December 31, 1999 set forth in the prospectus under the heading "Capitalization". (w) There are no parties that have rights to register any securities of the Company, other than Allegra Capital Partners III, L.P., Allegra Capital Partners IV, L.P. and Abbott Capital 1330 Investors I, L.P., each of which has waived such rights by executing the Lock-Up Agreement dated the date hereof, substantially in the form of Exhibit A attached hereto. (x) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (y) All material tax returns required to be filed by the Company and any of its subsidiaries in any jurisdiction have been filed or have properly been extended, and all material taxes, including withholding taxes, penalties and interest, assessments, fees and other charges due pursuant to such returns or pursuant to any assessment received by the Company or any of its subsidiaries have been paid, other than those which are being contested in good faith and for which adequate reserves have been provided. There are no transfer taxes or other similar fees or charges under federal law or the laws of any state, or any political subdivision thereof, required to be paid in connection with the 8 8 execution and delivery of this Agreement by the Company or the issuance by the Company or the sale by the Company of the Offered Securities, except for fees or charges that may be required to be paid in connection with applicable blue sky laws, which fees and charges the Company hereby agrees to pay. (z) PricewaterhouseCoopers LLC are independent public accountants with respect to the Company and its subsidiaries as required by the Act and the Rules and Regulations. (aa) The statements in the Prospectus under the heading "Certain Relationships and Related Transactions" set forth all existing agreements, arrangements, understanding or transactions, or proposed agreements, arrangements, understandings or transactions, between or among the Company, on the one hand, and any officer, director or stockholder of the Company, or with any partner, affiliate or associate of any of the forgoing persons or entities, on the other hand, required to be set forth or described thereunder. (bb) The Company is not and, after giving effect to the offering and sale of the Offered Securities and the application of the proceeds thereof as described in the Prospectus, will not be, an "investment company" or a company "controlled" by and "investment company" as such term is defined in the Investment Company Act of 1940, as amended, and the rules and regulations of the Commission thereunder. 3. Purchase, Sale and Delivery of Offered Securities. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to the Underwriters, and the Underwriters agree, severally and not jointly, to purchase from the Company, at a purchase price of $___________ per share, the respective numbers of shares of Firm Securities set forth opposite the names of the Underwriters in Schedule A hereto. The Company will deliver the Firm Securities to the Representatives for the accounts of the Underwriters, against payment of the purchase price in Federal (same day) funds by official bank check or checks or wire transfer to an account at a bank acceptable to Credit Suisse First Boston Corporation ("CSFBC") drawn to the order of the Company at the office of Simpson Thacher & Bartlett, at 10:00 A.M., New York time, on __________, 2000, or at such other time not later than seven full business days thereafter as CSFBC and the Company determine, such time being herein referred to as the "FIRST CLOSING DATE". For purposes of Rule 15c6-1 under the Securities Exchange Act of 1934, the First Closing Date (if later than the otherwise applicable settlement date) shall be the settlement date for payment of funds and delivery of securities for all the Offered Securities sold pursuant to the offering. The Firm Securities so to be delivered will be in definitive form, in such denominations and registered in such names as CSFBC requests and will be made available for checking and packaging at the above office of Simpson Thacher & Bartlett at least 24 hours prior to the First Closing Date. In addition, upon written notice from CSFBC given to the Company from time to time not more than 30 days subsequent to the date of the Prospectus, the Underwriters may purchase all or less than all of the Optional Securities at the purchase price per Security to be paid for the Firm Securities. The Company agrees to sell to the Underwriters the number of 9 9 shares of Optional Securities specified in such notice and the Underwriters agree, severally and not jointly, to purchase such Optional Securities. Such Optional Securities shall be purchased for the account of each Underwriter in the same proportion as the number of shares of Firm Securities set forth opposite such Underwriter's name bears to the total number of shares of Firm Securities (subject to adjustment by CSFBC to eliminate fractions) and may be purchased by the Underwriters only for the purpose of covering over-allotments made in connection with the sale of the Firm Securities. No Optional Securities shall be sold or delivered unless the Firm Securities previously have been, or simultaneously are, sold and delivered. The right to purchase the Optional Securities or any portion thereof may be exercised from time to time and to the extent not previously exercised may be surrendered and terminated at any time upon notice by CSFBC to the Company. Each time for the delivery of and payment for the Optional Securities, being herein referred to as an "OPTIONAL CLOSING DATE", which may be the First Closing Date (the First Closing Date and each Optional Closing Date, if any, being sometimes referred to as a "CLOSING DATE"), shall be determined by CSFBC but shall be not later than five full business days after written notice of election to purchase Optional Securities is given. The Company will deliver the Optional Securities being purchased on each Optional Closing Date to the Representatives for the accounts of the several Underwriters, against payment of the purchase price therefor in Federal (same day) funds by official bank check or checks or wire transfer to an account at a bank acceptable to CSFBC drawn to the order of the Company, at the above office of Simpson Thacher & Bartlett. The certificates for the Optional Securities being purchased on each Optional Closing Date will be in definitive form, in such denominations and registered in such names as CSFBC requests upon reasonable notice prior to such Optional Closing Date and will be made available for checking and packaging at the above office of Simpson Thacher & Bartlett at a reasonable time in advance of such Optional Closing Date. 4. Offering by Underwriters. It is understood that the several Underwriters propose to offer the Offered Securities for sale to the public as set forth in the Prospectus. 5. Certain Agreements of the Company. The Company agrees with the several Underwriters that: (a) If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, the Company will file the Prospectus with the Commission pursuant to and in accordance with subparagraph (1) (or, if applicable and if consented to by CSFBC, subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the second business day following the execution and delivery of this Agreement or (B) the fifteenth business day after the Effective Date of the Initial Registration Statement. The Company will advise CSFBC promptly of any such filing pursuant to Rule 424(b). If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement and an additional registration statement is necessary to register a portion of the Offered Securities under the Act but the Effective Time thereof has not occurred as of such execution and delivery, the Company will file the additional registration statement or, if filed, will file a post-effective amendment thereto with the Commission pursuant to and in accordance with Rule 462(b) on or prior to 10:00 P.M., 10 10 New York time, on the date of this Agreement or, if earlier, on or prior to the time the Prospectus is printed and distributed to any Underwriter, or will make such filing at such later date as shall have been consented to by CSFBC. (b) The Company will advise CSFBC promptly of any proposal to amend or supplement the initial or any additional registration statement as filed or the related prospectus or the Initial Registration Statement, the Additional Registration Statement (if any) or the Prospectus and will not effect such amendment or supplementation without CSFBC's consent; and the Company will also advise CSFBC promptly of the effectiveness of each Registration Statement (if its Effective Time is subsequent to the execution and delivery of this Agreement) and of any amendment or supplementation of a Registration Statement or the Prospectus and of the institution by the Commission of any stop order proceedings in respect of a Registration Statement and will use its best efforts to prevent the issuance of any such stop order and to obtain as soon as possible its lifting, if issued. (c) If, at any time when a prospectus relating to the Offered Securities is required to be delivered under the Act in connection with sales by any Underwriter or dealer, any event occurs as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend the Prospectus to comply with the Act, the Company will promptly notify CSFBC of such event and will promptly prepare and file with the Commission, at its own expense, an amendment or supplement which will correct such statement or omission or an amendment which will effect such compliance. Neither CSFBC's consent to, nor the Underwriters' delivery of, any such amendment or supplement shall constitute a waiver of any of the conditions set forth in Section 6. (d) As soon as practicable, but not later than the Availability Date (as defined below), the Company will make generally available to its securityholders an earnings statement covering a period of at least 12 months beginning after the Effective Date of the Initial Registration Statement (or, if later, the Effective Date of the Additional Registration Statement) which will satisfy the provisions of Section 11(a) of the Act. For the purpose of the preceding sentence, "AVAILABILITY DATE" means the 45th day after the end of the fourth fiscal quarter following the fiscal quarter that includes such Effective Date, except that, if such fourth fiscal quarter is the last quarter of the Company's fiscal year, "AVAILABILITY DATE" means the 90th day after the end of such fourth fiscal quarter. (e) The Company will furnish to the Representatives copies of each Registration Statement (four of which will be signed and will include all exhibits), each related preliminary prospectus, and, so long as a prospectus relating to the Offered Securities is required to be delivered under the Act in connection with sales by any Underwriter or dealer, the Prospectus and all amendments and supplements to such documents, in each case in such quantities as CSFBC requests. The Prospectus shall be so furnished on or prior to 3:00 P.M., New York time, on the business day following the later of the 11 11 execution and delivery of this Agreement or the Effective Time of the Initial Registration Statement. All other documents shall be so furnished as soon as available. The Company will pay the expenses of printing and distributing to the Underwriters all such documents. (f) The Company will arrange for the qualification of the Offered Securities for sale under the laws of such jurisdictions as CSFBC designates and will continue such qualifications in effect so long as required for the distribution; provided, however, that in connection therewith the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction. (g) During the period of five years hereafter, the Company will furnish to the Representatives and, upon request, to each of the other Underwriters, as soon as practicable after the end of each fiscal year, a copy of its annual report to stockholders for such year; and the Company will furnish to the Representatives (i) as soon as available, a copy of each report and any definitive proxy statement of the Company filed with the Commission under the Securities Exchange Act of 1934 or mailed to stockholders, and (ii) from time to time, such other information concerning the Company as CSFBC may reasonably request. (h) The Company will pay all expenses incident to the performance of its obligations under this Agreement, for any filing fees and other expenses (including fees and disbursements of counsel) incurred in connection with qualification of the Offered Securities for sale under the laws of such jurisdictions as CSFBC designates, for the filing fee incident to, and the reasonable fees and disbursements of counsel to the Underwriters in connection with, the review by the National Association of Securities Dealers, Inc. ("NASD") of the Offered Securities, for any travel expenses of the Company's officers and employees and any other expenses of the Company in connection with attending or hosting meetings with prospective purchasers of the Offered Securities and for expenses incurred in distributing preliminary prospectuses and the Prospectus (including any amendments and supplements thereto) to the Underwriters. (i) For a period of 180 days after the date of the initial public offering of the Offered Securities, the Company will not offer, sell, contract to sell, announce its intention to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Commission a registration statement under the Act relating to, any additional shares of its Securities or securities convertible into or exchangeable or exercisable for any shares of its Securities, or publicly disclose the intention to make any such offer, sale, pledge, disposition or filing, without the prior written consent of CSFBC, except (i) issuances of Securities pursuant to the conversion or exchange of the Company's preferred stock or the exercise of options, in each case outstanding on the date hereof, (ii) grants of stock options pursuant to stock option plans in effect on the date hereof and the issuance of securities pursuant to the exercise of such stock options, (iii) issuances of Securities to participants in any employee stock purchase plan in effect on the date hereof and (iv) filings of registration statements on Form S-8 with the Commission registering the shares of Common Stock issuable under its stock option and employee stock purchase plans in effect on the date hereof. 12 12 (j) The Company will (i) enforce the terms of each Lock-up Agreement (as hereinafter defined), and (ii) issue stop-transfer instructions to the transfer agent for the Securities with respect to any transaction or contemplated transaction that would constitute a breach of or default under the applicable Lock-up Agreement. In addition, except with the prior written consent of CSFBC, the Company agrees (i) not to amend or terminate, or waive any right under, any Lock-up Agreement, or take any other action that would directly or indirectly have the same effect as an amendment or termination, or waiver of any right under any Lock-up Agreement, that would permit the holder of any Securities, or any securities convertible into, or exercisable or exchangeable for, Securities, to make any short sale of, grant any option for the purchase of, or otherwise transfer or dispose of, any such Securities or other securities, prior to the expiration of the 180 days after the date of the Prospectus, and (ii) not consent to any sale, short sale, grant of an option for the purchase of, or other disposition or transfer of shares of Securities, or securities convertible into or exercisable or exchangeable for Securities, subject to a Lock-Up Agreement. (k) In connection with the Directed Share Program, the Company will ensure that the Directed Shares will be restricted to the extent required by the NASD or the NASD rules from sale, transfer, assignment, pledge or hypothecation for a period of three months following the date of the effectiveness of the Registration Statement. The Designated Underwriter will notify the Company as to which Participants will need to be so restricted. The Company will direct the transfer agent to place stop transfer restrictions upon such securities for such period of time. (l) The Company will pay all fees and disbursements of counsel incurred by the Underwriters in connection with the Directed Share Program and stamp duties, similar taxes or duties or other taxes, if any, incurred by the underwriters in connection with the Directed Share Program. Furthermore, the company covenants with the Underwriters that the company will comply with all applicable securities and other applicable laws, rules and regulations in each foreign jurisdiction in which the Directed Shares are offered in connection with the Directed Share Program. 6. Conditions of the Obligations of the Underwriters. The obligations of the several Underwriters to purchase and pay for the Firm Securities on the First Closing Date and the Optional Securities to be purchased on each Optional Closing Date will be subject to the accuracy of the representations and warranties on the part of the Company herein, to the accuracy of the statements of Company officers made pursuant to the provisions hereof, to the performance by the Company of its obligations hereunder and to the following additional conditions precedent: (a) The Representatives shall have received a letter, dated the date of delivery thereof (which, if the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, shall be on or prior to the date of this Agreement or, if the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement, shall be prior to the filing of the 13 13 amendment or post-effective amendment to the registration statement to be filed shortly prior to such Effective Time), from PricewaterhouseCoopers LLP to the effect that they are independent accountants with respect to the Company within the meaning of the Securities Act of 1933 and the applicable rules and regulations thereunder adopted by the SEC and stating to the effect that: (i) in their opinion the financial statements examined by them and included in the Registration Statements comply as to form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations; (ii) they have performed the procedures specified by the American Institute of Certified Public Accountants for a review of interim financial information as described in Statement of Auditing Standards No. 71, Interim Financial Information, on the unaudited financial statements included in the Registration Statements; (iii) on the basis of the review referred to in clause (ii) above, a reading of the latest available interim financial statements of the Company, inquiries of officials of the Company who have responsibility for financial and accounting matters and other specified procedures, nothing came to their attention that caused them to believe that: (A) the unaudited financial data included in the Registration Statements do not comply as to form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations or any material modifications should be made to such unaudited financial statements and summary of earnings for them to be in conformity with generally accepted accounting principles; (B) at the date of the latest available balance sheet read by such accountants, or at a subsequent specified date not more than three business days prior to the date of this Agreement, there was any change in the capital stock or any increase in short-term indebtedness or long-term debt of the Company and its consolidated subsidiaries or, at the date of the latest available balance sheet read by such accountants, there was any decrease in consolidated net current assets or net assets, as compared with amounts shown on the latest balance sheet included in the Prospectus; or (C) for the period from the closing date of the latest income statement included in the Prospectus to the closing date of the latest available income statement read by such accountants there were any decreases, as compared with the corresponding period of the previous year, in consolidated net revenues or net operating income or in the total or per share amounts of consolidated income before extraordinary items or net income; 14 14 except in all cases set forth in clauses (A) and (B) above for changes, increases or decreases which the Prospectus discloses have occurred or may occur or which are described in such letter; and (iv) the information set forth in the Registration Statement under the captions "Prospectus Summary--Lexent Inc.", "--The Offering", "--Summary Consolidated Financial Data", "Risk Factors", "Use of Proceeds", "Dividend Policy", "Capitalization", "Dilution", "Selected Consolidated Financial Data", "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Business", "Management", "Certain Relationships and Related Transactions" and "Description of Capital Stock", which is expressed in dollars (or percentages derived from such dollar amounts) and has been obtained from accounting records which are subject to controls over financial reporting or which has been derived directly from such accounting records by analysis or computation, is in agreement with such records or computations made therefrom. (v) they proved the arithmetic accuracy of the application of the pro forma adjustments to the historical amounts as set forth in the Registration Statement under the captions "Summary Consolidated Financial Data", "Capitalization", "Dilution" and "Management's Discussion and Analysis of Financial Condition and Results of Operations". For purposes of this subsection, (i) if the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement, "REGISTRATION STATEMENTS" shall mean the initial registration statement as proposed to be amended by the amendment or post-effective amendment to be filed shortly prior to its Effective Time, (ii) if the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement but the Effective Time of the Additional Registration is subsequent to such execution and delivery, "REGISTRATION STATEMENTS" shall mean the Initial Registration Statement and the additional registration statement as proposed to be filed or as proposed to be amended by the post-effective amendment to be filed shortly prior to its Effective Time, and (iii) "PROSPECTUS" shall mean the prospectus included in the Registration Statements. (b) If the Effective Time of the Initial Registration Statement is not prior to the execution and delivery of this Agreement, such Effective Time shall have occurred not later than 10:00 P.M., New York time, on the date of this Agreement or such later date as shall have been consented to by CSFBC. If the Effective Time of the Additional Registration Statement (if any) is not prior to the execution and delivery of this Agreement, such Effective Time shall have occurred not later than 10:00 P.M., New York time, on the date of this Agreement or, if earlier, the time the Prospectus is printed and distributed to any Underwriter, or shall have occurred at such later date as shall have been consented to by CSFBC. If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, the Prospectus shall have been filed with the Commission in accordance with the Rules and Regulations and Section 5(a) 15 15 of this Agreement. Prior to such Closing Date, no stop order suspending the effectiveness of a Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or, to the knowledge of the Company or the Representatives, shall be contemplated by the Commission. (c) Subsequent to the execution and delivery of this Agreement, there shall not have occurred (i) any change, or any development or event involving a prospective change, in the condition (financial or other), business, properties or results of operations of the Company and its subsidiaries taken as one enterprise which, in the judgment of a majority in interest of the Underwriters including the Representatives, is material and adverse and makes it impractical or inadvisable to proceed with completion of the public offering or the sale of and payment for the Offered Securities; (ii) any downgrading in the rating of any debt securities or preferred stock of the Company by any "nationally recognized statistical rating organization" (as defined for purposes of Rule 436(g) under the Act), or any public announcement that any such organization has under surveillance or review its rating of any debt securities or preferred stock of the Company (other than an announcement with positive implications of a possible upgrading, and no implication of a possible downgrading, of such rating); (iii) any material suspension or material limitation of trading in securities generally on the New York Stock Exchange or the Nasdaq Stock Market's National Market, or any setting of minimum prices for trading on such exchange, or any suspension of trading of any securities of the Company on any exchange or in the over-the-counter market; (iv) any banking moratorium declared by U.S. Federal or New York authorities; or (v) any outbreak or escalation of major hostilities in which the United States is involved, any declaration of war by Congress or any other substantial national or international calamity or emergency if, in the judgment of a majority in interest of the Underwriters including the Representatives, the effect of any such outbreak, escalation, declaration, calamity or emergency makes it impractical or inadvisable to proceed with completion of the public offering or the sale of and payment for the Offered Securities. (d) The Representatives shall have received an opinion, dated such Closing Date, of Reboul, MacMurray, Hewitt, Maynard & Kristol, counsel for the Company, to the effect that: (i) The Company has been duly incorporated and is an existing corporation in good standing under the laws of the State of Delaware, with corporate power and authority to own its properties and conduct its business as described in the Prospectus; and the Company is duly qualified to do business as a foreign corporation in good standing in ____________, __________ and _______, those being the only states in which the ownership or lease of property or the conduct of its business requires such qualification; (ii) Each subsidiary of the Company has been duly incorporated and is an existing corporation in good standing under the laws of the jurisdiction of its incorporation, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus; and each 16 16 subsidiary of the Company is duly qualified to do business as a foreign corporation in good standing in ____________, __________ and _______, those being the only states in which the ownership or lease of property or the conduct of its business requires such qualification; all of the issued and outstanding ownership interests of each subsidiary of the Company has been duly authorized and validly issued; and all the ownership interests of each subsidiary are owned directly by the Company free from liens, encumbrances and defects. (iii) The Offered Securities delivered on such Closing Date and all other outstanding shares of the Common Stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable and conform to the description thereof contained in the Prospectus; and the stockholders of the Company have no preemptive rights arising by operation of law, under the Company's certificate of incorporation or bylaws or otherwise with respect to the Securities; (iv) Except for the Registration Rights Agreement, dated as of July 23, 1998, between the Company and the investors named therein, there are no contracts, agreements or understandings known to such counsel between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Act; (v) No consent, approval, authorization or order of, or filing with, any governmental agency or body or any court is required for the consummation of the transactions contemplated by this Agreement in connection with the issuance or sale of the Offered Securities by the Company, except such as have been obtained and made under the Act and such as may be required under state securities laws; (vi) The execution, delivery and performance of this Agreement and the issuance and sale of the Offered Securities will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, any statute, any rule, regulation or order of any governmental agency or body or any court having jurisdiction over the Company or any subsidiary of the Company or any of their properties, or any agreement or instrument to which the Company or any such subsidiary is a party or by which the Company or any such subsidiary is bound or to which any of the properties of the Company or any such subsidiary is subject, or the charter or by-laws of the Company or certificate of formation or limited liability company agreement any such subsidiary, and the Company has full power and authority to authorize, issue and sell the Offered Securities as contemplated by this Agreement; 17 17 (vii) The Initial Registration Statement was declared effective under the Act as of the date and time specified in such opinion, the Additional Registration Statement (if any) was filed and became effective under the Act as of the date and time (if determinable) specified in such opinion, the Prospectus either was filed with the Commission pursuant to the subparagraph of Rule 424(b) specified in such opinion on the date specified therein or was included in the Initial Registration Statement or the Additional Registration Statement (as the case may be), and, to the best of the knowledge of such counsel, no stop order suspending the effectiveness of a Registration Statement or any part thereof has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the Act, and each Registration Statement and the Prospectus, and each amendment or supplement thereto, as of their respective effective or issue dates, complied as to form in all material respects with the requirements of the Act and the Rules and Regulations; such counsel have no reason to believe that any part of a Registration Statement or any amendment thereto, as of its effective date or as of such Closing Date, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus or any amendment or supplement thereto, as of its issue date or as of such Closing Date, contained any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; the descriptions in the Registration Statements and Prospectus of statutes, legal and governmental proceedings and contracts and other documents are accurate in all material respects and fairly present the information required to be shown; and such counsel do not know of any legal or governmental proceedings required to be described in a Registration Statement or the Prospectus which are not described as required or of any contracts or documents of a character required to be described in a Registration Statement or the Prospectus or to be filed as exhibits to a Registration Statement which are not described and filed as required; it being understood that such counsel need express no opinion as to the financial statements or other financial data contained in the Registration Statements or the Prospectus; and (viii) This Agreement has been duly authorized, executed and delivered by the Company. (e) The Representatives shall have received from Simpson Thacher & Bartlett, counsel for the Underwriters, such opinion or opinions, dated such Closing Date, with respect to the incorporation of the Company, the validity of the Offered Securities delivered on such Closing Date, the Registration Statements, the Prospectus and other related matters as the Representatives may require, and the Company shall have furnished to such counsel such documents as they request for the purpose of enabling them to pass upon such matters. 18 18 (f) The Representatives shall have received a certificate, dated such Closing Date, of the President or any Vice President and a principal financial or accounting officer of the Company in which such officers, to the best of their knowledge after reasonable investigation, shall state that: the representations and warranties of the Company in this Agreement are true and correct; the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to such Closing Date; no stop order suspending the effectiveness of any Registration Statement has been issued and no proceedings for that purpose have been instituted or are contemplated by the Commission; the Additional Registration Statement (if any) satisfying the requirements of subparagraphs (1) and (3) of Rule 462(b) was filed pursuant to Rule 462(b), including payment of the applicable filing fee in accordance with Rule 111(a) or (b) under the Act, prior to the time the Prospectus was printed and distributed to any Underwriter; and, subsequent to the dates of the most recent financial statements in the Prospectus, there has been no material adverse change, nor any development or event involving a prospective material adverse change, in the condition (financial or other), business, properties or results of operations of the Company and its subsidiaries taken as a whole except as set forth in or contemplated by the Prospectus or as described in such certificate. (g) The Representatives shall have received a letter, dated such Closing Date, of PricewaterhouseCoopers LLC which meets the requirements of subsection (a) of this Section, except that the specified date referred to in such subsection will be a date not more than three days prior to such Closing Date for the purposes of this subsection. (h) On or prior to the date of this Agreement, the Representatives shall have received lockup letters, in the form attached hereto as Exhibit A (each, a "Lock-Up Agreement"), from each of the executive officers, directors and shareholders of the Company identified on Schedule B attached hereto. The Company will furnish the Representatives with such conformed copies of such opinions, certificates, letters and documents as the Representatives reasonably requests. CSFBC may in its sole discretion waive on behalf of the Underwriters compliance with any conditions to the obligations of the Underwriters hereunder, whether in respect of an Optional Closing Date or otherwise. 7. Indemnification and Contribution. (a) The Company will indemnify and hold harmless each Underwriter, its partners, directors and officers and each person, if any, who controls such Underwriter within the meaning of Section 15 of the Act, against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement, the Prospectus, or any amendment or supplement thereto, or any related preliminary prospectus, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with 19 19 investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement in or omission or alleged omission from any of such documents in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representatives specifically for use therein, it being understood and agreed that the only such information furnished by any Underwriter consists of the information described as such in subsection (b) below. The Company agrees to indemnify and hold harmless the Designated Underwriter and each person, if any, who controls the Designated Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act (the "DESIGNATED ENTITIES"), from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) (i) caused by any untrue statement or alleged untrue statement of a material fact contained in any material prepared by or with the consent of the Company for distribution to Participants in connection with the Directed Share Program or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) caused by the failure of any Participant to pay for and accept delivery of Directed Shares that the Participant agreed to purchase; or (iii) related to, arising out of, or in connection with the Directed Share Program, other than losses, claims, damages or liabilities (or expenses relating thereto) that are finally judicially determined to have resulted from the bad faith or gross negligence of the Designated Entities. (b) Each Underwriter will severally and not jointly indemnify and hold harmless the Company, its directors and officers and each person, if any who controls the Company within the meaning of Section 15 of the Act, against any losses, claims, damages or liabilities to which the Company may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement, the Prospectus, or any amendment or supplement thereto, or any related preliminary prospectus, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter through the Representatives specifically for use therein, and will reimburse any legal or other expenses reasonably incurred by the Company in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred, it being understood and agreed that the only such information furnished by any Underwriter consists of the following information in the Prospectus furnished on behalf of each Underwriter: the concession and reallowance figures appearing in the fourth paragraph and last paragraph under the caption "Underwriting." 20 20 (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under subsection (a) or (b) above, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under subsection (a) or (b) above. In case any such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. Notwithstanding anything contained herein to the contrary, if indemnity may be sought pursuant to the last paragraph in Section 7 (a) hereof in respect of such action or proceeding, then in addition to such separate firm for the indemnified parties, the indemnifying party shall be liable for the reasonable fees and expenses of not more than one separate firm (in addition to any local counsel) for the Designated Underwriter for the defense of any losses, claims, damages and liabilities arising out of the Directed Share Program, and all persons, if any, who control the Designated Underwriter within the meaning of either Section 15 of the Act of Section 20 of the Exchange Act. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party unless such settlement (i) includes an unconditional release of such indemnified party from all liability on any claims that are the subject matter of such action and (ii) does not include a statement as to, or an admission of, fault, culpability or a failure to act by or on behalf of an indemnified party. (d) If the indemnification provided for in this Section is unavailable or insufficient to hold harmless an indemnified party under subsection (a) or (b) above, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in subsection (a) or (b) above (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent 21 21 such untrue statement or omission. The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any action or claim which is the subject of this subsection (d). Notwithstanding the provisions of this subsection (d), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this subsection (d) to contribute are several in proportion to their respective underwriting obligations and not joint. (e) The obligations of the Company under this Section shall be in addition to any liability which the Company may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Underwriter within the meaning of the Act; and the obligations of the Underwriters under this Section shall be in addition to any liability which the respective Underwriters may otherwise have and shall extend, upon the same terms and conditions, to each director of the Company, to each officer of the Company who has signed a Registration Statement and to each person, if any, who controls the Company within the meaning of the Act. 8. Default of Underwriters. If any Underwriter or Underwriters default in their obligations to purchase Offered Securities hereunder on either the First or any Optional Closing Date and the aggregate number of shares of Offered Securities that such defaulting Underwriter or Underwriters agreed but failed to purchase does not exceed 10% of the total number of shares of Offered Securities that the Underwriters are obligated to purchase on such Closing Date, CSFBC may make arrangements satisfactory to the Company for the purchase of such Offered Securities by other persons, including any of the Underwriters, but if no such arrangements are made by such Closing Date, the non-defaulting Underwriters shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the Offered Securities that such defaulting Underwriters agreed but failed to purchase on such Closing Date. If any Underwriter or Underwriters so default and the aggregate number of shares of Offered Securities with respect to which such default or defaults occur exceeds 10% of the total number of shares of Offered Securities that the Underwriters are obligated to purchase on such Closing Date and arrangements satisfactory to CSFBC and the Company for the purchase of such Offered Securities by other persons are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Company, except as provided in Section 9 (provided that if such default occurs with respect to Optional Securities after the First Closing Date, this Agreement will not terminate as to the Firm Securities or any Optional Securities purchased prior to such termination). As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section. Nothing herein will relieve a defaulting Underwriter from liability for its default. 22 22 9. Survival of Certain Representations and Obligations. The respective indemnities, agreements, representations, warranties and other statements of the Company or its officers and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation, or statement as to the results thereof, made by or on behalf of any Underwriter, the Company or any of their respective representatives, officers or directors or any controlling person, and will survive delivery of and payment for the Offered Securities. If this Agreement is terminated pursuant to Section 8 or if for any reason the purchase of the Offered Securities by the Underwriters is not consummated, the Company shall remain responsible for the expenses to be paid or reimbursed by it pursuant to Section 5 and the respective obligations of the Company and the Underwriters pursuant to Section 7 shall remain in effect, and if any Offered Securities have been purchased hereunder the representations and warranties in Section 2 and all obligations under Section 5 shall also remain in effect. If the purchase of the Offered Securities by the Underwriters is not consummated for any reason other than solely because of the termination of this Agreement pursuant to Section 8 or the occurrence of any event specified in clause (iii), (iv) or (v) of Section 6(c), the Company will reimburse the Underwriters for all out-of-pocket expenses (including fees and disbursements of counsel) reasonably incurred by them in connection with the offering of the Offered Securities. 10. Notices. All communications hereunder will be in writing and, if sent to the Underwriters, will be mailed, delivered or sent by facsimile transmission and confirmed to the Representatives, c/o Credit Suisse First Boston Corporation, Eleven Madison Avenue, New York, N.Y. 10010-3629, Attention: Investment Banking Department--Transactions Advisory Group, or, if sent to the Company, will be mailed, delivered or sent by facsimile transmission and confirmed to it at Lexent Inc., 3 New York Plaza, New York, NY 10004, Attention: Chief Operating Officer; provided, however, that any notice to an Underwriter pursuant to Section 7 will be mailed, delivered or sent by facsimile transmission and confirmed to such Underwriter. 11. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors and the officers and directors and controlling persons referred to in Section 7, and no other person will have any right or obligation hereunder. 12. Representation of Underwriters. The Representatives will act for the several Underwriters in connection with this financing, and any action under this Agreement taken by the Representatives jointly or by CSFBC will be binding upon all the Underwriters. 13. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same Agreement. 14. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. The Company hereby submits to the non-exclusive jurisdiction of the Federal and state courts in the Borough of Manhattan in The City of New York in any suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. 23 23 If the foregoing is in accordance with the Representatives' understanding of our agreement, kindly sign and return to the Company one of the counterparts hereof, whereupon it will become a binding agreement between the Company and the several Underwriters in accordance with its terms. Very truly yours, LEXENT INC. By__________________________________ Name: Title: The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. CREDIT SUISSE FIRST BOSTON CORPORATION CHASE SECURITIES INC. RAYMOND JAMES & ASSOCIATES Acting on behalf of themselves and as the Representatives of the several Underwriters By CREDIT SUISSE FIRST BOSTON CORPORATION By___________________________________________ Name: Title: 24 SCHEDULE A
UNDERWRITER FIRM SECURITIES ----------- --------------- Credit Suisse First Boston Corporation...................................... Chase Securities Inc........................................................ Raymond James & Associates, Inc............................................. --------------- Total.............................................................. ===============
25 SCHEDULE B PARTIES DELIVERING A LOCK-UP AGREEMENT DIRECTORS AND EXECUTIVE OFFICERS STOCKHOLDERS 26 EXHIBIT A FORM OF LOCK-UP AGREEMENT ________, 2000 Lexent Inc. Three New York Plaza New York, NY 10004 Credit Suisse First Boston Corporation Chase Securities Inc. Raymond James & Associates, Inc. As Representatives of the Several Underwriters, c/o Credit Suisse First Boston Corporation, Eleven Madison Avenue New York, NY 10010-3629 Dear Sirs: As an inducement to the Underwriters to execute the Underwriting Agreement, pursuant to which an offering will be made that is intended to result in the establishment of a public market for the Common Stock, par value $.001 per share (the "SECURITIES"), of Lexent Inc. (the "COMPANY"), the undersigned, a stockholder of the Company, hereby agrees that from the date hereof and until 180 days after the public offering date set forth on the final prospectus used to sell the Securities (the "PUBLIC OFFERING DATE") pursuant to the Underwriting Agreement, the undersigned will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of Securities or securities convertible into or exchangeable or exercisable for any shares of Securities, 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 the Securities, whether any such aforementioned transaction is to be settled by delivery of the Securities 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. Furthermore, the undersigned hereby agrees that from the date hereof until 180 days after the Public Offering Date, the undersigned waives any and all registration rights or similar rights with respect to any securities of the Company under any agreement or understanding to which the undersigned is a party. Any Securities received upon exercise of options granted to the undersigned [insert for Allegra Capital Partners --, or Securities purchased under the Directed Share Program (as defined in the Underwriting Agreement)] will also be subject to this Agreement. Any Securities acquired by the undersigned in the open market will not be subject to this Agreement. A transfer of Securities to a family member or trust may be made, provided the transferee agrees to be bound in writing by the terms of this Agreement. A-1 27 In furtherance of the foregoing, the Company and its transfer agent and registrar are hereby authorized to decline to make any transfer of shares of Securities if such transfer would constitute a violation or breach of this Agreement. This Agreement shall be binding on the undersigned and the successors, heirs, personal representatives and assigns of the undersigned. This Agreement shall lapse and become null and void if the Public Offering Date shall not have occurred on or before [insert -- six months after the Lock-Up Agreement is signed], 2000. Very truly yours, ___________________________________ Name: A-2 EX-3.5 3 0003.txt CERTIFICATE OF AMENDMENT 1 Exhibit 3.5 STATE OF DELAWARE OFFICE OF THE SECRETARY OF STATE ------------------------------ I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT OF "LEXENT INC.", FILED IN THIS OFFICE ON THE TWENTY-EIGHTH DAY OF MARCH, A.D. 2000, AT 9 O'CLOCK A.M. A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY RECORDER OF DEEDS. [SEAL OF THE /s/ Edward J. Freel SECRETARY OF STATE OF DELAWARE] -------------------------- Edward J. Freel, Secretary of State 2850935 8100 AUTHENTICATION: 0347225 001158617 DATE: 03-29-00 2 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 09:00 AM 03/28/2000 001158617 -- 2850935 CERTIFICATE OF AMENDMENT TO AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF LEXENT INC. ---------------------------- Under Sections 228 and 242 of the General Corporation Law of the State of Delaware ---------------------------- It is HEREBY CERTIFIED that 1. The name of the corporation (hereinafter called the "Corporation") is Lexent Inc 2. The amended and restated certificate of incorporation of the Corporation is hereby amended by striking out the first paragraph of the preamble of Article III thereof and by substituting in lieu of said paragraph, the following new paragraphs: "The total number of shares of all classes of stock which the Corporation shall have authority to issue is 100,000,000, consisting of (a) 94,461,542 shares of Common Stock, par value $.001 per share ("Common Stock"), and (b) 5,538,458 shares of Preferred Stock, par value $.001 per share ("Preferred Stock"), consisting of 5,538,458 shares of Series A Convertible Preferred Stock, par value $.001 per share ("Series A Preferred Stock"). Upon amendment of this Article as herein set forth (the "Effective Date"), each share of Common Stock issued and outstanding on the Effective Date (the "Old Common Stock") shall be converted into three (3) shares of Common Stock (the "New Common Stock"). A holder of shares of Old Common Stock shall be entitled to receive upon surrender of the certificates representing such Old Common Stock (the "Old Certificates," whether one or more) to the Company for cancellation, a certificate or certificates (the "New Certificates," whether one or more) representing the number of shares of the New Common Stock into which and for which the shares of the Old Common Stock formerly represented by such Old Certificates so surrendered, are reclassified under the terms hereof. From and after the 3 Effective Date, Old Certificates shall represent only the right to receive New Certificates pursuant to the provisions hereof." 4. The amendment of the certificate of incorporation herein certified has been duly adopted and written consent has been given in accordance with the provisions of Sections 228 and 242 of the General Corporation Law of the State of Delaware. Signed on March 28, 2000 /s/ KEVIN M. O'KANE ---------------------------- Kevin M. O'Kane Chief Operating Officer EX-5.1 4 0004.txt OPINION OF REBOUL, MACMURRAY ET AL 1 EXHIBIT 5.1 REBOUL, MACMURRAY, HEWITT, MAYNARD & KRISTOL 45 Rockefeller Plaza New York, New York 10111 June , 2000 Lexent Inc. Three New York Plaza New York, New York 10004 Ladies and Gentlemen: We have acted as counsel to Lexent Inc., a Delaware corporation (the "Company"), in connection with the preparation and filing of the Registration Statement (File No. 333-30660) of the Company on Form S-1, as amended (the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), relating to the public offering (the "Offering") by the Company of up to 14,375,000 shares (including 1,875,000 shares subject to over-allotment options) of Common Stock, $.001 par value, of the Company (the "Common Stock"). In that connection, we have participated in the preparation of the Registration Statement, including the Prospectus contained therein (the "Prospectus") and have reviewed certain corporate proceedings. In addition, we have examined originals or copies certified or otherwise identified to our satisfaction, of such corporate records, agreements, documents and other instruments, and such certificates or comparable documents of public officials and of officers and representatives of the Company, as we have deemed necessary to form a basis for the opinions hereinafter set forth. In such examination, we have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies and the authenticity of all such latter documents. As to all questions of fact material to this opinion that have not been independently established, we have relied upon certificates or comparable documents of officers and representatives of the Company. 2 Based on the foregoing, and subject to the qualifications stated herein, we are of the opinion that: 1. The Company is a corporation duly incorporated and validly existing under the laws of the State of Delaware. 2. The shares of Common Stock to be registered for sale by the Company under the Registration Statement have been duly authorized and, when issued and paid for as contemplated by the Prospectus, will be validly issued, fully paid and non-assessable. The opinions expressed herein are limited to the corporate laws of the State of Delaware and we express no opinion as to the effect on the matters covered by this letter of the laws of any other jurisdiction. The opinions expressed herein are rendered solely for your benefit in connection with the transactions described herein. These opinions may not be used or relied upon by any other person, nor may this letter or any copies thereof be furnished to a third party, filed with a governmental agency, quoted cited or otherwise referred to without our prior written consent. We hereby consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement. In giving the foregoing consent, we do not admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations of the Securities and Exchange Commission promulgated thereunder. We also consent to the incorporation by reference of this opinion in a related registration statement filed by the Company pursuant to Rule 462(b) under the Securities Act. Very truly yours, Reboul, MacMurray, Hewitt Maynard & Kustol 2 EX-10.15 5 0005.txt EMPLOYMENT AGREEMENT 1 Exhibit 10.15 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of March 30, 2000, by and between LEXENT INC., a Delaware corporation (the "Company"), and SIDNEY A. SAYOVITZ (the "Employee"). W I T N E S S E T H: WHEREAS the Company desires to induce the Employee to enter into employment with the Company for the period provided in this Agreement, and the Employee is willing to accept such employment with the Company on a full-time basis, all in accordance with the terms and conditions set forth below; NOW, THEREFORE, for and in consideration of the premises hereof and the mutual covenants contained herein, the parties hereto hereby covenant and agree as follows: 1. Employment. (a) The Company hereby agrees to employ the Employee, and the Employee hereby agrees to accept such employment with the Company, commencing on April 17, 2000 (the "Commencement Date") and continuing for the period set forth in Section 2 hereof, all upon the terms and conditions hereinafter set forth. (b) The Employee affirms and represents that as of the commencement of his employment by the Company on the Commencement Date, he will be under no obligation to any former employer or other party which is in any way inconsistent with, or which imposes any restriction upon, the Employee's acceptance of employment hereunder with the Company, the employment of the Employee by the Company, or the Employee's undertakings under this Agreement. 2. Term of Employment. Unless earlier terminated as provided in this Agreement, the term of the Employee's employment under this Agreement shall be for a period beginning on the Commencement Date and ending on April 17, 2004. The period from the Commencement Date until April 17, 2004, or, in the event that the Employee's employment hereunder is earlier terminated as provided herein, such shorter period, is hereinafter called the "Employment Term"(the "Employment Term"). 3. Duties. The Employee shall be employed as Senior Vice President - General Counsel of the Company, shall faithfully perform and discharge such duties as inhere in the 2 position of Senior Vice President of the Company as may be specified in the By-laws of the Company with respect to such position, and shall also perform and discharge such other duties and responsibilities consistent with such position as the Board of Directors of the Company (the "Board of Directors") shall from time to time determine. The Employee shall report to the President and Chief Executive Officer of the Company. The Employee shall perform his duties principally at offices of the Company in New York City, New York, with such travel to such other locations from time to time as the President and Chief Executive Officer may reasonably prescribe. Except as may otherwise be approved in advance by the Board of Directors, and except during vacation periods and reasonable periods of absence due to sickness, personal injury or other disability, the Employee shall devote his full business time throughout the Employment Term to the services required of him hereunder. The Employee shall render his business services exclusively to the Company and its subsidiaries during the Employment Term and shall use his best efforts, judgment and energy to improve and advance the business and interests of the Company and its subsidiaries in a manner consistent with the duties of his position. 4. Compensation. (a) Salary. As compensation for the performance by the Employee of the services to be performed by the Employee hereunder during the Employment Term, the Company shall pay the Employee a base salary at the annual rate of Two Hundred and Twenty-five Thousand Dollars ($225,000) (said amount, together with any increases thereto, being hereinafter referred to as "Salary"). The Employee's salary shall increase from time to time as determined by the Board of Directors in its sole discretion. Any Salary payable hereunder shall be paid in regular intervals in accordance with the Company's payroll practices from time to time in effect. (b) Bonus. The Employee shall be eligible to receive bonus compensation from the Company in respect of each fiscal year (or portion thereof) occurring during the Employment Term in an amount targeted at 40% of his Salary (pro rated for any portion of a fiscal year occurring during the Employment Term) if the Company achieves the target performance objectives established by the Compensation Committee of the Board of Directors (the "Compensation Committee") with respect to such fiscal year. The Employee shall also be eligible to receive additional bonus compensation from the Company in respect of each fiscal year (or portion thereof) occurring during the Employment Term for exceptional performance as may be determined by the Compensation Committee in its sole discretion. 5. Other Benefits; Options. (a) General. During the Employment Term, the Employee shall: 2 3 (i) be eligible to participate in employee fringe benefits and pension and/or profit sharing plans that may be provided by the Company for its senior executive employees in accordance with the provisions of such plans, as the same may be in effect from time to time; (ii) be eligible to participate in any medical and health plans or other employee welfare benefit plans that may be provided by the Company for its senior executive employees in accordance with the provisions of any such plans, as the same may be in effect from time to time; (iii) be entitled to the number of paid vacation days in each calendar year determined by the Company from time to time for its senior executive officers, provided that such number of paid vacation days in each calendar year shall not be less than fifteen (15) work days (three calendar weeks); the Employee shall also be entitled to all paid holidays given by the Company to its senior executive officers; (iv) be entitled to sick leave, sick pay and disability benefits in accordance with any Company policy that may be applicable to senior executive employees from time to time; and (v) be entitled to reimbursement for all reasonable and necessary out-of-pocket business expenses incurred by the Employee in the performance of his duties hereunder in accordance with the Company's normal policies from time to time in effect. (b) Grant of Initial Options. In connection with the execution and delivery of this Agreement by the Employee, the Company is granting to the Employee options ("Initial Options") to purchase 250,000 shares of Company Common Stock, $.001 par value ("Common Stock"), at a purchase price equal to the price per share of Common Stock sold in the Company's upcoming initial public offering or, in the event no such public offering occurs prior to the first anniversary of the Commencement Date, $10.00 per share, of which options to purchase 25% of such shares of Common Stock shall vest on the first anniversary of the Commencement Date and options to purchase the remaining shares of Common Stock will vest in thirty-six equal increments over the thirty-six month period beginning on the first anniversary of the Commencement Date. All terms and conditions, including those referred to herein, shall be provided in Stock Option Agreements of even date herewith between the Company and the Employee. (c) Grant of Subsequent Options. In connection with his continued employment by the Company, on the first anniversary of the Commencement Date, and on each of the subsequent anniversaries thereof during the Employment Term, the Company agrees to grant the Employee options ("Subsequent Options") to purchase shares of Common Stock at a purchase price equal to the fair market value of the 3 4 Common Stock on the date of grant in accordance with any Company policy that may be applicable for senior executive employees from time to time. Each grant of these Subsequent Options shall be pursuant to specific terms set forth in a stock option agreement between the Company and the Employee. 6. Confidential Information. The Employee hereby covenants, agrees and acknowledges as follows: (a) The Employee has and will have access to and will participate in the development of or be acquainted with confidential or proprietary information and trade secrets related to the business of the Company and any present or future subsidiaries or affiliates of the Company (collectively with the Company, the "Companies"), including but not limited to (i) customer lists; related records and compilations of information; the identity, lists or descriptions of any new customers, referral sources or organizations; financial statements; cost reports or other financial information; contract proposals or bidding information; business plans; training and operations methods and manuals; personnel records; software programs; reports and correspondence; and management systems, policies or procedures, including related forms and manuals; (ii) information pertaining to future developments such as future marketing or acquisition plans or ideas, and potential new business locations and (iii) all other tangible and intangible property, which are used in the business and operations of the Companies but not made public. The information and trade secrets relating to the business of the Companies described hereinabove in this paragraph (a) are hereinafter referred to collectively as the "Confidential Information", provided that the term Confidential Information shall not include any information (A) that is or becomes generally publicly available (other than as a result of violation of this Agreement by the Employee), (B) that the Employee receives on a nonconfidential basis from a source (other than the Companies or their representatives) that is not known by him to be bound by an obligation of secrecy or confidentiality to any of the Companies or (C) that was in the possession of the Employee prior to disclosure by the Companies. (b) The Employee shall not disclose, use or make known for his or another's benefit any Confidential Information or use such Confidential Information in any way except as is in the best interests of the Companies in the performance of the Employee's duties under this Agreement. The Employee may disclose Confidential Information when required by a third party and applicable law or judicial process, but only after providing immediate notice to the Company of any third party's request for such information, which notice shall include the Employee's intent to disclose any Confidential Information with respect to such request. (c) The Employee acknowledges and agrees that a remedy at law for any breach or threatened breach of the provisions of this Section 6 would be inadequate and, therefore, agrees that the Companies shall be entitled to seek injunctive relief in addition 4 5 to any other available rights and remedies in case of any such breach or threatened breach by the Employee; provided, however, that nothing contained herein shall be construed as prohibiting the Companies from pursuing any other rights and remedies available for any such breach or threatened breach. (d) The Employee agrees that upon termination of his employment with the Company for any reason, the Employee shall forthwith return to the Company all Confidential Information in whatever form maintained (including, without limitation, computer discs and other electronic media). (e) The obligations of the Employee under this Section 6 shall, except as otherwise provided herein, survive the termination of the Employment Term and the expiration or termination of this Agreement. (f) Without limiting the generality of Section 12 hereof, the Employee hereby expressly agrees that the foregoing provisions of this Section 6 shall be binding upon the Employee's heirs, successors and legal representatives. 7. Termination of Employment. (a) The Employee's employment hereunder shall be terminated upon the occurrence of any of the following: (i) death of the Employee; (ii) the Employee's inability to perform his duties on account of disability or incapacity for a period of one hundred eighty (180) or more days, whether or not consecutive, within any period of twelve (12) consecutive months; (iii) the Company giving written notice, at any time, to the Employee that the Employee's employment is being terminated for "Cause" (as defined in (b) below); (iv) the Company giving written notice, at any time, to the Employee that the Employee's employment is being terminated or is not being renewed, other than pursuant to clause (i), (ii) or (iii) above ("Without Cause"); or (v) the Employee terminates his employment hereunder for any reason whatsoever (whether by reason of retirement, resignation or otherwise, "Without Good Reason"). 5 6 (b) Cause. The following actions, failures and events by or affecting the Employee shall constitute "Cause" for termination within the meaning of clause (iii) of Section 7 (a) above: (i) an indictment for or conviction of the Employee of, or the entering of a plea of nolo contendere by the Employee with respect to, having committed a felony; (ii) abuse of controlled substances or alcohol or acts of dishonesty or moral turpitude by the Employee that are detrimental to one or more of the Companies; (iii) acts or omissions by the Employee that the Employee knew were likely to damage the business of one or more of the Companies; (iv) negligence by the Employee in the performance of, or disregard by the Employee of, his material obligations under this Agreement or otherwise relating to his employment, which negligence or disregard continue unremedied for a period of fifteen (15) days after written notice thereof to the Employee; or (v) failure by the Employee to obey the reasonable and lawful orders and policies of the Board of Directors that are consistent with the provisions of this Agreement. 8. Payments Upon Termination. (a) Termination Without Cause. In the event that the Employee's employment is terminated by the Company Without Cause during the period between the Commencement Date and the date six months following the Commencement Date (the "Initial Period") or thereafter, then the Company shall pay to the Employee, as severance pay or liquidated damages or both, monthly payments at the rate per annum of his Salary at the time of such termination for a period of: (i) eighteen (18) months after such termination if such termination occurs in the first month of the Initial Period; (ii) seventeen (17) months after such termination if such termination occurs in the second month of the Initial Period; (iii) sixteen (16) months after such termination if such termination occurs in the third month of the Initial Period; (iv) fifteen (15) months after such termination if such termination occurs in the fourth month of the Initial Period; 6 7 (v) fourteen (14) months after such termination if such termination occurs in the fifth month of the Initial Period; (vi) thirteen (13) months after such termination if such termination occurs in the sixth month of the Initial Period; and (vii) twelve (12) months after such termination if such termination occurs after the end of the Initial Period. (b) Payments Limited. Notwithstanding anything to the contrary expressed or implied herein, except as required by applicable law and except as set forth in Section 8(a) above, neither the Company nor any of its affiliates shall be obligated to make any payments to the Employee or on his behalf of whatever kind or nature by reason of the Employee's cessation of employment (including, without limitation, by reason of termination of the Employee's employment by the Company for Cause, Without Cause or otherwise), other than (i) such amounts, if any, of his Salary as shall have accrued and remained unpaid as of the date of said cessation and (ii) such other amounts, if any, which may be then otherwise payable to the Employee pursuant to the terms of the Company's benefits plans or pursuant to clause (v) of Section 5(a) above. (c) Interest. No interest shall accrue on or be paid with respect to any portion of any payments under this Section 8. 9. Non-Assignability. (a) Neither this Agreement nor any right or interest hereunder shall be assignable by the Employee or his beneficiaries or legal representatives without the Company's prior written consent; provided, however, that nothing in this Section 9(a) shall preclude the Employee from designating a beneficiary to receive any benefit payable hereunder upon his death or incapacity. This Agreement may not be assigned by the Company except with the Employee's prior written consent, provided, however, that the Company may assign this Agreement to an affiliate of the Company with the financial resources to fulfill the Company's obligations hereunder. (b) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or to exclusion, attachment, levy or similar process or to assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. 10. Restrictive Covenants. 7 8 (a) Competition. During the Employment Term and, in the event the Employee's employment is terminated, during the period (the "Applicable Continuation Period") following such termination and continuing until (i) the last payment is made to the Employee pursuant to Section 8(a) hereof or (ii) in the case of a termination of the Employee's employment pursuant to Section 7(a)(iii) or (v) hereof, the first anniversary of the date of such termination, the Employee will not directly or indirectly (as a director, officer, executive employee, manager, consultant, independent contractor, advisor or otherwise) engage in competition with, or own any interest in, perform any services for, participate in or be connected with any business or organization which engages in competition with any of the Companies within the meaning of Section 10(d), provided, however, that the provisions of this Section 10(a) shall not be deemed to prohibit the Employee's ownership of not more than two percent (2%) of the total shares of all classes of stock outstanding of any publicly held company, or ownership, whether through direct or indirect stock holdings or otherwise, of not more than one percent (1%) of any other business. (b) Non-Solicitation. During the Employment Term and during the Applicable Continuation Period, the Employee will not directly or indirectly induce or attempt to induce any employee of any of the Companies to leave the employ of the Company or such subsidiary or affiliate, or in any way interfere with the relationship between any of the Companies and any employee thereof. (c) Non-Interference. During the Employment Term and during the Applicable Continuation Period, the Employee will not directly or indirectly hire, engage, send any work to, place orders with, or in any manner be associated with any supplier, contractor, subcontractor or other business relation of any of the Companies if such action by him would have an adverse effect on the business, assets or financial condition of any of the Companies, or materially interfere with the relationship between any such person or entity and any of the Companies. (d) Certain Definitions. (i) For purposes of this Section 10, a person or entity (including, without limitation, the Employee) shall be deemed to be a competitor of one or more of the Companies, or a person or entity (including, without limitation, the Employee) shall be deemed to be engaging in competition with one or more of the Companies, if such person or entity conducts, or, to the knowledge of the Employee, plans to conduct, the Specified Business (as hereinafter defined) as a significant portion of its business in any of the markets served by the Companies or, in the case of a person or entity pursuing a business strategy of providing telecommunications infrastructure services, anywhere in the continental United States. 8 9 (ii) For purposes of this Agreement, "Specified Business" means (A) providing outsourced telecommunications infrastructure services to local or long distance telecommunications providers or engaging in any business conducted by the Company at the time of termination of the Employee's employment with the Company or (B) conducting, operating, carrying out or engaging in the business of managing any entity described in clause (A). (e) Certain Representations of the Employee. In connection with the foregoing provisions of this Section 10, the Employee represents that his experience, capabilities and circumstances are such that such provisions will not prevent him from earning a livelihood. The Employee further agrees that the limitations set forth in this Section 10 (including, without limitation, time and territorial limitations) are reasonable and properly required for the adequate protection of the current and future businesses of the Companies. It is understood and agreed that the covenants made by the Employee in this Section 10 (and in Section 6 hereof) shall survive the expiration or termination of this Agreement. (f) Injunctive Relief. The Employee acknowledges and agrees that a remedy at law for any breach or threatened breach of the provisions of Section 10 hereof would be inadequate and, therefore, agrees that the Company and any of its subsidiaries or affiliates shall be entitled to seek injunctive relief in addition to any other available rights and remedies in cases of any such breach or threatened breach; provided, however, that nothing contained herein shall be construed as prohibiting the Company or any of its affiliates from pursuing any other rights and remedies available for any such breach or threatened breach. 11. Representations and Warranties. The Employee represents and warrants that he is not subject to or a party to any agreement, contract, covenants, order or other restriction which in any way prohibits, restricts or impairs the Employee's ability to enter into this Agreement and carry out his duties and obligations hereunder. Each party hereto represents and warrants to the other that (i) each has the full legal right and power and all authority and approvals required to enter into, execute and deliver this Agreement and to perform fully all of his or its obligations hereunder; and (ii) this Agreement has been duly executed and delivered and constitutes a valid and binding obligation of each party, enforceable in accordance with its terms. 12. Binding Effect. Without limiting or diminishing the effect of Section 9 hereof, this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, successors, legal representatives and assigns. 9 10 13. Notices. All notices which are required or may be given pursuant to the terms of this Agreement shall be in writing and shall be sufficient in all respects if given in writing and (i) delivered personally, (ii) mailed by certified or registered mail, return receipt requested and postage prepaid, (iii) sent via a nationally recognized overnight courier or (iv) sent via facsimile confirmed in writing to the recipient, if to the Company at the Company's principal place of business, and if to the Employee, at his home address most recently filed with the Company, or to such other address or addresses as either party shall have designated in writing to the other party hereto, provided, however, that any notice sent by certified or registered mail shall be deemed delivered on the date of delivery as evidenced by the return receipt. 14. Law Governing. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 15. Severability. The Employee agrees that in the event that any court of competent jurisdiction shall finally hold that any provision of Section 6 or 10 hereof is void or constitutes an unreasonable restriction against the Employee, the provisions of such Section 6 or 10 shall not be rendered void but shall apply with respect to such extent as such court may judicially determine constitutes a reasonable restriction under the circumstances. If any part of this Agreement other than Section 6 or 10 is held by a court of competent jurisdiction to be invalid, illegible or incapable of being enforced in whole or in part by reason of any rule of law or public policy, such part shall be deemed to be severed from the remainder of this Agreement for the purpose only of the particular legal proceedings in question and all other covenants and provisions of this Agreement shall in every other respect continue in full force and effect and no covenant or provision shall be deemed dependent upon any other covenant or provision. 16. Waiver. Failure to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a waiver or relinquishment of such right or power at any other time or times. 17. Entire Agreement; Modifications. This Agreement constitutes the entire and final expression of the agreement of the parties with respect to the subject matter hereof and supersedes all prior agreements, oral and written, between the parties hereto with respect to the subject matter hereof. This Agreement may be modified or amended only by an instrument in writing signed by both parties hereto. 18. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. * * * * * 10 11 IN WITNESS WHEREOF, the Company and the Employee have duly executed and delivered this Agreement as of the day and year first above written. LEXENT INC. By: /s/ ALF T. HANSEN -------------------------------------------- Name: Alf T. Hansen Title: President and Chief Executive Officer /s/ SIDNEY A. SAYOVITZ ------------------------------------------------ Sidney A. Sayovitz 11 EX-10.16 6 0006.txt EMPLOYMENT AGREEMENT 1 Exhibit 10.16 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of June 1, 2000, by and between LEXENT INC., a Delaware corporation (the "Company"), and CHARLES T. CHRIST (the "Employee"). W I T N E S S E T H: WHEREAS the Company desires to induce the Employee to enter into employment with the Company for the period provided in this Agreement, and the Employee is willing to accept such employment with the Company on a full-time basis, all in accordance with the terms and conditions set forth below; NOW, THEREFORE, for and in consideration of the premises hereof and the mutual covenants contained herein, the parties hereto hereby covenant and agree as follows: 1. Employment. (a) The Company hereby agrees to employ the Employee, and the Employee hereby agrees to accept such employment with the Company, commencing on June 1, 2000 (the "Commencement Date") and continuing for the period set forth in Section 2 hereof, all upon the terms and conditions hereinafter set forth. (b) The Employee affirms and represents that as of the commencement of his employment by the Company, he was under no obligation to any former employer or other party which is in any way inconsistent with, or which imposes any restriction upon, the Employee's acceptance of employment hereunder with the Company, the employment of the Employee by the Company, or the Employee's undertakings under this Agreement. 2. Term of Employment. Unless earlier terminated as provided in this Agreement, the term of the Employee's employment under this Agreement shall be for a period beginning on the Commencement Date and ending on May 31, 2004. The period from the Commencement Date until May 31, 2004, or, in the event that the Employee's employment hereunder is earlier terminated as provided herein, such shorter period, is hereinafter called the "Employment Term"(the "Employment Term"). 3. Duties. The Employee shall be employed as Executive Vice President Sales & Marketing of the Company, shall faithfully perform and discharge such duties as inhere in the positions of Executive Vice President of the Company as may be specified in the By-laws of the Company with respect to such positions, and shall also perform and discharge such other duties and responsibilities consistent with such position as the Board of Directors of the Company (the "Board of Directors") shall from time to time determine. The Employee shall report to the Chief Executive Officer of the Company. The Employee shall perform his duties principally at offices 2 of the Company in New York City, New York and in an office in San Diego, California, with such travel to such other locations from time to time as the Chief Executive Officer may reasonably prescribe. Except as may otherwise be approved in advance by the Board of Directors, and except during vacation periods and reasonable periods of absence due to sickness, personal injury or other disability, the Employee shall devote his full business time throughout the Employment Term to the services required of him hereunder. The Employee shall render his business services exclusively to the Company and its subsidiaries during the Employment Term and shall use his best efforts, judgment and energy to improve and advance the business and interests of the Company and its subsidiaries in a manner consistent with the duties of his positions. 4. Compensation. (a) Salary. As compensation for the performance by the Employee of the services to be performed by the Employee hereunder during the Employment Term, the Company shall pay the Employee a base salary at the annual rate of Two Hundred Forty Thousand Dollars ($240,000) (said amount, together with any increases thereto as may be determined from time to time by the Board of Directors in its sole discretion, being hereinafter referred to as "Salary"). Any Salary payable hereunder shall be paid in regular intervals in accordance with the Company's payroll practices from time to time in effect. (b) Bonus. Provided that the Employee is employed by the Company on the last day of the fiscal year (or on May 31, 2004 for the calendar year 2004), the Employee shall be eligible to receive bonus compensation from the Company in respect of each fiscal year (or portion thereof) occurring during the Employment Term in an amount targeted at 40% of his Salary (pro rated only for the calendar year 2004) if the Company achieves the target performance objectives established by the Compensation Committee of the Board of Directors (the "Compensation Committee") with respect to such fiscal year. In accordance with the foregoing conditions, the Employee shall also be eligible to receive additional bonus compensation from the Company in respect of each fiscal year (or portion thereof) occurring during the Employment Term in an amount targeted at 60% of his Salary (prorated only for calendar year 2004) for exceptional performance as may be determined by the Compensation Committee in its sole discretion. 5. Other Benefits; Options. (a) General. During the Employment Term, the Employee shall: (i) be eligible to participate in employee fringe benefits and pension and/or profit sharing plans that may be provided by the Company for its senior executive employees in accordance with the provisions of such plans, as the same may be in effect from time to time; (ii) be eligible to participate in any medical and health plans or other employee welfare benefit plans that may be provided by the Company for its senior 2 3 executive employees in accordance with the provisions of any such plans, as the same may be in effect from time to time; (iii) be entitled to the number of paid vacation days in each calendar year determined by the Company from time to time for its senior executive officers, provided that such number of paid vacation days in each calendar year shall not be less than fifteen (15) work days (three calendar weeks); the Employee shall also be entitled to all paid holidays given by the Company to its senior executive officers; (iv) be entitled to sick leave, sick pay and disability benefits in accordance with any Company policy that may be applicable to senior executive employees from time to time; and (v) necessary out-of-pocket business expenses incurred by the Employee in the performance of his duties hereunder in accordance with the Company's normal policies from time to time in effect. (b) Grant of Initial Options. In connection with the execution and delivery of this Agreement by the Employee, the Company is granting to the Employee options ("Initial Options") to purchase 600,000 shares of Company Common Stock, $.001 par value ("Common Stock"), at a purchase price of $6.00 per share of which options to purchase 25% of such shares of Common Stock shall vest immediately and options to purchase the remaining shares of Common Stock will vest in thirty-six equal increments over the thirty-six month period beginning at the end of the month following the first anniversary of the Commencement Date, all as provided in the Stock Option Agreements of even date herewith between the Company and the Employee. (c) Grant of Subsequent Options. In connection with his continued employ ment by the Company, on the first anniversary of the Commencement Date, and on each of the subsequent anniversaries thereof during the Employment Term, the Company agrees to grant the Employee options ("Subsequent Options") to purchase 10,000 shares of Common Stock at a purchase price equal to the Fair Market Value (as defined in (d) below) of the Common Stock on the date of grant, which options shall vest in twenty-five percent increments over a four-year period with the first twenty-five percent to vest on the first anniversary of the date of grant. Each grant of these Subsequent Options shall be pursuant to specific terms set forth in a stock option agreement between the Company and the Employee. (d) Fair Market Value. "Fair Market Value" means as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, the Fair Market Value of a share of Common Stock shall be the closing sales 3 4 price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in Common Stock) on the last market trading day prior to the day of grant of the particular Subsequent Options and as reported in the Wall Street Journal or such other source as the Compensation Committee deems reliable; (ii) If the Common Stock is quoted on the NASDAQ System (but not on the National Market System thereof) or is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a share of Common Stock shall be the average between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of grant of the particular Subsequent Options and as reported in the Wall Street Journal or such other source as the Compensation Committee deems reliable; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Compensation Committee. 6. Confidential Information. The Employee hereby covenants, agrees and acknowledges as follows: (a) The Employee has and will have access to and will participate in the development of or be acquainted with confidential or proprietary information and trade secrets related to the business of the Company and any present or future subsidiaries or affiliates of the Company (collectively with the Company, the "Companies"), including but not limited to (i) customer lists; related records and compilations of information; the identity, lists or descriptions of any new customers, referral sources or organizations; financial statements; cost reports or other financial information; contract proposals or bidding information; business plans; training and operations methods and manuals; personnel records; software programs; reports and correspondence; and management systems, policies or procedures, including related forms and manuals; (ii) information pertaining to future developments such as future marketing or acquisition plans or ideas, and potential new business locations and (iii) all other tangible and intangible property, which are used in the business and operations of the Companies but not made public. The information and trade secrets relating to the business of the Companies described hereinabove in this paragraph (a) are hereinafter referred to collectively as the "Confidential Information", provided that the term Confidential Information shall not include any information (A) that is or becomes generally publicly available (other than as a result of violation of this Agreement by the Employee), (B) that the Employee receives on a nonconfidential basis from a source (other than the Companies or their representatives) that is not known by him to be bound by an obligation of secrecy or confidentiality to any of the Companies or (C) that was in the possession of the Employee prior to disclosure by the Companies. (b) The Employee shall not disclose, use or make known for his or another's benefit any Confidential Information or use such Confidential Information in any way 4 5 except as is in the best interests of the Companies in the performance of the Employee's duties under this Agreement. The Employee may disclose Confidential Information when required by a third party and applicable law or judicial process, but only after providing immediate notice to the Company of any third party's request for such information, which notice shall include the Employee's intent to disclose any Confidential Information with respect to such request. (c) The Employee acknowledges and agrees that a remedy at law for any breach or threatened breach of the provisions of this Section 6 would be inadequate and, therefore, agrees that the Companies shall be entitled to seek injunctive relief in addition to any other available rights and remedies in case of any such breach or threatened breach by the Employee; provided, however, that nothing contained herein shall be construed as prohibiting the Companies from pursuing any other rights and remedies available for any such breach or threatened breach. (d) The Employee agrees that upon termination of his employment with the Company for any reason, the Employee shall forthwith return to the Company all Confidential Information in whatever form maintained (including, without limitation, computer discs and other electronic media). (e) The obligations of the Employee under this Section 6 shall, except as otherwise provided herein, survive the termination of the Employment Term and the expiration or termination of this Agreement. (f) Without limiting the generality of Section 12 hereof, the Employee hereby expressly agrees that the foregoing provisions of this Section 6 shall be binding upon the Employee's heirs, successors and legal representatives. 7. Termination of Employment. (a) The Employee's employment hereunder shall be terminated upon the occurrence of any of the following: (i) death of the Employee; (ii) the Employee's inability to perform his duties on account of disability or incapacity for a period of one hundred eighty (180) or more days, whether or not consecutive, within any period of twelve (12) consecutive months; (iii) the Company giving written notice, at any time, to the Employee that the Employee's employment is being terminated for "Cause" (as defined in (b) below); 5 6 (iv) the Company giving written notice, at any time, to the Employee that the Employee's employment is being terminated or is not being renewed, other than pursuant to clause (i), (ii) or (iii) above ("Without Cause"); (v) the Employee terminates his employment hereunder because the Company, solely due to an Executive Management Stockholder Block (as defined in (c) below), fails to consummate an initial public offering of its Common Stock within one (1) year of the Commencement Date; or (vi) the Employee terminates his employment hereunder for any reason whatsoever (whether by reason of retirement, resignation or otherwise), other than in accordance with (v) above ("Without Good Reason"). (b) Cause. The following actions, failures and events by or affecting the Employee shall constitute "Cause" for termination within the meaning of clause (iii) of Section 7 (a) above: (i) an indictment for or conviction of the Employee of, or the entering of a plea of nolo contendere by the Employee with respect to, having committed a felony; (ii) abuse of controlled substances or alcohol or acts of dishonesty or moral turpitude by the Employee that are detrimental to one or more of the Companies; (iii) acts or omissions by the Employee that the Employee knew were likely to damage the business of one or more of the Companies; (iv) negligence by the Employee in the performance of, or disregard by the Employee of, his material obligations under this Agreement or otherwise relating to his employment, which negligence or disregard continue unremedied for a period of fifteen (15) days after written notice thereof to the Employee; or (v) failure by the Employee to obey the reasonable and lawful orders and policies of the Board of Directors that are consistent with the provisions of this Agreement. (c) Executive Management Stockholder Block. For purposes of this Agreement, an "Executive Management Stockholder Block" means the decision by the Company's Executive Management Stockholders (as that term is defined in the Stockholders Agreement, dated as of July 23, 1998, among the Company and the stockholders party thereto, as the same may be amended or modified from time to time) to not consent to an initial public offering by the Company of its Common Stock; provided, however, that an Executive Management Stockholder Block shall not be deemed to have occurred if a decision or action by the Board of Directors or the holders of the Company's Series A Convertible Preferred Stock, $.001 par value, prevents the consummation of such an initial public offering. 6 7 8. Payments Upon Termination. (a) Termination Without Cause. In the event that the Employee's employment is terminated by the Company Without Cause during the period between the Commencement Date and the date six months following the Commencement Date (the "Initial Period") and provided that the Employee is acting in accordance with his obligations pursuant to Section 10, then the Company shall pay to the Employee, as severance pay or liquidated damages or both, monthly payments at the rate per annum of his Salary at the time of such termination for a period of: (i) eighteen (18) months after such termination if such termination occurs in the first month of the Initial Period; (ii) seventeen (17) months after such termination if such termination occurs in the second month of the Initial Period; (iii) sixteen (16) months after such termination if such termination occurs in the third month of the Initial Period; (iv) fifteen (15) months after such termination if such termination occurs in the fourth month of the Initial Period; (v) fourteen (14) months after such termination if such termination occurs in the fifth month of the Initial Period; (vi) thirteen (13) months after such termination if such termination occurs in the sixth month of the Initial Period; and (vii) twelve (12) months after such termination if such termination occurs after the end of the Initial Period. (b) Termination by the Employee due to an Executive Management Stock holder Block. In the event that the Employee's employment is terminated by the Employee pursuant to clause (v) of Section 7(a) above during the ninety (90) day period following the date of such Executive Management Stockholder Block, then the Company shall pay to the Employee, as severance pay or liquidated damages or both, monthly payments at the rate per annum of his Salary at the time of such termination for a period of twenty-four (24) months after such termination. (c) Payments Limited. Notwithstanding anything to the contrary expressed or implied herein, except as required by applicable law and except as set forth in Sections 8(a) and (b) above, neither the Company nor any of its affiliates shall be obligated to make any payments to the Employee or on his behalf of whatever kind or nature by reason of the Employee's cessation of employment (including, without limitation, by 7 8 reason of termination of the Employee's employment by the Company's for Cause, Without Cause or otherwise), other than (i) such amounts, if any, of his Salary as shall have accrued and remained unpaid as of the date of said cessation and (ii) such other amounts, if any, which may be then otherwise payable to the Employee pursuant to the terms of the Company's benefits plans or pursuant to clause (v) of Section 5(a) above. (d) Interest. No interest shall accrue on or be paid with respect to any portion of any payments under this Section 8. 9. Non-Assignability. (a) Neither this Agreement nor any right or interest hereunder shall be assignable by the Employee or his beneficiaries or legal representatives without the Company's prior written consent; provided, however, that nothing in this Section 9(a) shall preclude the Employee from designating a beneficiary to receive any benefit payable hereunder upon his death or incapacity. This Agreement may not be assigned by the Company except with the Employee's prior written consent, provided, however, that the Company may assign this Agreement to an affiliate of the Company with the financial resources to fulfill the Company's obligations hereunder. (b) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or to exclusion, attachment, levy or similar process or to assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. 10. Restrictive Covenants. (a) Competition. During the Employment Term and, in the event the Employee's employment is terminated, during the period (the "Applicable Continuation Period") following such termination and continuing until (i) the last payment is made to the Employee pursuant to Section 8(a) or (b) hereof, as the case may be, or (ii) in the case of a termination of the Employee's employment pursuant to Section 7(a)(iii) or (vi) hereof, the first anniversary of the date of such termination, the Employee will not directly or indirectly (as a director, officer, executive employee, manager, consultant, independent contractor, advisor or otherwise) engage in competition with, or own any interest in, perform any services for, participate in or be connected with any business or organization which engages in competition with any of the Companies within the meaning of Section 10(d), provided, however, that the provisions of this Section 10(a) shall not be deemed to prohibit the Employee's ownership of not more than two percent (2%) of the total shares of all classes of stock outstanding of any publicly held company, or ownership, whether through direct or indirect stock holdings or otherwise, of not more than one percent (1%) of any other business. 8 9 (b) Non-Solicitation. During the Employment Term and during the Applicable Continuation Period, the Employee will not directly or indirectly induce or attempt to induce any employee of any of the Companies to leave the employ of the Company or such subsidiary or affiliate, or in any way interfere with the relationship between any of the Companies and any employee thereof. (c) Non-Interference. During the Employment Term and during the Applicable Continuation Period, the Employee will not directly or indirectly hire, engage, send any work to, place orders with, or in any manner be associated with any supplier, contractor, subcontractor or other business relation of any of the Companies if such action by him would have an adverse effect on the business, assets or financial condition of any of the Companies, or materially interfere with the relationship between any such person or entity and any of the Companies. (d) Certain Definitions. (i) For purposes of this Section 10, a person or entity (including, without limitation, the Employee) shall be deemed to be a competitor of one or more of the Companies, or a person or entity (including, without limitation, the Employee) shall be deemed to be engaging in competition with one or more of the Companies, if such person or entity conducts, or, to the knowledge of the Employee, plans to conduct, the Specified Business (as hereinafter defined) as a significant portion of its business in any of the markets served by the Companies or, in the case of a person or entity pursuing a business strategy of providing telecommunications infrastructure services anywhere in the continental United States. (ii) For purposes of this Agreement, "Specified Business" means (A) providing outsourced telecommunications infrastructure services to local or long distance telecommunications providers or engaging in any business conducted by the Company at the time of termination of the Employee's employment with the Company or (B) conducting, operating, carrying out or engaging in the business of managing any entity described in clause (A). (e) Certain Representations of the Employee. In connection with the foregoing provisions of this Section 10, the Employee represents that his experience, capabilities and circumstances are such that such provisions will not prevent him from earning a livelihood. The Employee further agrees that the limitations set forth in this Section 10 (including, without limitation, time and territorial limitations) are reasonable and properly required for the adequate protection of the current and future businesses of the Companies. It is understood and agreed that the covenants made by the Employee in this Section 10 (and in Section 6 hereof) shall survive the expiration or termination of this Agreement. (f) Injunctive Relief. The Employee acknowledges and agrees that a remedy at law for any breach or threatened breach of the provisions of Section 10 hereof would 9 10 be inadequate and, therefore, agrees that the Company and any of its subsidiaries or affiliates shall be entitled to seek injunctive relief in addition to any other available rights and remedies in cases of any such breach or threatened breach; provided, however, that nothing contained herein shall be construed as prohibiting the Company or any of its affiliates from pursuing any other rights and remedies available for any such breach or threatened breach. 11. Representations and Warranties. The Employee represents and warrants that he is not subject to or a party to any agreement, contract, covenants, order or other restriction which in any way prohibits, restricts or impairs the Employee's ability to enter into this Agreement and carry out his duties and obligations hereunder. Each party hereto represents and warrants to the other that (i) each has the full legal right and power and all authority and approvals required to enter into, execute and deliver this Agreement and to perform fully all of his or its obligations hereunder; and (ii) this Agreement has been duly executed and delivered and constitutes a valid and binding obligation of each party, enforceable in accordance with its terms. 12. Binding Effect. Without limiting or diminishing the effect of Section 9 hereof, this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, successors, legal representatives and assigns. 13. Notices. All notices which are required or may be given pursuant to the terms of this Agreement shall be in writing and shall be sufficient in all respects if given in writing and (i) delivered personally, (ii) mailed by certified or registered mail, return receipt requested and postage prepaid, (iii) sent via a nationally recognized overnight courier or (iv) sent via facsimile confirmed in writing to the recipient, if to the Company at the Company's principal place of business, and if to the Employee, at his home address most recently filed with the Company, or to such other address or addresses as either party shall have designated in writing to the other party hereto, provided, however, that any notice sent by certified or registered mail shall be deemed delivered on the date of delivery as evidenced by the return receipt. 14. Law Governing. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 15. Severability. The Employee agrees that in the event that any court of competent jurisdiction shall finally hold that any provision of Section 6 or 10 hereof is void or constitutes an unreasonable restriction against the Employee, the provisions of such Section 6 or 10 shall not be rendered void but shall apply with respect to such extent as such court may judicially determine constitutes a reasonable restriction under the circumstances. If any part of this Agreement other than Section 6 or 10 is held by a court of competent jurisdiction to be invalid, illegible or incapable of being enforced in whole or in part by reason of any rule of law or public policy, such part shall be deemed to be severed from the remainder of this Agreement for the purpose only of the particular legal proceedings in question and all other covenants and provisions of this Agreement shall in every other respect continue in full force and effect and no covenant or provision shall be deemed dependent upon any other covenant or provision. 10 11 16. Waiver. Failure to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a waiver or relinquishment of such right or power at any other time or times. 17. Entire Agreement; Modifications. This Agreement constitutes the entire and final expression of the agreement of the parties with respect to the subject matter hereof and supersedes all prior agreements, oral and written, between the parties hereto with respect to the subject matter hereof. This Agreement may be modified or amended only by an instrument in writing signed by both parties hereto. 18. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the Company and the Employee have duly executed and delivered this Agreement as of the day and year first above written. LEXENT INC. By: /s/ALF T. HANSEN ---------------------------- Name: Alf T. Hansen Title: President and Chief Executive Officer /s/ CHARLES T. CHRIST ---------------------------- Charles T. Christ 11 EX-21.1 7 0007.txt SUBSIDIARIES OF REGISTRANT 1 EXHIBIT 21.1 The subsidiaries of the Registrant are: 1. National Network Technologies LLC, a Delaware limited liability company; and 2. Hugh O'Kane Electric Co., LLC d/b/a/ Hugh O'Kane Datacom, a Delaware limited liability company. 3. Lexent Services, Inc., a Delaware corporation. EX-23.1 8 0008.txt 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 June 9, 2000 EX-27.1 9 0009.txt FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-2000 MAR-31-2000 1,860 0 62,590 4,100 0 64,547 7,046 658 72,609 30,101 0 12,663 0 48 13,685 72,609 56,210 56,210 42,655 46,494 (10) 0 391 5,072 3,016 2,056 0 0 0 2,056 0.04 0.03 WEIGHTED AVERAGE COMMON SHARES INCLUDES PREFERRED SHARES CONVERTIBLE INTO COMMON SHARES UPON THE COMPLETION OF THIS OFFERING.
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