-----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, QTHBtmZ+AqsgczMQYiX2OKWRrDUZH6CEeSb4FmL+J23V1zCFiHAMxFyvsUEz0SZh xT+pRQfcXYKWoDRu3dzH9Q== /in/edgar/work/20000707/0000950123-00-006382/0000950123-00-006382.txt : 20000920 0000950123-00-006382.hdr.sgml : 20000920 ACCESSION NUMBER: 0000950123-00-006382 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 20000707 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: 669470 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 s-1a.txt LEXENT INC 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 7, 2000. REGISTRATION NO. 333-30660 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 3 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 IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED JULY 7, 2000 5,800,000 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 $12.00 and $14.00 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 870,000 additional shares to cover over-allotments of shares. INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 7.
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS LEXENT INC. ------------------- ------------------- ------------------- Per Share............................................ $ $ $ Total................................................ $ $ $
Delivery of the shares of common stock will be made on or about , 2000. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. CREDIT SUISSE FIRST BOSTON CHASE H&Q RAYMOND JAMES & ASSOCIATES, INC. The date of this prospectus is , 2000. 3 AN INDEPENDENT PROVIDER OF LOCAL TELECOM OUTSOURCING SOLUTIONS [photographs of company employees with the text: plan, build, run] [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.................. 5,800,000 shares Common stock to be outstanding after this offering......................... 39,695,036 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 July 7, 2000 and gives effect to the automatic conversion of all outstanding shares of redeemable convertible preferred stock into 9,814,624 shares of common stock. This number excludes: - 5,013,813 shares subject to options outstanding as of July 7, 2000, at a weighted average exercise price of $4.87 per share; and - 870,000 shares that may be purchased by the underwriters to cover over-allotments, if any. Except as otherwise indicated, all information in this prospectus assumes: - no exercise of the underwriters' over-allotment option; - a three-for-one stock split that occurred on March 28, 2000; and - a one-for-two reverse stock split that occurred on July 6, 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 (loss)............... 3,500 6,517 16,214 2,016 (10,135) Net income (loss)..................... $ 2,189 $ 3,828 $ 7,952 $ 964 $(8,905) ======= ======= ======== ======= ======= Net income (loss) per share: Basic............................... $ 0.10 $ 0.16 $ 0.32 $ 0.03 $ (.39) ======= ======= ======== ======= ======= Diluted............................. $ 0.10 $ 0.15 $ 0.24 $ 0.03 $ (.39)(1) ======= ======= ======== ======= ======= Weighted average shares: Basic............................... 22,717 22,717 22,721 22,717 23,282 ======= ======= ======== ======= ======= Diluted............................. 22,717 26,390 33,531 31,563 23,282(1) ======= ======= ======== ======= ======= PRO FORMA INFORMATION (UNAUDITED): Pro forma net income(2)............... $ 1,287 $ 2,864 ======= ======= Pro forma net income (loss) per share(3): Basic............................... $ 0.06 $ 0.11 $ 0.24 $ 0.03 $ (.27) ======= ======= ======== ======= ======= Diluted............................. $ 0.06 $ 0.11 $ 0.23 $ 0.03 $ (.27)(1) ======= ======= ======== ======= ======= Pro forma weighted average shares: Basic............................... 22,717 27,025 32,536 31,457 33,097 ======= ======= ======== ======= ======= Diluted............................. 22,717 27,025 34,606 31,563 33,097(1) ======= ======= ======== ======= =======
AS OF MARCH 31, 2000 --------------------- AS ACTUAL ADJUSTED(4) ------- ----------- (UNAUDITED) CONSOLIDATED BALANCE SHEET DATA: Cash........................................................ $ 1,860 $ 62,554 Working capital............................................. 39,917 100,611 Total assets................................................ 78,080 138,774 Total debt.................................................. 18,766 11,625 Total stockholders' equity.................................. 19,204 99,702
- --------------- (1) Common stock equivalent shares, such as redeemable convertible preferred stock and stock options, have been excluded in the computation, as their effect is antidilutive for the period presented. As a result, diluted loss per share does not differ from basic loss per share. (2) Pro forma net income 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 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 1.77209 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, see Note 1 of Notes to Consolidated Financial Statements. (4) The As Adjusted column reflects conversion of all outstanding redeemable convertible preferred stock, our receipt of the net proceeds from the offering (assuming an initial public offering price of $13.00 per share), after deducting estimated underwriting discounts and commissions and estimated offering expenses and application of a portion of such proceeds to repay approximately $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 June 30, 2000, we increased our number of employees from 415 to 1,055. 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. 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. 8 12 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 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; 9 13 - 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, Charles Christ, our Executive Vice President in charge of sales and marketing, Victor DeJoy, our Executive Vice President in charge of design, engineering and program management services, Joseph Haines, our Executive Vice President in charge of network deployment, upgrade and maintenance services, and Sidney Sayovitz, our Senior Vice President, General Counsel and Secretary, 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 cover approximately 68% of our 1,055 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. 10 14 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 81.95% 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 81.95% 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 52.88% 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 $10.46 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 39,695,036 shares of common stock. Of these shares, 33,895,036 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 8,700,000 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 $68.7 million from the sale of the 5,800,000 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 $13.00 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 9,814,624 shares of common stock; and - On a pro forma as adjusted basis, giving effect to the conversion of all outstanding redeemable convertible preferred stock, our sale of the common stock in this offering at an assumed offering price of $13.00 per share, and the application of the net proceeds as described under "Use of Proceeds," including the cash payment of preferred dividends accrued from January 1, 1999 through 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 $ 62,554 ======= ======= ======== 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 $2.2864 per share, $.001 par value, 5,538,458 shares authorized, issued and outstanding(2)........................................... 12,663 862 -- ------- ------- -------- Stockholders' Equity: Common stock, $.001 par value, 50,000,000 shares authorized, 23,877,912 shares outstanding(3).......... 24 33 39 Additional paid-in capital............................... 58,647 70,439 139,130 Deferred stock-based compensation........................ (29,437) (29,437) (29,437) Retained earnings........................................ (10,030) (10,030) (10,030) ------- ------- -------- Total stockholders' equity............................ 19,204 31,005 99,702 ------- ------- -------- Total capitalization....................................... $50,633 $50,633 $111,327 ======= ======= ========
- --------------- (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 1.77209 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) 4,968,438 shares subject to options outstanding as of March 31, 2000 at a weighted average exercise price of $3.94 per share, (ii) 553,500 options to purchase common stock granted since March 31, 2000 at a weighted average exercise price of $13.11 per share, (iii) 1,357,500 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, (iv) 375,000 options to purchase common stock to be granted to Nancy Huson on July 10, 2000 at an exercise price of $12.00 per share and (v) subsequent to March 31, 2000, the expiration of 305,625 options at a weighted average price of $6.21. 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 $31.6 million, or $0.94 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 9,814,624 shares of common stock upon the closing of this offering. After giving effect to our sale of common stock in this offering at an assumed initial public offering price of $13.00 per share, and our receipt of the estimated net proceeds from the sale, our pro forma net tangible book value as of March 31, 2000 would have been approximately $100.3 million, or $2.54 per share. This represents an immediate increase in pro forma net tangible book value of $1.60 per share to existing stockholders and an immediate dilution of $10.46 per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price per share............. $13.00 Pro forma net tangible book value per share at March 31, 2000.............................................. $ 0.94 Increase per share attributable to new investors....... 1.60 ------ Pro forma net tangible book value per share after this offering.................................................. 2.54 ------ Dilution per share to new investors......................... $10.46 ======
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 5,800,000 shares of common stock at an assumed initial public offering price of $13.00 per share, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE --------------------- ----------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ------------ ------- --------- Existing stockholders................. 33,692,536 85.3% $ 31,582,000 29.5% $ 0.94 New investors......................... 5,800,000 14.7% $ 75,400,000 70.5% $13.00 ---------- ----- ------------ ----- Total................................. 39,492,536 100.0% $106,982,000 100.0% ========== ===== ============ =====
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 4,968,438 shares of common stock, with a weighted average exercise price of $3.94 per share. If holders exercise these outstanding options there will be further dilution. An additional (i) 553,500 options to purchase shares of common stock were granted at a weighted average exercise price of $13.11 per share since March 31, 2000, (ii) 1,357,500 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, (iii) 375,000 options to purchase shares of common stock will be granted to Nancy Huson on July 10, 2000 at an exercise price of $12.00 per share and (iv) subsequent to March 31, 2000, options for 305,625 shares with a weighted average exercise price of $6.21 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............... -- -- -- -- 2,191 -- 19,427 ------- ------- ------- ------- -------- ------- ------- Operating income (loss)...... 883 5,042 3,500 6,517 16,214 2,016 (10,135) Interest expense............. 289 620 1,151 1,143 1,104 224 391 Other expense (income), net........................ (12) -- 9 166 27 -- (10) ------- ------- ------- ------- -------- ------- ------- Income (loss) before income taxes...................... 606 4,422 2,340 5,208 15,083 1,792 (10,516) Provision for income taxes (benefit).................. 163 470 151 1,380 7,131 828 (1,611) ------- ------- ------- ------- -------- ------- ------- Net income (loss)............ $ 443 $ 3,952 $ 2,189 $ 3,828 $ 7,952 $ 964 $(8,905) ======= ======= ======= ======= ======== ======= ======= Net income (loss) per share: Basic...................... $ 0.02 $ 0.17 $ 0.10 $ 0.16 $ 0.32 $ 0.03 $ (0.39) ======= ======= ======= ======= ======== ======= ======= Diluted.................... $ 0.02 $ 0.17 $ 0.10 $ 0.15 $ 0.24 $ 0.03 $ (0.39)(1) ======= ======= ======= ======= ======== ======= ======= Weighted average shares: Basic...................... 22,717 22,717 22,717 22,717 22,721 22,717 23,282 ======= ======= ======= ======= ======== ======= ======= Diluted.................... 22,717 22,717 22,717 26,390 33,531 31,563 23,282(1) ======= ======= ======= ======= ======== ======= ======= PRO FORMA INFORMATION (UNAUDITED): Income before income taxes... $ 606 $ 4,422 $ 2,340 $ 5,208 Pro forma provision for income taxes(2)............ 273 1,990 1,053 2,344 ------- ------- ------- ------- Pro forma net income(3)...... $ 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 (loss) per share(4): Basic...................... $ 0.01 $ 0.11 $ 0.06 $ 0.11 $ 0.24 $ 0.03 $ (0.27) ======= ======= ======= ======= ======== ======= ======= Diluted.................... $ 0.01 $ 0.11 $ 0.06 $ 0.11 $ 0.23 $ 0.03 $ (0.27)(1) ======= ======= ======= ======= ======== ======= ======= Pro forma weighted average shares: Basic...................... 22,717 22,717 22,717 27,025 32,536 31,457 33,097 ======= ======= ======= ======= ======== ======= ======= Diluted.................... 22,717 22,717 22,717 27,025 34,606 31,563 33,097(1) ======= ======= ======= ======= ======== ======= =======
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 $ 62,554 Working capital............. 143 2,847 2,516 10,691 25,697 39,917 100,611 Total assets................ 11,496 18,417 18,212 32,309 60,379 78,080 138,774 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) 3,715 19,204 99,702
- --------------- (1) Common stock equivalent shares, such as redeemable convertible preferred stock and stock options, have been excluded in the computation, as their effect is antidilutive for the period presented. As a result, diluted loss per share does not differ from basic loss per share. (2) 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. (3) 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. (4) 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 1.77209 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 (loss) 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 $9.3 million in the year 1999 and $41.7 million in the first quarter of 2000 in connection with stock options granted and restricted stock issued during those periods. Amortization of deferred non-cash stock-based compensation was $2.2 million for the year 1999 and $19.4 million for the first quarter of 2000, and we expect future amortization to be $6.7 million, $9.0 million, $9.0 million and $4.7 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 $0.8 million in the year 1999 and $5.7 million in the first quarter of 2000. 21 25 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.
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.................. -- -- 1.5 -- 34.6 Operating income (loss)............................ 6.5 9.2 10.7 10.0 (18.0) Interest expense................................... 2.1 1.6 0.7 1.1 0.7 Other expense, net................................. -- 0.2 -- -- -- ----- ----- ----- ----- ----- Income (loss) before income taxes.................. 4.4 7.3 10.0 8.9 (18.7) Provision for income taxes (benefit)............... 0.3 1.9 4.7 4.1 (2.9) ----- ----- ----- ----- ----- Net income (loss).................................. 4.1% 5.4% 5.3% 4.8% (15.8%) ===== ===== ===== ===== =====
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 $19.4 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 loss in the first quarter of 2000 was $10.1 million. 22 26 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 derived in that jurisdiction. However, amortization of deferred non-cash stock-based compensation ($19.4 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 $5.7 million were recorded in the first quarter of 2000 in connection with amortization of $12.6 million of non-cash stock-based compensation related to nonqualified stock options. The balance of $6.8 million of amortization of stock-based compensation in the first quarter of 2000 is not subject to tax benefits because it relates to incentive stock options. As a result, our total effective tax rate for financial reporting purposes was a benefit of 15.3% 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. Non-cash stock-based compensation. We recorded amortization of non-cash stock-based compensation of $2.2 million in the year 1999 related to options granted during the year at exercise prices determined by our board of directors on the 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 prices were subsequently determined to be lower than the deemed fair values of the underlying common stock on the dates of grant. 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. Provision for income taxes. We changed 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 excluding the effect of amortization of deferred stock-based compensation, up 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 23 27 taxes would have been $2.3 million, and our net income would have been $2.9 million. Excluding the effect of amortization of deferred stock-based compensation, 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. However, amortization of deferred stock-based compensation ($2.2 million in the year 1999) 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 $0.8 million were recorded in the year 1999 in connection with amortization of $1.9 million of stock-based compensation related to nonqualified stock options. The balance of $0.3 million of amortization of stock-based compensation in the year 1999 is not subject to tax benefits because it relates to incentive stock options. As a result, our total effective tax rate for financial reporting purposes was 47% for the year 1999. Net income. Our net income increased 108% to $8.0 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, amortization of deferred non-cash stock-based compensation, 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. YEAR ENDED 1998 COMPARED TO YEAR ENDED 1997 Revenues. Our revenues increased by 32% to $71.0 million in 1998 from $53.7 million in 1997. The increase was primarily attributable to higher demand for our services from our customers as they expanded their telecommunications networks primarily in the greater New York metropolitan area, and partially as a result of the expansion of our operations in 1998 into the Philadelphia and Washington, D.C. areas. Cost of revenues. Our cost of revenues increased by 31% to $56.5 million in 1998 from $43.2 million in 1997, primarily due to increased technical personnel in support of additional demand from customers for our services. The costs of increased technical personnel are comprised of wages, related benefits and payroll-based insurance premiums. In addition, we expanded our operations into new geographic regions in 1998, incurring costs for new facilities, supervisory and support personnel. We also increased our fleet of specialty vehicles during 1998. General, administrative and marketing expenses. Our general, administrative and marketing expenses increased approximately 14% to $7.9 million in 1998 from $7.0 million in 1997. The increase was due in part to increased administrative personnel to support our higher level of revenues, and in part to an increase of $0.3 million in rent expense for our former New York City headquarters paid in 1998 to entities which are owned by our principal common stockholders. Prior to 1998, we paid rent based on an 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. 24 28 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 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 2,161 19,427 ------- ------- ------- ------- ------- ------- ------- ------- -------- Operating income (loss)................ 791 1,239 1,917 2,570 2,016 2,099 6,004 6,095 (10,135) Interest expense........ 251 248 261 383 224 238 290 352 391 Other expense (income), net................... -- -- 166 -- -- -- 39 (12) (10) ------- ------- ------- ------- ------- ------- ------- ------- -------- Income (loss) before income taxes.......... 540 991 1,490 2,187 1,792 1,861 5,675 5,755 (10,516) Provision for income taxes (benefit)....... 52 96 250 982 828 860 2,622 2,821 (1,611) ------- ------- ------- ------- ------- ------- ------- ------- -------- Net income (loss)....... $ 488 $ 895 $ 1,240 $ 1,205 $ 964 $ 1,001 $ 3,053 $ 2,934 $ (8,905) ======= ======= ======= ======= ======= ======= ======= ======= ======== 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 -- 3.9 34.6 ------- ------- ------- ------- ------- ------- ------- ------- -------- Operating income (loss)................ 6.0 7.3 9.9 12.0 10.0 7.1 13.0 11.0 (18.0) 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 (loss) before income taxes.......... 4.1 5.9 7.7 10.2 8.9 6.3 12.3 10.4 (18.7) Provision for income taxes (benefit)....... 0.4 0.6 1.3 4.6 4.1 2.9 5.7 5.1 (2.9) ------- ------- ------- ------- ------- ------- ------- ------- -------- Net income (loss)....... 3.7% 5.3% 6.4% 5.6% 4.8% 3.4% 6.6% 5.3% (15.8%) ------- ------- -------- ------- ------- ------- -------- ------- -------- ------- ------- -------- ------- ------- ------- -------- ------- --------
25 29 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. 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 26 30 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 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 $68.7 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 9,814,624 shares of common stock. Conversion of the preferred 27 31 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. 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 22,716,600 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 end-to-end, or turnkey, solutions. We have expertise installing, upgrading and maintaining equipment from most major telecommunication equipment manufacturers, including Lucent, Nortel, Marconi, ADC, Cisco, AccessLan and Tellabs. We are able to manage large scale deployments for our customers and upgrade their growing networks as usage increases and customers are added. We also provide ongoing maintenance and emergency restoration services 24 hours a day, seven days a week to ensure the reliability of our customers' networks. Our program management process enables us to meet our customers' needs on time and without compromising quality. Experience and Reputation. Since the late 1980s, we have provided critical services to local telecommunications providers in the New York metropolitan area. We installed a 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 manufacturers and we have not aligned ourselves with the 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 competitive local exchange carriers, 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 June 30, 2000, we had 1,055 employees, including 889 employees working directly on projects, 137 employees providing supervision and support to employees working directly on projects and 29 employees performing general and administrative work. Approximately 720 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 Charles T. Christ................. 55 Executive Vice President, Sales and Marketing Victor P. DeJoy................... 31 Executive Vice President, Engineering Joseph Haines..................... 38 Executive Vice President, Operations Nancy T. Huson.................... 46 Executive Vice President, Corporate Development Jonathan H. Stern................. 55 Executive Vice President and Chief Financial Officer Walter C. Teagle III.............. 50 Executive Vice President and Director Sidney A. Sayovitz................ 51 Senior Vice President, Secretary 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 our inception. From our 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. 37 41 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. 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. 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. Nancy T. Huson has over 18 years experience in corporate strategies, business development, finance, including 12 years in the telecommunications industry. She will join our company as Executive Vice President in charge of corporate development on July 10, 2000. Prior to July 2000, Ms. Huson served as Senior Vice President, Business Development at Switch and Data Facilities Corporation since March 2000. From August 1998 to February 2000 she served as Vice President-Corporate Strategy and Business Development at AT&T and from May 1996 to August 1998, she served as Vice President of Investor Relations for TCG. For seven years prior to May 1996, she held various positions as a Director in finance, business development, and investor relations for Sprint Communications, Inc. Ms. Huson holds a BS in Biochemistry/Natural Sciences from Colgate University and an MBA in finance from the University of Kansas. Jonathan H. Stern has approximately 18 years experience in the telecommunications industry and has been Executive Vice President and Chief Financial Officer since September 1998. Prior to joining our company, he served as Vice President and Controller of International Specialty Products Inc., a NYSE-listed chemical manufacturer since 1990. Prior to that, he was Vice President and Controller of Western Union Corp., a telecommunications provider. Mr. Stern holds a BA in economics from Brooklyn College and an MBA in finance from New York University, and he is also a CPA. 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. Sidney A. Sayovitz has approximately 20 years experience representing publicly traded telecommunications companies, and has been a Senior Vice President, Secretary and General Counsel 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. 38 42 Peter O. Crisp has been a Director since February 2000. Mr. Crisp was a general partner of Venrock Associates, a venture capital investment firm, for more than five years until his retirement in September 1997. He has been vice chairman of Rockefeller Financial Services, Inc. since December 1997. Mr. Crisp is also a director of American Superconductor Corporation, Evans & Sutherland Computer Corporation, United States Trust Corporation, Thermo Electron Corporation and several private companies. Mr. Crisp holds a BA from Yale University and an MBA from the Harvard Graduate School of Business. Thomas W. Hallagan has been a Director since July 1998. Since 1996, he has served as a Managing Director of Abbott Capital Management and a general partner of Abbott Capital 1330 Investors I, L.P. and Abbott Capital 1330 Investors II, L.P., private equity limited partnerships. From 1991 to 1996, Mr. Hallagan was employed by Aetna Investments. Prior to that, he was employed at Prudential Capital Corporation and he worked for Deloitte Haskins & Sells. Mr. Hallagan is a director of several private companies. He holds a BA in mathematics from Colgate University, an MBA in finance and an MS in accounting from New York University. L. White Matthews III has been a Director since September 1998. He has served as Executive Vice President and Chief Financial Officer of Ecolab Inc., a global developer of cleaning and sanitation products and services, since June 1999. Prior to that, he held various positions with Union Pacific Corporation, most recently as its Chief Financial Officer. Mr. Matthews holds a BS from Hampton-Sydney College and an MBA from the University of Virginia Darden School of Business and General Management. 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. 39 43 COMMITTEES OF THE BOARD OF DIRECTORS Our board of directors established an audit committee in January 1999. This committee currently consists of Messrs. Matthews, Crisp and Hallagan. The audit committee makes recommendations to the board of directors regarding the selection of independent auditors, reviews the results and scope of the audit and other services provided by our independent auditors and reviews and evaluates our audit and control functions. Our board of directors established a compensation committee in January 1999. This committee currently consists of Messrs. Hugh O'Kane, Hallagan and Smith. The compensation committee reviews and recommends to the board of directors the salaries, incentive compensation and benefits of our officers and employees and administers our stock option plan and employee benefit plans. COMPENSATION OF DIRECTORS Prior to February 2000, each director who was not also an employee or an affiliate of a principal stockholder of our company, was eligible to receive options to purchase shares of our common stock under our stock option plan and cash remuneration for specific actions they performed on our behalf. Each of these directors received a fee of $1,500 per quarter for each quarter served as a member of the board. In addition, each of these directors received $750 for each board meeting attended in person and $500 for each attended meeting of a committee on which the director served. We also agreed to provide these members a $1,000 per day fee in the event we imposed upon these members specific advisory responsibilities outside the scope of the normal responsibilities of a member of our 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 our 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 our board, Mr. Matthews received options to purchase 75,000 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 our 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................... 110,000 220,000 $1,393,700 $2,787,400
In the table above, the value of unexercised in-the-money options is based on the difference between the initial public offering price per share of $13.00 and the exercise price. The options granted to Mr. Stern were granted under our stock option plan. These options vested as to the first 25% on the first anniversary of the grant date and, as to the remaining portion, will vest in equal monthly installments for the 36 months thereafter. Mr. Stern's options were granted at an exercise price equal to the fair market value of our common stock, as determined by the board of directors on the date of grant. 41 45 OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth, with respect to each of the named executive officers, information concerning grants of stock options and restricted stock in 2000. None of our named executive officers received options or stock in 1999.
POTENTIAL REALIZABLE VALUE AT ASSUMED NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK SECURITIES OPTIONS PRICE APPRECIATION FOR UNDERLYING GRANTED TO EXERCISE OR OPTION TERM($)(3) OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ----------------------- NAME GRANTED(#)(1) FISCAL YEAR(2) ($/SHARE) DATE 5% 10% ---- ------------- -------------- ----------- ---------- --------- ----------- Hugh J. O'Kane, Jr. ......... 60,000 2.35 7.33 2/14/10 830,800 1,583,200 Kevin M. O'Kane.............. 60,000 2.35 7.33 2/14/10 830,800 1,583,200 Jonathan H. Stern............ -- -- -- -- -- --
- ------------------------ (1) These options were granted on February 14, 2000. For each recipient, options to purchase 19,095 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 36 months beginning on the first anniversary of the date of grant. (2) Based on a total of 2,556,000 options granted in 2000. This amount does not include (i) options to purchase 375,000 shares of our common stock to be granted to Nancy Huson on July 10, 2000 at $12.00 per share and (ii) options to purchase an aggregate 1,357,500 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 $13.00 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 our board of directors through July 2003. Each agreement shall be automatically renewed for successive one year periods until terminated by either party. 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 60,000 shares of common stock at an exercise price of $7.33 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. Mr. Stern is paid base compensation in an amount not less than $240,000 per year, subject to periodic increases as approved by the compensation committee. 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 330,000 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 42 46 the event Mr. Stern is terminated without cause, he is entitled to receive severance payments equal to 100% of his base salary and continuation of benefits for six months. In December 1999, we entered into substantially similar employment agreements with each of Messrs. Haines 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 525,000 shares, of our common stock at an exercise price of $6.67 per share upon execution of their respective agreements. These options vested as to the first 150,000 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 22,500 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 1,245,000 shares of common stock at an exercise price of $6.67 per share. These options vested as to the first 473,124 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 300,000 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 322,500 shares of our common stock at $6.67 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 125,000 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 20,834 shares in December 2000, the next 10,417 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. 43 47 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 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 300,000 shares of our common stock at an exercise price equal to the initial public offering price per share. These options vested as to the first 75,000 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 5,000 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. In July 2000, we entered into an employment agreement with Ms. Huson in which she agreed to serve as an Executive Vice President through July 2004. This agreement states that Ms. Huson is to commence employment on July 10, 2000. Under this agreement, Ms. Huson is to be 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, is entitled to receive a bonus of at least 40% of her base salary. In addition, Ms. Huson, upon commencement of her employment with our company, is to receive options to purchase 375,000 shares of our common stock at an exercise price equal to $12.00 per share. These options will vest as to the first 93,750 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. Further, these options will become immediately exercisable upon a change of control of our company. During the period which begins 180 days after the consummation of this offering and ends one year thereafter, Ms. Huson will be able to sell these options back to the our company at a purchase price equal to $5.00 per share. Also, Ms. Huson is eligible to receive options to purchase at least 22,500 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 Ms. Huson is terminated without cause or terminates her employment for good reason under this agreement, she is entitled to severance payments equal to 100% of her base salary for up to 12 months and the acceleration of options granted to her upon commencement of her employment with our company. 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 8,700,000 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. 44 48 Eligibility. Under the plan, employees, including officers, are eligible to receive grants of either incentive stock options structured to qualify under Section 422 of the Internal Revenue Code, or non-qualified stock options and restricted stock purchase awards, both of which are not intended to meet the requirements of Internal Revenue Code Section 422. Non-employees are eligible to be granted only non-qualified options and awards. Administration. The plan has been administered by our board of directors. However, the board has the right to appoint one or more committees to administer the plan. Each administering committee must consist of at least two members of the board. To the extent that transactions under the plan are intended to qualify as exempt from Rule 16b-3 of the Exchange Act, the administering committee as to those transactions will consist of entirely "Non-Employee Directors" within the meaning of the Exchange Act. To the extent that grants under the plan are intended to qualify as "performance-based compensation" within the meaning of the Internal Revenue Code, the administering committee as to those grants must consist of entirely "outside directors" within the meaning of the Internal Revenue Code. All questions of interpretation or application of the stock option plan are determined by the board of directors or administering committee or committees so appointed, whose decisions are final and binding upon all participants. Terms of Options and Awards. Each option or award granted will be evidenced by a stock option or restricted stock purchase agreement. The board or appointed committee or committees will fix the term and vesting provisions of all options granted pursuant to the plan. Options granted under the plan, other than those granted to outside directors as discussed below, generally vest as to 25% on the first anniversary of the grant date, and, as to the remaining portion, in equal monthly installments for the 36 months thereafter. These options generally provide for acceleration of vesting as to at least 50% of the unexercised portion on a change in control of our company. The exercise price of incentive stock options may not be less than 100% of the fair market value of the shares of common stock, as determined by the board or appointed committee or committees, as the case may be, on the date the option is granted. In addition, the aggregate fair market value of the shares of stock with respect to which incentive stock options are exercisable for the first time by an optionee during any calendar year shall not exceed $100,000. In addition, no incentive stock option shall be granted to an optionee who owns more than 10% of the total combined voting power of all classes of stock of our company, unless the exercise price is at least 110% of the fair market value of the shares of common stock and the exercise period does not exceed 5 years. Restricted stock purchase awards granted under the plan will be in amounts and at times as determined by the board or appointed committee or committees. The purchase price, as well as the vesting provisions, of awards will be determined by the board or committee and the purchase price may be equal to, less than or more than the fair market value of the shares of common stock to be awarded. Grants to Outside Directors. Directors who are not employees of our company or affiliates of our principal stockholders will receive options under the plan. Each eligible director will receive options to purchase shares of our common stock upon such director's initial election to the board and additional options to purchase shares for each year such director remains a member of the board of directors. The amount of each of these grants will be determined by the board or appointed committee or committees on the date of grant. The options granted to these directors will be non-qualified stock options. These options will have 10 year terms and will terminate three months following the date the director ceases to be a director or consultant or 12 months if the termination is due to death or disability. In the event of our dissolution or liquidation or change in control, these options will become 100% vested and exercisable in full. Term of the Stock Option Plan. The plan will continue in effect until July 2008 unless terminated prior to such date by the board. 45 49 401(k) Plan We have adopted the Vanguard Prototype 401(k) Savings Plan, a defined contribution plan intended to qualify under Section 401 of the Code. All of our employees not otherwise subject to collective bargaining agreements are eligible to participate and may enter the 401(k) Plan as of the first day of any month. Employees participating in the plan may make pre-tax contributions to the 401(k) Plan of up to 15% of their eligible earnings, subject to a statutorily prescribed annual limit. We make annual contributions to the 401(k) Plan in the amount of 3% of each participant's salary up to the prescribed annual limit. Our contributions vest annually over the related employee's first five years of service. Each employee's contributions, our corresponding contributions and any investment earnings, are generally not taxable to the participants until withdrawn. Employee contributions are held in trust as required by law. Individual participants may direct the trustee to invest their accounts in authorized investment alternatives. INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION ON LIABILITY Our bylaws provide that we shall indemnify our directors, officers and their agents to the fullest extent permitted by the Delaware General Corporation Law or DGCL. We are also empowered under our bylaws to purchase insurance on behalf of any director, officer, employee or agent whether or not we would be required to indemnify this person. Pursuant to this provision, we have entered into indemnification agreements with each of our directors and executive officers. In addition, our second restated certificate of incorporation, to be effective upon consummation of this offering, provides that our directors will not be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duty as a director, except for liability: - for any breach of the director's duty of loyalty to us or our stockholders; - for acts or omission not in good faith or which involve intentional misconduct or a knowing violation of law; - under Section 174 of the DGCL; or - for any transaction from which the director derives an improper personal benefit. Our second restated certificate of incorporation also provides that if, after the approval by our stockholders of our second restated certificate of incorporation, the DGCL is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of our directors shall be eliminated or limited to the fullest extent permitted by the DGCL. This provision does not affect a director's responsibilities under any other law, including the federal securities laws or state or federal environmental laws. 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 1.77209 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 165,000 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 165,000 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 75,000 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 37,500 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 405,000 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. On June 29, 2000, we issued 202,500 shares of common stock to Mr. Teagle in connection with his exercise of some of these stock options. 47 51 On January 21, 2000, we issued non-qualified options to purchase 37,500 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 30,000 shares of our common stock at a purchase price of $6.67 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 1, 2000, we issued options to purchase 75,000 shares of our common stock to Charles T. Christ, an Executive Vice President. These options will vest as to 25% on the first anniversary of the date of grant and as to the balance in equal monthly installments over the 36 months thereafter. On March 15, 2000, we issued non-qualified options to purchase 37,500 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 $10.00 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 2,500 shares) depending on the revenues we receive from business he generates for our company. In July 2000, we issued options to purchase 125,000 shares of our common stock to Sidney A. Sayovitz, our Senior Vice President, Secretary and General Counsel. These options will vest as to the first 16.67% on the fifth month after the date of grant, as to the next 8.33% on the first anniversary of the date of grant and as to the balance in equal monthly installments for the 36 months thereafter. 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 2,100,000 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. 48 52 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. 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 July 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 33,895,036 shares of common stock outstanding as of July 7, 2000, as adjusted to reflect the conversion of all outstanding shares of preferred stock upon the closing of this offering and 39,695,036 shares of common stock outstanding after completion of this offering. Fractional shares have been rounded to the nearest whole number. The table assumes no exercise of the underwriters' over-allotment option. If the underwriters' over-allotment option is exercised in full, we will sell up to an aggregate of 870,000 additional shares of our common stock, and up to 40,565,036 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)........................................ 12,605,539 37.17% 31.74% Hugh J. O'Kane, Jr.(3).................................... 10,505,539 30.98 26.45 Abbott Capital 1330 Investors I, L.P.(4).................. 6,827,564 20.14 17.20 1330 Avenue of the Americas, Suite 2800 New York, New York 10019 Allegra Capital Partners III, L.P.(5)..................... 3,437,060 10.14 8.66 515 Madison Avenue -- 29th Floor New York, New York 10022 Alf T. Hansen(6).......................................... 795,624 2.33 1.99 Jonathan H. Stern(7)...................................... 171,875 * * Walter C. Teagle III(8)................................... 392,813 1.16 * Peter O. Crisp(9)......................................... 48,750 * * Thomas W. Hallagan(10).................................... 6,827,564 20.14 17.20 L. White Matthews III(11)................................. 50,000 * * Richard L. Schwob(12)..................................... 18,750 * * Richard W. Smith(13)...................................... 3,437,060 10.14 8.66 All current directors and executive officers as a group (14 persons)(14)........................................ 33,128,513 95.68% 81.95%
- --------------- * 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 19,095 shares subject to options exercisable within 60 days of July 7, 2000, an aggregate 600,000 shares held in trust for Kevin O'Kane's children for which Mr. O'Kane is co-trustee and 2,100,000 shares held in trust for Hugh O'Kane's family for which Mr. O'Kane is co-trustee. (3) Includes 19,095 shares subject to options exercisable within 60 days of July 7, 2000, an aggregate 600,000 shares held in trust for Hugh O'Kane's children for which Mr. O'Kane is co-trustee and 2,100,000 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 341,250 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 225,624 shares subject to options exercisable within 60 days of July 7, 2000 and 322,500 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 July 7, 2000. (8) Includes 25,313 shares subject to options exercisable within 60 days of July 7, 2000 and 118,500 shares held in trust for Mr. Teagle's children. (9) Includes 18,750 shares subject to options exercisable within 60 days of July 7, 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 12,500 shares subject to options exercisable within 60 days of July 7, 2000. (12) All shares are subject to options exercisable within 60 days of July 7, 2000. (13) Includes 3,095,810 shares held by Allegra Capital Partners III, L.P. and 341,250 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 730,002 shares subject to options exercisable within 60 days of July 7, 2000. Does not include 375,000 options to be granted to Nancy Huson on July 10, 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 July 7, 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 33,895,036 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 our 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 9,814,624 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, our 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 9,923,374 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 our 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 39,695,036 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 33,895,036 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 396,950 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 9,923,374 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 8,700,000 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..................................................... 5,800,000 =========
The underwriting agreement provides that the underwriters are obligated to purchase all the shares of common stock in the offering, if any are purchased, other than those shares covered by the over-allotment option described below. The underwriting agreement also provides that, if an underwriter defaults, the purchase commitments of non-defaulting underwriters may be increased or the offering of common stock may be terminated. We have granted to the underwriters a 30-day option to purchase on a pro rata basis up to 870,000 additional shares from us at the initial public offering price less the underwriting discounts and commissions. The option may be exercised only to cover any over-allotments of common stock. The underwriters propose to offer the shares of common stock initially at the public offering price on the cover page of this prospectus and to selling group members at that price less a concession of $ per share. The underwriters and the selling group members may allow a discount of $ per share on sales to other broker/dealers. After the initial public offering, the public offering price and concession and discount to dealers may be changed by the representatives. The following table summarizes the compensation and estimated expenses we will pay.
PER SHARE TOTAL -------------------------------- -------------------------------- WITHOUT WITH WITHOUT WITH OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT -------------- -------------- -------------- -------------- Underwriting discounts and commissions paid by us............ $ $ $ $ Expenses payable by us.............. $ $ $ $
The underwriters have informed us that they do not expect discretionary sales to exceed 5% of the shares of common stock being offered. We have agreed that we will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Securities and Exchange Commission a registration statement under the Securities Act relating to, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, or publicly disclose the intention to make any such offer, sale, pledge, disposition or filing, without the prior written consent of Credit Suisse First Boston Corporation for a period of 180 days after the date of this prospectus, except issuances pursuant to the exercise of employee stock options outstanding on the date hereof. Our officers and directors and certain other stockholders have agreed that they will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, enter into a transaction which would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of our common stock, 57 61 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. The underwriters have reserved for sale, at the initial public offering price, up to 290,000 shares of the common stock offered hereby for employees, directors and certain other persons associated with us who have expressed an interest in purchasing common stock in the offering. In addition, at our request, the underwriters have reserved for sale, at the initial public offering price, up to 384,615 shares of common stock to Allegra 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 a report with the British Columbia Securities Commission 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 (Loss) 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 (loss), changes in stockholders' equity (deficit) 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 July 6, 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 3,592 9,262 ------- ------- ------- Total current assets.............................. 30,068 53,654 70,018 ------- ------- ------- Property and equipment, net............................ 2,087 6,180 7,046 Other assets........................................... 154 545 1,016 ------- ------- ------- Total assets...................................... $32,309 $60,379 $78,080 ======= ======= ======= 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, 50,000,000 shares authorized, 22,716,600, 22,919,100 and 23,877,912 shares outstanding at 1998, 1999 and 2000, respectively...................................... 23 23 24 Additional paid-in capital........................... 1,804 11,787 58,647 Deferred stock-based compensation.................... -- (7,142) (29,437) Retained earnings (accumulated deficit).............. (8,215) (953) (10,030) ------- ------- ------- Total stockholders' equity (deficit).............. (6,388) 3,715 19,204 ------- ------- ------- Total liabilities and stockholders' equity........ $32,309 $60,379 $78,080 ======= ======= =======
See accompanying notes to consolidated financial statements. F-3 67 LEXENT INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME(LOSS) (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*.......... -- -- 2,191 -- 19,427 ------- ------- -------- ------- ------- Operating income(loss)...................... 3,500 6,517 16,214 2,016 (10,135) Interest expense............................ 1,151 1,143 1,104 224 391 Other expense, net.......................... 9 166 27 -- (10) ------- ------- -------- ------- ------- Income(loss) before income taxes............ 2,340 5,208 15,083 1,792 (10,516) Provision for income taxes.................. 151 1,380 7,131 828 (1,611) ------- ------- -------- ------- ------- Net income(loss)............................ $ 2,189 $ 3,828 $ 7,952 $ 964 $(8,905) ======= ======= ======== ======= ======= Net income(loss) per share: Basic..................................... $ 0.10 $ 0.16 $ 0.32 $ 0.03 $ (0.39) ======= ======= ======== ======= ======= Diluted................................... $ 0.10 $ 0.15 $ 0.24 $ 0.03 $ (0.39) ======= ======= ======== ======= ======= Weighted average common shares outstanding: Basic..................................... 22,717 22,717 22,721 22,717 23,282 ======= ======= ======== ======= ======= Diluted................................... 22,717 26,390 33,531 31,563 23,282 ======= ======= ======== ======= ======= 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 (loss) per common share (unaudited): Basic..................................... $ 0.06 $ 0.11 $ 0.24 $ 0.03 $ (0.27) ======= ======= ======== ======= ======= Diluted................................... $ 0.06 $ 0.11 $ 0.23 $ 0.03 $ (0.27) ======= ======= ======== ======= ======= Pro forma weighted average common shares outstanding (unaudited): Basic..................................... 22,717 27,025 32,536 31,457 33,097 ======= ======= ======== ======= ======= Diluted................................... 22,717 27,025 34,606 31,563 33,097 ======= ======= ======== ======= =======
- --------------- * Substantially all of these amounts would have been classified as general, administrative and marketing expenses. 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 (loss)..................................... $ 2,189 $ 3,828 $ 7,952 $ 964 $ (8,905) 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................... -- -- 2,191 -- 19,427 Provision for deferred taxes........................ -- (1,696) (1,896) 511 (5,670) 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 DEFERRED EARNINGS PREFERRED PREFERRED COMMON COMMON PAID-IN STOCK-BASED (ACCUMULATED STOCK STOCK STOCK STOCK CAPITAL COMPENSATION DEFICIT) ----------- ----------- -------- ------ ---------- ------------ ------------ Balance January 1, 1997............ -- $ -- $100 $ -- -- $ 3,786 Purchase of common stock (14.5 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........ -- -- 22,717 (77) -- -- 77 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 22,717 $ 23 $ 1,804 $ -- $ (8,215) Issuance of 202,500 common shares........................... -- -- 202 -- 68 -- -- Tax benefit from exercise of nonqualified stock options....... -- -- -- -- 582 -- -- Deferred stock-based compensation..................... -- -- -- -- 9,333 (9,333) -- Amortization of deferred stock-based compensation......... -- -- -- -- -- 2,191 -- Dividends accrued on preferred shares........................... -- 690 -- -- -- -- (690) Net income......................... -- -- -- -- -- -- 7,952 ----- ------- ------ ---- ------- -------- -------- Balance at December 31, 1999....... 5,538 $12,491 22,919 $ 23 $11,787 $ (7,142) $ (953) Issuance of 958,812 common shares (unaudited)...................... -- -- 959 1 5,138 -- -- Deferred stock-based compensation (unaudited)...................... -- -- -- -- 41,722 (41,722) -- Amortization of deferred stock-based compensation (unaudited)...................... -- -- -- -- -- 19,427 -- Dividends accrued on preferred shares (unaudited)............... -- 172 -- -- -- -- (172) Net loss (unaudited)............... -- -- -- -- -- (8,905) ----- ------- ------ ---- ------- -------- -------- Balance at March 31, 2000 (unaudited)...................... 5,538 $12,663 23,878 $ 24 $58,647 $(29,437) $(10,030) ===== ======= ====== ==== ======= ======== ======== STOCKHOLDERS' EQUITY ------------------------ TREASURY TOTAL STOCK, STOCKHOLDERS' AT COST EQUITY -------- ------------- Balance January 1, 1997............ $ (91) $ 3,795 Purchase of common stock (14.5 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 202,500 common shares........................... -- 68 Tax benefit from exercise of nonqualified stock options....... -- 582 Deferred stock-based compensation..................... -- -- Amortization of deferred stock-based compensation......... -- 2,191 Dividends accrued on preferred shares........................... -- (690) Net income......................... -- 7,952 ------- -------- Balance at December 31, 1999....... $ -- $ 3,715 Issuance of 958,812 common shares (unaudited)...................... -- $ 5,139 Deferred stock-based compensation (unaudited)...................... -- -- Amortization of deferred stock-based compensation (unaudited)...................... -- 19,427 Dividends accrued on preferred shares (unaudited)............... -- (172) Net loss (unaudited)............... (8,905) ------- -------- Balance at March 31, 2000 (unaudited)...................... $ -- $ 19,204 ======= ========
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 22,716,600 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 year 1999 and 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 (LOSS) PER SHARE Basic net income (loss) per share is computed by dividing net income (loss) (after deducting dividends accrued on preferred stock) by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of other securities by assuming the redeemable convertible preferred stock had been converted into common stock as of the later of the date of issuance of the preferred stock or the beginning of the fiscal period presented at the conversion rates that would have been in effect at such dates (and without deducting from net income dividends accrued on preferred stock), and by including the dilutive effect of outstanding stock options in the weighted average number of common shares outstanding for each period. 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 (LOSS) PER SHARE -- BASIC: Net Income (loss)........................ $ 2,189 $ 3,828 $ 7,952 $ 964 $(8,905) Less: preferred dividends................ -- (301) (690) (172) (172) ------- ------- ------- ------- ------- Net income (loss) available to common shareholders........................... $ 2,189 $ 3,527 $ 7,262 $ 792 $(9,077) ======= ======= ======= ======= ======= Weighted average shares -- basic......... 22,717 22,717 22,721 22,717 23,282 ======= ======= ======= ======= ======= Net Income (loss) per share -- basic..... $ 0.10 $ 0.16 $ 0.32 $ 0.03 $ (0.39) ======= ======= ======= ======= =======
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 (LOSS) PER SHARE -- DILUTED: Net Income (loss)........................ $ 2,189 $ 3,828 $ 7,952 $ 964 $ * ======= ======= ======= ======= ======= Weighted average shares outstanding...... 22,717 22,717 22,721 22,717 * Assumed conversion of preferred stock as of the later of the date of issuance of the preferred stock or the beginning of the fiscal period presented at the conversion rates that would have been in effect at such dates................ -- 3,673 8,740 8,740 * Dilutive effect of stock options......... -- -- 2,070 106 * ------- ------- ------- ------- ------- Weighted average shares -- diluted....... 22,717 26,390 33,531 31,563 * ======= ======= ======= ======= ======= Net income (loss) per share -- diluted... $ 0.10 $ 0.15 $ 0.24 $ 0.03 $ * ======= ======= ======= ======= =======
* Common stock equivalent shares, such as redeemable convertible preferred stock and stock options, have been excluded in the computation, as their effect is antidilutive for the period presented. As a result, the computation for diluted loss per share does not differ from basic loss per share. 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 1.77209 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 (LOSS) PER SHARE -- BASIC: Pro forma net income................. $1,287 $2,864 $ -- $ -- $ -- ------ ------ ------ ------ ------- Actual net income (loss)............. $ -- $ -- $7,952 $ 964 $(8,905) ====== ====== ====== ====== ======= Weighted average shares -- actual.... 22,717 22,717 22,721 22,717 23,282 Assumed conversion of preferred stock at 1.77209 common shares for each share of redeemable convertible preferred stock.................... -- 4,308 9,815 8,740 9,815 ------ ------ ------ ------ ------- Pro forma weighted average shares -- basic.................... 22,717 27,025 32,536 31,457 33,097 ====== ====== ====== ====== ======= Pro forma net income (loss) per share -- basic..................... $ 0.06 $ 0.11 $ 0.24 $ 0.03 $ (0.27) ====== ====== ====== ====== ======= PRO FORMA NET INCOME (LOSS) PER SHARE -- DILUTED: Adjustments to basic weighted average shares for outstanding options..... -- -- 2,070 106 -- ------ ------ ------ ------ ------- Pro forma weighted average shares -- diluted............................ 22,717 27,025 34,606 31,563 33,097 ====== ====== ====== ====== ======= Pro forma net income (loss) per share -- diluted*.................. $ 0.06 $ 0.11 $ 0.23 $ 0.03 $ (0.27) ====== ====== ====== ====== =======
* Common stock equivalent shares, such as redeemable convertible preferred stock and stock options, have been excluded in the computation, as their effect is antidilutive for the periods presented. As a result, diluted loss per share does not differ from basic loss per share. 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 ======= ======= =======
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) 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. 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 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) 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. 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 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) by the Company to its two principal common stockholders aggregated $0.2 million. At December 31, 1998, such amounts were insignificant. Such amounts bear interest at the rate of 6%, are not subordinated, and are classified as current because there are no formal repayment terms. During 1998 and 1999, the Company purchased services for total costs of $0.5 million and $1.4 million, respectively, from Metro Design Systems, Inc. ("MDS"), an entity which was owned by the 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. 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) 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) (3,179) ------ ------- ------ Provision for income taxes...................... $ 151 $ 1,380 $7,131 ====== ======= ======
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 Amortization of deferred stock-based compensation related to nonqualified options............................... -- 844 Deferred costs on uncompleted projects................... 643 858 Accrued liabilities...................................... 558 340 ------ ------ Total deferred tax assets............................. 1,699 3,711 ------ ------ Deferred tax liability: Depreciation and amortization............................ 3 119 ------ ------ Net deferred tax asset..................................... $1,696 $3,592 ====== ======
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. 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) 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 1.88 Effect on income from S corporation years......... (41.33) (22.65) -- ------ ------ ----- Total tax provision............................... 6.45% 26.5% 47.28% ====== ====== =====
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. 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 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) 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). Conversion is automatic upon the closing of a public offering of common stock. If not otherwise converted into common stock, the preferred stock is redeemable over a three-year period at the option of the holders beginning July 23, 2003, or under certain circumstances, beginning July 23, 2001. The holders of the preferred stock have agreed that in the event a public offering of common stock is consummated, preferred dividends accrued through December 31, 1998 will be paid in the form of additional value of preferred stock, and preferred dividends accrued from January 1, 1999 through date of conversion will be paid in cash. Accordingly, assuming a public offering of common stock is consummated, the conversion rate will be 1.77209 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 8,700,000 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 165,000 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 75,000 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 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) 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.................................... 570,000 $0.34 $0.34 Exercised or canceled...................... -- -- Outstanding at December 31, 1998............. 570,000 $0.34 Granted.................................... 3,204,750 $2.60 $2.60 Exercised.................................. (202,500) $0.34 Canceled................................... -- -- ---------- Outstanding at December 31, 1999............. 3,572,250 $2.36 Granted.................................... 2,002,500 $6.14 $9.60 Exercised.................................. (606,312) $4.60 Canceled................................... -- -- ---------- Outstanding at March 31, 2000................ 4,968,438 $3.94 ==========
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 - --------------- ----------- -------------- -------------- ----------- -------------- $0.33 - $1.02 2,522,250 9.1 $0.56 565,625 $0.50 $6.67 1,050,000 10.0 $6.67 300,000 $6.67 --------- ------- 3,572,250 $2.36 865,625 $2.64 ========= =======
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 - --------------- ----------- -------------- -------------- ----------- -------------- $0.33 - $ 1.02 2,319,438 8.9 $ 0.56 758,028 $ 0.50 $ 6.67 2,491,500 8.4 $ 6.67 704,926 $ 6.67 $ 7.33 120,000 9.8 $ 7.33 38,190 $ 7.33 $20.00 37,500 9.8 $20.00 18,750 $20.00 --------- --------- 4,968,438 $ 3.94 1,519,894 $ 3.78 ========= =========
During the three months ended March 31, 2000, the Company granted options to purchase 2,002,500 shares of common stock at exercise prices ranging from $6.67 to $20.00 per share and issued rights to 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) purchase 352,500 shares of restricted stock at $6.67 per share. During the three months ended March 31, 2000, options were exercised to purchase 606,312 shares of common stock at prices ranging from $0.48 to $6.67 per share, and the Company issued 352,500 shares of restricted stock at $6.67 per share. For certain options and restricted stock granted in the year 1999 and 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 $9.3 million in the year 1999 and $41.7 million in the first quarter of 2000. Amortization of such deferred non-cash stock-based compensation was $2.2 million in the year 1999 and $19.4 million in the first quarter of 2000. Deferred tax benefits of $0.8 million and $5.7 million were recorded in the year 1999 and the first quarter of 2000, respectively, in connection with amortization of deferred non-cash stock-based compensation related to non-qualified options, to the extent that the Company expects to realize such tax benefits. The Company accounts for its stock-based compensation using the method prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees. Had the Company determined its stock-based compensation cost based on the fair value at the grant dates for the awards under the Black-Scholes option 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................................ $7,952 Pro forma.................................. $7,759 Basic and diluted net income per share as reported: Basic...................................... $ 0.32 Diluted.................................... $ 0.24 Basic and diluted pro forma net income per share: Basic...................................... $ 0.24 Diluted.................................... $ 0.23
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) 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 2,504 ------ ------ Total.................................................. $4,149 $9,613 ====== ======
13. CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the Company to credit risk consist primarily of cash and trade receivables. Cash balances may, at times, exceed amounts covered by FDIC insurance. The Company believes that it mitigates its risk by depositing cash balances with high quality financial institutions that it believes are financially sound. Recoverability is dependent upon the performance of the institution. Trade receivables are primarily short-term receivables from competitive local exchange carriers and generally well known contracting companies. To reduce credit risk, the Company performs credit evaluations of its customers but does not generally require collateral and, therefore, the majority of its trade receivables are unsecured. Credit risk is affected by conditions within the economy. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information. 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. F-21 85 LEXENT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000) 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. On July 6, 2000, the Company effected a 1-for-2 reverse stock split of the Company's common stock with no change in par value. Accordingly, the stock split has been recognized by reclassifying $22,717, the par value of the reduction in 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 July 6, 2000, the Company filed an amendment to its Restated Certificate of Incorporation. This amendment decreased the shares of authorized common stock from 94,461,542 to 50,000,000 shares. 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-22 86 [Lexent Logo] 87 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........................................ $ 24,653 NASD Filing Fee............................................. 9,838 Nasdaq Listing Fees......................................... 95,000 Legal Fees and Expenses..................................... 600,000 Blue Sky Fees and Expenses.................................. 2,500 Accounting Fees and Expenses................................ 450,000 Printing and Engraving...................................... 225,000 Transfer Agent and Register Fees and Expenses............... 3,000 Miscellaneous............................................... 15,009 ---------- $1,425,000 ==========
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 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. II-1 88 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 22,716,600 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 30,000 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 322,500 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 July 7, 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 Amended and Restated Stock Option and Restricted Stock Purchase Plan covering an aggregate of 6,330,750 shares of the Company's common stock. Pursuant to these grants, the Company has issued 1,011,312 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 89 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. 3.6 -- 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 the executive officers 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.
II-3 90
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. 10.17 -- Employment Agreement, dated July 2, 2000 between Nancy T. Huson 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.
- --------------- ** 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 91 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 July 7, 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 July 7, 2000 - --------------------------------------------------- Officer (Principal Alf T. Hansen executive officer); Director * Executive Vice President and July 7, 2000 - --------------------------------------------------- Chief Financial Officer Jonathan H. Stern (Principal financial and accounting officer) * Chairman of the Board of July 7, 2000 - --------------------------------------------------- Directors Hugh J. O'Kane, Jr. * Vice Chairman and Chief July 7, 2000 - --------------------------------------------------- Operating Officer Kevin M. O'Kane * Executive Vice President and July 7, 2000 - --------------------------------------------------- Director Walter C. Teagle III * Director July 7, 2000 - --------------------------------------------------- Peter O. Crisp * Director July 7, 2000 - --------------------------------------------------- Thomas W. Hallagan * Director July 7, 2000 - --------------------------------------------------- L. White Matthews III
II-5 92
SIGNATURES TITLE DATE ---------- ----- ---- * Director July 7, 2000 - --------------------------------------------------- Richard L. Schwob * Director July 7, 2000 - --------------------------------------------------- Richard W. Smith * /s/ HUGH J. O'KANE, JR. - --------------------------------------------------- Hugh J. O'Kane, Jr., individually and as Attorney-in-Fact
II-6 93 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. 3.6 -- 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 the executive officers 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.
94
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 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. 10.16** -- Employment Agreement, dated June 1, 2000 between Charles T. Christ and Registrant. 10.17 -- Employment Agreement, dated July 2, 2000 between Nancy T. Huson 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.
- --------------- ** Previously filed. + Portions of this exhibit have been filed confidentially with the Commission pursuant to a confidential treatment request filed by Registrant. EX-3.6 2 ex3-6.txt CERTIFICATE OF AMENDMENT 1 Exhibit 3.6 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 two paragraphs of the preamble of Article III thereof and by substituting in lieu of said paragraphs, the following new paragraphs: "The total number of shares of all classes of stock which the Corporation shall have authority to issue is 55,538,458, consisting of (a) 50,000,000 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"), every two (2) shares of Common Stock issued and outstanding on the Effective Date (the "Old Common Stock") shall be converted into one (1) share 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 Effective Date, Old Certificates 2 shall represent only the right to receive New Certificates pursuant to the provisions hereof." 3. The capital of the Corporation will not be decreased on account of the foregoing amendment. 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 July 6, 2000 /s/ KEVIN M. O' KANE --------------------------------- Kevin M. O'Kane Chief Operating Officer EX-4.1 3 ex4-1.txt SPECIMEN CERTIFICATE 1 [CERTIFICATE NUMBER] [CERTIFICATE SHARES] INCORPORATED UNDER THE LAWS SEE REVERSE FOR OF THE STATE OF DELAWARE CERTAIN DEFINITIONS [LEXENT LOGO] LEXENT INC. COMMON STOCK FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $.001 PER SHARE, OF LEXENT INC. (hereinafter called the "Corporation"), transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney, upon surrender of this Certificate properly endorsed. This Certificate and the shares represented hereby are issued and shall be held subject to all the provisions of the Certificate of Incorporation of the Corporation to all of which provisions the holder, by acceptance hereof assents. This Certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. DATED: COUNTERSIGNED AND REGISTERED AMERICAN STOCK TRANSFER & TRUST COMPANY (NEW YORK, NY) BY TRANSFER AGENT REGISTRAR [LEXENT SEAL] Alf T. Hansen PRESIDENT AND CHIEF EXECUTIVE OFFICER Kevin M. O'Kane VICE CHAIRMAN 2 THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT- __________ Custodian _________ TEN ENT - as tenants by the entireties (Cust) (Minor) JT TEN - as joint tenants with right of under Uniform Gifts to Minors survivorship and not as tenants Act _______________ in common (State)
Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, _______________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE +------------------------------------+ | | | | +------------------------------------+ _______________________________________________________________________________ _______________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) _______________________________________________________________________________ ________________________________________________________________________ Shares of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint ______________________________________________________________________ Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated ___________________ _____________________________________________ NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION (AS DEFINED IN RULE 17AJ-15 UNDER THE SECURITIES EXCHANGE ACT OF 1934) WHICH MAY INCLUDE A COMMERCIAL BANK TRUST COMPANY OR SAVINGS ASSOCIATION, CREDIT UNION OR MEMBER OF THE AMERICAN STOCK EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC STOCK EXCHANGE OR MIDWEST STOCK EXCHANGE. EX-10.5 4 ex10-5.txt FORM OF INDEMNIFICATION AGREEMENT 1 EXHIBIT 10.5 INDEMNIFICATION AGREEMENT INDEMNIFICATION AGREEMENT, made this ____ day of , by and between Lexent Inc., a Delaware corporation (the "Corporation"), and ("Indemnitee"). RECITALS WHEREAS, Indemnitee is currently serving as, or is assuming the position of, a director and/or officer of the Corporation and/or, at the Corporation's request, a director, officer, employee and/or agent of another Corporation, partnership, joint venture, trust or other enterprise, and the Corporation wishes Indemnitee to continue in such capacity(ies); WHEREAS, the Amended and Restated Certificate of Incorporation of the Corporation (the "Certificate of Incorporation") and the By-laws of the Corporation (the "By-laws") each provide that the Corporation shall indemnify, to the fullest extent permitted by law, certain persons, including directors and officers of the Corporation, against specified expenses and losses arising out of certain threatened, pending or completed actions, suits or proceedings; WHEREAS, Section 145(f) of the Delaware General Corporation Law (the "DGCL") expressly recognizes that the indemnification provided by Section 145 of the DGCL shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office; WHEREAS, in recognition of Indemnitee's need for protection against personal liability in order to induce Indemnitee to serve or continue to serve the Corporation in an effective manner as a director and/or officer of the Corporation and/or, at the Corporation's request, as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, and, in the case of directors and officers, to supplement or replace the Corporation's directors' and officers' liability insurance coverage, and to provide Indemnitee with specific contractual assurance that the protection promised by the Certificate of Incorporation and By-laws will be available to Indemnitee, the Corporation, with the prior approval of its stockholders, wishes to provide Indemnitee with the benefits contemplated by this Agreement; WHEREAS, as a result of the provision of such benefits, Indemnitee has indicated that he is willing to serve, or continue to serve, as a director and/or officer of the Corporation 2 and/or, at the Corporation's request, as a director, officer, employee and/or agent of another corporation, partnership, joint venture, trust or other enterprise; NOW, THEREFORE, , in consideration of the premises and mutual covenants herein contained, the Corporation and Indemnitee hereby agrees as follows: 1. Definitions. (a) "Expenses" means, for the purposes of this Agreement, all direct and indirect costs of any type or nature whatsoever (including, without limitation, any fees and disbursements of Indemnitee's counsel, accountants another experts and other out-of-pocket costs) actually and reasonably incurred by Indemnitee in connection with the investigation, preparation, defense or appeal of a Proceeding; provided, however, that Expenses shall not include judgments, fines, penalties or amounts paid in settlement of a Proceeding unless such matters may be indemnified under applicable provisions of the DGCL. (b) "Proceeding" means, for the purposes of this Agreement, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (including actions, suits or proceedings brought by or in the right of the Corporation), in which Indemnitee may be or may have been involved as a party or otherwise, by reason of the fact that Indemnitee is or was a director or officer of the Corporation, by reason of any action taken by hi or of any inaction on his part while acting as such director or officer or by reason of the fact that he is or was serving at the request of the Corporation as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or was a director and/or officer of the foreign or domestic corporation which was a predecessor corporation to the Corporation or of another enterprise at the request of such predecessor corporation, whether or not he is serving in such capacity at the time any liability or expense is incurred for which indemnification or reimbursement can be provided under this Agreement. 2. Indemnification. (a) Third Party Proceedings. To the fullest extent permitted by law, the Corporation shall indemnify Indemnitee against Expenses and liabilities of any type whatsoever (including, but not limited to, judgments, fines, penalties, and amounts paid in settlement (if the settlement is approved in advance by the Corporation)) incurred by Indemnitee in connection with a Proceeding (other than a Proceeding by or in the right of the Corporation) if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe Indemnitee's conduct was unlawful. The termination of any Proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner that Indemnitee reasonably believed to be in, or not opposed to, the best interests of 2 3 the Corporation, or, with respect to any criminal Proceeding, had reasonable cause to believe that Indemnitee's conduct was unlawful. Notwithstanding the foregoing, no indemnification shall be made in any criminal proceeding where Indemnitee has been adjudged guilty unless a disinterested majority of the directors determines that Indemnitee did not receive, participate in or share in any pecuniary benefit to the detriment of the Corporation and, in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for Expenses or liabilities. (b) Proceedings by or in the Right of the Corporation. To the fullest extent permitted by law, the Corporation shall indemnify Indemnitee against Expenses incurred by Indemnitee in connection with the defense or settlement of a Proceeding by or in the right of the Corporation to procure a judgment in its favor if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in, or not opposed to, the best interests of the Corporation. Notwithstanding the foregoing, no indemnification shall be made in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to the Corporation in the performance of Indemnitee's duty to the Corporation unless and only to the extent that the court in which such Proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for Expenses. (c) Scope. Notwithstanding any other provision of this Agreement other than Section 3, the Corporation shall indemnify Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by other provisions of this Agreement, the Certificate of Incorporation, the By-laws or statute. 3. Limitations on Indemnification. Any other provision herein to the contrary notwithstanding, the Corporation shall not be obligated pursuant to the terms of this Agreement: (a) Excluded Acts. To indemnify Indemnitee for any acts or omissions or transactions from which a director may not be relieved of liability under Section 102(b)(7) of the DGCL; or (b) Claims Initiated by Indemnitee. To indemnify or advance expenses to Indemnitee with respect to Proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under Section 145 of the DGCL, but such indemnification or advancement of Expenses may be provide by the Corporation in specific cases if a majority of the disinterested directors has approved the initiation or bringing of such proceeding or claim; or (c) Lack of Good Faith. To indemnify Indemnitee for any Expenses incurred by Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this 3 4 Agreement, if a court of competent jurisdiction determines that each of the material assertions made by Indemnitee in such proceeding was not made in good faith or was frivolous; or (d) Insured Claims. To indemnify Indemnitee for Expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines or penalties, and amounts paid in settlement) which have been paid directly to or on behalf of Indemnitee by an insurance carrier under a policy of directors' and officers' liability insurance maintained by the Corporation or another policy of insurance maintained by the Corporation or Indemnitee; or (e) Claims Under Section 16(b). To indemnify Indemnitee for expenses and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute. 4. Determination of Right to Indemnification. Upon receipt of a written claim addressed to the Board of Directors for indemnification pursuant to Section 2 of this Agreement, the Corporation shall determine by any of the methods set forth in Section 145(d) of the DGCL whether Indemnitee has met the applicable standards of conduct that make it permissible under applicable law to indemnify Indemnitee. If a claim under Section 2 of this Agreement is not paid in full by the Corporation within ninety days after such written claim has been received by the Corporation, Indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, unless such action is dismissed by the court as frivolous or brought in bad faith, Indemnitee shall be entitled to be paid also the expense of prosecuting such claim. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel or its stockholders) to make a determination prior to the commencement of such action that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct under applicable law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel or its stockholders) that Indemnitee has not met such applicable standard of conduct, shall create a presumption that Indemnitee has not met the applicable standard of conduct. The court in which such action is brought shall determine whether Indemnitee or the Corporation shall have the burden of proof concerning whether Indemnitee has or has not met the applicable standard of conduct. 5. Advancement and Repayment of Expenses. The Expenses incurred by Indemnitee in defending and investigating any Proceeding shall be paid by the Corporation prior to the final disposition of such Proceeding within thirty days after receiving from Indemnitee copies of invoices presented to Indemnitee for such Expenses and an undertaking by or on behalf of Indemnitee to the Corporation to repay such amount to the extent it is ultimately determined that Indemnitee is not entitled to indemnification. In determining whether or not to make an advance hereunder, the ability of Indemnitee to repay shall not be a factor. Notwithstanding the foregoing, in a proceeding brought by the Corporation directly, in its own right (as distinguished from an action brought derivatively or by any receiver or trustee), the Corporation shall not be required to make the advances called for hereby if a majority of the disinterested directors 4 5 determines that (i) it does not appear that Indemnitee has met the standards of conduct that made it permissible under applicable law to indemnify Indemnitee and (ii) the advancement of Expenses would not be in the best interests of the Corporation and its stockholders. 6. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification or advancement by the Corporation of some or a portion of any Expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, penalties, and amounts paid in settlement) incurred by him in the investigation, defense, settlement or appeal of a Proceeding, but is not entitled to indemnification or advancement of the total amount thereof, the Corporation shall nevertheless indemnify or pay advancements to Indemnitee for the portion of such Expenses or liabilities to which Indemnitee is entitled. 7. Notice to Corporation by Indemnitee. Indemnitee shall notify the Corporation in writing of any matter with respect to which Indemnitee intends to seek indemnification hereunder as soon as reasonably practicable following the receipt by Indemnitee of written notice thereof; provided that any delay in so notifying Corporation shall not constitute a waiver by Indemnitee of his rights hereunder. The written notification to the Corporation shall be addressed to the Board of Directors and shall include a description of the nature of the Proceeding and the facts underlying the Proceeding and be accompanied by copies of any documents filed with the court, if any, in which the Proceeding is pending. In addition, Indemnitee shall give the Corporation such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. 8. Defense of Claim. In the event that the Corporation shall be obligated under Section 5 hereof to pay the Expenses of any Proceeding against Indemnitee, the Corporation, if appropriate, shall be entitled to assume the defense of such Proceeding, with counsel approved by Indemnitee, which approval shall not be unreasonably withheld, upon the delivery to Indemnitee of written notice of its election to do so. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Corporation, the Corporation will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same proceeding; provided that (i) Indemnitee shall have the right to employ his or her own counsel in any such Proceeding at Indemnitee's expense and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Corporation, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Corporation and Indemnitee in the conduct of such defense or (C) the Corporation shall not, in fact, have employed counsel to assume the defense of such Proceeding, then the fees and expenses of Indemnitee's counsel shall be paid by the Corporation. 9. Attorneys' Fees. If any legal action is necessary to enforce the terms of this Agreement, the prevailing party shall be entitled to recover, in addition to other amounts to which the prevailing party may be entitled, actual attorneys' fees and court costs as may be awarded by the court. 5 6 10. Continuation of Obligations. All agreements and obligations of the Corporation contained herein shall continue during the period Indemnitee is a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, fiduciary, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, and shall continue thereafter so long as Indemnitee shall be subject to any possible proceeding by reason of the fact that Indemnitee served in any capacity referred to herein. 11. Successors and Assigns. This Agreement establishes contract rights that shall be binding upon, and shall inure to the benefit of, the successors, assigns, heirs and legal representatives of the parties hereto. 12. Non-exclusivity. (a) The provisions for indemnification and advancement of expenses set forth in this Agreement shall not be deemed to be exclusive of another rights that Indemnitee may have under any provision of law, the Certificate of Incorporation or By-laws, the vote of the Corporation's stockholders or disinterested directors, other agreements or otherwise, both as to action in his official capacity and action in another capacity while occupying his position as a director or officer of the Corporation. (b) In the event of any changes after the date of this Agreement in any applicable law, statute, or rule that expand the right of Delaware corporation to indemnify its directors and officers, Indemnitee's rights and the Corporation's obligations under this Agreement shall be expanded to the fullest extent permitted by such changes. In the event of any changes in any applicable law, statute or rule that narrow the right of a Delaware corporation to indemnify a director and officer, such changes, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties' rights and obligations hereunder. 13. Effectiveness of Agreement. This Agreement shall be effective as of the date set forth on the first page and may apply to acts or omissions of Indemnitee that occurred prior to such date if Indemnitee was a director or officer of the Corporation or its predecessor, or was serving at the request of the Corporation or its predecessor as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, a the time such act or omission occurred. 14. Severability. Nothing in this Agreement is intended to require or shall be construed as requiring the Corporation to do or omit to do any act or thing in violation of applicable law. The Corporation's inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify Indemnitee to the fullest extent permitted by any 6 7 applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms. 15. Governing Law. This Agreement shall be interpreted and enforced in accordance with the laws of the State of Delaware. To the extent permitted by applicable law, the parties hereby waive any provisions of law that render any provision of this Agreement unenforceable in any respect. 16. Notices. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand or by nationally recognized overnight courier and receipted for by the party addressed, on the date of such receipt, or (ii) if delivered by facsimile transmission to the recipient followed by a copy sent by mail, on the date of such transmission, or (iii) if mailed by certified or registered mail with postage prepaid to the following address, on the third business day after the mailing date: If to the Corporation: Lexent Inc. Three New York Plaza New York, New York 10004 Facsimile: 212-981-2493 Attn.: President If to Indemnitee: Kevin O'Kane 153 South Mountain Avenue Montclair, NJ 07042 or to such other address as either party shall have notified the other party in accordance with this Section 16. 17. Mutual Acknowledgment. Both the Corporation and Indemnitee acknowledge that in certain instances, federal law or applicable public policy may prohibit the Corporation from indemnifying its directors and officers under this Agreement or otherwise. Indemnitee understands and acknowledges that the Corporation has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Corporation's right under public policy to indemnify Indemnitee. 18. Counterparts. This Agreement may be executed in several counterparts, each of which shall constitute an original. 7 8 19. Amendment and Termination. No amendment, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by both parties hereto. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first set forth above. LEXENT INC. By _____________________________ _____________________________ 8 EX-10.14 5 ex10-14.txt ENGINEER PROCURE AND CONSTRUCT CONTRACT 1 Exhibit 10.14 ENGINEER, PROCURE AND CONSTRUCT CONTRACT BETWEEN LEVEL 3 COMMUNICATIONS, LLC AND NATIONAL NETWORK TECHNOLOGIES, LLC., CONTRACT NUMBER EAST 21-NE-EPC 2 TABLE OF CONTENTS RECITALS 1 1 DEFINITIONS; INTERPRETATION 1 2 PROJECT 8 3 CONTRACTOR OBLIGATIONS 9 4 INFORMATION SUPPLIED TO CONTRACTOR AND DISCLAIMER; REPRESENTATIONS AND WARRANTIES 15 5 ENFORCEABILITY; LOSS OR DAMAGE; TITLE 15 6 PAYMENT 17 Appendix "A" Description of Project Appendix "B" Not Used Appendix "C" Confidentiality Agreement Appendix "D" Award Fee Computation Appendix "E" Program Management Appendix "F" Safety Appendix "G" Quality Appendix "H" Cost Appendix "I" Schedule Appendix "J" Response Times for Owner's Approval Appendix "K" TBD Travel and Assignment Policy Appendix "L" Charge Schedule
3 ENGINEER, PROCURE AND CONSTRUCT CONTRACT THIS ENGINEER, PROCURE AND CONSTRUCT CONTRACT, is dated as of the ____ day of __________, 1998 the ("Effective Date"), by and between Level 3 Communications, LLC, located at 14023 Denver West Parkway, Golden, Colorado 80401, telephone number: (303) 215-8500, a Delaware limited liability corporation ("Owner"), and National Network Technologies, LLC., located at 26 Broadway, Suite 400, New York, New York 10004, telephone number: (212) 847-7770, federal tax I.D.: 13-3990223, a Delaware corporation ("Contractor"). RECITALS A. Owner desires to have constructed numerous multi-conduit fibre optic cable systems and other facilities (each, a "Network") in certain geographical areas. B. Owner was procured or will procure rights of way, or other necessary interests in real property, for the permanent placement of each Network. C. Owner desires to engage and the Contractor desires to be engaged to serve as the program manager which will provide program management, design, engineering, procurement and construction services for each Network described herein (the "Project", as hereinafter defined). NOW, THEREFORE, in consideration of the sums to be paid to Contractor by Owner, the foregoing premises and the covenants and agreements set forth herein, the parties hereby agree as follows: 1 DEFINITIONS; INTERPRETATION 1.1 Definitions. As used herein with capitalization of the initial letter of each word, the following terms shall have the following respective meanings: 1.1.1 "Additional Rights of Way" shall have the meaning assigned to such term in Section 10.1.2.2. 1.1.2 "Award Fee" shall have the meaning assigned to such term in Section 6.3.2. 1.1.3 "Base Fee" shall have the meaning assigned to such term in Section 6.12. 1.1.4 "Business Day" shall mean any day on which commercial banks are not authorized or required to be closed in Denver, Colorado. 1.1.5 "Change in Law" shall mean any controlling change in the judicial or administrative interpretation of, or adoption of, any Governmental Rule, Page 1 of 72 4 which is inconsistent with any Governmental Rule in effect on the execution date of this Contract. 1.1.6 "Change in the Work Form" shall have the meaning assigned to such term in Section 11.1.2.3. 1.1.7 "Change Order" shall mean a written order to Contractor issued and signed by Owner authorizing an addition to, deletion from, suspension of or other modification to the Work, the Warranties or any other requirement of this Contract. 1.1.8 "Claim" shall mean any claim by any Subcontractor or Vendor of Contractor for any compensation due or alleged to be due in connection with the Work. 1.1.9 "Completion Date" shall refer to the date specified in the relevant Construction Schedule for Substantial Completion of the Network or Segment. 1.1.10 "Construction Certificate" shall mean a Construction Certificate delivered by Contractor in accordance with Section 6.2.2 and duly completed and signed by Contractor. 1.1.11 "Construction Schedule" shall mean a schedule, prepared by the Contractor and for which Owner's Approval has been obtained, that specifies dates and milestones for the timely completion of each Network. 1.1.12 "Construction Work" shall refer to all Work other than engineering, program management, procurement and inspection Work. 1.1.13 "Contract" shall have the meaning assigned to such term in Section 1.3. 1.1.14 "Contract Budget" shall have the meaning assigned to such term in Section 3.2.1. 1.1.15 "Contract Price" shall have the meaning assigned to such term in Section 6.1. 1.1.16 "Contractor" shall have the meaning assigned to such term in the introductory paragraph of this Contract. 1.1.17 "Cost of Work" shall have the meaning assigned to such term in Section 6. Page 2 of 72 5 1.1.18 "Coverages" shall have the meaning assigned to such term in Section 15.2. 1.1.19 "CPM" shall have the meaning assigned to such term in Section 9.1. 1.1.20 "Day" shall mean a calendar day. 1.1.21 "Documents" shall mean, without limitation, all written, recorded, graphic or printed matter, in whatever form, including all originals, copies, and drafts including without limitation, all letters, e-mails, telegrams, memoranda, statements, drawings, graphs, photographs, reports, notes, diaries, charts, work papers, recordings, and computer printouts, and all data compilations from which information can be obtained or translated through detection devices into reasonably usable form. 1.1.22 "Drawings" shall mean all graphic and pictorial descriptions of the Work that must be accomplished in accordance with this Contract showing the design, location and dimensions of the Work including plans, elevations, sections, details and diagrams. 1.1.23 "Effective Date" shall have the meaning assigned to such term in the introductory paragraph of this Contract. 1.1.24 "Event of Default" shall have the meaning assigned to such term in Section 17. 1.1.25 "Final Acceptance" shall have the meaning assigned to such term in Section 20.3.2. 1.1.26 "Final Acceptance Date" shall mean the date on which Final Acceptance of all Work related to the Network or Segment thereof and shall have occurred in accordance with Section 20.3. 1.1.27 "Force Majeure Event" shall mean any cause beyond the control and not due to an act or omission of the party claiming the existence of the Force Majeure Event, and which could not have been avoided by due diligence and use of reasonable efforts by such party, as a result of which it is not possible for such party to avoid a delay in the performance of its obligations under this Contract or to avoid an increase in the cost to such party of the performance of its obligations under this Contract including: 1.1.27.1 an earthquake, fire, epidemic, blockade, rebellion, war, riot, civil disturbance, sabotage, explosion, act of God, act of public enemy or other similar occurrence; Page 3 of 72 6 1.1.27.2 a strike, labor dispute, work slowdown, work stoppage, secondary boycott, walkout or other similar occurrence; 1.1.27.3 Owner interference or failure of Owner to perform its obligations hereunder; 1.1.27.4 an expropriation, confiscation or condemnation of all or any portion of the Network or the Site; or 1.1.27.5 a Change in Law. 1.1.28 "G&A Fee" shall have the meaning assigned to such term in Section 6. 1.1.29 "Governmental Approval" shall mean any authorization, consent, approval, order, action, license, lease, ruling, permit, certification, exemption, filing or registration by or with any Governmental Person. 1.1.30 "Governmental Person" shall mean any federal, state, local or foreign government, any political subdivision or any governmental, quasi-governmental, judicial, public or statutory instrumentality, administrative agency, body or entity. 1.1.31 "Governmental Rule" shall mean any statute, law, regulation, ordinance, rule, license, permit, judgment, order, decree, concession, grant, franchise, agreement, directive, guideline, policy requirement, or other governmental restriction or any similar form of decision of or determination by, or any interpretation or administration of any of the foregoing by, any Governmental Person, whether now or hereafter in effect. 1.1.32 "Hazardous Substance" shall mean any "hazardous substances" as defined in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C. Section 9601 et seq., as amended, and any "hazardous waste" as defined in the Resource Conservation and Recovery Act of 1976, 42 U.S.C. Section 6901 et seq., as amended, any regulated substance under subtitle 1 of The Resource Conservation and Recovery Act of 1976 or the Colorado Underground Storage Tank Act or any substance the presence of which requires investigation, remediation or other action under any federal or state law, regulation or order. Hazardous Substance does not include any of the foregoing described substances which is or has been introduced by Contractor, Subcontractors, Vendors, or anyone for whom any of them may be liable. Page 4 of 72 7 1.1.33 "Implementation Plan" shall have the meaning assigned to such term in Section 3.1.1. 1.1.34 "Initial Rights of Way" shall have the meaning assigned to such term in Section 10.1.2.1. 1.1.35 "Network" shall have the meaning assigned to such term in Recital A, as more specifically described in Appendix "A", as may be modified from time to time. 1.1.36 "Notice" shall mean a written communication between the parties in substantial compliance with the requirements of Section 22.8. 1.1.37 "Notice of Termination" shall have the meaning assigned to such term in Section 12.1. 1.1.38 "Notice to Proceed" shall mean a Notice issued by Owner to Contractor to commence the Work or any portion thereof. 1.1.39 "OCIP" shall have the meaning assigned to such term in Section 15.1. 1.1.40 "Oversight Engineer" shall mean such consultant or consultants as Owner may engage to review the design Documents, Specifications and other Documents prepared by Contractor, to make periodic inspections of the Work and the Project, to review Change Orders and to render advice to and prepare reports for Owner on such matters as Owner may from time to time request, the identity of which Oversight Engineer(s) shall be the subject of a Notice by Owner to Contractor. An Oversight Engineer may, at Owner's option, be an employee or independent contractor of Owner. 1.1.41 "Owner" shall have the meaning assigned to such term in the introductory paragraph of this Contract. 1.1.42 "Owner-Supplied Items" shall mean those materials, equipment or other items supplied by Owner for use or incorporation in the Work, identified in Section 8. 1.1.43 "Owner's Approval" shall mean, with respect to information, Documents, Drawings, Specifications, or other items to be provided by the Contractor to the Owner under this Contract, that Owner has, in Owner's sole discretion, approved such item. When Owner's Approval is specified for an item, Contractor shall provide the same to Owner in such quantities and format as specified by Owner, and in sufficient time, in accordance with Page 5 of 72 8 this Contract, to enable Owner or the Oversight Engineer, as required, to review the same and respond to Contractor. In the event Owner or Oversight Engineer, as appropriate, does not approve an item submitted by Contractor for Owner's Approval on first or subsequent submission, Contractor shall revise the same and resubmit until Owner's Approval is obtained. Contractor shall not be entitled to an extension of the Contract Time for delays in receiving Owner's Approval where Contract has failed to comply with the requirements for Owner's Approval. Owner's Approval shall not constitute acceptance of Work not in accordance with the Contract, nor shall it constitute a representation or certification that the submittal is accurate or adequate, or that the Work described therein will be sufficient to satisfy the requirements of the Contract. Owner's Approval shall be effective only if in writing; verbal approval shall not constitute Owner's Approval. Unless otherwise specified, anticipated response times for items submitted for Owner's Approval are set forth in Appendix "J". 1.1.44 "Partial Acceptance" shall have the meaning assigned to such term in Section 20.2. 1.1.45 "Payment Date" shall have the meaning assigned to such term in Section 6.2.3. 1.1.46 "Person" shall mean individual, corporation, company, voluntary association, partnership, trust, unincorporated organization or Governmental Person. 1.1.47 "Preliminary Estimate" shall have the meaning assigned to such term in Section 3.2.1. 1.1.48 "Project" shall mean the total design, engineering, procurement and construction of all the Networks, including appurtenances thereto such as manholes, handholes, and end user sites, as described more fully in Appendix "A". 1.1.49 "Project Headquarters" shall mean the location of any of Contractor's central office task force. 1.1.50 "Project Manager" shall man the project manager designed by Contractor pursuant to Section 3.2.10. 1.1.51 "Punchlist" shall mean the list of Work, which is limited to minor incidental items of work necessary to correct imperfections which have no adverse effect on the safety or operability of the Network or Segment, Page 6 of 72 9 which remains to be completed after achievement of Substantial Completion of the Network or Segment. 1.1.52 "Quality Control Plan" or "QCP" shall have the meaning assigned to such term in Section 9.4.1. 1.1.53 "Rights of Way" shall man those geographic areas which Owner provides to the Contractor for the permanent installation of the Project, regardless of whether Owner's interest therein is fee title, easement or otherwise, and includes Initial Rights of Way and Additional Rights of Way. 1.1.54 "Safety Program" shall have the meaning assigned to such term in Section 3.3.1. 1.1.55 "Site" shall mean those areas designed in writing by Owner for performance of the Work and such additional areas as may, from time to time, be designated in writing by Owner for Contractor's use hereunder. 1.1.56 "Specifications" shall mean the written requirements for materials, equipment, construction systems, standards and workmanship for the Work, and performance of related services, all in accordance with the Contract, to be prepared and furnished by Contractor. Contractor must obtain the Owner's Approval of Specifications. 1.1.57 "Subcontractor" shall mean any Person with whom Contractor has entered into any subcontract to perform any part of the Work, or provide any materials, equipment, supplies or services on behalf of Contractor (and any other Person with whom any Subcontractor has further subcontracted any part of the Work). 1.1.58 "Substantial Completion" shall have the meaning assigned to such term in Section 20.1.3. 1.1.59 "Surety" shall mean each Person executing a payment and performance bond with a Subcontractor, which Person must be acceptable to Owner and listed in the National Registry. 1.1.60 "Vendor" shall mean any Person not performing Work at the Site that supplies machinery, equipment, materials or systems to Contractor or any Subcontractor in connection with the performance of the Work and completion of the Project. 1.1.61 "Warranties" shall mean the warranties of Contractor under Section 21. Page 7 of 72 10 1.1.62 "WBS" shall have the meaning assigned to such term in Section 9.1.1. 1.1.63 "Work" shall mean all design, engineering, procurement, program management, construction, labor, supervision, testing, and other services, equipment, systems and materials provided or to be provided by Contractor necessary to achieve Final Acceptance of the Project and satisfy the obligations of this Contract. 1.2 Interpretation. In this Contract, the singular includes the plural and the plural the singular; references to statute or regulations are to be construed as including all statutory or regulatory provisions consolidating, amending or replacing the statute or regulation referred to; references to "writing" include printing, e-mail, typing, lithography and other means of reproducing words in a tangible visible form; the words "including," "includes" and "include" shall be deemed to be followed by the words "without limitation" or words of similar import; references to articles, sections (or subdivisions of sections), exhibits, annexes, appendices, or schedules shall be construed to be to this Contract unless otherwise indicated; references to agreements, exhibits, appendices, hereto and other contractual instruments shall, unless otherwise indicated, be deemed to include all subsequent amendments and other modifications to such instruments, but only to the extent such amendments and other modifications are not prohibited by the terms of this Contract; words not otherwise defined which have well-known technical or construction industry meanings, unless the context otherwise requires, are used in accordance with such recognized meanings; and references to Persons include their respective permitted successors and assigns, and, in the case of Governmental Persons, Persons succeeding to their respective functions and capacities. References to a section of the Contract include all subsections or parts thereof unless otherwise specified. 1.3 The Contract. This Contract shall include this Engineer, Procure and Construct Contract by and between Owner and Contractor and all exhibits, appendices, attachments, amendments, supplements and modifications hereto and all Change Orders (collectively, this "Contract"). This Contract shall not be construed to create a contractual relationship of any kind between Owner and a Subcontractor or Vendor or any other Person other than Contractor. 2 PROJECT 2.1 The Project is more fully described in Appendix "A". Owner will further define and communicate to the Contractor Work of the Project including: 2.1.1 objectives for the Project; 2.1.2 Network infrastructure design criteria; Page 8 of 72 11 2.1.3 environmental and cultural resource policy, guidelines, reporting protocols, and permits conditions checklists; 2.1.4 tax payment, cost accounting and insurance policies and procedures. 2.2 Owner may change the Work at any time. 3 CONTRACTOR OBLIGATIONS 3.1 Design and Construction. Contractor's Work shall include the following: 3.1.1 Within thirty (30) Days of execution of the Contract, Contractor shall develop and submit for Owner's Approval a plan for the implementation ("Implementation Plan") of the design, engineering, procurement and construction of the Project as required to achieve Final Acceptance of the entire Project (including all Segments) and all Work in accordance with this Contract. 3.1.2 Contractor shall provide, for Owner's Approval, complete with accurate Drawings and Specifications for the Project that fulfill the requirements of the Contract and any requirements specified by Owner and that are in accordance with all Governmental Rules and industry standards. 3.1.3 Contractor shall make site visits on Rights of Way and shall design each Network route endeavoring to provide the optimum route by taking into consideration environmental concerns and sub-grade obstacles, as well as ease of construction, endeavoring to ensure cost effectiveness. Contractor shall then provide Drawings that adequately and accurately depict the Network route for Owner's Approval and in a manner to subdivide the Project into manageable Segments of Work. Contractor shall provide such Drawings in a sequence to promote the earliest start of construction in priority areas. 3.1.4 Except for Owner-Supplied Items, Contractor shall furnish, be responsible for and pay (subject to the reimbursement provisions of this Contract) the cost of all labor, materials, tools, equipment, insurance, taxes, supervision and all other incidentals necessary perform the Work and achieve Final Acceptance of the entire Project in accordance with the provisions of this Contract. 3.1.5 Contractor shall execute the Work in accordance with the Construction Schedules and all Governmental Approvals, using methods and equipment Page 9 of 72 12 that are approved by the Owner and are prudent engineering and construction practices and operations. 3.1.6 Contractor shall comply in all respects with all applicable permits, Governmental Rules, Government Approvals or requirements of parties with interests in the Rights of Way and pay at Contractor's own expense, all charges, fees, taxes, damages, fines, and penalties which may arise because of non-compliance by Contractor, Subcontractors, Vendors or other agents or employees of Contractor. 3.1.7 Contractor shall remove from the Site and maintain the Site free of waste material and rubbish, clear the Site of temporary structures, surplus material, equipment and tools prior to the Final Acceptance Date. 3.1.8 Contractor shall be solely responsible for and have control over construction means, methods, techniques, sequences, and procedures and for coordinating all portions of the Work under this Contract. Contractor shall evaluate and develop construction methods that effect the efficient and thorough performance of the Work, minimizing float in the Construction Schedule, and reducing the Cost of the Work. 3.1.9 Contractor shall be responsible to Owner for acts and omissions of Contractor's employees, Subcontractors, Vendors and their agents and employees, and other Persons performing portions of the Work under a contract with Contractor. 3.1.10 Contractor shall not be relieved of obligations to perform the Work in accordance with this Contract by tests, inspections, or approvals performed by persons other than Contractor. 3.1.11 Contractor shall not self-perform any portion of the Construction Work without Owner's Approval. 3.1.12 To the extent Contractor deems necessary in accordance with prudent engineering practices, Contractor shall inspect the Site and surrounding locations, including surface and subsurface conditions for performing its obligations under this Contract, and become familiar with the physical requirements of the Work and hereby accepts them for such performance. 3.2 Program Management. 3.2.1 Within thirty (30) Days of issuance of a Notice to Proceed with respect to a Network or portion thereof, Contractor shall submit a Preliminary Page 10 of 72 13 Estimate of the Cost of the Work for such Network ("Preliminary Estimate") for Owner's Approval. Upon issuance of Owner's Approval, the Preliminary Estimate will become the "Contract Budget", which will be used as a tool for measurement of Contractor's performance. 3.2.2 Within thirty (30) Days issuance of a Notice to Proceed with respect to a Network or portion thereof, Contractor shall establish an aggressive but achievable Construction Schedule for such Work for Owner's Approval. The time stated in a Construction Schedule in which Contractor agrees to achieve Substantial Completion of the Work or any portion thereof will be reasonable, adequate and sufficient. On a monthly basis, Contractor shall prepare and submit updates on schedules, budgets, forecasts and variance reports that accurately portray the Project's progress and budget financial standing in a format that is acceptable to Owner. At Owner's sole discretion, more frequent updates may be required from time to time. 3.2.3 Contractor shall utilize an Internet based web page reporting system provided by Owner that will contain all Project Documents, Drawings, schedules and reports. This system shall be developed such in a manner that upon completion of the Project, it will serve as the permanent archive for Project records and as-built Drawings to be utilized by Owner's operations and maintenance personnel. 3.2.4 Contractor shall, with the full cooperation of the Owner, obtain, furnish, be responsible for, pay the cost of and maintain in full force and effect all Governmental Approvals required under applicable Governmental Rules in connection with the execution, performance and obligations as contemplated by this Contract. Contractor shall furnish Owner a written list of all Governmental Approvals required for performance of the Work and the proper completion of the Project and clearly identify the type of Governmental Approvals that must be obtained before applicable Work on any particular Network or Segment can be started. The Work can and shall be performed in conformity with all relevant building codes, Governmental Approvals, Governmental Rules and this Contract. 3.2.5 Contractor shall develop and implement a Quality Control Plan that ensures the design of a lasting and durable Network including verification, testing and documentation of the design, materials and installation of the Network in accordance with Section 9.4. 3.2.6 Contractor shall develop and implement a material control and purchasing plan incorporating the logistics necessary for the distribution of all Owner-Supplied Items and Contractor-furnished materials, equipment and Page 11 of 72 14 construction equipment and including inspection, expediting, shipping, unloading, receiving, customs clearance and claims in accordance with the Construction Schedule. The material control systems shall be capable of populating the Network inventory system. 3.2.7 Contractor shall provide to Owner, on a monthly basis, a list of all Subcontractors, Vendors and agents of Contractor, including all relevant contact information, and provide timely advice to Owner concerning the status of negotiations with Subcontractors and Vendors concerning any suspension or termination charges related to any major component of the Work. At Owner's sole discretion more frequent updates may be required from time to time. 3.2.8 Contractor shall obtain, to the extent permitted by law, waivers of liens and Claims from all Subcontractors, Vendors and suppliers as of the execution of each agreement with each such Person, and in each case on a form approved by Owner. 3.2.9 Contractor shall prepare and provide to Owner final geotechnical reports, including the performance of all inspections, field and Site explorations and testing work related thereto prior to submittal of final design documents, and update the reports to reflect the as-built condition of the Work. 3.2.10 Contractor shall designate a Project Manager, acceptable to Owner, who will have full responsibility for the execution of the Work and will act as a single point of contact in all matters on behalf of Contractor. Contractor shall not change the Project Manager or any other key member of Contractor's Project staff without the prior written consent of Owner. 3.2.11 Contractor shall provide such assistance as is reasonably requested by Owner in dealing with any Governmental Person in any and all matters relating to the Work and the Project. 3.2.12 Contract shall pay all taxes generated as a result of the Work and administer taxing and cost accounting plans furnished by Owner. 3.2.13 Contractor shall provide such data, reports, certifications, and other documents or assistance as may be reasonably requested by Owner in connection with the financing of the Project provided, that the provision of this information shall not in any manner diminish Contractor's rights or obligations under any other provision of this Contract. Page 12 of 72 15 3.2.14 Contractor shall cooperate with Owner and Oversight Engineer in the review of design of the Project, the conduct of inspections, the development, implementation and review of the Construction Schedule and QCP, and other matters relating to the Work. 3.2.15 Contractor shall allow Owner to audit all documentation reasonably requested by Owner pertaining to any dispute related to the Work. Contractor shall not be required to provide access to those records and documentation relating to any sum which is not to be directly reimbursed as a Cost of the Work, which are included in the G&A Fee or Base Fee, or costs expressed as a percentage of other costs. 3.2.16 Contract shall provide and maintain field offices at locations to be determined by Owner, which facilities shall be in place and operational prior to the commencement of construction Work to be supervised through such office. Such facilities shall be for the exclusive use of the Project and shall contain copies of all relevant Documents, Drawings and Specifications necessary to perform the Work supervised from that office. 3.2.17 Contractor shall maintain a Project headquarters office where Contractor's Program Manager, engineering manager, QCP manager and other Owner approved key personnel maintain full-time offices, and original Documents, Drawings and Specifications are maintained. 3.2.18 Contractor shall, no later than execution of the Contract, provide Owner an organization chart identifying the Program Manager through Contractor's chief executive officer, which shall also specify the business address and work and home telephone numbers for key personnel. 3.2.19 contractor shall provide as-built Drawings to Owner within the time specified in the Contract. 3.3 Safety. 3.3.1 Within thirty (30) Days of execution of the Contract, Contractor shall submit a safety program ("Safety Program") for Owner's Approval. Such program shall include procedures that satisfy all Governmental Rules and Governmental Approvals and Rights of Way owner requirements on railroads, highways, roads and other Sites where the Work will be performed. 3.3.2 The Safety Program procedures shall be maintained and amended as necessary to comply with newly obtained Rights of Way requirements. Page 13 of 72 16 3.3.3 Contractor shall give Notices and Comply with all applicable Governmental Rules or rules and regulations of Rights of Way owners bearing on the safety of persons and property and their protection from damage, injury or loss, including providing any safety training requirement by such Rights of Way Owners. 3.3.4 Contractor shall be responsible for initiating, maintaining and providing supervision of safety precautions and programs in connection with the Work. 3.3.5 Contractor shall take all necessary precautions and be solely responsible for the safety of, and shall provide protection to prevent damage, injury or loss to: (i) all employees of Contractor, its Subcontractors and Vendors performing the Work and other Persons who may be affected thereby; (ii) the Work and materials and equipment to be incorporated therein; and (iii) other property at or adjacent to the Site that may be affected by the Work. Owner shall have no liability or responsibility for safety procedures. 3.3.6 Contractor shall provide, erect, and maintain barricades, suitable and sufficient light, pavement markings, signs and other traffic control devices as required to protect the Work and safety of the public. Barricades shall protect roadways closed to traffic, and obstructions shall be illuminated during hours of darkness. Signs shall be provided to control and direct traffic. Contractor shall erect signs at locations where operations may interfere with the use of the road by traffic, and at all intermediate points where the Work crosses or coincides with an existing road. Signs shall be constructed, erected and maintained as required to protect the Work and the safety of the public. Barricades, warning signs, lights, temporary signals, and other protective devices shall conform with the latest revision of the "Manual on Uniform Traffic Control Devices for Streets and Highways" published by the Federal Highway Administration and any local version or supplement thereto. 3.3.7 Contractor shall observe all applicable rules and regulations of federal, state, county and local health officials. Contractor shall not require any worker to work in surroundings or under conditions that are unsanitary, hazardous or dangerous to health or safety. Contractor shall conduct the Work to minimize obstruction to traffic. Contractor shall provide for the safety and convenience of the general public and the residents along the Rights of Way and the protection of person and property. Page 14 of 72 17 4 INFORMATION SUPPLIED TO CONTRACTOR AND DISCLAIMER; REPRESENTATIONS AND WARRANTIES 4.1 Information Supplied. Owner has made and will make available to Contractor certain information acquired in the course of planning for the Project. 4.2 Reliance. Contractor may rely on information provided by Owner, provided that Contractor shall verify any information in accordance with the appropriate standard of care. 4.3 Representations and Warranties. Contractor represents, warrants and covenants that: 4.3.1 It has the required expertise, ability, skills and capacity to, and shall, perform the Work in a manner consistent with this Contract. 4.3.2 Contractor is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite power to own its properties and assets and carry on its business as now conducted or proposed to be conducted. Contractor is duly qualified and registered to do business in each state where the Work will be performed. 4.3.3 The execution, delivery and performance of this Contract and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporation action and do not and will not (i) require any consent or approval of the board of directors or any shareholders of Contractor or any other Person that has not been obtained and each such consent and approval that has been obtained is in full force and effect or (ii) result in a breach of or a default under the certificate of incorporation or by-laws of Contractor or any indenture or loan or credit agreement or other material agreement or instrument to which Contractor is a party or by which its properties and assets may be bound or affected. 4.3.4 This Contract constitutes the legal, valid, and binding obligations of Contractor, enforceable in accordance with its respective terms. 5 ENFORCEABILITY; LOSS OR DAMAGE; TITLE 5.1 Enforceability. Notwithstanding any other provision set forth in this Contract, performance by a Surety of any of the obligations of Contractor shall not relieve Contractor of liability for or breach of its obligations hereunder. 5.2 Loss or Damage. Page 15 of 72 18 5.2.1 Until the date of Substantial Completion of a Network or a portion thereof, Contractor assumes full responsibility for replacement or repair of any damage to such Network including materials, equipment, supplies and maintenance equipment purchased for permanent installation or use during construction, regardless of whether Owner has title thereto under this Contract. Such costs to repair or replace damage shall be a Cost of the Work, subject to the following: 5.2.1.1 to the extent any such damage is not covered by insurance and is attributable to the negligence or willful misconduct of Contractor, it shall be at Contractor's sole cost and expense; and 5.2.1.2 to the extent any such damage is covered by insurance and is attributable to the negligence or willful misconduct of Contractor, any deductible shall be at Contractor's cost and expense. From and after the date of the transfer of the care, custody, and control of a Network or portion thereof, Owner shall assume all risks of physical loss or damage thereto and Owner will and shall cause its insurers to waive rights of subrogation against Contractor for loss or damage to the Work which may thereafter occur, provided that this shall not limit Contractor's obligations under the Warranties. 5.2.2 Contractor shall ensure the safe delivery of all materials, equipment, supplies and other items to the Site and for maintaining, insuring, storing and transporting Owner-Supplied Items. 5.3 Title. Contractor warrants that it will own and have good and marketable title to all materials, equipment, tools and supplies furnished by it and its Subcontractors and Vendors that become part of the Network or are purchased for Owner for the operation, maintenance or repair thereof, free and clear of all liens. Title to all of said materials, equipment, tools and supplies which shall have been delivered to the Site shall pass to Owner upon the sooner of (i) incorporation into the Network or (ii) payment by Owner to Contractor under Section 6.2 of invoiced amounts pertaining thereto. Such transfer of title shall in no way affect Owner's rights as set forth in any other provision of this Contract. For the purpose of protecting Owner's interest in all materials, equipment, tools and supplies with respect to which title has passed to Owner but which remain in possession of another party, Contractor shall take or cause to be taken all commercially reasonably steps necessary under the laws of the appropriate jurisdiction to protect Owner's title and to protect Owner against claims by other parties with respect thereto. Page 16 of 72 19 6 PAYMENT 6.1 Contract Price. As full compensation for the Work and all other obligations to be performed by Contractor under this Contract, Owner shall pay Contractor the Contract Price, which consists of the following three components: 6.1.1 the Cost of the Work as detailed in Section 6.4; 6.1.2 the G&A Fee as described in Section 6.7; 6.1.3 an Award Fee as described in Section 6.8; and 6.1.4 a Base Fee as described in Section 6.12. 6.2 Progress Payments. Payment to Contractor of the Contract Price shall be made as follows: 6.2.1 By the tenth (10th) day of each month, Contractor shall submit an invoice to Owner for the Cost of the Work for Work performed during the preceding month plus the G&A Fee and Base Fee. Such Contractor's invoice shall clearly specify the Networks which it relates to and provide documentation, as required by Owner, to substantiate the Cost of the Work. Contractor shall not invoice Owner for any amount, such as retainage, which Contractor does not intend to pay to Subcontractors or Vendors upon receipt. Invoices shall be addressed to the following person and location or shall be deemed invalid: Todd Christianson Contracts Manager Level 3 Communications, LLC 14023 Denver West Parkway Golden, Colorado 80401 With each invoice, Contractor shall include a conditional lien waiver for amounts payable to Contractor (exclusive of Subcontractors' and Vendors' costs). 6.2.2 Contractor shall submit with each such invoice a Construction Certificate describing in sufficient detail for independent verification, all approved materials to which it holds title and which were obtained in the preceding month, the Work that has been invoiced, and stating that such Work has been performed in compliance with the requirements of this Contract. The Construction Certificate shall be in a form acceptable to Owner. The Page 17 of 72 20 invoice, Construction Certificate and supporting documentation shall be subject to audit on demand by Owner. Should any audit of such records discover the cost invoiced is in excess of the actual cost, Contract shall reduce the invoice in the amount of five (5) times the audited excess amount and such amount shall not be part of the Cost of Work and shall be borne by the Contractor. 6.2.3 Owner shall promptly notify Contractor concerning any invoiced amount which is in dispute and any Work which Owner believes was not performed in accordance with the Contract (all such Work and invoiced amounts in respect thereof shall be deemed in dispute until otherwise agreed). Owner shall pay Contractor the amount then payable and not in dispute within fifteen (15) Days after receipt by Owner of Contractor's invoice, all required supporting information and the related Construction Certificate, which fifteenth (15th) day shall be the date payment is due (the "Payment Date"). 6.2.4 Failure by Owner to pay any amount in dispute shall not alleviate, diminish or modify in any respect Contractor's obligation to achieve Final Acceptance of the Work, and Contractor shall not cease or slow down its performance hereunder on account of any such amount. 6.2.5 Amounts not paid by Owner by the Payment Date which are not disputed or the subject of withholding as allowed hereunder shall begin to accrue interest at the rate of one and one-tenth (1.1) of the current prime rate of the Chase Manhattan Bank as follows: 6.2.5.1 for amounts for Work self-performed by Contractor, fifteen (15) Days after the Payment Date; and 6.2.5.2 for amounts payable to Subcontractors and Vendors, but only for the period for which Contractor was required to expend unreimbursed funds. 6.2.6 The portion of the G&A Fee payable each month shall be the amount determined by multiplying the Cost of the Work for such month times the G&A Fee. The portion of the Base Fee payable each month shall be the amount determined by multiplying the Cost of the Work for such month times the Base Fee. 6.2.7 As a condition to final payment to a Subcontractor or Vendor, Contractor shall provide to Owner full and final waivers and releases of liens and, if the Subcontractor or Vendor is bonded, a consent of surety. Page 18 of 72 21 6.2.8 Payments may be withheld on account of: 6.2.8.1 defective Work not remedied; 6.2.8.2 claims filed by third parties arising out of the Work for which Contractor is liable under this Contract; 6.2.8.3 failure of the Contractor to make payments to Subcontractors or Vendors for labor, materials or equipment for Work; 6.2.8.4 damage to the Owner or another contractor arising out of the Work for which Contractor is liable under this Contract; or 6.2.8.5 persistent failure to carry out the Work in accordance with the Contract. 6.2.9 Contractor shall, as and when requested, furnish evidence satisfactory to the Owner that all amounts due for labor and material furnished the Contractor in connection with performance of this Contract have been paid or are being paid in the normal course, including union health, welfare and pension fund payments and payroll taxes where applicable. Such evidence shall be furnished in such form and manner as requested by Owner and all statements relative thereto shall, if called for by Owner, be made by sworn affidavit. 6.3 Award Fee Payments. 6.3.1 On a monthly basis, Owner shall meet with Contractor to provide Owner's assessment of Contractor's performance of the Work. 6.3.2 Contractor shall be eligible to receive from Owner a fee ("Award Fee") which Owner, acting in its sole and absolute discretion, determines is due in accordance with the criteria specified in Section 6.8 and Appendix "D". The Award Fee due the Contractor, if any, shall be determined on a monthly basis and invoiced in the following month. 6.4 Cost of the Work. The "Cost of the Work" shall mean costs necessarily and reasonably incurred by the Contractor in the proper performance of the Work. Such costs shall be at rates not higher than the standard paid at the place of the Network except with prior consent of the Owner. The Cost of the Work shall include only the items set forth in this Section 6.4. Page 19 of 72 22 6.4.1 Labor Costs. 6.4.1.1 Wages of construction workers directly employed by the Contractor to perform the construction of the Work at the Site, or with the Owner's written approval, at off-Site workshops. 6.4.1.2 Base compensation (wage + time off with pay) of the Contractor's supervisory and administrative personnel, who are Owner-approved, when stationed at the Site or at Project Headquarters. 6.4.1.3 Base compensation (wage + time off with pay) of the Contractor's supervisory or administrative personnel, who are Owner-approved, engaged at factories, workshops or on the road, in expediting the production or transportation of materials or equipment required for the Work, but only for that portion of their time required for the Work. 6.4.1.4 Costs paid or incurred by the Contractor for taxes, insurance, assessments and benefits required by law or collective bargaining agreements and, for personnel not covered by such agreements, customary benefits such as sick leave, medical and health benefits, holidays, vacations and pensions, provided such costs are based on wages and salaries included in the Cost of the Work under Section 6.4.1.1 through 6.4.1.3. These costs include retirement plans, 401(k) contributions, group health, life long and short-term disability, and public duty pay. Burden costs include FICA, FUI, SUI, workers' compensation (if applicable), and GL insurance costs (if applicable). For home office personnel, the burden and benefit cost is _______ of base compensation. For field employees in the OCIP, the burden and benefit cost is _________ of base compensation. For field employees not in the OCIP, the burden and benefit cost is ________. These rates and burdens will be fixed for the term of the Contract, except as impacted by Change in Law. 6.4.2 Subcontract, Material and Equipment Costs. Payments to be made by Contractor to Contractor's Subcontractors and Vendors in accordance with Project requirements and Owner-approved subcontracts and purchase Page 20 of 72 23 orders, inclusive of any duties, taxes or licensing fees arising directly out of or that are applicable thereto, other than taxes on net income. 6.4.3 Cost of Shared Resources. Costs associated with resources that are not fully assigned to the Project, costs that require accruals with periodic adjustments and costs related to the use of Contractor equipment will be reimbursed by the Owner as described below. Examples of these costs include: Contractor owned vehicles, construction equipment and test equipment; Contractor owned or separately leased office, warehouse, shop or laydown space; insurance and wage add-ons such as workers' compensation. 6.4.3.1 Contractor shall develop and propose for Owner's Approval cost allocation methodologies for shared resources which represent a fair approximation of the actual cost to compensate Contractor for shared resources used in the Work. Contractor's proposal shall include supporting analysis. Upon Owner's Approval of such methodologies, Contractor shall administer them. 6.4.3.2 Contractor and Owner shall have the right at any time to request a review of the cost allocation methodologies if 6.4.4 Costs of Other Materials and Equipment. Temporary Facilities and Related Items. 6.4.4.1 Costs, including transportation, installation, maintenance, dismantling and removal of materials, supplies, temporary facilities, machinery. equipment, and hand tools not customarily owned by the construction workers, which are provided by the Contractor at the Site and are fully consumed in the performance of the Work. Cost less salvage value on such items if not fully consumed, whether sold to others or retained by the Contractor. 6.4.4.2 Rental charges for temporary facilities, machinery, equipment, and hand tools not customarily owned by the construction workers, which are provided by the Contractor at the site, whether rented from the Contractor or others, and costs of transportation, installation, minor repairs and replacements, dismantling and removal thereof. Rates and quantities of equipment rented shall be subject to the Owner's prior approval. Page 21 of 72 24 6.4.4.3 Costs of removal of debris from the Site. 6.4.4.4 Costs of business-related (non-personal) telegrams and long-distance telephone calls, postage and parcel delivery charges, telephone service at the site and reasonable petty cash expenses of Project Headquarters. 6.4.4.5 That portion of the reasonable travel and subsistence expenses of the Contractor's personnel incurred while traveling in discharge of duties connected with the Work. Such expenses shall not exceed Contractor's Travel and Assignment policy attached hereto as Appendix K. 6.4.5 Miscellaneous Costs. 6.4.5.1 That portion directly attributable to this Contract of premiums for insurance and bonds, except to the extent any coverage obtained is provided as part of the OCIP. 6.4.5.2 Sales, use, gross receipts, business and occupation or similar taxes imposed by a Governmental Person which are related to the Work and for which the Contractor is liable or required by any Governmental Person to charge the Owner in connection with any materials or Work. 6.4.5.3 Fees and assessments for building permits and for other permits, licenses and inspections which the Contractor is required to pay or charge as required by the Contract. 6.4.5.4 Fees of testing laboratories for tests required by the Contract, except those related to defective or nonconforming Work. 6.4.5.5 Royalties and license fees paid for the use of a particular design, process or product required by the Contract. 6.4.5.6 Deposits lost for causes other than the Contractor's fault or negligence. 6.4.5.7 Other costs specified in Appendix L. 6.4.6 Other Costs. Other costs incurred in the performance of the Work if and to the extent approved in advance in writing by the Owner. Page 22 of 72 25 6.4.7 Emergencies; Repairs to Damaged Work. 6.4.7.1 Costs incurred by the Contractor for the emergency repair of damaged Work. 6.4.7.2 Costs incurred taking action to prevent threatened damage, injury or loss in case of an emergency affecting the safety of persons or property. 6.4.8 Equipment for Project. Construction equipment, vehicles, testing equipment, computers and other equipment and services (e.g. office space, maintenance, etc.) which will be used solely for the Project and will be required by Contractor shall be leased or purchased from third party vendors using the following guidelines: 6.4.8.1 The equipment or services shall be acquired on behalf of Owner unless otherwise directed by Owner. 6.4.8.2 For equipment or service that Owner desires the Contractor to lease or purchase from third party vendors, Owner shall retain title/ownership. Upon completion of the Project (or at the point the service or equipment is no longer needed for the Project), Owner will determine whether to keep the equipment or service for its ongoing in the disposal as needed and the salvage value shall accrue to Owner. 6.4.8.3 Generally, lease or purchase from third party vendors is preferred unless it is demonstrated that leasing equipment or service from Contractor is more efficient. Owner shall retain the right to approve the method of acquisition for equipment or services. 6.5 Costs Not to Be Reimbursed. The Cost of the Work shall not include: 6.5.1 Salaries and other compensation of the Contractor's personnel stationed at the Contractor's principal office or offices other than the Site office, except as specifically provided in Sections 6.4.1.2 and 6.4.1.3. 6.5.2 Expenses of the Contractor's principal office and offices other than the Site office, except as otherwise specified. 6.5.3 Overhead and general expenses, except as may be expressly included in Section 6.4. Page 23 of 72 26 6.5.4 The Contractor's capital expenses, including interest on the Contractor's capital employed for the Work, except as otherwise provided herein. 6.5.5 Rental costs of machinery and equipment except as specifically provided in Section 6.4.4.2. 6.5.6 Costs incurred due to the fault, negligence, error or omission of the Contractor, Subcontractors, Vendors or anyone directly employed, indirectly employed or representing any of them, including costs for correction of damaged, defective or nonconforming Work, disposal and or replacement of materials and equipment incorrectly ordered or supplied, and making good damage to property not forming part of the Work. 6.5.7 Any cost not specifically and expressly described in Section 6.4. 6.5.8 The cost of Owner-Supplied Items or Rights of Way or anything else provided by Owner. 6.6 Discounts, Rebates and Refunds. Cash discounts obtained in payments made by the Contractor shall accrue to the Owner. Trade discounts, rebates, refunds and amounts received from sales of surplus materials and equipment shall accrue to the Owner, and the Contractor shall make provisions so that they can be secured. 6.7 The G&A Fee shall be of the Cost of the Work and shall compensate Contractor for the general and administrative expenses, services and Work performed under this Contract. 6.8 The maximum Award Fee payable shall be of the Cost of the Work. The amount of the Award Fee which Contractor will receive will be based on Contractor's performance of the Work, as weighted and determined by Owner in accordance with Appendix "D", in the following areas: 6.8.1 Program Management: Timely and accurate reporting, estimating, drawing completion, material control, permitting and cooperation with Owner and the Oversight Engineer. See Appendix "E". 6.8.2 Safety: Preparation, coordination and compliance with all safety requirements of federal, state, local laws, rules and regulations and Rights of Way owners to ensure an accident free work environment. See Appendix "F". Page 24 of 72 27 6.8.3 Quality: Development, maintenance and reporting the evidence of a Quality Control Plan to ensure the integrity and durability of the Network. See Appendix "G". 6.8.4 Cost: Timeliness and accuracy of estimates, cost projections, cost management, application of effective cost accounting and Contract Budget compliance. See Appendix "H". 6.8.5 Schedule: Timely preparation and maintenance of the Construction Schedule with the greatest emphasis on meeting or beating all milestones and Completion Dates. See Appendix "I". 6.9 Owner's evaluation of the foregoing criteria shall be in Owner's sole and absolute discretion and not subject to determination by any other party or tribunal. If Contractor does not agree with Owners performance rating, Owner will re-evaluate the rating, but Owner's revised rating (if revised) is final. 6.10 Upon completion of each Segment and as may be more frequently required by Owner, Contractor shall provide waivers and releases of lien and bond rights for itself, Subcontractors and Vendors. 6.11 Within ten (10) Days of execution of the Contact, Contractor shall provide a labor rate schedule, specifying name and hourly/weekly rates and any addons, for key personnel of Contractor performing any Work. Charges which become part of the Cost of the Work for each such person shall be consistent with such schedule. 6.12 The Base Fee shall be of the Cost of the Work. 7 PROJECT COMPLETION TIMEFRAME 7.1 Contractor shall perform all Work necessary so that the Final Acceptance of each Network in accordance with Section 20 is no later than the Completion Date specified in the relevant Construction Schedule, as approved by Owner. Time is of the absolute essence of this Contract. Completion Dates may be changed only with Owner's Approval. 7.2 As the design and engineering progresses, Contractor shall subdivide the Work of each Network into manageable Segments as shown in the Construction Schedule approved by Owner. Each of these Segments shall have a Completion Date as they are incorporated into the Construction Schedule. 8 ITEMS FURNISHED BY OWNER Page 25 of 72 28 8.1 Owner will furnish Rights of Way and real estate for the Project infrastructure. 8.2 Owner will furnish the design criteria for the fiber optic cable and conduit system, and facilities. 8.3 Owner will execute purchase agreements or otherwise procure the following materials in sufficient quantities to complete the Project, but reserves the right to direct Contractor to perform the bid and purchasing process for such items ("Owner-Supplied Items"): 8.3.1 duct; 8.3.2 fiber optic cable; 8.3.3 handholes; 8.3.4 manholes; 8.3.5 splice cases; 8.3.6 fiber splice panels; 8.3.7 fiber locate system; and 8.3.8 such other items as Owner determines to provide. 8.4 With respect to any Owner-Supplied Items for which Owner has executed purchase agreements, Contractor shall issue delivery orders against said purchase agreements and incorporate these materials into the material control system required under Section 3.2.6 to ensure compliance with the Construction Schedule. 8.5 Owner will comply with Appendix "J" Response Times for Owners Approval attached hereto. 9 SCHEDULING AND QUALITY CONTROL 9.1 Scheduling. 9.1.1 Scheduling of Construction. It shall be the obligation of Contractor to develop, assemble, coordinate and obtain Owner's Approval of a Construction Schedule for each Network or portion thereof as provided Page 26 of 72 29 herein, which shall provide for Substantial Completion thereof and all Work related thereto by the Completion Date. Contractor shall prepare the Construction Schedule and prepare monthly updates and other reports specified herein. The critical path method ("CPM") type progress schedule shall be used to schedule the Work. Each Construction Schedule shall include a full definition of Work to be performed by Contractor, Subcontractors and Vendors and showing utilization of Owner-Supplied Items and Rights of Way. Each Construction Schedule shall be a fully resource and cost loaded precedence network plan utilizing a work breakdown structure ("WBS") for defining the scheduling hierarchy and provide for the planning and the execution of the Work. Each Construction Schedule shall be a resource-leveled schedule, which defines target dates in place of initially developed early/late start dates. Each Construction Schedule shall, in addition, be used for planning and monitoring the progress of the. All CPM Construction Schedules shall be done in the latest version of MS Project. Unless otherwise approved by Owner, all duration of activities for which Owner is responsible shall be the duration specified in this Contract. 9.1.2 Construction Schedule. Within thirty (30) Days after issuance by Owner of a Notice to Proceed with a Network or a portion thereof, Contractor shall submit each Construction Schedule in CPM format, in hard copy and on 3.5 inch data diskettes, which shall contain all data used to produce the Construction Schedule in accordance with Section 9.1. The Construction Schedule shall provide information to Owner detailing and describing all activities required to complete the Work, their duration and location. The type, WBS element, duration, location where the activity will be performed and its relationship to other elements of the Work shall be stated for each activity shown on the Construction Schedule. The Construction Schedule shall be prepared such that each activity is controlled, is capable of being measured and is provided with a sorting capability to the established WBS elements, performing organizations, dates, float and activity numbers. Each Construction Schedule shall incorporate as activities, Governmental Approvals, permits, submittals, samples and shop drawings that will be required for the Work. Design and construction activities shall be scheduled separately and preliminary and final design submittals shall be indicated as milestone events. 9.1.3 Allocation of Contract Budget and Cost of the Work. Contractor shall allocate such amounts among the scheduled activities defined by the Construction Schedule such that each activity has an allocation that accurately indicates the Contract Budget and Cost of the Work for such activity. Page 27 of 72 30 9.1.4 Representations. Review of Construction Schedules and updates by Owner shall not constitute a representation by Owner that the Work can be completed as shown on the Construction Schedule or updates. Construction Schedules and updates shall constitute a representation by Contractor as to how it envisions the Work to be accomplished. 9.1.5 Schedule Authorization. After each Construction Schedule has been developed and received Owner's Approval, Contractor shall use each Construction Schedule for the performance and completion of the Work and by both parties to this Contract for monitoring and determining actual progress and Cost of the Work. Each Construction Schedule shall be used to evaluate time impacts to the critical path of those events for which an adjustment of time is allowed under Section 11. A Construction Schedule may not be amended or modified without the prior written consent of Owner, except as provided in Section 9.1.6. 9.1.6 Revisions to the Construction Schedules. No change to a Completion Date for a Network may be made other than pursuant to Section 11. If Owner does not agree to an updated or revised Construction Schedule, and a dispute ensues, Contractor may upon notification to Owner, in the interim while the dispute is pending, amend or modify such Construction Schedule to correspond to the resources and rates of production to be used by the Contractor, but only for the purpose of Contractor's scheduling of its effort. The final resolution of the dispute shall be reflected in such Construction Schedule, and, if necessary, a recovery schedule will be prepared. 9.1.7 Orderly Progression of Work. Contractor shall at all times schedule and direct its Work so that it provides an orderly progression of the Work to completion within the specified time for completion and in general conformance with the Construction Schedule and revisions accepted by Owner. 9.1.8 Updates. Contractor shall review and update the progress of its Work each month for the duration of the Project. A Construction Schedule update meeting will be held each month by Owner and shall be attended by Contractor. At Owner's sole discretion more frequent updates may be required from time to time. Actual progress of the previous month will be recorded and future activities will be reviewed. Each Construction Schedule shall be updated for the purpose of determining: 9.1.8.1 actual physical percentage of completion of each Network; 9.1.8.2 proposed revisions to logic, duration, unit cost or unit productivity rates; Page 28 of 72 31 9.1.8.3 projected future start and Completion Dates; and 9.1.8.4 delays affecting the Completion Date for a Network; 9.1.9 Progress Summary. Contractor is responsible for having information and data at each monthly meeting to provide the verifications set out above. As a part of the monthly updating process, Contractor shall prepare a narrative progress summary describing the physical progress during the report period, plans for the forthcoming month, potential delays and problems, their estimated effect on performance and overall Project completion and an explanation of corrective action taken or proposed. Contractor shall submit two (2) copies of the narrative progress report to Owner five (5) Business Days before each schedule update meeting. 9.1.10 Additional Information. At the monthly schedule meeting, Contractor shall also provide to Owner a copy of the following: 9.1.10.1 a ninety (90) Day computer look ahead tabular listing and bar chart schedule sorted by WBS component and activity start dates; 9.1.10.2 a bar chart schedule reflecting the activities shown on each Construction Schedule for the immediately succeeding six (6) month period; 9.1.10.3 an updated report that shows actual progress in obtaining permits as compared to each Construction Schedule; 9.1.10.4 a report, which shows Contractor's actual material and labor progress, as compared to each Construction Schedule; 9.1.10.5 a copy of data diskettes (3.5 - inch DS/HD) from which the monthly reports were prepared; 9.1.10.6 an updated design submittal schedule detailing submittals for the succeeding ninety (90) Days. 9.1.10.7 Additional information as may be requested to address questions that may arise. 9.1.11 A three (3) week look ahead schedule will be submitted for each Network on a weekly basis that indicates the two (2) forthcoming weeks and the previous week. If Contractor fails to meet the previous week's schedule, Page 29 of 72 32 Contractor shall provide a written explanation describing the cause of any deviation from the planned progress. 9.1.12 Recovery Schedule. Contractor shall furnish employees, materials, facilities and equipment to work such hours, including extra shifts, overtime, Sundays and holidays, as necessary to ensure the completion of Work in accordance with the Construction Schedule. If Contractor falls fifteen (15) Days behind on any critical path activity shown on the Construction Schedule, or it becomes apparent that the Work may not be completed as scheduled, or that milestone dates may not be achieved as scheduled, Contractor shall prepare and submit a recovery schedule demonstrating Contractor's program and proposed plan to regain the lost schedule progress. After Owner and Contractor agree upon a recovery schedule, it will become a part of the Construction Schedule. 9.2 Review by Owner. Contractor shall produce and Owner shall review all design and construction Documents. Owner's review of or comment upon or lack of review of or comment upon any Documents does not relieve Contractor from its obligation to complete the Project in accordance with this Contract. Review or release by Owner of any of the design and construction Documents shall not relieve Contractor of any of its obligations under this Contract. 9.3 Design and Construction Documents. All design Documents required for the Work shall be sufficiently complete to allow Owner to review the design and authorize the start of construction of all elements of the Work. Owner's responses shall be delivered in accordance with Appendix "J". 9.4 Quality Control Program. 9.4.1 Plan. Contractor shall establish and maintain procedures to ensure the quality of Work and the completed Project. The procedures shall apply to design, engineering, construction and procurement of the Work. The procedures shall be implemented by Contractor as a "Quality Control Plan" ("QCP") and shall contain information as specified herein or required by Owner. The QCP shall be submitted to Owner for Owner's Approval within forty-five (45) Days of the date of execution of this Contract. After Owner's Approval of the QCP, Contractor shall notify Owner in writing of any proposed changes. Proposed changes shall be subject to Owner's Approval in its sole discretion. The QCP shall include at a minimum the following: 9.4.1.1 a description of the quality control organization; Page 30 of 72 33 9.4.1.2 the name, qualifications, duties, responsibilities and authorities of each person assigned a quality control function; 9.4.1.3 a description of the responsibilities and a resume of experience of the QCP manager; 9.4.1.4 procedures for preparing, reviewing and presenting submittals, including those of Subcontractors, Vendors, offsite fabricators, suppliers and purchasing agents, to ensure they conform to Contract requirements; 9.4.1.5 testing frequencies and procedures for each specific test, to be submitted incrementally, as technical specification sections are prepared; 9.4.1.6 reporting procedures, including proposed reporting formats; 9.4.1.7 document control system and procedures showing how design, quality and discipline coordination will be achieved; and 9.4.1.8 names of testing firms to be used, with licenses as appropriate. 9.4.2 Documentation. Contractor shall maintain current records of quality control operations, activities, and tests performed including the Work of Vendors and Subcontractors. These records shall be in a form acceptable to Owner and indicate a description of Subcontractors and Vendors working on the Project, the number of personnel working, the weather conditions encountered, any delays encountered, and acknowledgment of deficiencies noted along with the corrective actions taken on current and previous deficiencies. In addition, these records shall include factual evidence that required activities or tests have been performed, including but not limited to the following: 9.4.2.1 type and number of quality control activities and tests involved; 9.4.2.2 results of quality control activities or tests; 9.4.2.3 nature of defects, causes for rejection, etc; 9.4.2.4 proposed remedial action; and Page 31 of 72 34 9.4.2.5 corrective actions taken. Such records shall cover both conforming and defective or deficient features and shall include a statement that supplies and materials incorporated in the Work comply with this Contract. Legible copies of such records shall be furnished weekly to Owner. 9.4.3 Contractor shall not commence Work until Owner has accepted the QCP for that Work element. 9.4.4 Owner retains the right, but not the obligation, to direct the location and the timing of testing additional to that planned by Contractor. 10 NOTICE TO PROCEED, RIGHTS OF WAY.RELEASE AND CONSTRUCTION PROCEDURES 10.1 Notice to Proceed. 10.1.1 Owner will issue a Notice to proceed ("Notice to Proceed") to authorize Contractor to proceed with the Work, or portions of the Work in respect of a Network, in numerous separate stages as Owner deems proper. Issuance of a Notice to Proceed shall constitute a release to Contractor of the Rights of Way described therein. Contractor shall not be authorized or obligated to proceed to perform or incur any Cost of the Work to perform any Work for which a Notice to Proceed has not been issued. Contractor shall review and inspect the Rights of Way and Immediately advise Owner of any inadequacy of which Contractor is aware or reasonably should be aware. 10.1.2 Owner may provide a Notice to Proceed with respect to Additional Rights of Way as they become available. Nothing in Section 10.1 shall limit Contractor's obligations to obtain all necessary licenses, permits and approvals, including without limitation Governmental Approvals, including without limitation all access permits necessary to construct on, under and over Rights of Way of other Governmental Persons or owners of Rights of Way to comply with the Construction Schedule. Contractor agrees to take or allow no action, which may impair or delay Owner in obtaining Rights of Way or which may tend to increase the cost for obtaining the Rights of Way or the compensation Owner may pay for Rights of Way. Owner shall advise Contractor of any Rights of Way issues of which it is aware which may impact the Cost of the Work. Page 32 of 72 35 10.1.2.1 Initial Rights of Way. The "Initial Rights of Way" are those Rights of Way selected and procured by Owner for the Project. Contractor shall design, engineer and plan its Work so that it can be constructed within the Initial Rights of Way whenever possible. 10.1.2.2 Additional Rights of Way. If, in order to accommodate Contractor's design, Rights of Way additional to Initial Rights of Way are desired, and if, in Owner's sole discretion, Owner agrees to acquire such additional Rights of Way, Owner shall provide them at Owner's expense whereupon they shall become "Additional Rights of Way." 10.1.2.3 Owner reserves the right to at its own discretion, to direct in writing Contractor to secure Additional Rights of Way on behalf of Owner. 10.1.2.4 If Contractor desires to incur Cost of the Work with respect to Rights of Way prior to Owner obtaining the requested Rights of Way, Contractor may request such access, which Owner may grant in its sole discretion. 10.1.2.5 Notices to Proceed with construction will be issued separately from Notices to Proceed with engineering and procurement. 10.1.3 Contractor acknowledges that as of the Effective Date, Owner has not secured Rights of Way for all portions of the Network. 10.2 Commencement of Construction Work. Contractor will not perform any construction Work until all Governmental Approvals necessary for construction have been obtained, and Owner has determined that adequate Drawings and Specifications exist to allow observation of the Work by the Oversight Engineer and Owner. 10.3 Review Period. Owner will issue a Notice to Proceed for Construction Work when all Governmental Approvals necessary for such Construction Work have been obtained, and Owner has determined that adequate Drawings and Specifications exist to allow observation of the Construction Work by the Oversight Engineer and Owner. 10.4 Character of Employees. Contractor shall employ resources for completing the Work to full completion in the manner and time required by this Contract. All Page 33 of 72 36 employees shall have the skill and experience and any licenses required to perform the Work assigned to them. Any Person employed by Contractor or by any Subcontractor who does not perform the Work in a proper and skillful manner or conducts himself or herself in a non-professional manner shall, at the written request of Owner, be removed by Contractor or such Subcontractor and shall not be employed on the Project without the approval of Owner. 10.5 Inspection and Testing. All materials and every part of the Work shall be subject to inspection and testing by Owner. Owner and the Oversight Engineer shall be allowed access to all parts of the Work and shall be furnished with information and assistance by Contractor as required to make a complete and detailed inspection and perform any testing that such entity may deem appropriate. Prior to Substantial Completion, Contractor shall remove or uncover such portions of the finished Work as directed. After examination by Owner or the Oversight Engineer, Contractor shall restore the Work to the standard required by this Contract. If the Work thus exposed or examined conforms to the requirements of the Contract, uncovering, removing, and restoring the Work will be paid for as part of the Cost of the Work. If the Work exposed or examined does not conform to the requirements of the Contract, uncovering, removing, and restoring the Work shall not be part of the Cost of the Work. Any Work done or materials used without inspection by an authorized Owner representative may be ordered uncovered, removed, or restored at Contractor's expense unless Owner's representative failed to inspect the Work after having been given, reasonable notice in writing that the Work was to be performed. All inspections and all tests conducted by Owner or the Oversight Engineer are for the convenience and benefit of the Owner or the Oversight Engineer. These inspections, tests or any payment do not constitute acceptance of the materials, Work tested or Work inspected. Owner may reject or accept any Work or materials at any time prior to Substantial Completion whether or not previous inspections or tests were conducted by Owner or the Oversight Engineer. 10.6 Removal of Unacceptable Work. Unacceptable Work is Work that does not conform to the requirements of this Contract. Unacceptable Work shall be removed and replaced so as to be acceptable to Owner at Contractor's expense and shall not be included in the Cost of the Work. The fact that Owner may not have discovered the unacceptable Work shall not constitute an acceptance of such unacceptable Work. Owner may cause unacceptable Work to be remedied or removed and replaced. Owner may deduct the cost of doing so from any monies due or to become due to Contractor. 10.7 Utilities, Railway and Highway Crossings. Page 34 of 72 37 10.7.1 Contractor is responsible for the provision of all utilities necessary for construction and operation of the Project when completed. Contractor is also responsible for the relocation and the temporary provision of all utilities necessary to supply utility service to Contractor and other utility customers while existing utilities are being relocated by Contractor. Contractor shall honor and perform all obligations of Owner under all relocation agreements to the extent Owner advises Contractor of the same. 10.7.2 Where Contractor's operations are adjacent to utility property, which if damaged might result in any expense, loss, or inconvenience, Work shall not commence until Contractor shall have made arrangements for the protection of such property. Contractor shall make arrangements for the temporary use of railway and roadway crossings. Work performed by Contractor on railroad or roadway Rights of Way shall be performed to avoid interference with the movement of trains or traffic on the railroad tracks or traffic on the roadways. Contractor shall use care and caution in order to avoid accidents, damage, or unnecessary delay or interference with the railway company's trains or property or with public or private roadway traffic or property. Any loss of the nature to be prevented as described in this section shall be a Cost of the Work, subject to the following: 10.7.2.1 to the extent any such loss is not covered by insurance and is attributable to the negligence or willful misconduct of Contractor, it shall be at Contractor's sole cost and expense; and 10.7.2.2 to the extent any such loss is covered by insurance and is attributable to the negligence or willful misconduct of Contractor, any deductible shall be at Contractor's cost and expense. 10.7.3 Owner shall be entitled to and receive all rebates and recoveries of any nature and type arising from construction and relocation of utilities. When securing temporary and permanent utilities for the Project, Contractor shall arrange for the utilities based on usage indicated by Owner. 10.8 Subcontracting and Purchasing. 10.8.1 Contractor shall pre-qualify all proposed Subcontractors and Vendors for submittal to Owner for Owner's Approval and obtain the Owner's Approval of all proposed Subcontractor and Vendor selections and agreements with a value greater than ten thousand dollars ($10,000). All Work to be Page 35 of 72 38 subcontracted or purchased shall be in accordance with Owner-approved procedures. Contractor shall keep Owner advised of all of its bidding activities for subcontracts or purchase orders. 10.8.2 Each instruction evidencing any agreement of Contractor with any Subcontractor or Vendor shall provide that, pursuant to terms in form and substance satisfactory to Owner, the rights of Contractor under such instrument are assignable to Owner, its assigns, and their respective successors and assigns upon Owner's written request following default by Contractor and termination or expiration of this Contract, and all warranties of such Subcontractor or Vendor shall run to Owner and its assigns. Notwithstanding any subcontract or agreement with any Subcontractor or Vendor, Contractor is solely responsible for the Work, and no portion thereof shall be unfinished or incomplete and the Project milestones identified in each Construction Schedule shall not be delayed due in whole or in part to any disagreement between or among Subcontractors or between any Subcontractor or Vendor and Contractor. No subcontract or purchase order shall bind or purport to bind Owner. Contractor shall include in each of its subcontracts and material supply agreements terms that are substantially similar to those contained in Sections 11, 12 and 13. Contractor shall provide to Subcontractors and Vendors, as appropriate, copies of those provisions of this Contract which the Subcontractor or Vendor shall be bound on a flowdown basis, as they relate to such Person's portion of the Work. 10.8.3 Contractor shall not utilize as a Subcontractor or Vendor any Person whom Contractor owns or controls or with which it is affiliated without specific advance written approval by Owner. 10.8.4 Unless waived by Owner, Contractor shall require each Subcontractor to provide a payment and performance bond in a format acceptable to Owner and executed by a Surety. 10.9 Use of Explosives. Explosives shall not be used in the prosecution of the Work without prior written approval of Owner. 10.10 Protection and Restoration of Property and Landscape. Contractor shall preserve private and public property and protect it from damage. Land monuments and property marks shall not be disturbed or moved until their location has been witnessed or referenced and their removal approved. Contractor shall restore damaged or injured property, at Contractor's expense, to a condition similar or equal to that existing before the damage or injury occurred, by repairing, rebuilding, or restoring the property. Page 36 of 72 39 10.11 Limitation on Work Hours. Contractor shall comply with state and local laws and policy with respect to work hours. 11 CHANGES IN THE WORK 11.1 Change Order. 11.1.1 Owner may, at any time and from time to time and without notice to any Surety, authorize changes in the Work, including but not limited to changes to the Warranties or increase the Work or decrease the Work, through issuance of a "Change Order". 11.1.2 In the event that Owner issues a Change Order, Owner shall advise Contractor of same and Owner and Contractor shall then promptly consult concerning the estimated cost and impact on the relevant Contract Budget and Construction Schedule of implementing the Change Order. Any Change Order for engineering or design Work will be issued separately from a Change Order for Construction Work. 11.1.2.1 Following such consultation, Owner may request, and Contractor shall promptly prepare, a detailed estimate relating to the contemplated change including, a modification to the Work, projected modification of the relevant Contract Budget, a detailed identification of the effect on the Cost of the Work. 11.1.2.2 Contractor shall notify Owner of any effect such change could be expected to have on any Completion Dates for a Network, on the relevant Construction Schedule, on any other relevant Construction Schedule and on Contractor's ability to comply with any of its obligations hereunder, including the Warranties. 11.1.2.3 Contractor shall provide the information required in Sections 11.1.2.1 and 11.1.2.2 in a form acceptable to Owner which shall be referred to as a "Change in the Work Form." If the parties reach agreement on the matters listed in a Change in the Work Form, such form shall be amended, if necessary, to reflect such agreement and Owner shall endorse the same "Accepted by Owner." Contractor shall promptly adjust (with approval of Owner) the relevant Construction Schedule and any other exhibits and Page 37 of 72 40 Construction Schedule requiring adjustment to indicate the effect of the change so agreed. Each Change in the Work Form, once approved in accordance with this Section 11.1.2, shall become a part of the relevant Change Order. 11.1.3 Owner and Contractor shall use their best efforts to agree upon the change to the relevant Contract Budget as a result of any Change Order. Contractor shall proceed with a change as ordered by Owner. No change in a Contract Budget shall result from a change which does not materially affect the Cost of the Work. In the event Owner and Contractor are unable to agree on whether a change will materially affect the Cost of the Work or the applicable Completion Date for a Network, Contractor shall separately record such costs and the time associated therewith. Nothing in this Section 11.1.3 shall alleviate, diminish, or modify in any respect Contractor's obligations under this Contract. 11.1.4 Contractor may request that Owner consider a Change Order for the Work. A request by Contractor for a Change Order shall be made by written Notice. Supporting data in the form of a Change in the Work Form shall be delivered within ten (10) Business Days of the request. The Change in Work Form shall be accompanied by a written statement that the amount requested includes all known costs amounts including direct, indirect, and consequential costs, and all impacts to the relevant Construction Schedule and any Completion Dates. Contractor shall not make any changes in the Work (including such changes that have no net cost effect on the Contract Budget) without the prior written consent of Owner. Owner may withhold its consent in its absolute discretion. 11.2 Extensions of Time. 11.2.1 The Completion Date for a Network may only be changed as a result of the existence or occurrence of a Force Majeure Event if such event results in a change in the duration of the critical path as set forth in the relevant Construction Schedule. All requests pursuant to Section 11.2.1 for changes to a Completion Date shall include an analysis showing the actual impact of the event on the Construction Schedule and affected Completion Date or Final Acceptance Date. No adjustments to a Completion Date pursuant to this Section 11.2.1 shall be allowed if the event did not directly affect the critical path indicated in the Construction Schedule. As a condition precedent to Owner providing an adjustment in accordance with this Section 11.2.1, Contractor must notify Owner in writing of any such request within seven (7) Days of the first discovery of the occurrence of said Force Majeure Event and must update this notification in writing every Page 38 of 72 41 five (5) Days. Within ten (10) Days of the termination of the said Force Majeure Event, Contractor shall submit a written request for change. If notification and request for change to the relevant Completion Date is not received within the time limits identified above, the critical path shall be considered unaffected by the occurrence or existence of the Force Majeure Event, and Contractor shall forfeit all rights to an adjustment to such Completion Date. 11.2.2 Rights of Way Release Delay. Adjustments to a Completion Date shall not be allowed if a delay did not affect the critical path indicated on the relevant Construction Schedule. Contractor shall not be entitled to any extension of a Completion Date to the extent that the release of Rights of Way is delayed by reason of the fault, negligence, act or failure to act of Contractor, any Subcontractor, any Vendor or any other Person for whom any of them may be responsible. As a condition precedent to Owner providing an adjustment other than a day-for-day extension to a Completion Date in accordance with this Section 11.2.2, Contractor must notify Owner in writing of any such request within seven (7) Days of first discovery of a delay in issuance of a Notice of proceed with respect to Rights of Way affecting the critical path and resulting in a seasonal restraint. Within ten (10) Days of the termination of the seasonal restraint, Contractor shall submit a written request for change. If notification and request for change to a Completion Date is not received within the time limits identified above, the critical path shall be considered unaffected by the occurrence of the seasonal restraint and Contractor shall forfeit all rights to an adjustment to such Completion Date. 11.2.3 Notwithstanding any other provision contained herein, no Completion Date shall be adjusted for normal inclement weather. Contractor shall be entitled to an extension of time only if Contractor can substantiate that there was greater than normal inclement weather considering the full term of this Contract and using a ten-year average of accumulated record mean values from climatological data compiled by the U.S. Department of Commerce National Oceanic and Atmospheric Administration for the locale of the relevant Network, and that such alleged greater than normal inclement weather lengthened the critical path indicated in the relevant Construction Schedule. The time for completion shall be extended by the appropriate number of calendar days as determined from the aforesaid data and schedule analysis. 11.3 Additional Costs Page 39 of 72 42 11.3.1 Change in Law: Scope. If, as a result of any Change in Law requiring a material change in the Work, the Cost of the Work for a Network will exceed the relevant Contract Budget, the Contract Budget with respect thereto may be increased in accordance with this Section 11.3.l. All requests for increases in a Contract Budget under this Section 11.3.1 shall include an analysis showing the actual impact of the Change in Law on the Cost of the Work. No increase in a Contract Budget shall be allowed if the Change in Law did not directly increase the Cost of the Work. As a condition precedent to Owner providing such an increase, Contractor must notify Owner in writing of any such request within ten (10) Days of obtaining knowledge of such Change in Law. Within thirty (30) Days of the date of such request, Contractor shall provide Owner with the analysis of the actual impact of such Change in Law referenced above. If notification and the analysis are not received within the time limits identified above, the Contract Budget will be considered unaffected by the Change in Law and Contractor shall forfeit all rights to an increase in the Contract Budget with respect thereto. Any increase in a Contract Budget in accordance with this Section 11.3.1 shall be limited to the additional costs reasonably incurred by Contractor which are directly attributable to and which would not have been incurred but for the Change in Law giving rise to such request. 11.4 Hazardous Substances. In the event the Contractor encounters on the Site material reasonably believed to be a Hazardous Substance which has not been rendered harmless, the Contractor shall immediately stop Work in the area affected and report the condition to the Owner in writing. Work in the affected area shall not thereafter be resumed except by written agreement of the Owner and Contractor if in fact the material is a Hazardous Substance and has not been rendered harmless. The Work in the affected area shall be resumed in the absence of a Hazardous Substance or when it has been rendered harmless by written agreement of the Owner and Contractor. Owner shall provide Contractor information in its possession or of which it is aware concerning Hazardous Materials at the Site. Contractor shall not be required to perform Work in connection with Hazardous Substances absent mutual agreement of Owner and Contractor with respect thereto. 11.5 Acceleration. Notwithstanding any other provisions herein, in the event any extension of a Completion Date is properly due under this Contract, regardless of the provision of this Contract under which such extension arises, Owner shall have the right, in its sole discretion, to decide whether to permit the extension, relief or to require Contractor to implement a recovery schedule which does not include any time extension or relief. At Owner's request, Contractor shall prepare and submit to Owner with its request for time extension or relief at least two (2) Page 40 of 72 43 alternative Change in the Work Forms setting forth the proposed cost of additional Work to implement the recovery schedule, both with and without a time extension or relief. If Owner elects to implement the recovery schedule in lieu of an extension of the affected Completion Date or relief, Owner shall issue a Change Order adjusting the relevant Contract Budget to account for additional costs resulting from all steps necessary to accelerate the Work and implement the recovery schedule. 11.6 Failure of Owner and Contractor to agree to any adjustment under this Section 11 shall be a dispute under Section 18. However, nothing in this Section 11 shall excuse Contractor from expeditiously proceeding with the Work required under this Contract as changed pursuant to a Change Order. 12 TERMINATION FOR CONVENIENCE 12.1 Owner may, in its sole discretion, terminate this Contract and the performance of the Work in whole or, from time to time, in part, if Owner determines that a termination is in Owner's best interest. Owner shall notify Contractor of its decision to terminate by delivering to Contractor a written Notice of such termination (a "Notice Of Termination") specifying the extent of termination and the effective date. 12.2 Contractor may, in its sole discretion, terminate this Contract if Contractor determines that a termination is in Contractor's best interest. Contractor shall notify Owner of its decision to terminate by delivering to Owner a written Notice of such termination (a "Notice Of Termination") at least sixty (60) Days prior to the effective date. 12.3 In the event either party has given a Notice of Termination, and except as directed by Owner, Contractor shall immediately proceed with the following obligations, regardless of any delay in determining or adjusting any amounts due under this clause: 12.3.1 stop Work as specified in the Notice. 12.3.2 issue no further subcontracts or purchase orders for materials, services, or facilities, except as necessary to complete the continued portion of the Contract. 12.3.3 terminate all subcontracts and purchase orders to the extent that they relate to the Work terminated. Page 41 of 72 44 12.3.4 with approval of and at the direction of Owner, settle all outstanding liabilities and termination settlement proposals arising from the termination of subcontracts and purchase orders or assign to Owner, all of Contractors rights, titles, and interests in the subcontracts terminated, in which case Owner shall have the right to settle or to pay any termination settlement proposal arising out of those terminations. 12.3.5 as directed by Owner, Contractor shall transfer title and deliver to Owner the fabricated parts, unfabricated parts, Work in process, completed Work, supplies, other material produced or acquired for the Work terminated, completed or partially completed plans, drawings, information, and other property that, if this Contract had been completed, would be required to be furnished to Owner. 12.3.6 complete performance in accordance with this Contract of all of the Work not terminated. 12.3.7 take any action that may be necessary, or that Owner may direct, for the protection and preservation of the property related to this Contract that is in the possession of Contractor and in which Owner has or may acquire an interest. 12.3.8 use its best efforts to sell, only as authorized by Owner, any property of the types referred to in subparagraph 12.3.5 above provided. However, Contractor is not required to extend credit to any purchaser and may acquire the property under the conditions prescribed and at prices approved by Owner. The proceeds of any transfer or disposition will be applied to reduce any payments to be made by Owner under this Contract or paid in any other manner directed by Owner. 12.4 Contractor shall submit to Owner a list of termination inventory not previously disposed of and excluding items authorized for disposition by Owner. Within forty-five (45) Days of receipt of this list, Owner will accept title to those items. 12.5 After termination, Contractor shall submit a final termination settlement proposal to Owner, which includes wind down cost, pro-rata portions of the G&A Fee and Base Fee and an adjusted Award Fee in the form and with the certification prescribed by Owner. Contractor shall submit the proposal promptly, but no later than ninety (90) Days from the effective date at termination, unless extended in writing by Owner upon written request of Contractor within such ninety (90) Day period. However, if Owner determines that the facts justify it, a termination settlement proposal may be received and acted on after ninety (90) Days or any reasonable extension thereof. If Contractor fails to submit the proposal within the time allowed, Owner may determine, on the basis of information available, the Page 42 of 72 45 amount, if any, due Contractor because of the termination and shall pay the amount determined. 12.6 With respect to terminated Work, Contractor shall be paid the Cost of the Work, the G&A Fee and Base Fee applicable thereto incurred prior to the effective date of the termination, and such amount of the Award Fee as Owner deems proper in its sole and absolute discretion. However, the total amount paid to Contractor for the Cost of the Work may not exceed the Contract Budget with respect thereto as reduced by the amount of payments previously made. The Contract shall be amended, and Contractor paid the agreed amount. 12.7 In no event shall Contractor be entitled to any lost profits or other consequential or indirect damages as a result of a partial or complete termination, or any breach of this Contract by Owner. 13 SUSPENSION OF ALL OR PART OF WORK 13.1 Owner may at any time and for any reason, order, in writing, Contractor to suspend, all or any part of the Work required under this Contract for the period of time that Owner determines appropriate for the convenience of Owner. 13.2 If the performance of all or any part of the Work is suspended pursuant to Section 13.1 by an act of Owner in the administration of this Contract and affects the critical path of Work, by Owner's failure to act within the time specified in this Contract (or within a reasonable time if not specified), an adjustment in the relevant Contract Budget or Completion Date shall be made pursuant to a Change Order for any increase in the cost or time for the performance of this Contract necessarily caused by the suspension by Owner. 13.3 No change of a Contract Budget or Completion Date shall be made under this Section 13 based on any suspension caused by Owner if Contractor's performance would have been so suspended by any other cause, including the fault or negligence of Contractor, a Subcontractor, a Vendor or anyone for whom any of them may be responsible, or for which a price adjustment or extension of any Completion Date is provided for or excluded under any other term or condition of this Contract. 13.4 During periods that Work is suspended, Contractor shall be responsible for the Work under this Contract and shall prevent damage to the Project, provide for drainage, and shall erect necessary temporary structures, signs, or other facilities required to maintain the Project. During any suspension period, Contractor shall maintain in a growing condition all newly established plantings, seedlings, and Page 43 of 72 46 soddings furnished under the Contract, and shall protect new tree growth and other vegetative growth against injury. 14 [NOT USED] 14.1 Not Used. 15 INSURANCE 15.1 Owner Controlled Insurance Program. Owner, through its Owner Controlled Insurance Program ("OCIP"), will provide at its expense (which shall not be part of the Cost of the Work) certain insurance coverages for Contractor and certain Subcontractors, after completion of the enrollment process for Contractor and eligible Subcontractors. In addition to any insurance provided by Owner, Contractor shall be responsible for providing certain insurance as specified below. 15.2 Coverage to be Provided by Owner. The coverages to be provided through the OCIP (the "Coverages") include builders' risk property insurance, commercial general liability insurance (excluding automobile liability), railroad protective liability as required by the railroads and statutory workers' compensation insurance and employer's liability insurance, as more specifically described below. The Coverages provided will apply to the operations of Contractor and each eligible and enrolled (as hereinafter described) Subcontractor and other insureds at the Site. Off-Site operations of Contractor and eligible Subcontractors in performance of Work will be covered only if all operations at such site are identified and solely dedicated to the Work. Contractor shall be responsible for advising Owner of its intention to establish a dedicated off-site location, and to request OCIP coverage approval for such sites or operations. The coverage provided by Owner will be subject to terms, conditions and other provisions, including exclusions and limitations, contained in the insurance policies issued to Owner. 15.2.1 Liability Coverage. The OCIP will provide the following liability coverage to Contractor and all eligible and enrolled Subcontractors during the period starting on the date of issuance of the Notice to Proceed for Contractor (or such other date as mutually agreed) and for each eligible and enrolled Subcontractor starting on the date of commencement of Work by such Subcontractor, and ending on the Final Acceptance Date (or other period specified below): 15.2.1.1 Commercial general liability (including umbrella or excess liability coverage as necessary to achieve required limits) for bodily injury, property damage, personal injury and advertising injury, including contractual liability, completed Page 44 of 72 47 operations and products liability: Limits will be $100,000,000 per occurrence; with general aggregate limits of $100,000,000 and products/completed operations aggregate limits of $100,000,000. Limits are annual limits of liability shared by all insureds. Primary coverage will use Insurance Services' Office commercial general liability "occurrence" form CG 0001 (or its equivalent) specifically including coverage for liability arising out of an agreement or contract in connection with construction or demolition operations on or near any railroad, with no exclusion for explosion, collapse or underground hazards. No coverage will be provided for products liability for any product manufactured, assembled, or otherwise worked upon away from the Site, unless such manufacturing or assembly is expressly required by the terms of the Contract. Products/completed operations coverage will remain in effect for ten (10) years from the date of Final Acceptance. The limit of liability for the extended products/completed operations coverage applies as a one (1) time separate aggregate limit for the entire period of the ten-year extension. The addition of insureds shall not operate to increase such limit. Coverage also includes sudden and accidental pollution occurrences subject to compliance with certain notification requirements. 15.2.1.2 Railroad protective liability: as required by the railroad agreements. Owner shall demand reinstatement of any limits of liability, which have been exhausted due to claim of Owner's other contractors. Owner shall use best efforts to notify Contractor in the event annual aggregate reserves are less than $50,000,000. 15.2.2 Workers' Compensation Coverage. During the period commencing on the date of issuance of the Notice to Proceed (or such other date as mutually agreed) and ending on the Final Acceptance Date, Contractor and all eligible and enrolled Subcontractors will, at Owner's expense, be covered under the applicable laws relating to workers' compensation and employer's liability insurance, for all of their employees performing construction Work at the Site and at dedicated off-Site locations approved by Owner and its insurer except as specified below. Contractor and each eligible and enrolled Subcontractor will be issued a separate workers' compensation employer's liability policy which will continue until the earlier to occur of Page 45 of 72 48 the Final Acceptance Date or until all Site activities have been completed. No coverage will be provided for any warranty or other Work performed following Final Acceptance. In no event shall the provision of the Coverages or the OCIP render Owner an employer with respect to Contractor or Subcontractor. 15.2.2.1 Owner will not provide workers' compensation coverage in any of the monopolistic state fund states, or Canada. Contractor must provide its own workers' compensation coverage in these states or Canada. 15.2.3 Property Insurance. The OCIP will include builder's risk property insurance, which shall protect against property loss as specified below during the period starting on the date of issuance of the Notice to Proceed and ending on the Final Acceptance Date. 15.2.3.1 Minimum Scope. The property insurance will cover all real and tangible personal property to be incorporated into the Work for "all risks" of loss, subject to standard policy terms, conditions and exclusions, covering all buildings, structures, fixtures, materials and supplies at the Site including inland transit and off-Site storage. 15.2.3.2 Exclusions. The OCIP property insurance will not cover any personal property of Contractor or Subcontractor, including tools, equipment, scaffolding, staging towers, and forms, rented or owned by Contractor or any Subcontractor, the capital value of which is not included in the Cost of the Work or any shanties or other structures erected for the sole convenience of the workers. Owner will not be responsible for any loss or damage to said excluded items, and the indemnifications by Contractor set forth in the Contract shall include any claims or causes of actions brought by any Person as a result of loss or damage to such excluded items. 15.2.4 Contractor and Owner Responsibility for Deductibles and Self-Insured Retentions. Owner will be responsible for deductibles or self-insured retentions with respect to the Coverages. However, Owner's responsibility will apply only after Contractor has paid any amounts for loss or damage specified below, irrespective of the actual insurance policy deductible. Contractor's obligation to pay these amounts (which shall not be part of the Cost of the Work) shall remain uninsured and will not be covered by the OCIP Coverages. Page 46 of 72 49 15.2.4.1 Commercial General Liability Policy. With respect to any claims under the policy described in Section 15.2.1.1, Contractor shall pay the first $5,000 per occurrence to the extent losses payable are attributable to acts or omissions of Contractor, its employees, agents, officers or Subcontractors or any other Persons performing any of the Work for whom Contractor may be contractually or legally responsible. 15.2.4.2 Builders' Risk. With respect to any claims under the policy described in Section 15.2.3, Contractor shall pay the first $25,000 per occurrence for all perils to the extent losses payable are attributable to acts or omissions of Contractor, its employees, agents, officers or Subcontractors or any other Persons performing any of the Work for whom Contractor may be contractually or legally responsible. 15.2.5 Eligibility of Subcontractors for Coverage. Subcontractors shall be eligible for coverage under the OCIP only if they perform Work at the Site and/or a pre-approved dedicated off-Site location. With respect to the worker's compensation and employer's liability policies, coverage will be provided only for certain workers, as specified in Section 15.2.2. No insurance coverage provided by Owner under the OCIP shall extend to the activities or products of the following: 15.2.5.1 any person and/or organization that fabricates and/or manufactures products, materials and/or supplies away from the Site; 15.2.5.2 any architect, engineer, soil tester, or surveyor and their consultants except where required by Contract; 15.2.5.3 truckers, material dealers, vendors, suppliers, and owner/operators (independent contractors), whose operations(s) and/or employee(s) is/are engaged solely in the loading, hauling and/or unloading of material, supplies and/or equipment to or from the Site; 15.2.5.4 unless such employee(s) is/are dedicated full time to the Work, as evidenced by payroll records, any employee(s) of an enrolled Contractor or Subcontractor of any tier, which is/are engaged solely in the loading, hauling and/or Page 47 of 72 50 unloading of material, supplies and/or equipment to or from the Site; 15.2.5.5 any employee(s) of an enrolled Contractor and Subcontractor of any tier, that does not work and/or generate payroll at the Site; 15.2.5.6 any employee(s) of an enrolled Contractor and Subcontractor of any tier, that occasionally visits the Site to make deliveries, pick up supplies and or personnel, to perform supervisory and/or progress inspection, or for any other reason, 15.2.5.7 any day labor employees (labor service employees whose coverage is provided by their employer); or 15.2.5.8 any other entity specifically determined by Owner to be excluded. 15.2.6 Cooperation. Contractor and all Subcontractors shall cooperate fully in the implementation and administration of the OCIP and provide any information or records requested by Owner or its insurance representative regarding all aspects of the OCIP, including claims, audit, payroll records and safety procedures. Delays in reporting information to Owner or its insurance representative will result in delays in payment to Contractor. Contractor and all Subcontractors shall comply with the terms and conditions of the Coverages. 15.2.7 Verification of Coverage. Contractor shall acknowledge that it has received copies of binders or other appropriate evidence of coverage with respect to the OCIP. Owner will deliver copies of each original workers' compensation policy to Contractor promptly upon Owner's receipt thereof. 15.3 Insurance Coverage to be Provided by Contractor and Subcontractors. Contractor shall provide insurance as described herein and ensure that all Subcontractors provide insurance as described herein, and shall ensure that all such insurance is maintained in full force and effect as specified herein from the date of issuance of the Notice to Proceed to the date of expiration of the warranty period hereunder. All insurance is to be placed with insurers admitted as such at the locations of the Work with an A.M. Best and Company rating level of A- or better, Class VII or better, or as otherwise approved by Owner in its sole discretion. Page 48 of 72 51 15.3.1 Required Coverage. Contractor and Subcontractors shall provide and maintain liability insurance as specified below. Contractor's commercial general liability insurance for off-Site exposures, automobile liability and aircraft liability (if applicable) policies shall protect Contractor, and to the extent of Contractor's indemnity obligations contained in the Contract protect Owner, and any other persons required in writing to be added as additional insureds to Contractor's coverage. 15.3.2 Minimum Scope. Liability insurance shall include the following (or broader) coverage. 15.3.2.1 Insurance Services Office commercial general liability coverage "occurrence" form CG 0001 (Ed. 11/88), or its equivalent, with no exclusion for explosion, collapse or underground hazards, only as respects Contractor operations and exposures off-Site; 15.3.2.2 Insurance Service Office form number CA 0001 (Ed. 1/87) or equivalent covering Automobile Liability, including hired and non-owned automobile liability; 15.3.2.3 workers' compensation insurance complying with the applicable worker's compensation laws, including employer's liability, specifically limiting coverage to exclude payroll covered under the OCIP. Contractor and Subcontractors must supply workers' compensation coverage in all monopolistic state fund states and Canada; 15.3.2.4 aircraft liability insurance in all cases where any aircraft is used on the Project that is owned, leased or chartered by Contractor or any of its employees, agents, officers, or Subcontractors or other Persons for whom Contractor may be legally or contractually responsible, protecting against claims for damages resulting from such use. The policy shall include coverage for hull damage covering the aircraft hull, engines and all aircraft equipment for "all risks" of damage for the full replacement of the aircraft, and liability insurance for bodily injury (including death), passenger liability and property damage liability. Any aircraft intended for use in performance of the Work, the aircraft crew, flight path and altitude, including landing of any aircraft on the Site or on any property owned by Owner shall be subject to review and acceptance by Owner prior to any such usage Page 49 of 72 52 occurs. If any aircraft are leased or chartered with crew and/or pilot, evidence of non-owned aircraft liability insurance will be acceptable but must be provided prior to use of the aircraft; 15.3.2.5 professional liability insurance policy (including errors and omissions). Such coverage shall be continued for a period of not less than three (3) years after acceptance of the completed Project by Owner and evidence to this effect will be provided to Owner in the form of annual certificates of insurance. Contractor shall cause its insurer for this coverage to notify Owner of any reduction in coverage or material change within thirty (30) Days of such change. Where professional services are performed by a Subcontractor, evidence of coverage from Subcontractor shall satisfy this requirement. 15.3.3 Limits. The limits for such policies are: 15.3.3.1 commercial general liability (for bodily injury, property damage, personal injury and advertising injury): $5,000,000 per occurrence and in the aggregate for Contractor and $1,000,000 per occurrence and in the aggregate for Subcontractors. Contractor shall provide this policy on a project specific basis, and the cost thereof shall not be a Cost of the Work. 15.3.3.2 automobile liability (for bodily injury and property damage): $5,000,000 per accident for Contractor and $1,000,000 per accident for Subcontractors. 15.3.3.3 workers' compensation and employer's liability (for bodily injury or disease): Statutory limits for workers' compensation and $1,000,000 per accident for employer's liability. 15.3.3.4 aircraft liability: $50,000,000 per occurrence. 15.3.3.5 professional liability: $10,000,000 per claim. 15.4 Additional Coverage to be Provided by Contractor and Subcontractor. During (i) the period prior to Contractors/Subcontractors enrollment into the OCIP and (ii) the period following the Final Acceptance Date and prior to expiration of the warranty period hereunder, Contractor and Subcontractors shall maintain in full Page 50 of 72 53 force and effect all insurance as specified in Section 15.3, covering all Work performed during such periods. 15.5 Other Insurance Requirements. 15.5.1 Endorsements and Waivers. Liability insurance policies required to be provided by Contractor hereunder shall contain or be endorsed to contain the following provisions: 15.5.1.1 Owner, its members, directors, officers, employees and agents and such other parties as may be designated in writing shall, to the extent of Contractor's indemnity obligations contained in the Contract, be covered as additional insureds under Contractor's and Subcontractor's commercial general liability policies, up to the limits required in Section 15.3.3.l. 15.5.1.2 Contractor's and Subcontractor's commercial general and automobile liability insurance shall apply separately to each insured against whom a claim is made or suit is brought, except with respect to the limits of the insurer's liability. 15.5.1.3 Each policy (including the workers compensation and employer's liability policies) shall include a waiver of any right of subrogation against Owner, (and its members, directors, officers, employees and agents). 15.5.1.4 Each policy (including the worker's compensation and employer's liability policies) shall be endorsed to state that coverage shall not be suspended, voided, canceled or reduced in coverage or in limits except after sixty (60) Days' prior written notice by certified mail, return receipt requested, has been given to Owner. Such endorsement shall not include any limitation of liability of the insurer for failure to provide such notice. 15.5.2 Verification of Coverage. 15.5.2.1 Contractor agrees to deposit with Owner, on or before the date of issuance of the Notice to Proceed, certificates of insurance and required endorsements for all policies required to be provided under Section 15.3. Page 51 of 72 54 15.5.2.2 Not less than fifteen (15) Days prior to the expiration date of any policy of insurance required by Section 15.3, Contractor shall deliver to Owner a binder or certificate of insurance with respect to each renewal policy. Required endorsements and certificates of insurance applicable to each renewal policy shall be delivered to Owner within thirty (30) Days of the renewal date. 15.6 Owner's Right to Remedy Breach by Contractor. If Contractor fails to provide insurance as required herein, Owner shall have the right but not the obligation, to purchase such insurance. In such event Owner shall be entitled to withhold any premiums paid from such amount which may currently be due Contractor or which shall become due Contractor in the future. 15.7 Disclaimer. Contractor acknowledges that Owner is not an agent, partner or guarantor of the OCIP insurers, and is not responsible for any claims or disputes between Contractor or its Subcontractors and the OCIP insurers. Contractor shall obtain a similar acknowledgment from all Subcontractors covered by the OCIP. Any type of insurance coverage or increase in limits not provided by the OCIP which Contractor or its Subcontractors require for their own protection or on account of statute, will be the responsibility of Contractor and each Subcontractor at its own expense. The Coverages are set forth in full in the respective insurance policy forms and the description of such policies contained herein or in Owner's project insurance manual are not intended to be complete or to alter or amend any provision of the actual insurance policies and in matters, if any, in which the description herein conflicts with such policies, the provisions of the actual insurance policies shall govern. 15.8 Owner's Right to Modify Insurance Program. Owner reserves the option to exclude Contractor or any Subcontractor from the OCIP or to terminate the OCIP, in whole or in part, at any time upon ninety (90) Days' written notice to Contractor, and also reserves the option, at any time, to require additional insurance to be provided by Contractor/Subcontractor or to revise the requirements for Contractor/Subcontractor-provided insurance. Any such action shall be deemed an Owner directed change entitling Contractor/Subcontractor to an increase for the costs incurred by Contractor/Subcontractor due to such change (with an appropriate change to the Contract Budget) (i.e., the cost of procuring substitute coverage for the OCIP coverage no longer being provided and the cost of any additional insurance required to be provided by Contractor/Subcontractor. Contractor/Subcontractor shall provide to Owner all such information or records as may be required or helpful in determining Contractor's/ Subcontractor's costs. Page 52 of 72 55 15.9 Subcontractor Insurance Requirements. Each subcontract with a Subcontractor eligible for OCIP coverage shall provide that the Subcontractor agrees to participate in the OCIP. Contractor shall ensure that all Subcontractors are required to comply with all applicable insurance requirements contained in the Contract and with all requirements imposed by the insurance policies. Contractor shall have sole responsibility for monitoring Subcontractor's compliance with such requirements. Contractor shall require each Subcontractor to include Owner and such other persons who are identified in writing to be added as additional insureds to Subcontractor's coverage. Owner and its designated agent shall have the right to contact Subcontractors directly in order to verify the above coverages. 15.10 Other Conditions. 15.10.1 Dividends or Return Premiums. The cost of premiums for the Coverages will be paid by Owner. Owner will receive and pay, as the case may be, all adjustments in such costs by way of dividend, return premium, retrospective adjustment or otherwise. Contractor hereby relinquishes any claims to such dividends, retentions, retrospective premium adjustments or other form of return premium, and agrees to execute and deliver to Owner any and all instruments of assignment as may be requested by Owner to confirm its right to receive the same. Contractor shall obtain a similar relinquishment and agreement to provide further assurances from all Subcontractors eligible for OCIP coverage. Rights of cancellation of all policies provided to Contractor and Subcontractor by Owner are assigned to Owner. 15.10.2 Property Loss Insurance Proceeds. Contractor agrees, and shall obtain a similar agreement from all Subcontractors, that any insurance recoveries for property loss covered under the property insurance shall be for the account of Owner and payable to Owner. 15.10.3 Due Care Required. Nothing contained in this Section shall relieve Contractor or any Subcontractor of its obligation to exercise due care in the performance of the Work and to complete the Work in strict compliance with this Contract. 15.10.4 Disclaimer. Nothing contained in this Section shall in any way act as a limitation of the liability of Contractor, Subcontractor or anyone for whom any of them may be liable legally or contractually, for damage or injury, including death, which arises out of the obligations of Contractor, Subcontractor or any one for whom any Page 53 of 72 56 of them may be liable legally or contractually, under this Contract or the applicable subcontract. Further, in no event shall the OCIP or Owner's decision to include or exclude any Work, Contractor or Subcontractors from or in the OCIP create any liability on Owner's part. 15.11 Contractor Obligations. 15.11.1 Contractor shall enroll in the OCIP by obtaining the necessary information and forms from Owner or its designee. In addition, Contractor shall notify its Subcontractors of the procedure for enrolling in the OCIP. Contractor and its Subcontractors, of any tier, shall not commence work until all insurance requirements are met. These requirements in part include: Contractor furnishing (and causing each of its Subcontractor's at any tier to furnish) to Owner or its designee, in a form satisfactory to Owner, an estimate of labor costs (listed by Standard Workers' Compensation Insurance classification) to be incurred in connection with Work at the Site, other insurance related information that Owner or the insurer may need to effect and maintain Owner provided coverage. 15.11.2 Contractor shall not violate any conditions of the Coverages. All requirements imposed by the Coverages upon, and to be performed by, Contractor shall likewise be imposed on, assumed and performed by each of the Subcontractors. The Contractor agrees and will require each Subcontractor to agree to keep and maintain an accurate and classified record of its payroll data and information in accordance with the requirements of the insurance company or companies issuing the Coverages or as otherwise required. The Contractor and their Subcontractors agree to permit their books and records to be examined and audited periodically by the insurance company or companies issuing the Coverages, Owner or their respective representatives. 15.11.3 Contractor shall furnish each bidding and negotiating Subcontractor eligible for coverage under the OCIP, a copy of this Section 15 of the Contract and shall make the same requirement of their eligible Subcontractors. 15.11.4 Contractor will be required to participate in the claim reporting procedures of the OCIP. Contractor agrees to assist and cooperate in every reasonable manner possible in connection with the adjustment of all claims arising out of operations within the scope Page 54 of 72 57 of the Work provided for by the applicable Contract, and to cooperate with the insurer in all claims and demands which Owner's insurers are called upon to adjust or to defend against. Contractor shall take all necessary action to assure that its Subcontractors, of all tiers, comply with any such request for assistance and cooperation. 15.11.5 Monthly Payroll Reports. All Contractors and their Subcontractors of all tiers shall submit monthly payrolls and worker-hour reports to Owner and/or its designee on the OCIP-3: OCIP Monthly On-site Payroll Report. The OCIP-3 reporting form will be provided to all Contractors and Subcontractors at time of enrollment into the OCIP. Failure to submit these reports may result in funds being held or delayed from monthly progress payments. An OCIP-3 must be submitted for each month, including zero (0) payrolls if applicable, until completion of the work under each contract. For those Contractors/Subcontractors performing Work under multiple Contracts, a separate Payroll Report is required for each Contract under which Work is being performed. 15.12 Audit and Adjustment of Insurance Credits. 15.12.1 Owner, at its option and as applicable, may adjust the amount and monies due the Contractor as summarized below: 15.12.2 Initial Insurance Credit Eliminated from Bid. 15.12.2.1 Contractor and Subcontractors of any tier shall submit their bids excluding all cost for the Coverages described in Section 15.2. Contractor shall also identify those costs for insurance, which would be added back to its bid price should Owner elect to not include Contractor and/or Subcontractor in the OCIP. Contractor shall summarize its alternate cost for the Coverages to be provided by the OCIP, including Subcontractors of all tiers on the attached OCIP-1 and OCIP-2 forms. 15.12.2.2 If Owner elects to not include Contractor or any Subcontractor in the OCIP, Contractor's and/or Subcontractor's contract amount will be amended to include the insurance costs as indicated on the OCP-1 form. 15.12.3 Cost per Payroll Dollar Rate. Page 55 of 72 58 15.12.3.1 Upon acceptance of the Contractor in the OCIP, Owner and/or its designee will determine a cost per payroll dollar rate for the average cost of project site insurance based upon the information submitted on the OCIP-1 form. The cost per payroll dollar rate will be established by the following formula for the Work of each Contractor and each Subcontractor, of any tier, performed under this Contract. [Total Contractor Insurance Premiums multiplied by plus Award Fee percentage, Base Fee percentage & G&A Fee percentage)] divided by total payroll for the Contract cost = per payroll dollar rate. 16 INDEMNIFICATION 16.1 To the fullest extent permitted by law, Contractor shall defend, indemnify and hold harmless Owner and the Oversight Engineer and any owner of Rights of Way required to be indemnified by Owner, their successors and assigns and their shareholders, officers, directors, agents and employees and any affected third party or political subdivision, from and against any and all claims, damages, losses, liabilities, costs and expenses, including attorneys' fees, resulting from claims of third parties to the extent such claims, damages, losses, liabilities, costs and expenses, including attorneys' fees arise out of, relate to or result from Contractor's breach or failure to perform in accordance with the Contract, or the negligence or willful misconduct of Contractor or anyone for whom it is responsible or liable. Such obligation shall not be construed to negate, abridge, or reduce other rights or obligations of indemnity, which would otherwise exist under this Contract. 16.2 To the fullest extent permitted by law, Contractor shall defend, indemnify and hold harmless Owner, the Oversight Engineer and any owner of Rights of Way required to be indemnified by Owner, their successors and assigns and their shareholders, officers, directors, agents and employees, from and against any and all claims by any governmental or taxing Owner claiming taxes based on income of Contractor or any of its Subcontractors or Vendors or any of their respective agents or employees with respect to any payment for the work made to or earned by Contractor or any of its Subcontractors or Vendors or any of their respective agents or employees under this Contract. 16.3 To the fullest extent permitted by law, Contractor shall defend and hold harmless Owner, the Oversight Engineer and any owner of Rights of Way required to be indemnified by Owner, their successors and assigns and their shareholders, officers, directors, agents and employees and any affected third party or political Page 56 of 72 59 subdivision, from and against any and all claims, damages, losses, liabilities, costs and expenses, including attorneys' fees, arising out of or relating to the failure of Contractor, its employees, agents, officers, Vendors or Subcontractors or any other Persons performing any of the Work to comply with any applicable Governmental Rule. 16.4 Contractor shall properly guard the Work and areas affected by the Work to prevent any person or persons from being injured by it or by the condition of the site, and shall in all respects comply with any and all provisions of the law and of local ordinances relating to the maintenance of danger signals, barriers, lights, and similar safeguards respecting falling materials and in and about all excavations, protruding nails, hoists, openings, scaffolding, stairways, other parts of the Work and adjacent areas where the same are required. 16.5 To the fullest extent permitted by law, Contractor shall defend, indemnify and hold harmless Owner, the Oversight Engineer and any owner of Rights of Way required to be indemnified by Owner, their successors and assigns and their shareholders, officers, directors, agents and employees and any affected third party or political subdivision from and against any and all claims for infringement resulting from the use of any patented design, device, material or process, or any trademark or copyright, and shall indemnify Owner for any claims, damages, losses, liabilities, costs and expenses, including attorneys' fees, which it may become obligated to pay by reason of any infringement, during the prosecution or after the completion of the Project, except to the extent such claim arises out of Owner-Supplied Items. If Owner is enjoined from completion of the Project or any part thereof, or from the use, operation or enjoyment of the Project or any part thereof as a result of such claim or legal action or any litigation based thereon, Contractor shall promptly arrange to have such injunction removed at no cost to Owner. Owner's acceptance of Contractor's engineering design and/or proposed or supplied materials and equipment shall not be construed to relieve Contractor of any obligation hereunder. 16.6 To the fullest extent permitted by law, Contractor shall defend, indemnify and hold harmless Owner, the Oversight Engineer and any owner of Rights of Way required to be indemnified by Owner, their successors and assigns and their shareholders, officers, directors, agents and employees from and against any and all Claims for non-payment filed in connection with the Work, including all expenses and attorneys' fees incurred in discharging any Claims for non-payment. 16.7 The foregoing obligations shall not be construed to negate, abridge, or reduce other rights or obligations, which would otherwise exist in favor of a party indemnified hereunder. Page 57 of 72 60 16.8 In claims against any person or entity indemnified under this Section 16 by an employee of Contractor, a Subcontractor, a Vendor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, the indemnification obligation under this section shall not be limited by a limitation on amount or type of damages, compensation or benefits payable by or for Contractor or a Subcontractor under workers' or workmen's compensation acts, disability benefit acts or other employee benefit acts. 16.9 In no event shall either party be liable to the other for any indirect, consequential, special, punitive or exemplary damages or lost profits, except to the extent such claims are included in third party claims for which indemnification is due hereunder. Without limiting Contractor's obligations with respect to the Work, Owner waives and releases Contractor for any damages for delay arising out of Contractor's failure to achieve a Completion Date. 16.10 Indemnities against, releases from, assumptions of and limitations on liability expressed in this Contract, as well as waivers of subrogation rights, shall apply even in the event of the fault, negligence (whether active, passive, joint or concurrent) or strict liability of the party indemnified or released or whose liability is limited or assumed or against whom rights of subrogation are waived and shall be effective to, and only to, the maximum extent allowable by law and in the event such provision is determined to exceed the maximum scope allowed by law, said provision shall be interpreted and enforced so as to preserve the indemnity, release or limitation to the maximum extent allowable. Such indemnities against, releases from, assumptions of and limitations on liability expressed in this Contract, as well as waivers of subrogation rights, shall extend to the officers, directors, employees, licensors, agents, partners and related entities of such party and its partners and related entities. 17 DEFAULT 17.1 Default of Contract by Contractor. Contractor shall be immediately in default hereunder (an "Event of Default") upon the occurrence of any one or more of the other events or conditions set forth below and continuation thereof for ten (10) Days following delivery to Contractor of a Notice from Owner to cure such event or condition; provided that if such event or condition is susceptible of being cured but cannot reasonably be cured within such ten (10) Day period and Contractor commences to cure such event or condition within such ten (10) Day period and continues to diligently prosecute such cure then Contractor shall be entitled to a reasonable period of time not exceeding ninety (90) Days to complete such cure: 17.1.1 Contractor fails to promptly begin the Work under the Contract; or Page 58 of 72 61 17.1.2 Contractor fails to perform the Work with sufficient workers and equipment or with sufficient materials so as to give reasonable assurance that Final Acceptance of all Work will be achieved by the respective Completion Date; or 17.1.3 Contractor performs the Work not in accordance with the requirements of this Contract or refuses to remove and replace rejected materials or unacceptable Work; or 17.1.4 Contractor refuses to remove any worker not acceptable to owner; or 17.1.5 Contractor discontinues the prosecution of the Work; or 17.1.6 Contractor fails to resume Work which has been discontinued within a reasonable time after Notice to do so; or 17.1.7 Contractor shall have become insolvent, or generally does not pay its debts as they become due, or admits in writing its inability to pay its debts, or makes an assignment or the benefit of credits; or 17.1.8 Contractor allows any final judgment against it arising out of the prosecution of the Work to go unsatisfied for more than thirty (30) Days; or 17.1.9 insolvency, receivership, reorganization, or bankruptcy proceedings shall have been commenced by or against Contractor; or 17.1.10 Contractor breaches any material agreement, representation or warranty contained in this Contract; or 17.1.11 Contractor shall have assigned or transferred this Contract or any right or interest herein, except as expressly permitted under Section 22.2; or 17.1.12 any representation or warranty made by Contractor in this Contract or any certificate, schedule, instrument or other document delivered by Contractor pursuant to this contract shall have been false or materially misleading when made; or 17.1.13 Contractor shall have failed to make payment when due for labor, equipment or materials in accordance with its agreements with Subcontractors or Vendors or shall have failed to comply with any Governmental Rule or failed to reasonably comply with the instructions of Owner consistent with this Contract; or Page 59 of 72 62 17.1.14 Contractor fails to achieve Final Acceptance of a Network or Segment and all Work related thereto by the relevant Completion Date. 17.2 Remedies Upon Default by Contractor. 17.2.1 If an Event of Default shall have occurred and be continuing that either is not curable under this Contract or has not been cured within the period allowed by the Contract, Owner or its assignee shall have the following rights and remedies that may be available to Owner, or such assignee, at law or in equity, and Contractor shall have the following obligations subject to the reimbursement provisions of Section 6: 17.2.1.1 Owner, without prejudice to any of its other rights or remedies, may terminate this Contract forthwith by delivery of a Notice of Termination to Contractor. 17.2.1.2 Owner shall have the right to require Contractor to withdraw from the Site, assign Contractor's subcontracts or purchase agreements to Owner and remove materials, equipment, tools, instruments, debris, or waste materials from the site as Owner may direct, and Owner may take possession, without incurring any liability to Contractor, of any or all designs, drawings, and Site facilities of Contractor that Owner deems necessary to completion of the Work. 17.2.1.3 Owner shall have the right to take the prosecution of the Work from Contractor and Owner may appropriate or use Contractor's materials, equipment, tools and instruments located at the site of the Project which are to be consumed or incorporated in the Work as may be suitable and acceptable and may enter into an agreement for the completion of the Work in accordance with the terms and provisions of this Contract, or use other methods, as in the opinion of Owner, will be required for the completion of the Project. 17.2.1.4 Owner shall have the right to use all design and construction Documents and Specifications that have been prepared by Contractor. 17.3 Default of Contract by Owner. If Owner fails to pay Contractor any properly invoiced amount finally determined in a binding proceeding to be due and payable in accordance with Section 6 hereof, Contractor may, upon thirty (30) Days' Page 60 of 72 63 written notice to Owner, terminate this Contract and recover from Owner payment for all Work performed and reasonable termination expenses. If Owner cures its default by making full payment of sums finally determined to be due and payable before or during the Notice period, then Contractor shall not be entitled to terminate the Contract. Payment of interest shall not excuse or cure any default in payment. 17.4 Upon a determination by a court of competent jurisdiction that termination of Contractor or its successor in interest pursuant to any provision of this Contract was wrongful, such termination will be deemed converted to a termination for convenience and the Contractor's remedies shall be limited to those set forth in Section 12.5. 18 DISPUTE RESOLUTION 18.1 In the event a dispute arises between Owner and Contractor regarding the application, interpretation or breach of any provision of this Contract, the aggrieved party shall promptly notify the other party to this Contract of its intent to invoke this dispute resolution procedure within fifteen (15) Business Days after the dispute arises. If the parties shall have failed to resolve the dispute within fifteen (15) Business Days after delivery of such notice, each party shall, within fifteen (15) Business Days thereafter nominate a senior officer of its management to meet at any mutually agreed location, to resolve the dispute in an amicable and peaceful manner. Should the parties be unable to resolve the dispute to their mutual satisfaction within fifteen (15) Business Days after such nomination, each party shall have the right to pursue litigation. 18.2 Continuance Of Work During Dispute. At all times during the course of the dispute resolution process and during the course of litigation, Contractor shall continue with the Work as directed, in a diligent manner and without delay, or conform to Owner's decision or order, and shall be governed by all applicable provisions of the Contract. 19 COOPERATION BETWEEN CONTRACTORS 19.1 Owner reserves the right to contract for and perform other or additional work, on or near the Work covered by this Contract. 19.2 If other separate contracts are awarded within the limits of the Work, Contractor shall conduct its Work without unreasonably interfering or hindering the progress or completion of the work being performed by other contractors. All contractors working on the Project shall cooperate with each other as directed by Owner. Page 61 of 72 64 20 COMPLETION AND ACCEPTANCE 20.1 Substantial Completion. 20.1.1 Contractor shall provide Notice to Owner when Contractor has completed an entire Network or a portion thereof, except for Punchlist items and final clean up. Owner or the Oversight Engineer will approve a Punchlist of items remaining to be completed for Final Acceptance. By providing a Notice of completion, Contractor has ensured that the Network or Segment has been constructed in accordance with the requirements of this Contract, may be operated without damage to the Network, Segment, or any other property on or off the Site, without injury to any Person, and is ready for initial operation. 20.1.2 Within thirty (30) Days after receipt of Notice pursuant to Section 20.1.1, Owner shall advise Contractor in writing of any defects, deficiencies or deviations from the Contract requirements or workmanship. Contractor shall, at its own cost and expense, correct such defects, deficiencies and/or deviations immediately. As soon as any such defects, deficiencies and/or deviations are corrected (or as soon as the thirty (30) Day period for such notice has expired if Owner does not advise Contractor of any such items within the period), Owner shall accept such Work in writing or they shall be deemed accepted. 20.1.3 Substantial Completion of a Network or any Segment, as the case may be, and the Work with respect thereto ("Substantial Completion") shall be deemed to have occurred on the earlier of 20.1.3.1 beneficial use or occupancy by Owner; or 20.1.3.2 when all of the following have occurred: 20.1.3.2.1 Contractor has corrected, pursuant to the provisions of Section 20.1.2, all defects, deficiencies and/or deviations in respect of the Network or Segment, as the case may be, and Owner has accepted such corrections in writing; 20.1.3.2.2 Contractor has received all the required Governmental Approvals pursuant to Section 3.1.2; 20.1.3.2.3 Owner's Approval has been given to a Punchlist in respect of the Network or Segment; Page 62 of 72 65 20.1.3.2.4 all authorities having jurisdiction over the Network or Segment, as the case may be, have given their approval of the Network or Segment, as the case may be, for use for its intended purpose; and 20.1.3.2.5 the entire Network or Segment, as the case may be, is fully operational and available to be utilized by Owner for its intended purposes. 20.2 Partial Acceptance. If at any time during the prosecution of the Project, Contractor achieves, in regard to a Network or Segment, satisfaction with respect to the Network or Segment, of all conditions and terms set forth in regard to Segments in Section 20.3, and upon written notice requesting same, Owner may, but shall not be required to, accept said Network or Segment ("Partial Acceptance"). 20.3 Final Acceptance of a Segment. 20.3.1 Promptly after Substantial Completion of a Network or Segment, Contractor shall perform all Work, if any, which was waived for purposes of Substantial Completion, and shall satisfy all other of its obligations under this Contract, including ensuring that the Network or Segment has been completed and all components have been properly adjusted and tested. 20.3.2 Final acceptance ("Final Acceptance") of a Network or Segment shall be deemed to have occurred when all of the following have occurred: 20.3.2.1 all requirements of the Contract with respect thereto shall have been fully satisfied and all requirements for Substantial Completion of the subject Network or Segment shall have been fully satisfied; and 20.3.2.2 Owner shall have received all Drawings (including as-built drawings of the subject Segment), Specifications, test data, and other technical information required hereunder related to the subject Network or Segment; and 20.3.2.3 all special tools purchased by Contractor as, provided herein shall have been delivered to Owner and all replacement spare parts shall have been purchased for delivery to Owner free and clear of liens; and Page 63 of 72 66 20.3.2.4 all Contractor's and Subcontractor's personnel, supplies, equipment, waste materials, rubbish and temporary facilities shall have been removed from the Site; and 20.3.2.5 Contractor shall have delivered to Owner a certification to the effect that Contractor claims no additional charges or adjustments pursuant to Section 11 or otherwise, other than those charges or adjustments of which Contractor has notified Owner; and 20.3.2.6 the Punchlist items shall have been completed to the reasonable satisfaction of Owner and all of Contractor's other obligations under this Contract shall have been satisfied in full or waived, provided that Contractor may delay completion of any landscaping and planting contained in the Punchlist in accordance with generally recognized forestry and landscaping practices, but in no case longer than nine (9) months, and Owner shall have delivered to Contractor a Notice of Final Acceptance to the effect of the foregoing. 20.3.3 The occurrence of the Final Acceptance Date shall not relieve Contractor from any of its continuing obligations hereunder. 20.3.4 The date which Final Acceptance of the Network or Segment or a specified portion thereof occurs shall be the "Final Acceptance Date". Page 64 of 72 67 21 WARRANTY 21.1 Contractor's warranties in respect of the Work (the "Warranties") are as follows. Contractor warrants to Owner that: 21.1.1 all Construction Work shall be performed in a good and workmanlike manner and be free from defects; 21.1.2 materials and equipment furnished under this Contract shall be of good quality and new and be free from defects; 21.1.3 all professional services Work will be consistent with the standard of care and diligence practiced by recognized professionals performing similar services, and be free from material defects; and 21.1.4 all Work shall meet all of the requirements of this Contract. 21.2 Owner shall look to the vendor or manufacturer for warranty claims on Owner-Supplied Items or items specifically required by Owner, provided Contractor shall provide reasonable assistance in enforcement of same. 21.3 Contractor shall, for the protection of Owner, demand from all Vendors and make available to Owner warranties satisfying the requirements of this Section 21. Contractor's liability with respect to such equipment and materials obtained from vendors shall be limited to procuring such warranties and rendering reasonable assistance in enforcement of same. 21.4 Work not conforming to the Warranties, including substitutions not properly approved and authorized, shall be considered defective. Contractor shall furnish satisfactory evidence as to the kind and quality of materials and equipment. 21.5 Contractor shall promptly correct Work rejected by Owner for failing to conform to the Warranties, whether observed before or after Substantial Completion and whether or not fabricated, installed or completed. Contractor shall bear all costs of correcting such rejected Work, including additional testing and inspections and compensation for Owner's expenses made necessary thereby. 21.6 Warranties shall commence on Substantial Completion of such Work except for items completed and accepted on an earlier date in accordance with Section 20.2, and for items completed later with the express written consent of Owner, when such Work is accepted by Owner. Notwithstanding the forgoing provisions of this Section 21, if this Contract is terminated in accordance with Sections 12 or 18, Warranties in respect of all Work performed by Contractor under this Contract Page 65 of 72 68 prior to such termination shall be deemed to commence the effective date of such termination. 21.7 If at any time within one (1) year after the date on which the Warranties commenced on a Network or Segment or any portion thereof, such Segment, Sub- Segment or portion thereof is found to be not in accordance with the Warranties, Contractor shall correct it promptly after receipt of written Notice from Owner unless Owner has previously given Contractor a written acceptance of such condition. This one (1) year period shall be extended with respect to portions of Work first performed after the applicable Partial Acceptance Date or Final Acceptance Date by the period of time between the applicable Partial Acceptance Date or Final Acceptance Date and the date of completion of such Work. Owner shall give such Notice promptly after discovery of any such condition. Work required under this Section 21.4 shall, unless necessitated by Contractor's failure to perform as required under the Contract or negligence or willful misconduct, be a Cost of the Work. 21.8 Contractor's Warranties shall apply to any such re-done Work and shall last as to the re-done Work until the latest of: (i) the expiration of the relevant original Warranty Period; (ii) the expiration of any Warranty Period with respect to repurchased equipment; or (iii) one (1) year after completion of any re-done Work. 21.9 Without in any way derogating Contractor's own representations and warranties (including Warranties) and Contractor's other obligations with respect to all of the Work, Contractor shall obtain from all Subcontractors or Vendors and cause to be extended to Owner prudent representations, warranties, guarantees and obligations with respect to design, materials, workmanship, equipment, tools and supplies furnished by such Subcontractors or Vendors. All representations, warranties, guarantees and obligations of Subcontractors or Vendors shall be: (i) so written as to survive all Owner and Contractor inspections, tests and approvals; and (ii) run directly to and be enforceable by Owner, its successors and assigns. Contractor shall deliver to Owner promptly following execution thereof duly executed copies of all contracts containing such representations, warranties, guarantees and obligations. Contractor shall assign to Owner, at no additional cost, all of Contractor's rights and interest in all extended warranties for periods exceeding the applicable warranty period which were received by Contractor from any of its Subcontractors or Vendors. 21.10 Upon receipt from Owner of a Notice of failure of any of the Work to satisfy any Subcontractor or Vendor warranty, representation or guarantee obtained by Contractor, Contractor shall be responsible for enforcing or performing any such representation, warranty or guarantee. Owner's rights under this Section 21.1 shall commence at the time such representation, warranty or guarantee is furnished and Page 66 of 72 69 shall continue until the expiration of Contractor's relevant Project Warranty (including extensions for re-warranties). Until such expiration, the cost of any equipment, material, labor (including re-engineering) or shipping shall be for the account of Contractor if such cost is covered by such a Project Warranty and Contractor shall be required to replace or repair defective equipment, material or workmanship furnished by Subcontractors. 21.11 Commencing on the expiration of each of the respective Warranties, or such later date as is provided with respect to re-done Work, Owner shall be responsible for enforcing all representations, warranties and guarantees from Subcontractors and Vendors, but Contractor shall provide reasonable assistance to Owner in enforcing such representations, warranties and guarantees, when and as reasonably requested by Owner. 21.12 Except in cases of an emergency requiring immediate curative action by Contractor, within five (5) Days of receipt by Contractor of a Notice from Owner specifying a failure of any of the Work to satisfy Contractor's Warranties, or of any Subcontractor or Vendor representation, warranty or guarantee which Contractor is responsible to enforce, Contractor and Owner shall mutually agree when and how Contractor shall remedy said violation; provided, however, that in case of emergency requiring immediate curative action, Contractor and Owner shall so agree on such remedy immediately upon Notice by Owner of such emergency. If Contractor does not use its best efforts to proceed to complete said remedy within the time agreed to, or should Contractor and Owner fail to reach such an agreement within such five (5) Day period (or immediately, in the case of emergency conditions), Owner, after Notice to Contractor, shall have the right to perform or have performed by third parties the necessary remedy and the costs thereof shall be borne by Contractor. 21.13 The obligations contained in this Section 21 WARRANTY, govern and supersede any other terms in this Contract which address warranties, guarantees, or the quality of the Work and are Contractor's sole warranty and guarantee obligations and Owner's exclusive remedies with respect thereto. Contractor shall have no warranty obligation or liability for defects in the Work unless Owner demonstrates the warranty claim is not attributable to Contractor's reliance upon or use of data, design criteria, drawings, specifications or other information furnished by Owner. 21.14 Contractor makes no representations, covenants, warranties, or guarantees, express or implied, other than those expressly set forth herein. The parties' rights, liabilities, responsibilities and remedies with respect to the Work shall be exclusively those expressly set forth in this Contract. Page 67 of 72 70 22 MISCELLANEOUS PROVISIONS 22.1 Governing Law and Venue. THE PARTIES AGREE THIS CONTRACT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF COLORADO. THE PARTIES FURTHER AGREE THAT ANY LITIGATION ARISING OUT OF THIS CONTRACT SHALL BE TRIED IN DENVER COUNTY, COLORADO, OR THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO AND NOT ELSEWHERE. 22.2 Successors and Assigns. This Contract shall be binding upon and inure to the benefit of Owner and Contractor and their successors, assigns, and legal representatives. Without the prior consent of Contractor, Owner may, upon reasonable advance written notice, assign all or part of its right, title, and interest in this Contract. Contractor shall not assign this Contract or any right to receive payment hereunder without the prior written consent of Owner. Contractor may not delegate any of its duties hereunder except as expressly otherwise permitted herein. Contractor's assignment or delegation of any of its Work hereunder, whether permitted hereunder or not, shall relieve Contractor of its responsibility for the Work assigned or delegated. 22.3 Third Party Beneficiary. It is specifically agreed between the parties executing this Contract that it is not intended by any of the provisions of any part of this Contract to create in the public or any member thereof a third party beneficiary hereunder, or to authorize anyone not a party to this Contract to maintain a suit for personal injuries or property damage pursuant to the terms or provisions of this Contract. The duties, obligations and responsibilities of the parties to this Contract with respect to third parties shall remain as imposed by law. 22.4 Designation of Representatives. Owner and Contractor shall each designate an individual or individuals that shall be authorized to make decisions and bind the parties on matters relating to this Contract. These representatives shall live in the general vicinity of the Work. Such designation shall be in writing and may be changed by a subsequent writing. The parties may also designate technical representatives who shall be authorized to investigate and report on matters relating to the Project and negotiate on behalf of each of the parties but who do not have authority to bind Owner. 22.5 Entire Agreement: Amendments. This Contract, including its exhibits, appendixes and attachments contains the entire understanding of the parties with respect to this subject matter. This Contract supersedes all prior agreements and understandings between the parties with respect to its subject matter. This Page 68 of 72 71 Contract may be amended only by a written instrument duly executed by the parties or their respective successors or assigns. 22.6 Independent Contractors. Contractor is an independent contractor and nothing lien shall be construed as constituting any relationship with Owner other than that of owner and independent contractor, nor shall it be construed as creating any relationship whatsoever between Owner and Contractor's employees. Neither Contractor, nor any of its employees, are or shall be deemed employees of Owner. Contractor has sole liability and responsibility as a principal for its agents, Subcontractors, Vendors and all others it hires to perform or assist in performing the Work. 22.7 Liens and Claims. If Contractor shall fail promptly to discharge any nothing contained herein or claim upon the Project, or upon any materials, equipment or structures encompassed therein, or upon the premises upon which they are located, Owner shall promptly notify Contractor in writing and Contractor shall then satisfy or defend any such liens or Claims. If Contractor either does not promptly satisfy such liens or Claims or does not give Owner reasons in writing satisfactory to Owner for not causing the release of such lien or paying such Claims, Owner shall have the right, at its option, after written Notice to Contractor, to cause the release, pay or settle such lien or Claims by agreement and Contractor shall within five (5) Days of request by Owner, reimburse Owner for all costs incurred by Owner to discharge such lien or Claims including administrative costs, attorneys' fees and other expenses. Contractor shall have the right to contest any such lien provided it first provides to Owner a bond or other assurances of payment reasonably satisfactory to Owner, in the amount of such lien or Claim in form and substance satisfactory to Owner. 22.8 Notice and Communications. Any Notice pursuant to the terms and conditions of this Contract shall be in writing and: (i) delivered personally; or (ii) sent by certified mail, return receipt requested; or (iii) sent by a recognized overnight mail or courier service, with delivery receipt requested, to the following addresses (or to such other address as may from time to time be specified in writing by Contractor or Owner): If to Contractor: National Network Technologies, LLC. 26 Broadway, Suite 400 New York, NY 10004 Attn: Daniel Corbett, VP of Engineering Ph: (212) 837-7700 Fax: (212) 837-7917 Page 69 of 72 72 If to Owner: Raouf Abdel Level 3 Communications, LLC 14023 Denver West Parkway Golden, Colorado 80401 Ph: (303) 215-8554 Fax: (303) 218-8388 with a copy to: Level 3 Communications, LLC 1450 Infinite Drive Louisville, Colorado 80027 Attention: General Counsel Fax: (303) 926-3467 Notices shall be effective when received by the party to whom addressed. Any technical or other communications pertaining to the Work shall be between designated representatives appointed by the parties. Each party shall notify the other in writing of the name of such representatives. Contractor's representatives shall be satisfactory to Owner, have knowledge of the Work and be available at all reasonable times for consultation. Each party's representative shall be authorized to act on behalf of such party in matters concerning the Work. 22.9 Ownership of Documents. All design and construction Documents and Specifications shall become Owner's property upon preparation and Contractor shall retain and furnish Owner with copies of all such design and construction Documents and Specifications as they are completed. Notwithstanding anything to the foregoing, Owner shall not receive title to proprietary Contractor or third party property. All Documents, Specifications and information prepared or obtained by Contractor in connection with the performance of its obligations under this Contract such as, by way of illustration and not limitation, studies, technical and other reports, shop drawings, record drawings and the like, shall also be retained and become the property of Owner upon preparation or receipt. Copies of all such Documents, Specifications and information shall be furnished, in a form and manner acceptable to Owner, upon receipt or completion thereof by Contractor. 22.10 Severability. The invalidity or unenforceability of any portion or provision of this Contract shall not affect the validity or enforceability of any other portion or provision. Any invalid or unenforceable portion or provision shall be deemed severed from this Contract and the balance of this Contract shall be construed and Page 70 of 72 73 enforced as if this Contract did not contain such invalid or unenforceable portion or provision. 22.11 Survival. Certain obligations of Contractor shall survive the termination of this Contract including the obligations of Contractor under Sections 16, 19, and 21 and terms which by their very nature extend beyond termination or completion of the job. 22.12 Waiver. Either party's waiver of any breach or failure to enforce any of the terms, covenants, conditions or other provisions of this Contract at any time shall not in any way affect, limit, modify or waive that party's right thereafter to enforce or compel strict compliance with every term, covenant, condition or other provision, any course of dealing or custom of the trade notwithstanding. 22.13 Headings. The headings contained herein are included solely for the convenience of the parties. 22.14 Confidentiality. If Owner and Contractor have not done so prior to execution of this Contract, each agrees to execute a Confidentiality Agreement contemporaneously with the execution of this Contract in a form substantially similar to the form attached hereto as Appendix "C". The provisions of the Confidentiality Agreement shall survive the expiration or termination of this Contract. Contractor shall require Subcontractors and Vendors to execute and abide by similar confidentiality requirements. 22.15 Publicity. Neither party shall publish or use any advertising, sales, promotions, press releases or other publicity matters which use the other party's logo, trademarks or service marks without the prior written approval of the other party. Neither party is licensed hereunder to conduct business under any logo, trademark, service mark, or trade name (or any derivative thereof) of the other. 22.16 Solicitation of Employment. Neither party shall, during the term of this Agreement or for a period of one hundred eighty (180) days thereafter, directly or indirectly for itself or on behalf of, or in conjunction with, any other person, partnership, corporation, business or organization, solicit employment of an employee of the other with whom that party or its personnel have had contact during the course of the Project under this Contract, unless that party has obtained the written consent of the other to such solicitation. Page 71 of 72 74 IN WITNESS WHEREOF, the parties have caused this Contract to be duly executed and delivered as of the date and the year above written. LEVEL 3 COMMUNICATIONS, LLC By: _______________________________ Title: ____________________________ Attest: ________________________________________________ NATIONAL NETWORK TECHNOLOGIES, LLC. By: _______________________________ Title: ____________________________ Attest: ________________________________________________ Page 72 of 72 EX-10.17 6 ex10-17.txt EMPLOYMENT AGREEMENT 1 Exhibit 10.17 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of July 2, 2000, by and between LEXENT INC., a Delaware corporation (the "Company"), and NANCY HUSON (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 July 10, 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 her employment by the Company on the Commencement Date, she 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 July 10, 2004. The period from the Commencement Date until June 10, 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." 3. Duties. The Employee shall be employed as Executive Vice President - Corporate Development of the Company, shall faithfully perform and discharge such duties as inhere in the position of Executive Vice President of the Company as may be specified in the Bylaws of the Company with respect to such position, and shall also perform and discharge such 2 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 her duties principally at offices of the Company in New York City, New York, with such travel to such other locations from time to time as the Chief Executive Officer may reasonably prescribe. Except as may otherwise be approved in advance by the Board of Directors, and except during vacation periods and reasonable periods of absence due to sickness, personal injury or other disability, the Employee shall devote her full business time throughout the Employment Term to the services required of her hereunder. The Employee shall render her business services exclusively to the Company and its subsidiaries during the Employment Term and shall use her 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 her 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 Forty Thousand Dollars ($240,000) (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; provided, that such Salary shall increase at least five percent (5%) each year of the Employment Term. 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 June 30, 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 her 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 her Salary (prorated only for calendar year 2004) for exceptional performance as may be determined by the Compensation Committee in its sole discretion. (c) Initial Payment. In connection with the execution and delivery by the Employee of this Agreement, the Company shall pay the Employee a one-time bonus in the amount of $50,000 (the "Initial Payment") on or before July 31, 2000. 2 3 5. Other Benefits; Options. (a) General. During the Employment Term, the Employee shall: (i) be eligible to participate in employee fringe benefits and pension and/or profit sharing plans that may be provided by the Company for its senior executive employees in accordance with the provisions of such plans, as the same may be in effect from time to time; (ii) be eligible to participate in any medical and health plans or other employee welfare benefit plans that may be provided by the Company for its senior executive employees in accordance with the provisions of any such plans, as the same may be in effect from time to time; (iii) be entitled to the number of paid vacation days in each calendar year determined by the Company from time to time for its senior executive officers, provided that such number of paid vacation days in each calendar year shall not be less than twenty (20) work days (four 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 her 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 750,000 shares (as adjusted equitably for stock dividends, stock splits, combinations, etc.) of Company Common Stock, $.001 par value ("Common Stock"), at a purchase price $6.00 (as adjusted equitably for stock dividends, stock splits, combinations, etc.), of which options to purchase 25% of such shares of Common Stock shall vest on 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. Further, the Initial Options will contain provisions providing that (i) if the Employee's employment hereunder is terminated Without Cause or for Good Reason (each, as defined in Section 7 hereof) during the Employment Term, all of the previously unexercisable portion of the Initial Options shall become immediately vested; and (ii) if there is a Change of Control (as defined in (e) below) of the Company during the Employment Term, all of the previously unexercisable portion of the Initial Options shall become immediately vested. 3 4 All terms and conditions, including those referred to herein, shall be provided in a Stock Option Agreement of even date herewith between the Company and the Employee. (c) Put Option for Certain Initial Options. Subject to Section 8(c) hereof, for the period (the "Put Option Period") beginning on the date (the "Lock-Up Termination Date") which is 180 days after the date the Company consummates an initial public offering of its Common Stock and ending on the one-year anniversary of the Lock-Up Termination Date, Employee shall have the right and option (the "Put Option"), but not the obligation, to sell to the Company any unexercised and vested Initial Options representing up to 187,500 shares (as adjusted equitably for stock dividends, stock splits, combinations, etc., the "Put Option Shares") of Common Stock in accordance with the following terms and conditions: (i) In the event that Employee exercises the Put Option, the Company shall pay to Employee as purchase price for the Put Option Shares an amount (the "Purchase Price") per share equal to the difference between $8.50 (as adjusted equitably for stock dividends, stock splits, combinations, etc.) and the exercise price of the Initial Options underlying any Put Option Shares provided for in paragraph (b) of Section 5 hereof. (ii) Employee may exercise the Put Option by giving the Company a written notice of election to sell the Put Option Shares (the "Put Option Notice") at any time during the Put Option Period, which Put Option Notice shall specify the number of Put Option Shares to be sold and the Purchase Price for such Put Option Shares. (iii) The closing for the purchase by the Company of such Put Option Shares will take place at the principal office of the Company as soon as practicable for both Employee and the Company after delivery of the Put Option Notice. At such closing, the Employee will deliver the stock option agreement representing the options underlying the Put Option Shares to be sold to the Company and such other documentation as reasonably requested by the Company or their counsel, against payment in cash of the Purchase Price thereof. Any Initial Options underlying Put Option Shares sold to the Company pursuant to the provisions of this Section 5(c) will thereafter be terminated and no longer exercisable by Employee. (d) Grant of Subsequent Options. In connection with her continued employment by the Company, on the first anniversary of the Commencement Date, and on each of the subsequent anniversaries thereof during the Employment Term, the Company agrees to grant the Employee options ("Subsequent Options") to purchase at least 45,000 shares (as adjusted equitably for stock dividends, stock splits, combinations, etc.) of Common Stock at a purchase price equal to the Fair Market Value (as defined in (f) below) of the Common Stock on the date of grant, which options shall vest in twenty-five 4 5 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. (e) Change of Control. "Change of Control" means any capital reorganization, consolidation, merger or sale of assets as a result of which or in connection with which a person, corporation or other entity other than Kevin and Hugh O'Kane acquires (x) ownership of more than 50% of the equity securities of the Company or (y) all or substantially all of the assets and properties of the Company as an entirety. (f) Fair Market Value. "Fair Market Value" means as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in Common Stock) on the last market trading day prior to the day of grant of the particular Subsequent Options and as reported in the Wall Street Journal or such other source as the Compensation Committee deems reliable; (ii) If the Common Stock is quoted on the NASDAQ System (but not on the National Market System thereof) or is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a share of Common Stock shall be the average between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of grant of the particular Subsequent Options and as reported in the Wall Street Journal or such other source as the Compensation Committee deems reliable; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Compensation Committee. 6. Confidential Information. The Employee hereby covenants, agrees and acknowledges as follows: (a) The Employee has and will have access to and will participate in the development of or be acquainted with confidential or proprietary information and trade secrets related to the business of the Company and any present or future subsidiaries or affiliates of the Company (collectively with the Company, the "Companies"), including but 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; 5 6 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 her 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 her or another's benefit any Confidential Information or use such Confidential Information in any way except as is in the best interests of the Companies in the performance of the Employee's duties under this Agreement. The Employee may disclose Confidential Information when required by a third party and applicable law or judicial process, but only after providing immediate notice to the Company of any third party's request for such information, which notice shall include the Employee's intent to disclose any Confidential Information with respect to such request. (c) The Employee acknowledges and agrees that a remedy at law for any breach or threatened breach of the provisions of this Section 6 would be inadequate and, therefore, agrees that the Companies shall be entitled to seek injunctive relief in addition to any other available rights and remedies in case of any such breach or threatened breach by the Employee; provided, however, that nothing contained herein shall be construed as prohibiting the Companies from pursuing any other rights and remedies available for any such breach or threatened breach. (d) The Employee agrees that upon termination of her 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). 6 7 (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 her 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 her employment hereunder for "Good Reason" (as defined in (c) below); or (vi) the Employee terminates her employment hereunder for any reason whatsoever (whether by reason of retirement, resignation or otherwise) other than in accordance with (v) above. (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) a conviction of, or plea of nolo contendere to, a felony; (ii) willful misconduct that is materially injurious to the Company; 7 8 (iii) failure to undertake communicated directives on material business matters despite written instruction to do so by the Board of Directors or the Chairman of the Company; or (iv) any willful material breach of this Agreement which has resulted in material injury to the Company. (c) Good Reason. The Employee may terminate her employment with the Company for "Good Reason" if, without the Employee's written consent, there is: (i) a material adverse change in the Employee's title or Salary; (ii) the assignment of duties to the Employee materially and adversely inconsistent with the Employee's position; (iii) any requirement by the Company that Employee's primary office location be other than in New York City or the state of New Jersey; or (iv) a Change of Control of the Company. In the event that Employee determines that a Good Reason exists for termination, Employee must notify the Company of such determination in writing, within 30 days following Employee's actual knowledge of the event giving rise to such Good Reason. Following receipt of such notice, if, in the next 30 days, the Company remedies the event giving rise to such Good Reason, Employee may not terminate her employment with the Company for Good Reason as a result of such event. 8. Payments Upon Termination. (a) Termination Without Cause or for Good Reason. In addition to the acceleration of the Initial Options provided for in Section 5(b)(i) hereof and subject to paragraph (c) below, in the event that the Employee's employment is terminated by the Company Without Cause or by the Employee for Good Reason during the Employment Term then the Company shall pay to the Employee, as severance pay or liquidated damages or both, monthly payments at the rate per annum of her Salary at the time of such termination and any bonus that Employee would have been entitled to under Section 4(b) but for Employee's termination by the Company (pro rated for the portion of the fiscal year occurring prior to the cessation of the Employee's employment) for a period of twelve (12) months after such termination. (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 her behalf of whatever kind or nature by reason of the 8 9 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 or by the Employee for Good Reason or otherwise), other than (i) such amounts, if any, of her Salary and bonus as shall have accrued and remained unpaid as of the date of said cessation, (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 and (iii) subject to paragraph (c) below, such amounts, if any, pursuant to the Employee's exercise of the Put Option. (c) Treatment of Put Option upon Termination. Unless the Employee shall have previously delivered to the Company the Put Option Notice in accordance with Section 5(c)(ii) hereof, the Employee's right to exercise the Put Option will be terminated on the date the Employee's employment is terminated for any reason; provided, that, in the event that Employee's employment is terminated by the Company Without Cause or by the Employee for Good Reason during the Put Option Period, Employee shall have the right to exercise the Put Option for 30 days after such termination in accordance with Section 5(c) 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 her 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 her 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) hereof or (ii) in the case of a termination of the 9 10 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 her 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). 10 11 (e) Certain Representations of the Employee. In connection with the foregoing provisions of this Section 10, the Employee represents that her experience, capabilities and circumstances are such that such provisions will not prevent her 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 she 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 her 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 her 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 her 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. 11 12 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. * * * * * 12 13 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: -------------------------------- Name: Title: ----------------------------------- Nancy Huson 13 EX-11.1 7 ex11-1.txt STATEMENT RE COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11.1 Lexant Inc. Computation of Earnings Per Share (Dollars in thousands except per share amounts)
For the year ended December 31, 1997 For the year ended December 31, 1998 ------------------------------------ ------------------------------------ Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- --------- ----------- ------------- --------- Net Income $ 2,189 $ 3,828 Less: Preferred Stock Dividends -- (301) -------------------------- -------------------------- NET INCOME PER SHARE - BASIC: Income available to common shareholders 2,189 22,717 $ 0.10 3,527 22,717 $ 0.16 ========= ======= EFFECT OF DILUTIVE SECURITIES: Convertible preferred stock -- -- 301 3,673 Common stock options -- -- -- -- -------------------------- -------------------------- NET INCOME PER SHARE - DILUTED: Income available to common shareholders plus assumed conversions $ 2,189 22,717 $ 0.10 $ 3,828 26,390 $ 0.15 ===================================== =====================================
For the year ended December 31, 1999 ------------------------------------ Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- --------- Net Income $ 7,952 Less: Preferred Stock Dividends (690) -------------------------- NET INCOME PER SHARE - BASIC: Income available to common shareholders 7,262 22,721 $ 0.32 ========= EFFECT OF DILUTIVE SECURITIES: Convertible preferred stock 690 8,740 Common stock options -- 2,070 -------------------------- NET INCOME PER SHARE - DILUTED: Income available to common shareholders plus assumed conversions $ 7,952 33,531 $ 0.24 =====================================
For the three months ended March 31, 2000 ----------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- --------- Net Income $ 8,905 Less: Preferred Stock Dividends (172) ------------ ------------ NET INCOME PER SHARE - BASIC and DILUTIVE: Income available to common shareholders 9,077 23,282 $ 0.39 ========================= =========
EX-23.1 8 ex23-1.txt CONSENT OF INDEPENDENT ACCOUNTANTS 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 July 6, 2000 -----END PRIVACY-ENHANCED MESSAGE-----