Lexent 10Q 2003 Q1 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED MARCH 31, 2003.

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 000-31105

LEXENT INC.

(Exact name of registrant as specified in its charter)


Delaware		13-3990223
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
Three New York Plaza New York, New York (Address of principal executive offices)		10004 (Zip Code)

Registrant’s telephone number, including area code:

212-981-0700

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12 b-2 of the Securities Exchange Act of 1934). Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common Stock, $.001 par value, 42,244,959 shares outstanding as of April 28, 2003.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATION
CERTIFICATION

LEXENT INC. AND SUBSIDIARIES

TABLE OF CONTENTS


		Page No.

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2003 (unaudited) and December 31, 2002		2
	Condensed Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2003 and March 31, 2002		3
	Condensed Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2003 and March 31, 2002		4
	Notes to Condensed Consolidated Financial Statements (unaudited)		5-11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		12-14
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		14-15
Item 4.	Controls and Procedures		15
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		15
Item 5.	Other information		15-16
Item 6.	Exhibits and Reports on Form 8-K		16
Signatures			17
Certifications			18-19

PART I.

FINANCIAL INFORMATION

Item 1. Financial Statements

LEXENT INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


			March 31,				December 31,
			2003				2002

			(Unaudited)

			(Dollars in thousands,
			except per share amounts)
ASSETS
Current assets:
	Cash and cash equivalents		$	26,101			$	28,109
	Certificate of deposit (restricted cash)			2,003				2,012
	Available-for-sale investments			42,939				44,302
	Receivables, net			20,782				28,311
	Prepaid expenses and other current assets			549				2,048
	Income taxes receivable			14,750				14,750

		Total current assets		107,124				119,532
Property and equipment, net				3,559				4,033
Other assets				849				880
						��
		Total assets	$	111,532			$	124,445


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	4,225			$	7,494
	Accrued liabilities			3,170				6,229
	Restructure reserve			3,077				4,023
	Billings in excess of costs and estimated earnings on uncompleted projects			2,880				1,837
	Provision for contract losses			3,082				3,472
	Subordinated note payable to stockholder			1,582				1,582
	Equipment and capital lease obligations			170				451

		Total current liabilities		18,186				25,088
Subordinated note payable to stockholder				—				396
Accrued liabilities — noncurrent				750				600
Restructure reserve — noncurrent				6,216				6,566
Equipment and capital lease obligations				39				70

		Total liabilities		25,191				32,720

Commitments and contingencies
Stockholders’ equity:
	Common stock, $.001 par value, 120,000,000 shares authorized, 42,236,959 and 42,168,396 shares outstanding at March 31, 2003 and December 31, 2002, respectively			42				42
	Additional paid-in capital			156,057				156,035
	Deferred stock-based compensation			(1,435	)			(2,126	)
	Accumulated other comprehensive income			2				105
	Accumulated deficit			(68,325	)			(62,331	)

		Total stockholders’ equity		86,341				91,725

		Total liabilities and stockholders’ equity	$	111,532			$	124,445

See accompanying notes to condensed consolidated financial statements.

LEXENT INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS



			For the Three Months
			Ended March 31,

			2003			2002


			(Dollars in thousands,
			except per share
			amounts)
			(Unaudited)
Revenues			$	20,345		$	31,313
Cost of revenues				22,529			29,435

	Gross margin			(2,184	)		1,878

Operating expenses:
	General and administrative expenses			2,854			4,432
	Depreciation and amortization			513			1,289
	Non-cash stock-based compensation*			681			1,021
	Restructuring charges			—			1,441

		Total operating expenses		4,048			8,183

Loss from operations				(6,232	)		(6,305	)
Other income and expense:
	Interest expense			34			76
	Interest income			(259	)		(359	)
	Other (income) expense, net			(51	)		1,408

		Total other (income) expense, net		(276	)		1,125

Loss before income taxes				(5,956	)		(7,430	)
Provision for (benefit from) income taxes				38			(701	)

	Net loss		$	(5,994	)	$	(6,729	)

Net loss per share:
	Basic and diluted		$	(0.14	)	$	(0.16	)

Weighted average common shares outstanding:
	Basic			42,195			41,699

	Diluted			**			**


*	Substantially these amounts would have been classified as general and administrative expenses.

**	Anti-dilutive, therefore, not presented.

See accompanying notes to condensed consolidated financial statements.

LEXENT INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



				For the Three Months
				Ended March 31,

				2003			2002


				(Dollars in thousands)
				(Unaudited)
Cash flows from operating activities:
	Net loss			$	(5,994	)	$	(6,729	)
	Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
		Restructuring charges			—			1,441
		Depreciation and amortization			513			1,289
		Provision for uncollectible accounts			(118	)		237
		Loss on investment/disposition of assets			—			1,408
		Provision for deferred taxes			—			2,253
		Provision for contract losses			(390	)		—
		Non-cash stock-based compensation			681			1,021
	Changes in working capital items:
		Receivables			7,647			6,493
		Prepaid expenses and other current assets			1,499			632
		Other assets			31			403
		Accounts payable			(3,269	)		178
		Accrued liabilities			(4,093	)		(3,856	)
		Income taxes payable and prepaid taxes			—			(1,245	)
		Billings in excess of costs and estimated earnings on uncompleted projects			1,043			764

			Net cash (used in) provided by operating activities		(2,450	)		4,289

Cash flows from investing activities:
	Capital expenditures, net of equipment loans and capital leases				(148	)		(300	)
	Proceeds from renewal of certificate of deposit				16			—
	Proceeds from sale of available-for-sale investments				1,260			3,003

			Net cash provided by investing activities		1,128			2,703

Cash flows from financing activities:
	Proceeds from exercise of stock options and stock purchase plan				22			279
	Repayments of subordinated note payable to stockholder				(396	)		(396	)
	Repayments of equipment loans and capital leases				(312	)		(420	)

			Net cash used in financing activities		(686	)		(537	)

Net (decrease) increase in cash and cash equivalents					(2,008	)		6,455
Cash and cash equivalents at beginning of period					28,109			75,839

Cash and cash equivalents at end of period				$	26,101		$	82,294

Supplemental cash flow information:
	Cash paid for:
		Interest		$	36		$	83
		Income taxes		$	20		$	96

See accompanying notes to condensed consolidated financial statements.

LEXENT INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2003

(Unaudited)

The condensed consolidated financial statements of Lexent Inc. and Subsidiaries (the “Company”) included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to SEC rules and regulations. The condensed consolidated financial statements of the Company reflect, in the opinion of management, all adjustments necessary to present fairly the financial position of the Company at March 31, 2003 and the results of its operations and cash flows for the periods ended March 31, 2003 and March 31, 2002. All adjustments are of a normal recurring nature. These financial statements should be read in conjunction with the annual financial statements and notes thereto for the year ended December 31, 2002. The results of operations for the three months ended March 31, 2003 are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2003.

Certain amounts in the prior period have been reclassified to conform with the current year presentation.

The Company received a letter, dated March 3, 2003 from the Nasdaq Stock Market notifying the Company that, as a result of the resignations of the four independent Board of Directors, the Company does not currently meet the independent director and audit committee requirements for the continued listing on Nasdaq. Nasdaq rules require the Company to have an audit committee composed of at least 3 independent directors.

On April 23, 2003, the Company received a Nasdaq Staff Determination stating that the Company’s common stock is subject to delisting from the Nasdaq National Market for failing to meet such requirements for continued listing in accordance with Marketplace Rules 4350(c) and 4350(d)(2). The Company filed a request for a hearing before the Nasdaq Listing Qualifications Panel to appeal the delisting determination, and a hearing has been scheduled for May 29, 2003. The Company’s common stock will continue to be traded on the Nasdaq National Market pending the final decision by Nasdaq. There can be no assurance that the Nasdaq Listing Qualifications Panel will grant the Company’s request for continued listing on the Nasdaq National Market. In the event the Company’s common stock is delisted from the Nasdaq Stock Market, the stock would then trade on the Nasdaq’s OTC Bulletin Board. The delisting of the Company’s common stock from the Nasdaq National Market could result in a reduction in the market price and the liquidity of the Company’s common stock.

1. Net Loss Per Share

Net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted loss per share reflects the potential dilution of other securities by including in the weighted average number of common shares outstanding for each period the dilutive effect of stock options and shares issuable under the employee stock purchase plan. Details of the calculations are as follows:



	Three Months Ended
	March 31,

	2003			2002


	(In thousands, except
	per share amounts)
Net loss per share — basic:
Net loss	$	(5,994	)	$	(6,729	)

Weighted average shares — basic		42,195			41,699

Net loss per share — basic	$	(0.14	)	$	(0.16	)

LEXENT INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



	Three Months Ended
	March 31,

	2003			2002


	(In thousands, except
	per share amounts)
Net loss per share — diluted:
Net loss	$	(5,994	)	$	(6,729	)

Weighted average shares — basic		42,195			41,699
Dilutive effect of stock options		358			1,121
Dilutive effect of employee stock purchase plan		—			4

Weighted average shares — diluted		42,553			42,824

Net loss per share — diluted		*			*


*	Inclusion of common stock equivalent shares would result in an anti-dilutive net loss per share. As a result, the computation for diluted loss per share is not presented.

2. Accumulated Other Comprehensive Income

Comprehensive income includes net loss and unrealized gains from available-for-sale investments, net of income tax effect. The unrealized gains from available-for-sale investments were $0.002 million and $0.1 million for 2003 and 2002, respectively.

Changes in the components of accumulated other comprehensive income for 2003 and 2002 were as follows:


	Unrealized Gain			Accumulated
	on Available-			Other
	for-Sale			Comprehensive
	Investments			Income


	(In thousands)
Balance, December 31, 2002	$	105		$	105

Change for first quarter 2003		(103	)		(103	)

Balance, March 31, 2003	$	2		$	2

3. Certificate of Deposit (Restricted Cash)

In August 2002, Lexent Metro Connect, LLC ( “LMC”), a wholly owned subsidiary of Lexent Inc., entered into a franchise agreement with the City of New York, whereunder LMC will be permitted to construct, operate and provide local high capacity telecommunications networks and services. In connection therewith, the City of New York required that LMC post $2.0 million to secure its obligations. LMC provided the $2.0 million in the form of an unconditional letter of credit. A certificate of deposit for $2.0 million was pledged as collateral for the $2.0 million letter of credit, and was renewed during the first quarter 2003.

LEXENT INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4. Receivables, Net


	March 31,			December 31,
	2003			2002


	(In thousands)
Accounts receivable — billed to customers	$	17,539		$	23,891
Unbilled receivables on completed projects accounted for under the completed contract method		466			717
Costs and estimated earnings in excess of billings on projects accounted for under the percentage-of-completion method		3,075			5,044
Costs of uncompleted projects accounted for under the completed contract method		699			661
Retainage		3,282			2,638

		25,061			32,951
Less allowance for uncollectible amounts		(4,279	)		(4,640	)

	$	20,782		$	28,311

The amounts written off against the allowance for the three months ended March 31, 2003 and 2002 were $0.2 million and $1.7 million, respectively.

Amounts retained by customers related to projects that are progress-billed may be outstanding for periods that exceed one year.

5. Investments

Available-for-sale investments represents investment grade securities backed by U.S. government, Federal Agency bonds, and AA rated corporate notes that have maturities in excess of 90 days.

6. Employee Stock Purchase Plan

At December 31, 2002, 39,457 shares were issuable to employees based on payroll deductions of $0.03 million through that date. Employees participating in the Employee Stock Purchase Plan (“ESPP”) withdrew their funds prior to the January 31, 2003 purchase. The ESPP was terminated in January 2003.

7. Related Party Transactions

During the three months ended March 31, 2003, the Company repaid $0.4 million including interest expense of $0.03 million on a subordinated note payable to a common stockholder.

The Company leases buildings for office and warehouse purposes in New York City and in South Plainfield, New Jersey from entities owned by its two principal common stockholders and another common stockholder. Rent expense for these premises was $0.1 million for the three months ended March 31, 2003.

In May 2000, the Company entered into a ten-year lease for a garage and warehouse facility in Long Island City, New York. Lease payments were $0.2 million for the three months ended March 31, 2003. The facility is leased from an entity owned by the Company’s two principal common stockholders.

On February 18, 2003, the Company announced that it had received an offer from a buying group, which included Hugh J. O’Kane, Jr. and Kevin M. O’Kane (“Buying Group”), to purchase all outstanding shares of the Company (not owned by the Buying Group) for $1.25 per share (“Offer”). The Company’s Board of Directors currently consists solely of Hugh J. O’Kane, Jr. and Kevin M. O’Kane. As a result of the absence of independent members from the Company’s Board of Directors, the Company retained Rodman & Renshaw,

LEXENT INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Inc., a New York based investment banking firm as an independent advisor to assist in evaluating and responding to the Offer.

8. Contingencies

From time to time, the Company is involved in various suits and legal proceedings, which arise in the ordinary course of business. Six (6) class action lawsuits were filed during February and March 2003 in connection with an offer received by the Company from a buying group, which included Hugh J. O’Kane, Jr. and Kevin M. O’Kane, to purchase all outstanding shares of the Company (not owned by the buying group) for $1.25 per share. All of the lawsuits were filed in Delaware State Court and named Lexent Inc., Hugh J. O’Kane, Jr. and Kevin M. O’Kane as defendants. One of the lawsuits also named, as defendants, several former members of the Company’s Board of Directors. The suits allege, inter alia, that the offer is unfair and inadequate, the buying group has engaged in self-dealing and has not acted in good faith, and that the Company and its Board of Directors, present and former, have breached their fiduciary duty to shareholders. By Order, dated April 7, 2003, the six (6) class action lawsuits were consolidated under the captionIn Re Lexent Inc. Shareholder Litigation. The Complaint adopted in the consolidated action names only Lexent Inc., Hugh J. O’Kane, Jr. and Kevin M. O’Kane as defendants. The plaintiff seeks damages, including but not limited to, enjoining the Company and the Buying Group from proceeding with, consummating or closing the proposed transaction. It is too early to assess the outcome of the above referenced matters. Therefore, at present it cannot be determined whether the ultimate outcomes of these matters will have a material impact on the Company’s financial position or results of operations.

A shareholder class action suit filed on October 26, 2001,Labansky, et al. v. Lexent Inc. et al., in the Southern District of New York against the Company, certain of its present and former senior executives and its underwriters continues. All individual present and former senior executive defendants have been dismissed from the case without prejudice. The complaint alleges that the registration statement and prospectus relating to the Company’s initial public offering contained material misrepresentations and/or omissions in that those documents did not disclose that (1) certain underwriters had solicited and received undisclosed fees and commissions and other economic benefits from some investors in connection with the distribution of the Company’s stock in the initial public offering; and (2) certain underwriters had entered into arrangements with some investors that were designed to distort and/or inflate the market price for the Company’s stock in the aftermarket following the initial public offering. The suit against the Company is part of a number of initial public offering securities claims against multiple issuers and underwriters presently pending before the Judge. No discovery has occurred in the suit involving the Company. On February 19, 2003, U.S. District Court Judge Scheindlin issued an opinion denying the Motion to Dismiss the Section 11 claims against the Company but granting said motion, without prejudice, with respect to the Section 10 (b) (5) claims. As indicated in previous filings, the Company intends to defend itself vigorously. Management currently believes that the resolution of this litigation will not have a material adverse impact on the Company’s financial position or the results of operations, although the ultimate outcome of this matter cannot be determined at this time.

On July 9, 2002, the Company’s subsidiary, Hugh O’Kane Electric Co., LLC (“HOK”), was served with a Complaint filed in the District of Maryland by several former employees,Yemele T. William Nestor et al. v. Hugh O’Kane Electric Company, LLC (“Employee Action”), alleging violations of Title VII of the Civil Rights Act of 1964, as amended. Plaintiffs in the Employee Action seek compensatory and punitive damages. In addition, on September 9, 2002, HOK was served with a second Complaint filed in the District of Maryland by the U.S. Equal Employment Opportunity Commission on behalf of other employees,Equal Employment Opportunity Commission v. Hugh O’Kane Electric Company, LLC (“EEOC Action”), alleging violations of Title VII of the Civil Rights Act of 1964, as amended. The EEOC Action seeks compensatory damages and injunctive relief. The Employee Action and the EEOC Action arise from the same core of allegations. HOK

LEXENT INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

intends to defend itself vigorously in both actions. HOK’s Answers in both actions have been filed, and limited discovery has been conducted in connection with mediation proceedings. It is too early to assess the ultimate outcomes of the above-referenced matters served upon the Company. Therefore, at present, it cannot be determined whether the ultimate outcome of these matters, individually or cumulatively, will have a material impact on the Company’s financial position or results of operations.

On or about July 22, 2002, the Company was served with a complaint in the Northern District of Illinois,Annecca Inc. et al. v. Lexent Inc., brought by several plaintiffs associated with U.S. Electric LLC, alleging that the Company’s decisions neither to complete the purchase of U.S. Electric nor to employ certain of U.S. Electric’s principals constitute a breach of contract. Plaintiffs seek damages for lost profits, salaries, etc. The Company believes that the complaint is without merit and will vigorously defend itself. The Company’s Answer has been filed, and the Company has asserted several counterclaims. The parties are currently engaged in discovery. It is too early to assess the ultimate outcome of the litigation. Therefore, at present, it cannot be determined whether the ultimate outcome will have a material impact on the Company’s financial position or results of operations.

HOK continues to be involved in litigation in the Southern District of New York,U.S. Information Systems, Inc. et al. v. International Brotherhood of Electrical Workers Local Union 3, AFL-CIO et al., served on or about March 10, 2002, brought by three electrical contractors alleging a conspiracy among certain other contractors (including HOK) and the International Brotherhood of Electrical Workers, Local Union Number 3, AFL-CIO (“IBEW”). The suit alleges violations of the federal Sherman Antitrust Act and state laws and claims that the defendants exercise market power restricting the ability of plaintiffs, who employ workers from the Communication Workers of America (“CWA”), from performing telecommunications services work in the New York metropolitan area. Plaintiffs seek treble damages. The Company believes that this suit is part of an ongoing labor dispute between the IBEW and the CWA and that the allegations against HOK are without merit. HOK intends to defend itself vigorously in this litigation. Discovery is complete, but it is too early to assess the ultimate outcome of the litigation. Notwithstanding, a damage judgment against HOK could have a material adverse effect on the Company’s business operating results and financial condition.

9. Stock Options and Awards

During the three months ended March 31, 2003, there were no options granted to purchase common shares, 297,482 options were terminated and expired and 68,563 options were exercised. As of March 31, 2003, options to purchase 4,759,722 common shares were outstanding.

Deferred stock-based compensation is recorded for options and restricted stock grants for which the exercise or sale prices are lower than the deemed fair values for financial reporting purposes of the underlying common stock on the grant date. Deferred stock-based compensation also includes the fair value at grant date of options granted to non-employees and options which were remeasured to fair value on the date optionees’ status was changed from employee to consultant. Deferred stock-based compensation is amortized to expense over the vesting term of the options. To the extent that unvested options are forfeited, the balance of unamortized deferred stock-based compensation is reversed.

During the three months ended March 31, 2003 there was not any deferred stock-based compensation recorded and $0.1 million, was recorded during the first quarter 2002. Also during the three months ended March 31, 2003 and 2002, $0.01 million and $3.8 million, respectively, was reversed for unvested options, which were forfeited.

Amortization of deferred stock-based compensation was $0.7 million and $1.0 million for the three months ended March 31, 2003 and 2002, respectively. Deferred tax benefits were recorded in the amount of $0.1 million for the three months ended March 31, 2003 and 2002, in connection with amortization of deferred

LEXENT INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

stock-based compensation for nonqualified options. With respect to such deferred tax benefits, to the extent that nonqualified options are forfeited or are exercised when the fair value of the stock is lower than the deemed fair value of the stock for financial reporting purposes on the grant date ($22.80 per share), a portion of such deferred tax benefits would not be realized and such portion may be charged to expense. During the first three months ended March 31, 2003 and 2002, $0.2 million and $2.4 million of deferred tax assets was charged to expense in connection with forfeited options, respectively. For the three months ended March 31, 2003 such charges were offset by a corresponding reduction in the deferred tax asset valuation allowance.

In December 2002, the Financial Accounting Standards Board (“FASB”), issued Statement of Accounting Standards No. (“SFAS”) 148, “Accounting for Stock-Based Compensation — Transition Disclosure, An Amendment of FASB Statement No. 123”. This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of Statement No. 123 to require more prominent and more frequent disclosures in financial statements about the effects of the stock-based compensation. The provisions of SFAS 148 are effective for fiscal years ending after December 15, 2002. The adoption did not have a material impact on the Company’s results of operations or financial position and the additional required disclosures have been provided below.

The Company applies the Accounting Principles Board Opinion No. (“APB”) 25 “Accounting for Stock Issued to Employees,” and related interpretations, in accounting for its stock-based compensation plans. Accordingly, no compensation costs have been recognized for its stock option plans and its stock purchase plan. Had compensation cost for the Company’s stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with SFAS 123, the Company’s net loss and loss per share would have been increased to the pro forma amounts indicated below:



		Three Months Ended
		March 31,

		2003			2002


		(In thousands, except
		amounts per share)
Net loss as reported		$	(5,994	)	$	(6,729	)
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards net of related tax effects			(509	)		(564	)

Pro forma net loss		$	(6,503	)	$	(7,293	)

Basic and diluted net loss per share as reported:
	Basic	$	(0.14	)	$	(0.16	)

	Diluted	$	(0.14	)	$	(0.16	)

Basic and diluted pro forma net loss per share:
	Basic	$	(0.15	)	$	(0.17	)

	Diluted	$	(0.15	)	$	(0.17	)

10. Provision for Restructuring Charges

In 2002, the Company recorded $9.1 million in restructuring expense, primarily in connection with the closing of eleven offices and reduction in its workforce. The restructuring charges were comprised primarily of $6.5 million for obligations under leases for premises which the Company has vacated, $0.7 million for severance and related contractual obligations for approximately fifteen non-unionized personnel and executives in areas closed or scaled back, and $2.3 million for write-offs of property and equipment offset against a

LEXENT INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

reversal of $0.4 million for the unused restructure reserve for severance from 2001. During 2002 the Company scaled back its expansion plans and closed a number of offices, and changed its business plans to focus primarily on its traditional markets, including the New York metropolitan region, Washington D.C., and Florida.

A summary of the restructuring reserve at March 31, 2003, is as follows:


		Reserve							Reserve
		Balance at		Restructuring					Balance at
		December 31, 2002		Charges					March 31, 2003
		(including		Recorded in		Amounts			(including
		noncurrent		First Quarter		Charged to			noncurrent
		portion)		of 2003		the Reserve			portion)


		(In thousands)
Severance and related contractual obligations		$	639	$	—	$	(398	)	$	241
Lease obligations			9,921		—		(869	)		9,052
Property and equipment			29		—		(29	)		—

	Total	$	10,589	$	—	$	(1,296	)	$	9,293

11. Deferred Income Taxes

Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes” requires that a valuation allowance be established when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. Based on the Company’s performance in the past few years and the current challenging economic environment that has negatively impacted the Company’s operating results, the Company concluded that it was appropriate to establish a full valuation allowance for its net deferred tax assets at December 31, 2002. The Company is continuing to provide a full valuation allowance on future tax benefits until it can substantiate a level of profitability that demonstrates its ability to utilize the assets. Adjustments to increase or decrease the valuation allowance are charged or credited, respectively, to income tax expense. For the three months ended March 31, 2003, the Company recorded a charge to the provision for income taxes of approximately $38,000 primarily in connection with the state franchise taxes.

12. Recent Accounting Pronouncements

In December 2002, the Financial Accounting Standards Board (“FASB”), issued Statement of Accounting Standards No. (“SFAS”) 148, “Accounting for Stock-Based Compensation — Transition Disclosure, An Amendment of FASB Statement No. 123”. This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of Statement No. 123 to require more prominent and more frequent disclosures in financial statements about the effects of the stock-based compensation. The provisions of SFAS 148 are effective for fiscal years ending after December 15, 2002. The Company adopted SFAS 148 during the quarter ended December 31, 2002. The adoption did not have a material impact on the Company’s results of operations or financial position and the additional required disclosures are provided in Note 9 of “Notes to Condensed Consolidated Financial Statements”.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis provides information that should be read in conjunction with the historical condensed consolidated financial statements, including the notes thereto, included elsewhere in this Form 10-Q.

Overview

We are an infrastructure services company, which designs, deploys and maintains telecommunications, electrical, life safety and other systems. We deliver a full spectrum of services including engineering, program management, deployment and installation in certain local metropolitan markets. Our principal focus is to provide the expertise and resources our customers need to design, build, and operate their infrastructure systems. We generally offer our services 24 hours a day, 7 days a week.

During our most recent fiscal years, our customers included primarily competitive local exchange carriers, internet service providers and carriers’ carriers. Given the current market conditions in the telecommunications industry, we have taken steps to broaden our customer base to include large enterprise customers, the real estate community and government entities and to diversify our service offerings to include systems integration, electrical contracting, installation of security systems, and other infrastructure services.

We have offices in New York City, Washington D.C. metro, Boston metro, Long Island, and in the states of Florida, North Carolina and New Jersey.

Our two largest customers in the first quarter of 2003 were a general contractor in the NY metro area and AT&T. We generated 27.4% and 20.1%, respectively, of our revenues from each of these customers for the quarter ended March 31, 2003. Some of our key customers include IBM, general contractors in the New York metro area, and the Dormitory Authority of the State of New York.

Lexent was incorporated in Delaware in January 1998. Our wholly owned subsidiaries, Hugh O’Kane Electric Co., LLC, National Network Technologies LLC, Lexent Services, Inc., HOK Datacom, Inc., Lexent Capital, Inc., and Lexent Metro Connect LLC, were formed in June 1998, August 1998, May 2000, November 2000, July 2001 and March 2002, respectively. On August 22, 2002, Lexent Metro Connect was awarded a 15 year Franchise for Local High Capacity Telecommunications Services for the City of New York, which expires on or about August 22, 2017, unless terminated earlier.

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, substantially 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.

a hearing has been scheduled for May 29, 2003. The Company’s common stock will continue to be traded on the Nasdaq National Market pending the final decision by Nasdaq. There can be no assurance that the Nasdaq Listing Qualifications Panel will grant the Company’s request for continued listing on the Nasdaq National Market. In the event the Company’s common stock is delisted from the Nasdaq Stock Market, the stock would then trade on the Nasdaq’s OTC Bulletin Board. The delisting of the Company’s common stock from the Nasdaq National Market could result in a reduction in the market price and the liquidity of the Company’s common stock.

Critical Accounting Policies

Please refer to the description of our “Critical Accounting Policies” in the Management’s Discussion and Analysis section of our Form 10-K for the year ended December 31, 2002.

Results of Operations


	*First Quarter 2003 Compared to First Quarter 2002*

Revenues.Our revenues decreased by 35% to $20.3 million in the first quarter of 2003 from $31.3 million in the same period last year. The decrease in revenues was primarily a result of lower capital expenditures by several of our large telecommunications customers due to changing conditions in the telecommunications industry and the completion of the engineering, procurement and construction contract in the 4th quarter of 2002.

Cost of revenues.Our cost of revenues represented 111% of revenues in the first quarter of 2003 compared with 94% of revenues in the same period last year. The increased percentage was due in part to the cold winter causing a decrease in productivity and delays in completing projects, the establishment of job loss provisions due to revisions in estimates on certain electrical contracting projects and in part to pricing pressure. We anticipate that pricing pressure will continue during 2003.

General and administrative expenses.Our general and administrative expenses decreased 36% to $2.9 million in the first quarter 2003 from $4.4 million in the same period last year. The decrease is attributed to a reduction in wages and related benefits as a result of a headcount reduction, a reduction in rent and facilities expenses and a reduction in travel and related meals and entertainment.

Non-cash stock-based compensation.Amortization of deferred stock-based compensation declined to $0.7 million in the first quarter of 2003 from $1.0 million in the same period of last year. The decrease was attributed to the decrease in the unamortized balance of non-cash stock based compensation as a result of resignations, terminations and fully amortized balances.

Interest expense. Interest expense in the first quarter of 2003 was $0.03 million compared to $0.08 million in the same period last year. The decrease was due primarily to a lower average outstanding balance on equipment and vehicle loans and a subordinated note payable to a stockholder.

Interest income. Interest income in the first quarter of 2003 was $0.3 million compared to $0.4 million in the same period last year. The decrease was due to lower average prevailing interest rates during 2003.

Provision for income taxes. Based upon our performance in the past few years and the current challenging economic environment that has negatively impacted our operating results, we have established a full valuation allowance to fully offset deferred tax assets, including those related to tax carryforwards, at December 31, 2002 and to date, resulting in no income tax benefit for financial reporting purposes for the three months ended March 31, 2003. Additionally, in 2003, we recorded a charge to the provision of approximately $38,000 in connection with state franchise taxes. During the first quarter 2002, approximately $2.3 million of deferred tax benefits were charged to expense as a result of forfeited options.

Liquidity and Capital Resources

Net cash used by operations was $2.5 million for the first three months ended March 31, 2003, representing net collections of receivables offset by payments made for accounts payable and accrued

liabilities. Cash provided by investing activities was $1.1 million, representing $1.3 million of proceeds from the sale of investments, offset by $0.1 million for capital expenditures. Net cash used in financing activities was $0.7 million, comprised of repayments of $0.3 million for equipment and capital leases and $0.4 million of repayments on a subordinated note payable to a stockholder.

We have no material commitments other than installment obligations related to equipment purchases, leases for facilities, computer equipment and vehicles, and a subordinated note payable to a stockholder. We anticipate that available cash and cash equivalents and cash flows from operations will be sufficient to satisfy our working capital requirements for the foreseeable future. Our future working capital requirements and liquidity will depend upon many factors, including our customers’ financial condition and their ability to pay amounts owing to us, our ability to replace the revenues previously derived from several of our large telecommunications-carrier customers with revenue from other customers, and our ability to reduce costs at a rate commensurate with any reduction in revenues which we are unable to replace with new revenues.

In connection with the restructuring plan initiated during 2001, we recorded restructuring charges of $9.1 million during the year ended December 31, 2002. These charges primarily related to the expense associated with certain lease obligations, the write-offs of property, equipment and leasehold improvements, and severance costs related to our organizational restructuring, partially offset by the reduction to the 2001 accrual for restructuring costs. Refer to our audited consolidated financial statements and notes thereto for the year ended December 31, 2002 for further details and components of these charges. During the three months ended March 31, 2003, we had cash outflows of approximately $1.3 million, related to the expenses associated with certain lease obligations, property equipment and leasehold improvements and severance that were accrued for as of December 31, 2002. The current accrued liability for additional cash outflows, related to the expense associated with certain lease obligation and severance are payable as follows: $2.7 million throughout the remainder of 2003, $1.4 million during 2004, $1.2 million during 2005, $0.7 million during 2006, $0.8 million during 2007, 2008, 2009 and 2010, and $0.1 million during 2011.

Impact of Recently Issued Accounting Standards

In December 2002, the Financial Accounting Standards Board (“FASB”), issued Statement of Accounting Standards No. (“SFAS”) 148, “Accounting for Stock-Based Compensation — Transition Disclosure, An Amendment of FASB Statement No. 123”. This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of Statement No. 123 to require more prominent and more frequent disclosures in financial statements about the effects of the stock-based compensation. The provisions of SFAS 148 are effective for fiscal years ending after December 15, 2002. We adopted SFAS 148 during the quarter ended December 31, 2002. The adoption did not have a material impact on our results of operations or financial position and the additional required disclosures are provided in Note 9 of “Notes to Condensed Consolidated Financial Statements”.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Financial instruments, which potentially subject the Company to credit risk, consist primarily of cash, cash equivalents, available-for-sale investments, and trade receivables. Cash balances may at times, exceed amounts covered by FDIC insurance. The Company believes 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. The Company’s cash equivalents are diversified and consist primarily of investment grade securities with original maturities of three months or less. Investments are made in obligations of high-quality financial institutions, government and government agencies and corporations, thereby reducing credit risk concentrations. Interest rate fluctuations impact the carrying value of the portfolio.

Trade receivables are primarily short-term receivables from telecommunications companies and general contractor companies. To attempt 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 its evaluation of factors surrounding the credit risk of specific customers, historical trends, and other information.

For the first quarter 2003, the Company had revenues from two separate customers, which comprised 27% and 20%, respectively, of the Company’s total revenues.

We currently do not own any investments in publicly traded equity securities. Therefore, we do not currently have any direct equity market price risk.

We currently do not have any international operations, and we currently do not enter into forward exchange contracts or other financial instruments with respect to foreign currency. Accordingly, we currently do not have any foreign currency exchange rate risk.

Forward Looking Statements

This Quarterly Report on Form 10-Q contains both historical and forward-looking statements. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934. These forward-looking statements are only predictions and generally can be identified by use of statements that include phrases such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “foresee” or other words or phrases of similar import, including statements regarding the Company’s planned appeal of the Nasdaq notice of delisting and the outcome of such appeal. Similarly, statements that describe the Company’s objectives, plans or goals also are forward-looking statements. The Company’s operations are subject to certain risks and uncertainties that could cause actual results to differ materially from those contemplated by the relevant forward-looking statement. These risks are more fully outlined in the Company’s registration statement on Form S-1 and other SEC filings. The forward-looking statements included herein are made only as of the date of this Quarterly Report on Form 10-Q and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. No assurances can be given that projected results or events will be achieved.

Item 4. Controls and Procedures

Within the ninety days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company’s periodic SEC filings. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

PART II

OTHER INFORMATION


Item 1.	*Legal Proceedings*

See Note 8 to the unaudited interim condensed consolidated financial statements.


Item 5.	*Other Information*

On February 18, 2003, the Company announced that it had received an offer from a buying group, which includes Hugh J. O’Kane, Jr. and Kevin M. O’Kane, to purchase all outstanding shares of the Company not owned by the buying group for $1.25 per share. The Company’s Board of Directors currently consists solely of

Hugh J. O’Kane, Jr. and Kevin M. O’Kane. As a result of the absence of independent members from the Company’s Board of Directors, Lexent retained Rodman & Renshaw, Inc., a New York based investment-banking firm, as an independent advisor to assist in evaluating and responding to the offer. The evaluation by Rodman & Renshaw is ongoing.

In addition, as previously announced, the Nasdaq Stock Market has been reviewing the Company’s eligibility for continued listing on Nasdaq because the Company does not currently meet the independent director and audit committee requirements for continued listing on the Nasdaq Stock Market. On April 23, 2003, the Company received a Nasdaq Staff Determination stating that the Company’s common stock is subject to delisting from the Nasdaq National Market for failing to meet such requirements for continued listing in accordance with Marketplace Rules 4350(c) and 4350(d)(2). The Company filed a request for a hearing before the Nasdaq Listing Qualifications Panel to appeal the delisting determination, and a hearing has been scheduled for May 29, 2003. The Company’s common stock will continue to be traded on the Nasdaq National Market pending the final decision by Nasdaq. There can be no assurance that the Nasdaq Listing Qualifications Panel will grant the Company’s request for continued listing on the Nasdaq National Market. In the event the Company’s common stock is delisted from the Nasdaq Stock Market, the stock would then trade on the Nasdaq’s OTC Bulletin Board. The delisting of the Company’s common stock from the Nasdaq National Market could result in a reduction in the market price and the liquidity of the Company’s common stock.


Item 6.	*Exhibits and Reports on Form 8-K*

Exhibits:


	Exhibit 99.1	Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

	Exhibit 99.2	Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Reports:

Reports on Form 8-K

On February 5, 2003, the Company announced the resignation of L. White Matthews, III, from the Board of Directors of the Company.

On February 13, 2003, the Company announced the resignation of Kathleen Perone from the Board of Directors of the Company.

On February 13, 2003, the Company announced the resignation of Richard L. Schwob from the Board of Directors of the Company.

On February 20, 2003, the Company announced the resignation of Richard W. Smith from the Board of Directors of the Company.

On March 4, 2003, the Company announced the retention of Rodman & Renshaw, Inc., a New York based investment-banking firm, as an independent advisor to assist in evaluating and responding to the proposed buyout offer.

On March 12, 2003, the Company announced the receipt of a letter from the Nasdaq Stock Market notifying the Company that it does not currently meet the independent director and audit committee requirements for continued listing on Nasdaq and requesting information from the Company.

On April 28, 2003, the Company furnished an 8-K for the announcement of its earnings for the three months ended March 31, 2003 and the receipt of a Nasdaq Staff Determination stating that the Company’s common stock is subject to delisting from the Nasdaq National Market for failing to meet the independent director and audit committee requirements for continued listing in accordance with the rules of the Nasdaq Stock Market.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused the report to be signed on its behalf by the undersigned thereunto duly authorized.


		By: /s/ KEVIN M. O’KANE Kevin M. O’Kane Chief Executive Officer, on behalf of Registrant

Dated: May 2, 2003

		By: /s/ NORMAN G. FORNELLA Norman G. Fornella Executive Vice President & Chief Financial Officer

Dated: May 2, 2003

CERTIFICATION

I, Kevin O’Kane, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Lexent Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:


	a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):


	a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


	/s/ KEVIN O’KANE
	Kevin O’Kane Chief Executive Officer

Date: May 2, 2003

CERTIFICATION

I, Norman Fornella, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Lexent Inc.;


	a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;


	a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


	/s/ NORMAN G. FORNELLA

	Norman G. Fornella
	Executive Vice President & Chief Financial Officer

Date: May 2, 2003

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	7th grade Avg

Lexent (LXNT) Inactive 10-Q2003 Q1 Quarterly report

Content analysis

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents