SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED MARCH 31, 2002.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURI-
TIES 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 (I.R.S. Employer Identification No.)
incorporation or organization)
Three New York Plaza
New York, New York 10004
- -------------------------------------------------------------------------
(Address of principal executive offices) (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 X No
---- ----
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,
41,798,616 shares outstanding as of May 9, 2002.
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, 2002
(unaudited) and December 31, 2001 3
Condensed Consolidated Statements of Operations (unaudited) for
the Three Months Ended March 31, 2002 and March 31, 2001 4
Condensed Consolidated Statements of Cash Flows (unaudited) for the
the Three Months Ended March 31, 2002 and March 31, 2001 5
Notes to Condensed Consolidated Financial Statements 6-10
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 11-13
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 13
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 14
ITEM 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
2
PART I. FINANCIAL INFORMATION
ITEM 1: Financial Statements
LEXENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
March 31, December 31,
2002 2001
---- ----
Assets: (unaudited)
Current Assets:
Cash and cash equivalents $ 82,294 $ 75,839
Available-for-sale securities 419 4,932
Receivables, net 34,441 41,171
Prepaid expenses and other current assets 5,833 5,220
Deferred tax asset, net 23,425 25,627
--------- ---------
Total current assets 146,412 152,789
Property and equipment, net 11,594 12,896
Other assets 2,427 2,830
--------- ---------
Total assets $ 160,433 $ 168,515
========= =========
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable $ 6,929 $ 6,751
Accrued liabilities 10,756 13,635
Billings in excess of costs and estimated
earnings on uncompleted projects 1,238 474
Subordinated note payable to stockholder 1,582 1,582
Equipment and capital lease obligations 1,169 1,351
--------- ---------
Total current liabilities 21,674 23,793
Subordinated note payable to stockholder 1,582 1,978
Accrued liabilities - noncurrent 4,254 4,093
Equipment and capital lease obligations 443 682
--------- ---------
Total liabilities 27,953 30,546
--------- ---------
Stockholders' equity:
Common stock, $.001 par value, 120,000,000
shares authorized, 41,740,251 and
41,612,372 shares outstanding at 2002
and 2001, respectively 42 42
Additional paid-in capital 155,606 158,986
Deferred stock-based compensation (4,405) (9,085)
Accumulated other comprehensive income - 60
Accumulated deficit (18,763) (12,034)
---------- ----------
Total stockholders' equity 132,480 137,969
--------- ---------
Total liabilities and stockholders' equity $ 160,433 $ 168,515
========= =========
See accompanying notes to condensed consolidated financial statements.
3
LEXENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
(unaudited)
For the Three Months Ended March 31,
2002 2001
---- ----
Revenues $ 31,313 $ 72,105
Cost of revenues 29,435 58,663
General and administrative expenses 4,195 6,432
Depreciation and amortization 1,289 1,311
Non-cash stock-based compensation* 1,021 2,244
Provision for doubtful accounts* 237 15,775
Restructuring charges 1,441 5,946
-------- ---------
Operating loss (6,305) (18,266)
Interest expense 76 284
Interest income (359) (799)
Other expense, net 1,408 393
-------- ---------
Loss before income taxes (7,430) (18,144)
Income tax benefit (701) (8,202)
-------- --------
Net loss $ (6,729) $ (9,942)
======== =========
Net loss per share:
Basic and diluted $ (0.16) $ (0.24)
======== =========
Weighted average common shares outstanding:
Basic and diluted 41,699 41,189
======== =========
* Substantially all of these amounts would have been classified as general and
administrative expenses.
See accompanying notes to condensed consolidated financial statements.
4
LEXENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
For the Three Months Ended
March 31,
2002 2001
---- ----
Cash flows from operating activities:
Net loss $ (6,729) $ (9,942)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Restructuring charges 1,441 5,946
Depreciation and amortization 1,289 1,311
Provision for uncollectible accounts 237 15,775
Loss (gain) on investment/disposition of assets 1,408 (3)
Non-cash stock-based compensation 1,021 2,244
Provision for deferred tax benefits 2,253 (8,202)
Changes in working capital items:
Receivables 6,493 (2,212)
Prepaid expenses and other current assets 632 (97)
Other assets 403 122
Accounts payable 178 1,671
Accrued liabilities (3,856) (7,054)
Income taxes payable and prepaid taxes (1,245) (7,510)
Billings in excess of costs and estimated earnings on 764 (1,764)
uncompleted projects -------- -------
Net cash provided by (used in) operating activities 4,289 (9,715)
-------- --------
Cash flows from investing activities:
Capital expenditures, net of equipment loans and capital
leases (300) (2,627)
Investments in securities 3,003 (1,655)
-------- ----------
Net cash provided by (used in) investing activities 2,703 (4,282)
-------- ----------
Cash flows from financing activities:
Exercise of stock options and stock purchase plan 279 91
Repayment of subordinated note payable to stockholder (396) (396)
Repayments of equipment loans and capital leases (420) (401)
--------- ----------
Net cash used in financing activities (537) (706)
--------- ----------
Net increase (decrease) in cash and cash equivalents 6,455 (14,703)
Cash and cash equivalents at beginning of period 75,839 63,690
-------- ---------
Cash and cash equivalents at end of period $ 82,294 $ 48,987
======== =========
Supplemental cash flow information:
Cash paid for:
Interest $ 83 $ 237
Income and franchise taxes 96 7,510
Supplemental disclosures of noncash investing and financing activities:
Property and equipment additions financed by capital leases $ - $ 74
See accompanying notes to condensed consolidated financial statements.
5
LEXENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(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, 2002 and the results of its operations and
cash flows for the periods ended March 31, 2002 and March 31, 2001. 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, 2001. The results of operations for the three
months ended March 31, 2002 are not necessarily indicative of the results of
operations to be expected for the year ending December 31, 2002.
1. Net Loss Per Share
Basic 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:
LEXENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(unaudited)
Three Months Ended March 31,
2002 2001
---- ----
(in thousands, except per share amounts)
Net loss per share-basic:
Net loss.......................................... $ (6,729) $ (9,942)
======== ========
Weighted average shares-basic..................... 41,699 41,189
======== ========
Net loss per share-basic.......................... $ (0.16) $ (0.24)
======== ========
Net loss per share-diluted:
Net loss.......................................... $ (6,729) $ (9,942)
======== ========
Weighted average shares-basic..................... 41,699 41,189
Dilutive effect of stock options.................. 1,121 1,301
Dilutive effect of employee stock purchase plan... 4 -
-------- --------
Weighted average shares-diluted................... 42,824 42,490
========= ========
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.
6
LEXENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(unaudited)
2. RECEIVABLES, NET
March 31, December 31,
2002 2001
---- ----
(in thousands)
Accounts receivable - billed to customers.............. $ 36,685 $ 42,237
Unbilled receivables on completed projects accounted
for under the completed contract method........... 1,461 3,734
Costs and estimated earnings in excess of billings on
projects accounted for under the percentage-of-
completion method.................................. 5,745 2,852
Unbilled receivables on cost-plus contracts............. 1,469 4,793
Costs of uncompleted projects accounted for under the
completed contract method.......................... 2,461 2,457
Retainage............................................... 725 736
----------- ----------
48,546 56,809
Less allowance for uncollectible amounts............... (14,105) (15,638)
----------- ----------
$ 34,441 $ 41,171
=========== ==========
The amounts written off against the allowance for the three months
ended March 31, 2002 and 2001 were $1.7 million and $1.5 million, respectively.
Amounts retained by customers related to projects that are
progress-billed may be outstanding for periods that exceed one year.
3. INVESTMENTS
Available-for-sale securities at December 31, 2001 represented the
market value at that date of publicly traded shares of common stock received
from a customer in October 2001 in partial settlement of a receivable.
Realization of the carrying value of such shares depends on the market price on
the date the shares are sold. The Company is exposed to the risk of market loss
with respect to such shares. One half of such shares could be sold on or after
January 2, 2002 and the other half on or after April 2, 2002. The Company sold
half of the shares during January 2002 for a net gain of $0.6 million. With
respect to the other half of such shares, a net loss of $2.0 million was accrued
as a permanent impairment as of March 31, 2002. See Note 11. Net gains and
losses on investments are included in "Other expense, net."
4. ACCUMULATED OTHER COMPREHENSIVE INCOME
Statement of Financial Accounting Standards (SFAS) 130, "Reporting
Comprehensive Income," requires that financial statements report comprehensive
income and its components. Comprehensive income includes, among other things,
net income (loss) and unrealized gains and losses from investments in
available-for-sale securities, net of income tax effect.
Changes in the components of accumulated other comprehensive income for
first quarter of 2002 is as follows:
Unrealized gain on Accumulated other
available-for-sale comprehensive income
securities
(in thousands)
Balance, December 31, 2001..... $ 60 $ 60
Change for first quarter 2002.. (60) (60)
---------- ----------
Balance, January 31, 2002...... $ - $ -
========== ==========
7
LEXENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(unaudited)
5. EMPLOYEE STOCK PURCHASE PLAN
In August 2001, the Company established an employee stock purchase plan
("ESPP") through which employees may purchase shares of common stock through
payroll deductions. The price paid by an employee is 85% of the lesser of the
market value on the offering date or the last day of each purchase period. There
are two 6-month purchase periods in each year, commencing August 1, 2001. The
market value was $5.38 per share on the first offering date (August 1, 2001) and
$5.85 per share on the second offering date (February 1, 2002). Employees may
purchase up to 1,000 shares in each purchase period. Under the ESPP, 2,500,000
shares were authorized and available for issuance. At the end of the first
purchase period (January 31, 2002), 49,791 shares were issued at a purchase
price of $4.57. At March 31, 2002, 20,733 shares are issuable to employees based
on payroll deductions of $0.1 million through that date.
6. RELATED PARTY TRANSACTIONS
During January 2002, the Company repaid $0.4 million plus accrued
interest on a subordinated note payable to a common stockholder.
The Company leases a building for office and warehouse purposes in New
York City and a warehouse building in South Plainfield, NJ from entities owned
by its two principal common stockholders and another common stockholder. Rent
expense for these premises totaled $0.1 million for the three months ended March
31, 2002.
In May 2000, the Company entered into a ten-year lease for a garage and
warehouse facility in Long Island City, New York. The lease payments totaled
$0.2 million for the three months ended March 31, 2002. The facility is leased
from an entity owned by the Company's two principal common stockholders.
7. CONTINGENCIES
From time to time, the Company is involved in various suits and legal
proceedings, which arise in the ordinary course of business. Included in these
proceedings are several employment related lawsuits or administrative complaints
that have been filed alleging wrongful termination, breach of contract or
employment discrimination. There was also a class action suit filed in October
2001 against the Company, certain of its senior executive and its underwriters,
alleging violation of the Securities law in connection with the initial public
offering. The Company believes that these claims are without merit and is
vigorously defending its position. Management currently believes that resolving
these matters will not have a material adverse impact on the Company's financial
position or results of operations, although the ultimate outcome of these
matters cannot be determined at this time.
The Company has been served with a complaint by three electrical
contractors alleging a conspiracy among certain contractors (including the
Company) and the International Brotherhood of Electrical Workers, Local Union
Number 3, AFL-CIO. The suit alleges violations of the federal Sherman Antitrust
Act and state laws and claims that defendants exercise market power restricting
the ability of plaintiffs, who employ workers from the Communications Workers of
America, from performing telecommunications services work in the New York
metropolitan area. As the Company has only recently been served, it is too early
to assess the ultimate outcome of this complaint.
8. STOCK OPTIONS AND AWARDS
On September 24, 2001, pursuant to an offer by the Company to exchange
outstanding options with exercise prices of $13.50 or higher for new options, a
total of 1,743,700 options were tendered and were canceled. On March 25, 2002,
the Company granted 1,343,425 new options to optionees who were still employed
on that date. The exercise price of the new options was $3.03 based on the
closing market price on March 25, 2002, and the new options will vest as if the
tendered options had not been canceled.
8
LEXENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(unaudited)
In addition to the aforementioned, during the three months ended March
31, 2002, options to purchase 692,500 common shares were granted. As of March
31, 2002, options to purchase 5,573,239 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 first quarter of 2002 and 2001, $0.1 million and $2.2
million, respectively, of deferred stock-based compensation was recorded. Also
during the first quarter of 2002 and 2001, $3.8 million and $7.6 million,
respectively, was reversed for unvested options which were forfeited.
Amortization of deferred stock-based compensation was $1.0 million and
$2.2 million for the first quarter of 2002 and 2001, respectively. Deferred tax
benefits were recorded in the amounts of $0.1 million and $0.9 million for the
first quarter of 2002 and 2001, respectively, in connection with amortization of
deferred 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 quarter of 2002, $2.2
million of deferred tax assets was charged to expense in connection with
forfeited options.
9. PROVISION FOR RESTRUCTURING CHARGES
During the first quarter of 2001, the Company recorded $5.9 million of
restructuring charges primarily in connection with the closing and/or scaling
back of operations in regional offices. During the first quarter of 2002, the
Company recorded $1.4 million in restructuring charges in connection with the
closing of an office and a further reduction of the workforce. The restructuring
charges in the first quarter of 2002 are comprised of $0.9 million of
obligations under leases for the vacated premises and excess vehicles to be paid
over various lease terms up to three years, $0.4 million of severance and
related contractual obligations to be paid over various periods up to one year,
and $0.2 million for writeoffs of property and equipment, which will not require
future cash outlays.
A summary of the restructuring reserve at March 31, 2002, is as
follows:
Reserve Reserve
Balance at Restructuring Balance at
January 1, 2002 Charges Recorded in Amounts March 31, 2002
(including noncurrent First Quarter of Charged to (including noncurrent
portion) 2002 the Reserve portion)
-------- ---- ----------- --------
(in thousands)
Severance and related
contractual obligations. $1,751 $ 360 $ (666) $1,445
Lease obligations......... 7,591 896 (957) 7,530
Property and equipment.... - 185 (185) -
------ ------ -------- ------
Total................. $9,342 $1,441 $ (1,808) $8,975
====== ====== ======== ======
9
LEXENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(unaudited)
10. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued SFAS 141
"Business Combinations" and SFAS 142 "Goodwill and Other Intangible Assets,"
which became effective for the Company beginning January 1, 2002. SFAS 141
requires that all business combinations initiated after June 30, 2001 be
accounted for under the purchase method of accounting. SFAS 142 provides that
intangible assets with finite lives must be amortized over their estimated
useful life, and intangible assets with indefinite lives will not be amortized
but will be evaluated annually for impairment. Adoption of SFAS 142 is not
expected to have a material effect on the Company's results of operations or
financial position.
In October 2001, the Financial Accounting Standards Board issued SFAS
144 "Accounting for the Impairment or Disposal of Long-Lived Assets." This
statement defines the accounting and reporting for the impairment and disposal
of long-lived assets and became effective for the Company on January 1, 2002.
The Company does not expect this statement to have a material effect on its
results of operations or financial position.
11. SUBSEQUENT EVENT
On April 2, 2002, the Company sold its remaining shares of common stock
received from a customer in October 2001 in partial settlement of a receivable
for a net loss of $2.0 million. That amount was accrued as a permanent
impairment as of March 31, 2002 and recorded as a loss in "Other expense, net."
See Note 3.
10
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
Lexent Inc. is 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,
management, deployment and installation in 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, seven (7) days a week.
During our most recent three 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.
For the quarter ended March 31, 2002, approximately 77% of our revenues
was earned from services provided in the New York metropolitan region, including
New York City, New Jersey, Long Island and Westchester. Our customers for the
design and deployment of telecommunications networks include 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 quarter ended March 31, 2002, we derived approximately 20% of
our revenues from our largest customer and 17% 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. Several of our
telecommunications-carrier customers who provided us with significant revenues
in the past have experienced financial difficulties and have curtailed their
capital expenditures. As a result, revenues from those customers have declined
and we do not expect to continue to derive future revenue from those customers.
We intend to derive other revenues by providing our services to new customers,
but no assurance of our success in replacing those revenues can be given.
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, 2001.
RESULTS OF OPERATIONS
FIRST QUARTER 2002 COMPARED TO FIRST QUARTER 2001
Revenues. Our revenues decreased by 57% to $31.3 million in the first
quarter of 2002 from $72.1 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 filing for bankruptcy by a number of our
telecommunications customers during 2001. During 1999, we entered into an
engineering, procurement and construction contract (the "EPC contract") with one
of our largest customers, Level 3 Communications, under which we recorded
approximately $4.6 million and $8.1 million of revenues for first quarter of
2002 and 2001, respectively. The EPC contract was completed for all markets
11
except New York and Boston during 2001, and is expected to be fully completed
during 2002, and accordingly, revenues from the EPC contract will be lower in
2002 than in 2001.
Cost of revenues. Our cost of revenues represented 94% of revenues in
the first quarter of 2002 compared with 81% of revenues in the same period last
year. The increased percentage was due in part to fixed overhead costs which
represented a higher percentage of a lower level of revenues, and in part to
pricing pressure. We anticipate that pricing pressure will continue during 2002.
Costs of approximately $3.8 million and $6.9 million were incurred during the
first quarter of 2002 and 2001, respectively, in connection with the EPC
contract.
General and administrative expenses. Our general and administrative
expenses decreased 35% to $4.2 million in the first quarter of 2002 from $6.4
million in the same period last year. The decrease was primarily due to a
reduction in wages and related benefits as a result of a reduction in headcount,
a reduction in rent expense and a reduction in travel and related meals and
entertainment.
Non-cash stock-based compensation. Amortization of deferred stock-based
compensation declined to $1.0 million in the first quarter of 2002 from $2.2
million in the same period of last year. The decrease was due to the reversal in
the first quarter of 2002 of $3.8 million of deferred stock-based compensation
for unvested options forfeited during that period, and the reversal on March 31,
2001 of $7.6 million with respect to an optionee whose status was changed from
employee to consultant on that date.
Interest expense. Interest expense in the first quarter of 2002 was
$0.1 million compared to $0.3 million in the same period last year. The decrease
was due primarily to the repayment of our outstanding bank loan and termination
of the credit facility during the last quarter of 2001, and in part to a lower
average outstanding level of equipment and vehicle loans and a subordinated note
payable to a stockholder.
Interest income. Interest income in the first quarter of 2002 was $0.4
million compared to $0.8 million in the same period last year. The decrease was
due to lower average prevailing interest rates during 2002.
Provision for income taxes. Excluding tax benefits related to
amortization of deferred stock-based compensation, 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. Deferred tax benefits of $0.1 million and $0.9
million were recorded in the first quarter of 2002 and 2001, respectively, in
connection with amortization of deferred stock-based compensation for
nonqualified options. Tax benefits are not applicable to incentive options. With
respect to deferred tax benefits recorded for nonqualified options, to the
extent such 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 quarter of 2002, $2.3 million of deferred tax benefits were
charged to expense as a result of forfeited options. That expense charge offset
the tax benefits recorded in connection with our pre-tax loss, and as a result,
our total effective tax rate for financial reporting purposes was 9% for the
first quarter 2002, compared with 45% for the first quarter of 2001.
Restructuring charges. During the first quarter of 2001, we recorded
restructuring charges of $5.9 million primarily in connection with the closing
of seven offices and reduction in our workforce. During the first quarter of
2002, we recorded $1.4 million of restructuring charges in connection with the
closing of an office and an additional reduction of the workforce. The
restructuring charges in the first quarter of 2002 were comprised of $0.9
million of obligations under leases for the closed office and excess vehicles to
be paid over various lease terms up to three years, $0.4 million of severance
and related contractual obligations to be paid over various periods up to one
year, and $0.2 million for writeoffs of property and equipment, which will not
require future cash outlays. We may potentially record additional restructuring
12
charges in future periods depending on our ability to replace the revenues
previously derived from several of our large telecommunications-carrier
customers with revenues 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.
Liquidity and Capital Resources
Net cash provided by operations was $4.3 million for the quarter ended
March 31, 2002, representing net collections of receivables offset by payments
made for accrued liabilities. Cash provided by investing activities was $2.7
million, representing $3.0 million of proceeds from the sale of shares of common
stock received from a customer in October 2001 in partial settlement of a
receivable, offset by $0.3 million for capital expenditures. Net cash used in
financing activities was $0.5 million, comprised of repayments of $0.4 million
for equipment and capital leases and $0.4 million of repayments on a
subordinated note payable to a stockholder, offset by $0.3 million in proceeds
from exercises of stock options and the ESPP.
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.
ITEM 3. 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, 2002, we had cash and cash equivalents of $82.3
million. Cash equivalents are 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 Form 10-Q 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 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
13
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. 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. 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.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
See Note 7 to the unaudited interim condensed financial statements.
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
--------
None.
(b) Reports:
--------
Reports on Form 8-K
-------------------
Report on Form 8-K, dated March 6, 2002, reporting the
resignation of Joseph Haines, Executive Vice President, Operations.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
LEXENT INC.
(Registrant)
By: /s/ KEVIN O'KANE
-----------------------------------
Kevin O'Kane
President and
Chief Executive Officer, on
behalf of the Registrant
By: /s/ JONATHAN H. STERN
------------------------------
Jonathan H. Stern
Executive Vice President and
Chief Financial Officer
May 10, 2002