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 SEPTEMBER 30, 2001.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 000-31105
LEXENT INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3990223
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Three New York Plaza
New York, New York 10004
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(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,
41,600,561 shares outstanding as of November 1, 2001.
<Page>
LEXENT INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 2001 (unaudited) and December 31, 2000 3
Condensed Consolidated Statements of Operations
(unaudited) for the Three and Nine Months Ended
September 30, 2001 and September 30, 2000 4
Condensed Consolidated Statements of Cash Flows
(unaudited) for the Nine Months Ended September 30, 2001
and September 30, 2000 5
Notes to Condensed Consolidated Financial Statements 6-9
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-12
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
<Page>
PART I. FINANCIAL INFORMATION
ITEM 1: Financial Statements
LEXENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
<Table>
<Caption>
September 30, December 31,
2001 2000
---- ----
Assets: (unaudited)
Current Assets:
Cash and cash equivalents $ 69,951 $ 63,690
Receivables, net 61,946 105,253
Prepaid expenses and other current assets 4,643 400
Deferred tax asset, net 19,964 12,359
--------- ---------
Total current assets 156,504 181,702
Property and equipment, net 15,883 14,614
Other assets 4,056 2,685
--------- ---------
Total assets $ 176,443 $ 199,001
========= =========
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable $ 9,527 $ 11,124
Accrued liabilities 14,214 17,857
Income taxes payable - 3,628
Billings in excess of costs and estimated
earnings on uncompleted projects 1,445 5,080
Subordinated note payable to stockholder 1,582 1,582
Equipment and capital lease obligations 1,522 1,596
Due to related parties 24 24
--------- ---------
Total current liabilities 28,314 40,891
Subordinated note payable to stockholder 2,374 3,561
Notes payable to banks - 2,000
Equipment and capital lease obligations 982 2,068
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Total liabilities 31,670 48,520
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Stockholders' equity:
Common stock, $.001 par value, 120,000,000 shares authorized,
41,598,682 and 41,084,300 shares outstanding at 2001 and 2000,
respectively 42 41
Additional paid-in capital 158,573 165,919
Deferred stock-based compensation (10,312) (22,705)
Retained earnings (accumulated deficit) (3,530) 7,226
---------- ---------
Total stockholders' equity 144,773 150,481
--------- ---------
Total liabilities and stockholders' equity $ 176,443 $ 199,001
========= =========
</Table>
See accompanying notes to condensed consolidated financial statements.
3
<Page>
LEXENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
(unaudited)
<Table>
<Caption>
For the Three Months For the Nine Months Ended
Ended September 30, September 30,
2001 2000 2001 2000
----- ----- ----- ----
Revenues $ 49,189 $ 82,412 $ 188,338 $ 203,649
Cost of revenues 40,938 61,030 151,800 151,077
General and administrative expenses 4,366 5,712 16,675 14,673
Depreciation and amortization 1,527 892 4,278 2,339
Non-cash stock-based compensation* 1,269 2,244 4,800 23,915
Provision for doubtful accounts* 475 632 23,959 1,716
Restructuring charges - - 5,946 -
-------- -------- --------- ---------
Operating income (loss) 614 11,902 (19,120) 9,929
Interest expense 253 283 709 1,017
Interest income (575) (877) (1,915) (890)
Other (income) expense, net (72) (6) 447 1
--------- --------- --------- ---------
Income (loss) before income taxes 1,008 12,502 (18,361) 9,801
Provision for (benefit from) income
taxes 714 5,762 (7,605) 7,756
-------- -------- ---------- ---------
Net income (loss) $ 294 $ 6,740 $ (10,756) $ 2,045
======== ========= ========== =========
Net income (loss) per share:
Basic $ 0.01 $ 0.19 $ (0.26) $ 0.06
======= ======== ========= =========
Diluted $ 0.01 $ 0.16 $ (0.26) $ 0.05
======= ======== ========= =========
Weighted average common shares outstanding:
Basic 41,572 35,124 41,396 27,429
======= ======== ======= =========
Diluted 42,777 40,854 ** 37,339
======= ======== =========
</Table>
* Substantially all of these amounts would have been classified as general and
administrative expenses.
** Anti-dilutive, therefore, not presented.
See accompanying notes to condensed consolidated financial statements.
4
<Page>
LEXENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
<Table>
<Caption>
For the Nine Months
Ended September 30,
2001 2000
---- ----
Cash flows from operating activities:
Net (loss) income $ (10,756) $ 2,045
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Restructuring charges 5,946 -
Depreciation and amortization 4,278 2,339
Provision for uncollectible accounts 23,959 1,716
Loss on disposition of assets 108 18
Non-cash stock-based compensation 4,800 23,915
Provision for deferred tax benefits (7,605) (6,844)
Changes in working capital items:
Receivables 19,348 (42,258)
Prepaid expenses and other current assets (193) (786)
Other assets 81 (376)
Accounts payable (1,597) 9,149
Accrued liabilities (9,459) 8,989
Income taxes payable and prepaid taxes (7,678) (3,495)
Billings in excess of costs and estimated earnings on (3,635) 3,734
uncompleted projects --------- ----------
Net cash provided by (used in) operating activities 17,597 (1,854)
--------- ----------
Cash flows from investing activities:
Capital expenditures, net of equipment loans and capital
leases (5,507) (6,819)
Proceeds from sale of fixed assets - 13
Investments in securities (1,655) -
---------- ---------
Net cash used in investing activities (7,162) (6,806)
---------- ----------
Cash flows from financing activities:
Proceeds from exercise of stock options and sales of
restricted stock 248 5,905
Preferred dividends paid - (1,087)
Proceeds from initial public offering of common shares - 96,255
Payments of equity issuance costs - (2,260)
Repayments of subordinated note payable to stockholders (1,187) (1,577)
Net repayments under revolving credit line (2,000) (6,841)
Net payments to related parties - (191)
Repayments of equipment loans and capital leases (1,235) (940)
---------- ----------
Net cash (used in) provided by financing activities (4,174) 89,264
---------- ---------
Net increase in cash and cash equivalents 6,261 80,604
Cash and cash equivalents at beginning of period 63,690 1,158
--------- ---------
Cash and cash equivalents at end of period $ 69,951 $ 81,762
========= =========
Supplemental cash flow information:
Cash paid for:
Interest $ 693 $ 1,093
Income taxes 7,685 18,094
Supplemental disclosures of noncash investing and financing activities:
Property and equipment additions financed by equipment - 1,826
loans and capital leases $ 74 $ -
Accrued dividends on preferred shares - 104
Reduction in deferred stock-based compensation 7,593 -
</Table>
See accompanying notes to condensed consolidated financial statements.
5
<Page>
LEXENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(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 September 30, 2001 and the results of its operations
and cash flows for the periods ended September 30, 2001 and September 30, 2000.
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, 2000. The results of operations for the
three and nine months ended September 30, 2001 are not necessarily indicative of
the results of operations to be expected for the year ending December 31, 2001.
1. Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income
(loss) (after deducting dividends paid on preferred stock) by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution of other securities by assuming the
redeemable convertible preferred stock had been converted into common stock as
of the beginning of the fiscal period presented (and without deducting from net
income (loss) dividends paid on preferred stock), and 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:
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
(in thousands, except per share amounts)
Net income (loss) per share-basic:
Net income (loss).......................................... $ 294 $ 6,740 $ (10,756) $ 2,045
Less: preferred dividends................................. - (53) - (397)
-------- -------- --------- --------
Net income (loss) available to common
shareholders.......................................... $ 294 $ 6,687 $ (10,756) $ 1,648
======== ======== ========== ========
Weighted average shares-basic.......................... 41,572 35,124 41,396 27,429
======== ======== ========== ========
Net income (loss) per share-basic....................... $ 0.01 $ 0.19 $ (0.26) $ 0.06
======== ========= =========== ========
Net income (loss) per share-diluted:
Net income (loss)....................................... $ 294 $ 6,740 * $ 2,045
======== ======== ========== ========
Weighted average shares-basic.......................... 41,572 35,124 41,396 27,429
Assumed conversion of preferred stock.................. - 3,272 - 7,634
Dilutive effect of stock options....................... 1,200 2,458 1,232 2,276
Dilutive effect of employee stock purchase plan.. 5 - 5 -
-------- -------- ---------- --------
Weighted average shares-diluted....................... 42,777 40,854 42,633 37,339
======== ======== ========== ========
Net income (loss) per share-diluted.................... $ 0.01 $ 0.16 * $ 0.05
======== ======== ========== ========
</Table>
* 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
<Page>
2. RECEIVABLES, NET
<Table>
<Caption>
2001 2000
---- ----
(in thousands)
Accounts receivable - billed to customers..................... $ 69,010 $ 73,009
Unbilled receivables on completed projects accounted
for under the completed contract method.................. 4,516 16,839
Costs and estimated earnings in excess of billings on
projects accounted for under the percentage-of-
completion method........................................ 3,596 4,238
Unbilled receivables on cost-plus contracts................... 4,696 5,426
Costs of uncompleted projects accounted for under the
completed contract method................................ 4,848 10,572
Retainage..................................................... 1,182 2,446
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87,848 112,530
Less allowance for uncollectible amounts...................... (25,902) (7,277)
----------- -----------
$ 61,946 $ 105,253
=========== ===========
</Table>
The amounts written off against the allowance for the nine months ended
September 30, 2001 and 2000 were $5.3 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
In February 2001, the Company purchased 1,000,000 shares of Series C
Preferred Stock of Telseon Inc. for an aggregate cost of $1.6 million. Also see
Note 12 below ("Subsequent Event") in connection with common stock of Metromedia
Fiber Network, Inc. received by the Company in partial satisfaction of an
outstanding receivable.
4. 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 the purchase period. There
are two 6-month purchase periods in each year, commencing August 1, 2001. The
market value on the first offering date was $5.38 per share. 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 September 30, 2001, 22,404
shares are issuable to employees based on payroll deductions of $0.1 million
through that date.
5. BANK CREDIT FACILITY
During the 3rd quarter of 2001, the Company repaid its outstanding loan
of $2.0 million under its $50 million collateralized revolving credit facility,
which expires in November 2003. Under the terms of the credit agreement, the
Company must meet specified thresholds with respect to profitability, net worth
and fixed charge coverage ratios. At September 30, 2001, the Company did not
meet certain of these thresholds. The Company is currently negotiating with the
banks to obtain revisions to its credit agreement.
7
<Page>
6. RELATED PARTY TRANSACTIONS
During the nine months ended September 30, 2001, the Company repaid
$1.2 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 $0.3 million for the nine months ended
September 30, 2001.
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
$0.5 million for the nine months ended September 30, 2001. 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 lawsuits and
legal proceedings, which arise in the ordinary course of business. The Company
estimates that these lawsuits will not have a material adverse effect on its
financial condition or results of operations. In addition, in April 2001, the
Company filed a lawsuit against Network Plus, Inc. ("NWP") seeking payment of
$2.2 million for services rendered. NWP has denied that said amounts are due and
owing and has filed a counterclaim seeking unspecified damages. The Company
intends to prosecute forcefully the claim against NWP and defend vigorously
NWP's counterclaim. As this litigation is still in the earliest stages, the
Company is not yet able to determine whether the resolution of the counterclaim
will have a material effect on its financial condition or results of operations.
8. STOCK OPTIONS AND AWARDS
During the three and nine months ended September 30, 2001, options to
purchase 27,000 and 440,850 common shares were granted, respectively. 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
1,788,700 options were tendered and were canceled. The Company will grant the
same number of new options on March 25, 2002 to optionees still employed at that
date. The exercise price of the new options will be the closing market price on
March 24, 2002, and the new options will vest as if the tendered options had not
been canceled.
As of September 30, 2001, options to purchase 3,867,166 common shares
were outstanding.
For certain options and restricted stock granted in the fourth quarter
of 1999 and the first quarter of 2000, the exercise or sale prices were
determined by the Board of Directors at dates of grant to be equal to the fair
value of the underlying common stock; however, such exercise or sale prices were
subsequently determined to be lower than the deemed fair values for financial
reporting purposes of the underlying common stock on the date of grant.
Accordingly, for those options and restricted stock grants, the Company recorded
deferred stock-based compensation of $9.3 million during the fourth quarter of
1999 and $41.7 million in the first quarter of 2000.
On April 1, 2001, an optionee's status was changed from an employee to
a consultant. As a result, deferred stock-based compensation was reduced by $7.6
million for his unvested options. Such options remain outstanding and will vest
monthly through January 2003. On April 1, 2001, such options were remeasured at
their fair value at that date of $1.3 million and charged to deferred
stock-based compensation and will be amortized to expense over the vesting
period.
Amortization of deferred stock-based compensation was $1.3 million and
$2.2 million for the three months ended September 30, 2001 and 2000,
respectively, and $4.8 million and $23.9 million for the nine months ended
September 30, 2001 and 2000, respectively. Deferred tax benefits were recorded
in the amounts of $0.2 million and $0.9 million for the three months ended
September 30, 2001 and 2000, respectively, and $1.2 million and $7.4 million for
the nine months ended September 30, 2001 and 2000, 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 at a time when the fair value of the
stock is lower than the deemed fair value of the stock for financial reporting
purposes on the date the options were granted, a portion of such deferred tax
benefits would not be realized and such portion may be charged to expense.
8
<Page>
9. RESTRUCTURING CHARGES
In the first quarter of 2001, the Company recorded $5.9 million in
restructuring charges primarily in connection with the closing and/or scaling
back of operations in certain regional offices. The restructuring charges are
comprised of $3.3 million of obligations under leases which are required to be
paid out over the various lease terms up to ten years, $2.5 million of severance
and related contractual obligations which will be paid out over various periods
up to one year, and $0.1 million of write-downs of property and equipment which
will not require future cash outlays. A summary of the restructuring reserve at
September 30, 2001, is as follows:
<Table>
<Caption>
Reserve Amounts Reserve
Balance at Charged to Balance at
March 31, 2001 the Reserve September 30, 2001
-------------- ----------- ------------------
(in thousands)
Severance and related contractual
obligations...................... $2,537 (1,877) $ 660
Lease obligations.................. 3,295 (410) 2,885
Property and equipment............. 114 (110) 4
--------- -------------- ------------
Total.............................. $5,946 (2,397) $3,549
========= ============== ============
</Table>
10. RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current period presentation.
11. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement
No. 141 "Business Combinations" and Statement No. 142 "Goodwill and Other
Intangible Assets". These statements are effective July 1, 2001 for business
combinations completed on or after that date. These statements become effective
for the Company on January 1, 2002 with respect to business combinations
completed on or before June 30, 2001. The pro forma effect of the adoption of
FAS No. 141 and FAS No. 142 for the three and nine months ended September 30,
2001 would be insignificant.
12. SUBSEQUENT EVENT
On October 2, 2001 the Company agreed to settle an outstanding
receivable from Metromedia Fiber Network, Inc. for a cash payment, a $2.7
million non-interest bearing secured promissory note payable monthly from
October 2002 through September 2003, and common stock initially valued at $4.8
million. The shares of common stock will be classified as "available for sale"
securities and will be included in "Other assets - noncurrent" on the
consolidated balance sheet.
9
<Page>
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 provide outsourced local telecommunications network services to
telecommunications companies by supplying the expertise and resources needed to
enable our customers to build and connect their networks to other local and
long-distance telecommunications companies and to individual end users. We also
provide security, closed circuit TV and electrical system upgrades. For the
three and nine months ended September 30, 2001, approximately 75% and 81% of our
revenues were 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 a significant portion of our
revenues from a limited number of customers. For the three and nine months ended
September 30, 2001, we derived approximately 32% and 21%, respectively, of our
revenues from our largest customer and 16% and 13%, respectively, of our
revenues from our second largest customer.
RESULTS OF OPERATIONS
THIRD QUARTER 2001 COMPARED TO THIRD QUARTER 2000
Revenues. Our revenues decreased by 40% to $49.2 million in the third
quarter of 2001 from $82.4 million in the same period last year. The decrease in
revenues was in part due to lower capital expenditures by customers.
Cost of revenues. Our cost of revenues represented 83% of revenues in
the third quarter of 2001 compared with 74% of revenues in the same period last
year. The increased percentage was due in part to fixed overhead costs which
represented a greater percentage of a lower level of revenues, and in part to
inefficiencies related to our efforts to help our customers restore service
after the World Trade Center disaster on September 11, 2001.
General and administrative expenses. Our general and administrative
expenses decreased 24% to $4.4 million in the third quarter of 2001 from $5.7
million in the same period last year. The decrease was primarily due to a lower
provision for incentive compensation this year.
Depreciation and amortization. Our depreciation and amortization
expense increased to $1.5 million in the third quarter of 2001 from $0.9 million
in the same period last year. The increase reflects the depreciation of
additional equipment acquired subsequent to March 31, 2000 as well as
amortization of leasehold improvements installed in newly occupied premises.
Non-cash stock-based compensation. We recorded amortization of
stock-based compensation of $1.3 million in the third quarter of 2001, compared
with $2.2 million in the same period last year, primarily related to options and
restricted stock granted at exercise prices determined by our Board of Directors
at dates of grant to be equal to the fair value of the underlying stock, but
with respect to which, for financial reporting purposes, the exercise or sales
prices were subsequently determined to be lower than the deemed fair values of
the underlying common stock at dates of grant. The decrease in amortization of
stock-based compensation was due to a change in an optionee's status from
employee to consultant in April 2001, which resulted in a reduction of $7.6
million in deferred stock-based compensation for such optionee's unvested
options. Such options were remeasured at their current fair value on April 1,
2001 of $1.3 million, which was charged to deferred stock-based compensation and
will be amortized to expense over the remaining vesting period.
10
<Page>
Interest income. Interest income in the third quarter of 2001 was $0.6
million compared to $0.9 million in the same period last year. The decrease is
due in part to lower average interest rates during 2001, and in part to a lower
average level of cash equivalents.
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 $0.2 million and $0.9
million were recorded in the third quarter of 2001 and 2000, respectively, in
connection with amortization of deferred stock-based compensation for
nonqualified options. Tax benefits are not applicable to amortization of
deferred stock-based compensation for incentive options. With respect to
deferred tax benefits recorded for nonqualified options, to the extent that
nonqualified options are forfeited or are exercised at a time when the fair
value of the stock is lower than the deemed fair value of the stock for
financial reporting purposes on the date the options were granted, a portion of
such deferred tax benefits would not be realized and such portion may be charged
to expense.
FIRST NINE MONTHS 2001 COMPARED TO FIRST NINE MONTHS 2000
Revenues. Our revenues decreased by 8% to $188.3 million in the nine
months ended September 30, 2001 from $203.6 million in the same period last
year. The decrease was in part due to lower capital expenditures by customers.
Cost of revenues. Our cost of revenues represented 81% of revenues in
the nine months ended September 30, 2001 compared with 74% of revenues in the
same period last year. The increased percentage was due in part to fixed
overhead costs which represented a greater percentage of a lower level of
revenues, and in part to inefficiencies related to our efforts to help our
customers restore service after the World Trade Center disaster on September 11,
2001.
General and administrative expenses. Our general and administrative
expenses increased 14% to $16.7 million in the nine months ended September 30,
2001 from $14.7 million in the same period last year. The increase was primarily
due a higher average number of general and administrative personnel this year,
and rents and related expenses for additional office premises occupied in mid
2000 and early 2001, partially offset by a lower provision for incentive
compensation this year.
Depreciation and amortization. Our depreciation and amortization
expense increased to $4.3 million in the nine months ended September 30, 2001
from $2.3 million in the same period last year. The increase reflects
depreciation of additional equipment and amortization of leasehold improvements
installed in newly occupied premises in the last half of 2000.
Non-cash stock-based compensation. Amortization of stock-based
compensation declined to $4.8 million in the nine months ended September 30,
2001, from $23.9 million in the same period last year, primarily because
amortization last year reflected up-front vesting of options granted to certain
executives in the first quarter of 2000, and in part because of the change in an
optionee's status from employee to consultant in April 2001 as mentioned above.
Provision for doubtful accounts. Our provision for doubtful accounts
increased to $24.0 million in the nine months ended September 30, 2001 from $1.7
million in the same period last year, primarily as a result of adverse
developments in the financial condition of several of our customers during the
first six months of 2001.
Restructuring charges. In the first quarter of 2001, we recorded $5.9
million in restructuring charges primarily in connection with the closing and/or
scaling back of operations in certain regional offices. The restructuring
charges are comprised primarily of severance and remaining obligations under
leases and other contracts.
11
<Page>
Interest expense. Interest expense decreased to $0.7 million in the
nine months ended September 30, 2001 from $1.0 million in the same period last
year, primarily due to a lower average level of debt outstanding this year. On
August 1, 2001, the Company repaid its outstanding loan of $2.0 million under
its revolving credit facility.
Interest income. Interest income in the nine months ended September 30,
2001 was $1.9 million compared to $0.9 million in the same period last year. The
increase resulted from the fact that the proceeds from the Company's initial
public offering were received in August 2000 and, accordingly, those funds
earned interest income for only two months in the same period of last year.
Other (income) expense, net. Other (income) expense, net in the nine
months ended September 30, 2001 was $0.4 million of expense (net), comprised
primarily of costs related to a potential acquisition not consummated.
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 $1.2 million and $7.4
million were recorded in the nine months ended September 30, 2001 and 2000,
respectively, in connection with amortization of deferred stock-based
compensation for non-qualified options. Tax benefits are not applicable to
amortization of deferred stock-based compensation for incentive options. With
respect to deferred tax benefits recorded for nonqualified options, to the
extent that nonqualified options are forfeited or are exercised at a time when
the fair value of the stock is lower than the deemed fair value of the stock for
financial reporting purposes on the date the options were granted, a portion of
such deferred tax benefits would not be realized and such portion may be charged
to expense.
Liquidity and Capital Resources
Net cash provided by operations was $17.6 million for the nine months
ended September 30, 2001, including net collections of receivables offset by
payments made for accounts payable, accrued liabilities and income taxes. Cash
used in investing activities was $7.2 million, including $5.5 million for
capital expenditures and $1.6 million for the purchase of 1,000,000 convertible
preferred shares of Telseon Inc. Net cash used in financing activities was $4.2
million, comprised of repayments of $1.2 million for equipment and capital
leases, $2.0 million of repayments under the bank revolving credit facility and
$1.2 million of repayments on a subordinated note payable to stockholder, offset
by $0.2 million in proceeds from exercises of stock options.
We have no material commitments other than obligations under our bank
credit facility, installment obligations related to equipment purchases, leases
for facilities, computer equipment and vehicles, and a subordinated note payable
to a stockholder. We anticipate that available cash and cash flows from
operations will be sufficient to satisfy our working capital requirements for
the foreseeable future. Our future capital requirements will depend upon many
factors, including our potential expansion to additional geographic regions,
which would require that we expend funds for personnel, equipment and facilities
in each region in advance of earning revenue and receiving payments from
customers.
At September 30, 2001, the Company has a $50 million collateralized
revolving credit facility, which expires in November 2003. Under the terms of
the credit agreement, the Company must meet specified thresholds with respect to
profitability, net worth and fixed charge coverage ratios. At September 30,
2001, the Company did not meet certain of these thresholds, and as a result,
funds were not available to the Company under the credit facility. The Company
is currently negotiating with the banks to obtain revisions to its credit
agreement. The Company does not anticipate that funds under its bank credit
facility would be required in order for the Company to meet its projected needs
for liquidity for the foreseeable future.
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.
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As of September 30, 2001, we had cash and cash equivalents of $70.0
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.
On October 2, 2001, the Company received common shares of Metromedia
Fiber Network, Inc. initially valued at $4.8 million in partial settlement of an
outstanding receivable. Such shares are traded on NASDAQ, however the Company is
restricted from selling half of such shares until January 1, 2002 and the other
half until April 1, 2002. The Company is subject to market price risk with
respect to such common shares.
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. 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.
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PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
From time to time, we may become involved in various lawsuits and legal
proceedings, which are in the ordinary course of business.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None.
(b) Reports:
None.
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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
November 7, 2001