<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 6, 1999
REGISTRATION NO. 333-80161
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
PRE-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
LUMINANT WORLDWIDE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7379 75-2783690
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
------------------------------
4100 SPRING VALLEY ROAD, SUITE 750
DALLAS, TEXAS 75244
(972) 404-5167
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
GUILLERMO G. MARMOL
CHIEF EXECUTIVE OFFICER AND PRESIDENT
LUMINANT WORLDWIDE CORPORATION
4100 SPRING VALLEY ROAD, SUITE 750
DALLAS, TEXAS 75244
(972) 404-5167
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
WITH A COPY TO:
<TABLE>
<S> <C>
JOHN B. WATKINS, ESQUIRE R.W. SMITH, JR., ESQUIRE
WILMER, CUTLER & PICKERING PIPER & MARBURY L.L.P.
2445 M STREET, N.W. 36 SOUTH CHARLES STREET
WASHINGTON, D.C. 20037 BALTIMORE, MARYLAND 21201
(202) 663-6000 (410) 539-2530
</TABLE>
------------------------------
APPROXIMATE DATE THE REGISTRANT PROPOSES TO BEGIN SELLING SECURITIES TO THE
PUBLIC: From time to time after the effective date of this registration
statement.
------------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED TO BE REGISTERED (1) PER SHARE (2) PRICE REGISTRATION FEE (3)
<S> <C> <C> <C> <C>
Common Stock, par value $0.01 per share 14,461,250 $13.00 $190,000,000 $52,820
</TABLE>
(1) Includes a maximum of 1,886,250 shares that may be purchased by the
underwriters to cover over-allotments.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o) under the Securities Act of 1933. The proposed maximum
offering price includes amounts attributable to shares that may be purchased
by the underwriters to cover over-allotments.
(3) The Company has previously paid to the Securities and Exchange Commission
the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT FILES
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
IS TO BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OR
UNTIL THE REGISTRATION STATEMENT BECOMES EFFECTIVE ON THE DATE THE SEC, ACTING
UNDER SECTION 8(A), DETERMINES.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Subject to Completion,
Dated August 6, 1999
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
[LOGO]
12,575,000 SHARES
COMMON STOCK
This is Luminant Worldwide Corporation's initial public offering. We are
offering 12,575,000 shares of common stock.
We expect that the public offering price will be between $11 and $13 per
share.
We have filed an application for the common stock to be quoted on the Nasdaq
National Market under the symbol "LUMT."
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 9.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
PROCEEDS,
BEFORE
EXPENSES,
PRICE TO UNDERWRITING TO LUMINANT
PUBLIC DISCOUNT WORLDWIDE CORPORATION
<S> <C> <C> <C>
Public Offering Price $ $ $
Underwriting Discounts and Commissions $ $ $
Proceeds, Before Expenses, to Luminant $ $ $
</TABLE>
Luminant has granted the underwriters the right to purchase up to 1,886,250
shares to cover any over-allotments, at any time until 30 days after the date
of this prospectus.
DEUTSCHE BANC ALEX. BROWN
HAMBRECHT & QUIST
SOUNDVIEW TECHNOLOGY GROUP
THE DATE OF THIS PROSPECTUS IS , 1999
<PAGE>
[graphics showing:
old, digital business model with the following text:
Under the old digital business model, firms provide services in either strategy
consulting, creative solutions or in technology solutions.
new, Luminant integrated solution model with the following text:
Under the new digital business model, Luminant provides services and client
focus in all these disciplines.]
THIS PROSPECTUS INCLUDES TRADEMARKS AND TRADE NAMES OF OTHER PARTIES.
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS
AND MAY NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. TO LEARN ABOUT
THIS OFFERING AND OUR BUSINESS YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING
THE HISTORICAL AND PRO FORMA FINANCIAL STATEMENTS AND THE RELATED NOTES
BEGINNING ON PAGE F-1. WE WERE FORMED IN AUGUST 1998 TO ACQUIRE EIGHT INTERNET
AND ELECTRONIC COMMERCE BUSINESSES WITH THE PROCEEDS OF THIS OFFERING. PRIOR TO
THE CLOSING OF THIS OFFERING AND THE SIMULTANEOUS ACQUISITION OF THE EIGHT
COMPANIES, WE HAVE NOT CONDUCTED ANY OPERATIONS. SIMULTANEOUSLY WITH THE
COMPLETION OF THIS OFFERING, WE WILL ACQUIRE EIGHT BUSINESSES IN EXCHANGE FOR
CASH AND SHARES OF OUR COMMON STOCK. WE WILL REFER TO THE EIGHT BUSINESSES WE
ARE ACQUIRING AS THE "COMPANIES" OR THE "EIGHT COMPANIES". IN THIS PROSPECTUS,
WE SPEAK AS IF WE HAVE ALREADY ACQUIRED THESE COMPANIES. UNLESS OTHERWISE
INDICATED:
- ALL REFERENCES TO "LUMINANT WORLDWIDE CORPORATION," "LUMINANT," "US," "WE"
AND "OUR" REFER TO LUMINANT WORLDWIDE CORPORATION AND THE EIGHT BUSINESSES
THAT WE WILL ACQUIRE SIMULTANEOUSLY WITH THE CLOSING OF THIS OFFERING:
- THE INFORMATION PRESENTED ASSUMES:
(1) THE UNDERWRITERS' OVERALLOTMENT IS NOT EXERCISED;
(2) THE CLOSING OF THE ACQUISITIONS OF THE EIGHT COMPANIES
SIMULTANEOUSLY WITH THE CLOSING OF THIS OFFERING; AND
(3) THE COMPLETION OF A 71,387-FOR-ONE STOCK SPLIT.
LUMINANT WORLDWIDE CORPORATION
OUR BUSINESS
We provide professional services to Fortune 500 companies, Internet and
electronic commerce-based companies and other organizations which use or want to
use the Internet and electronic commerce in their business. We provide the
following Internet and electronic commerce professional services:
- strategy consulting, which helps clients understand how to use the
Internet and electronic commerce to operate their businesses more
competitively and interact with their customers and suppliers more
effectively;
- creative solutions, which involves web site designing, creating marketing
programs for attracting customers to web sites, and developing a web site
"look and feel" that projects a client's identity and serves a client's
business goals;
- technology solutions, which involves the actual building and installation
of Internet and electronic commerce software applications, including web
sites and interfaces to mainframes and existing systems; and
- ongoing services, which are continuing services we provide that support
and complement our clients' Internet and electronic commerce businesses,
such as ongoing Internet site management.
3
<PAGE>
We perform services for more than 100 clients diversified across many
industries, including technology, financial, retailing, media and
communications. We also work with companies that do business primarily over the
Internet. As of July 1, 1999, our 641 employees were located throughout the
United States in seventeen different states. On a pro forma combined basis, we
had $54.8 million of revenues for the 12 months ended December 31, 1998 and
$18.4 million of revenues for the three months ended March 31, 1999. As of March
31, 1999, the total retained deficit of Luminant and the eight companies was
$15.5 million, without considering any pro forma adjustments.
OUR MARKET OPPORTUNITY
The Internet is continuing to develop as an interactive platform through
which companies market, operate and manage their businesses and conduct
transactions. The explosive growth of the Internet and its potential to create
new opportunities and pose fundamental threats to the competitive positions of
traditional businesses present enormous challenges for the managers of
companies. This is leading to the rapid growth of, and demand for, professional
services relating to the Internet and electronic commerce.
The need for organizations to quickly and effectively act has led to the
demand for coordinated strategic, creative and technology solutions. Many
traditional professional services firms can provide expert services in strategy
consulting, creative solutions or in technology solutions. The need to integrate
these disciplines exceeds the capabilities of most traditional service firms,
however, especially given the rapid time frames needed for developing Internet
and electronic commerce businesses. As a result, we believe there is great
demand for professional services firms that can effectively and timely provide
integrated services and client focus in all three disciplines.
OUR STRATEGY
We intend to expand our position as a leading provider of Internet and
electronic commerce professional services to Fortune 500 companies,
Internet-based companies and other organizations. Our strategy for achieving
this objective is to:
- Leverage our three main practice areas;
- Expand long-term client relationships;
- Operate as a single, fully-integrated firm;
- Maintain leading edge professional capabilities and technologies;
- Expand our breadth of services and geographic scope; and
- Provide value-added services.
OUR OFFICES AND HISTORY
We have leased offices located in:
- Atlanta, Georgia
- Chicago, Illinois
- Dallas, Texas
- Houston, Texas
- Herndon, Virginia
- Larchmont, New York
- New York, New York
- San Francisco, California
- Seattle, Washington
Our principal business office is currently located at 4100 Spring Valley Road,
Suite 750, Dallas, Texas 75244, and our telephone number is 972-404-5167. We
were incorporated in Delaware on August 21, 1998.
4
<PAGE>
THE OFFERING
The following table presents a summary of this offering. Following this
offering and the acquisition of the eight companies, there will be outstanding
options to purchase 7,803,917 shares of common stock, including options to
purchase 1,983,316 shares that will be exercisable immediately following this
offering and the acquisition of the eight companies.
<TABLE>
<S> <C>
Stock offered by Luminant.................... 12,575,000 shares of common stock, assuming
the underwriters do not exercise their over-
allotment option; or 14,461,250 shares,
assuming the underwriters exercise their
overallotment option in full.
Stock outstanding after this offering........ 40,909,091 shares of common stock, assuming
the underwriters do not exercise their over-
allotment option; or 42,795,341 shares,
assuming the underwriters exercise their
over-allotment option in full.
Use of proceeds.............................. We will use the proceeds of this offering to
pay the cash portion of the purchase prices
payable in the acquisitions of eight
companies, repay indebtedness and for general
corporate purposes, including working
capital, as well as future acquisitions.
Proposed Nasdaq symbol....................... "LUMT"
Dividend policy.............................. We do not anticipate paying dividends on our
common stock.
</TABLE>
5
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
We were incorporated in August 1998 and have not conducted any operations as
yet, except for negotiating and documenting the acquisitions of the eight
companies we will acquire simultaneously with the closing of this offering,
preparing this prospectus and the related documents for this offering and
developing our management team and corporate structure. Each of our eight
companies has been operating for at least 18 months. We present below our
summary unaudited pro forma combined financial data based on historical data for
the 12 months ended December 31, 1998 and the three months ended March 31, 1998
and 1999, considering our combined historical results and those of the companies
we will acquire. We also present below the unaudited pro forma combined balance
sheet data as of March 31, 1999 based on historical data and as adjusted for the
eight acquisitions and this offering. The unaudited pro forma combined statement
of operations data for the 12 months ended December 31, 1998 and the three
months ended March 31, 1998 and 1999 assume that the eight acquisitions and this
offering were closed on January 1, 1998. The unaudited pro forma combined
balance sheet data assume that the eight acquisitions and this offering were
closed on March 31, 1999.
The unaudited summary pro forma financial data do not necessarily indicate
the operating results or financial position that would have resulted from our
operation on a combined basis during the period presented, nor do these
unaudited pro forma data necessarily represent any future operating results or
financial position. In addition to these unaudited summary pro forma combined
financial data, you should also refer to the more complete financial information
included elsewhere in this prospectus, including more complete historical
results for the eight companies that we will acquire and our unaudited pro forma
combined financial statements and the accompanying notes.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
YEAR ENDED ----------------------------
DECEMBER 31, 1998 1998 1999
-------------------- ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
UNAUDITED PRO FORMA COMBINED
STATEMENT OF OPERATIONS DATA:
Revenues................................................ $ 54,846 $ 11,563 $ 18,415
Cost of services(1)..................................... 36,268 7,673 11,245
----------- ------------- -------------
Gross profit............................................ 18,578 3,890 7,170
Selling, general and administrative expenses(1)(2)...... 26,014 6,148 7,394
Equity based compensation expense(3).................... 8,186 7,361 284
Intangibles amortization(4)............................. 83,775 20,936 20,947
----------- ------------- -------------
Loss from operations.................................... (99,397) (30,555) (21,455)
Interest and other income, net.......................... 149 (49) (73)
----------- ------------- -------------
Loss before income taxes................................ (99,248) (30,604) (21,528)
Income taxes(5)......................................... -- -- --
----------- ------------- -------------
Loss before nonrecurring charges........................ $ (99,248) $ (30,604) $ (21,528)
----------- ------------- -------------
----------- ------------- -------------
Loss before nonrecurring charges per share.............. $ (2.43) $ (0.75) $ (0.53)
Shares used in computing pro forma loss before
nonrecurring charges per share(6)..................... 40,909,091 40,909,091 40,909,091
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
---------------------------
PRO FORMA PRO FORMA
COMBINED AS ADJUSTED(7)
----------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
UNAUDITED PRO FORMA COMBINED
BALANCE SHEET DATA:
Cash and cash equivalents........................................................... $ 2,230 $ 37,882
Working capital (deficit)........................................................... (94,743 (8) 38,549
Total assets........................................................................ 270,438 306,040
Long-term debt, net of current maturities........................................... 1,405 1,405
Stockholders' equity................................................................ 158,424 291,716
</TABLE>
6
<PAGE>
- ------------------------
(1) Excludes compensation expense related to issuances of equity and equity
appreciation rights of four of our companies. Compensation expense was
reduced by $1.9 million for the year ended December 31, 1998, and $8.0
million for the three months ended March 31, 1999.
(2) Includes adjustments to increase expenses related to additional compensation
expense to our new corporate management and the estimated incremental costs
associated with being a public company. Selling, general and administrative
expense was increased by $5.5 million for the year ended December 31, 1998,
$1.4 million for the three months ended March 31, 1998 and $1.4 million for
the three months ended March 31, 1999.
(3) Consists of compensation expense related to shares of common stock issued to
the management of Luminant at less than fair market value, equity based
compensation of Align Solutions Corp., or Align, the accounting acquiror,
and the reclassification of compensation expense related to shares sold to
Luminant management at less than fair market value in 1998.
(4) Consists of amortization over a three-year period of $243.6 million of
goodwill and $7.5 million of other intangible assets to be recorded as a
result of the acquisitions of the eight companies and the granting of
options. The amortization is computed on the basis described in the notes to
the unaudited pro forma combined financial statements. No amounts have been
included for contingent consideration that may be payable to the former
owners of our eight companies. None of this contingent consideration is
expected to be compensatory.
(5) We have not demonstrated that we will generate future taxable income;
therefore, a net deferred tax asset for the pro forma loss before income
taxes has not been recognized.
(6) Includes:
- 20,481,520 shares of common stock we will issue to the former owners of
the eight companies we are acquiring;
- 7,852,571 shares issued to our initial stockholder and an executive
officer; and
- 12,575,000 shares sold in this offering.
(7) Adjusted to reflect the sale of the 12,575,000 shares of common stock
offered by this prospectus at an assumed initial public offering price of
$12 per share and the application of the estimated net proceeds of this
offering. See "Use of Proceeds."
(8) Includes the effect of liabilities in the amount of $97.6 million payable to
the former owners of the eight companies we are acquiring for the
acquisition of common equity, for other equity securities and the repayment
of shareholder debt of a company representing the cash portion of the
initial purchase prices to be paid from a portion of the net proceeds of
this offering.
7
<PAGE>
RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING RISKS AND THE OTHER INFORMATION
IN THIS PROSPECTUS BEFORE YOU DECIDE TO BUY OUR COMMON STOCK. AN INVESTMENT IN
OUR COMMON STOCK INVOLVES RISK. THE TRADING PRICE OF OUR COMMON STOCK COULD
DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
SOME OF OUR COMPANIES HAVE A HISTORY OF OPERATING LOSSES. IF THESE LOSSES
CONTINUE, WE MAY NOT BE PROFITABLE IN THE FUTURE.
If we do not consistently generate higher revenues, we may not be profitable
in the future. Our companies incurred historical combined net losses of
approximately $5.7 million for the 12 months ended December 31, 1998 and $11.0
million for the three months ended March 31, 1999. After this offering and
closing of the acquisitions, we will have significantly increased expenses
compared to those of the individual companies. We expect to incur increasing
sales and marketing, infrastructure development and general and administrative
expenses until we have integrated the companies. As a result, we will need to
generate substantially higher revenues to achieve profitability. Even if we do
achieve profitability, we may not be able to sustain or increase it in the
future. See "Summary Unaudited Pro Forma Combined Financial Data," "Selected
Historical Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
IF WE ARE UNABLE TO SUCCESSFULLY INTEGRATE EACH OF THE COMPANIES WE ACQUIRE, OUR
FINANCIAL RESULTS WILL SUFFER.
We will combine eight independent Internet and electronic commerce
professional services providers into a single company. Our future profitability
will depend heavily on our ability to integrate the operations and management of
our eight companies. Failure to successfully integrate any of the companies we
acquire may cause significant operating inefficiencies and adversely affect our
profitability. Our professional services providers have generally not worked
together before and in some cases have previously served the same clients and
provided duplicative services and may have competed against each other. To the
extent our companies have competed with each other in the past, we will need to,
but may not be able to, redeploy our resources. To the extent we cannot
effectively redeploy our resources, our revenues may suffer. We plan to spend
substantial resources to integrate these businesses. In particular, to
successfully integrate our newly acquired companies, we must:
- install and standardize adequate operational, financial and control
systems;
- deploy common equipment and telecommunications facilities;
- implement and integrate new and existing marketing and sales efforts; and
- create a unified brand identity.
We have no current plans or agreements to acquire any specific companies or
businesses other than the eight businesses to be acquired in connection with
this offering. If we acquire additional companies in the future as expected,
however, we will face integration risks similar to those described above.
In addition, during our beginning stage of development and operation, we may
encounter expenses and difficulties that we may not expect or are beyond our
control. We may not be able to achieve or maintain profitability for any of the
companies we are acquiring or for ourselves as a whole.
8
<PAGE>
WE MAY NOT BE ABLE TO HIRE, TRAIN AND RETAIN SKILLED EMPLOYEES, WHICH COULD
IMPEDE OUR ABILITY TO COMPETE SUCCESSFULLY.
As a services company, our future profitability and growth depends in large
part on our ability to hire, train and retain skilled consulting, creative,
technical and other professionals. If we cannot hire, train and retain a
sufficient number of qualified employees, we may not be able to adequately staff
projects, our expenses could increase and we may be unable to expand our
business as quickly as we would like. Skilled personnel are in short supply and
competition for these people is intense. In addition, to maintain our
competitive position and to grow our business, we must make sure our employees
maintain and develop their technical expertise and business skills to satisfy
the increasingly sophisticated needs of our clients. This process could be time
consuming and expensive and may not be successful.
We plan to grant stock options to attract and retain qualified employees.
The trading price of our stock after this offering will affect the incentive
value of these stock options. We cannot determine whether prospective employees
will consider our stock options a valuable incentive. If they do not, we may
face more difficulty and expense in hiring qualified personnel.
WE DEPEND ON THE SERVICES OF OUR SENIOR MANAGEMENT AND OTHER KEY PERSONNEL. THE
LOSS OF SENIOR MANAGERS OR OTHER KEY PERSONNEL COULD ADVERSELY AFFECT OUR
BUSINESS.
The loss of management personnel, other key personnel or client
relationships could seriously harm our business and adversely affect our growth.
We believe that our ability to effectively serve our clients and expand our
business in the future will depend on our continued employment of senior
management and key strategic, creative and technical personnel. Competition for
qualified management personnel and other key personnel is intense. In addition,
personal relationships are critical in obtaining and maintaining client
engagements in our industry. Our personnel could join with a competitor or start
a new business and compete with us, which may result in the loss of client
relationships or business opportunities.
IF WE HAVE TO PAY ADDITIONAL CONSIDERATION TO THE FORMER OWNERS OF OUR
PROFESSIONAL SERVICES PROVIDERS, YOUR INVESTMENT IN US MAY BE DILUTED.
We have agreed to pay the former owners of our professional services
providers additional consideration upon satisfaction of certain financial and
operational conditions. Payment of these obligations in cash may substantially
deplete our cash reserves or require us to borrow funds. Payment of these
obligations in our common stock will dilute the value of your investment in us.
Regardless of the form of payment, the additional consideration will create
additional goodwill and increase the related amortization expense. We cannot
predict the amount of additional consideration that we will have to pay to the
former owners of our eight companies, although the total amount of this
additional consideration will not exceed $196.7 million. For a more detailed
discussion of these contingent consideration arrangements, see "About Luminant
Worldwide Corporation."
OUR REVENUES ARE DIFFICULT TO PREDICT AND WE MAY NOT BE ABLE TO REDUCE EXPENSES
IF REVENUES DECLINE.
Our operating expenses are relatively fixed and we incur costs based on our
expectation of future revenues. We generally cannot reduce our expenses on short
notice to compensate for unanticipated variations in the number or size of
engagements in progress. As a result, our failure to accurately predict our
revenues may result in unnecessary expenses and adversely affect our
profitability and financial condition.
Most of our client engagements are under short-term contracts. If a client
defers, modifies or cancels an engagement or chooses not to retain us for
additional phases of a project, we may
9
<PAGE>
not be able to rapidly redeploy our employees or other resources to other
engagements. Under these engagements, the client can generally reduce the scope
of or cancel our services without penalty and with little or no notice. A number
of factors unrelated to our work product or the progress of the project, such as
general business conditions or the client's financial state, could cause
cancellations or delays.
WE MAY LOSE MONEY ON FIXED FEE CONTRACTS IF WE MISCALCULATE THE RESOURCES
REQUIRED TO COMPLETE A PROJECT.
We have generally entered into contracts with our clients on a fixed-fee,
fixed timeframe basis. A miscalculation of the resources or time needed to
complete fixed-fee engagements could substantially reduce our profitability. The
risk of these miscalculations for us is high because we work with complex
technologies in compressed time frames.
UNDERUTILIZATION OF OUR EMPLOYEE RESOURCES MAY ALSO ADVERSELY AFFECT OUR
OPERATING REVENUES.
We generally establish our personnel levels based on our expectations of
client demand. If we hire more employees than our engagements require, or if we
are unable to effectively redeploy our employees from project to project, our
operating margins may decline and we may suffer losses. We have hired a large
number of administrative and support personnel to support our anticipated
growth. These personnel costs and expenses constitute the substantial majority
of our operating expenses.
WE MAY NOT SUCCESSFULLY DEVELOP BRAND AWARENESS OF OUR SERVICES, AND OUR BRAND
REPUTATION MAY DEPEND UPON THE SUCCESS OR FAILURE OF OUR CLIENTS.
Developing and maintaining widespread awareness of the "Luminant Worldwide
Corporation" brand name is an important element of our business strategy. If we
do not successfully promote and maintain our brand name without significant
expense, our operating margins and growth may decline. We plan to increase our
marketing expenses to promote our brand name, which may reduce our operating
margins. In addition, our brand name will replace the current brand names of our
eight companies, which may disrupt our business and adversely affect our
revenues and profitability. The public may closely associate our brand with the
business success or failure of some of our high-profile clients, many of whom
are pursuing unproven business models in competitive markets. As a result, the
failure or difficulties of one or more of our high-profile clients may damage
our brand name.
OUR LACK OF COMBINED OPERATING HISTORY MAKES IT DIFFICULT TO PREDICT HOW THE
COMBINED OPERATIONS OF OUR EIGHT COMPANIES WILL PERFORM IN THE FUTURE.
We have no combined operating history upon which you can evaluate our
business and prospects. We will combine the operations of eight businesses into
a new company, and we may not be able to achieve or maintain profitability of
any of our businesses or overall. The pro forma financial information included
in this prospectus is based on the separate pre-acquisition financial
information of the eight companies. As a result, our historical results of
operations and pro forma financial information may not give you an accurate
indication of our future results of operations or prospects. In addition,
companies like us in an early stage of development frequently encounter risks,
expenses and difficulties associated with starting a new business, many of which
may be unexpected or beyond our control.
OUR PROFITABILITY MAY SUFFER IF SEASONAL FACTORS CAUSE OUR REVENUES TO FLUCTUATE
AND WE ARE NOT ABLE TO ADJUST OUR EXPENSES ACCORDINGLY.
Our industry is affected by seasonal factors. Our revenues and income are
generally higher in the first and second calendar quarters, and lower during the
third and fourth calendar quarters as a result of the summer and end-of-year
holiday seasons. As a result of these factors, we
10
<PAGE>
believe that period-to-period comparisons of our results of operations will not
reliably indicate our future performance. It is likely that in some future
quarter or quarters our operating results will be below the expectations of
public market analysts or investors. These shortfalls may significantly affect
the market price of our common stock.
Several other factors may cause our revenues and operating results to vary
from quarter-to-quarter, including:
- the number, size and type of client engagements we commence and complete
during a quarter;
- modification or termination of material contracts;
- the amount and timing of expenditures by our clients for Internet and
electronic commerce professional services;
- our ability to adequately staff our projects and effectively utilize our
employees;
- the fixed personnel and other costs we incur in advance of the quarter;
- the number, type, timing and costs of acquisitions completed during a
quarter;
- our ability to manage costs, including personnel costs and support
services costs; and
- our introduction of new services.
WE MAY INCUR UNEXPECTED OR UNQUANTIFIABLE LIABILITIES AND EXPENSES ARISING FROM
THE OPERATION OF A COMPANY BEFORE WE ACQUIRED IT.
When we acquire companies, we may acquire liabilities and expenses that we
did not know about at the time we negotiated these acquisitions. We may also
acquire contingent liabilities that become realized, or liabilities that prove
to be larger than anticipated. Because our recourse against the former owners of
the companies for these liabilities is limited as described below, the
realization of any of these liabilities may increase our expenses and reduce our
cash reserves.
THE INDEMNIFICATION PROVISIONS OF THE ACQUISITION AGREEMENTS MAY NOT FULLY
PROTECT US AND MAY RESULT IN UNEXPECTED LIABILITIES.
Some of the former owners of each company will be required to indemnify us
against liabilities related to the operation of their company before we acquired
it. The acquisition agreements include provisions for the indemnification of
Luminant by the former owners of each company for breaches of their
representations and warranties in the acquisition agreements, and inaccuracy of
the information provided by them for use in this prospectus. These indemnities
limit the liability of each former owner to the total amount of the purchase
price, including contingent consideration, that each former owner receives. The
liability of the former owners is also subject to a deductible equal to one
percent of the aggregate purchase price, excluding contingent consideration,
paid to the former owners. Additionally, in some cases these former owners may
not have the financial ability to meet their indemnification responsibilities.
We have also agreed to indemnify the former owners of each company for
liabilities arising out of breaches of each other party's representations and
warranties, and inaccuracy of information provided by any other party for use in
this prospectus and other matters traditionally covered under the
indemnification terms of similar contracts. There is no assurance that any party
will meet its obligations to indemnify any other party. In addition, the
Securities and Exchange Commission's position is that indemnification for
securities law violations is against public policy.
11
<PAGE>
WE INTEND TO EXPAND OUR BUSINESS ABROAD. INTERNATIONAL EXPANSION COULD RESULT IN
FINANCIAL LOSSES DUE TO SEVERAL FACTORS, INCLUDING FAILURE TO COMPLY WITH
FOREIGN REGULATORY REQUIREMENTS, CHANGES IN FOREIGN ECONOMIC CONDITIONS AND
FLUCTUATIONS IN FOREIGN CURRENCIES.
We intend to expand our business by providing Internet and electronic
commerce professional services to companies operating outside of the United
States. An inability to successfully establish and expand our international
operations could seriously harm our growth and place us at a competitive
disadvantage. We intend to acquire existing companies and open offices in
foreign markets and otherwise market our business abroad. We may be unable to
successfully market, sell, deliver and support our services internationally. In
addition to other risks described in this section, international expansion poses
additional risks, including:
- intense competition for qualified personnel outside of the United States;
- international legal and regulatory requirements;
- problems in collecting accounts receivable and longer payment cycles;
- the impact of recessions in economies outside the United States;
- higher marketing costs;
- fluctuations in currency exchange rates;
- restrictions on the import and export of certain technologies;
- reduced protection for intellectual property rights in some countries;
- potentially adverse tax consequences; and
- increases in tariffs, duties, price controls, restrictions on foreign
currencies and other trade barriers.
WE PROVIDE SERVICES THAT ARE OFTEN CRITICAL TO OUR CUSTOMERS' BUSINESS; ANY
DEFECTS IN OUR SERVICES COULD EXPOSE US TO SIGNIFICANT LIABILITY.
We create, implement and maintain Internet and electronic commerce systems
and other applications that are critical to our clients' businesses. Any defects
or errors in these systems or applications or failure to meet clients'
expectations could result in:
- delayed or lost client revenues;
- rendering additional services to a client at no charge;
- negative publicity regarding us and our services; and
- claims for substantial damages against us, regardless of fault.
The successful assertion of a large claim against us could seriously harm
our business, financial condition and operating results. Our contracts generally
limit our damages arising from negligent acts, errors, mistakes or omissions in
rendering services to our clients. However, we cannot be sure that these
contractual provisions will protect us from liability for damages in the event
we are sued. Our general liability insurance coverage may not cover one or more
large claims, or the insurer may disclaim coverage as to any future claim. In
addition, our general liability insurance coverage may not continue to be
available on reasonable terms or at all.
OUR FAILURE TO PROTECT OR MAINTAIN OUR INTELLECTUAL PROPERTY RIGHTS COULD COST
US MONEY, PLACE US AT A COMPETITIVE DISADVANTAGE AND RESULT IN LOSS OF REVENUE
AND HIGHER EXPENSES.
The steps we have taken to protect our proprietary intellectual property
rights may not prevent or deter someone else from using or claiming rights to
our intellectual property. Third
12
<PAGE>
party infringement or misappropriation of our trade secrets, copyrights,
trademarks or other proprietary information could seriously harm our business.
We also cannot assure you that we will be able to prevent the unauthorized
disclosure or use of our proprietary knowledge, practices and procedures if our
senior managers or other key personnel leave us. In addition, although we
believe that our proprietary rights do not infringe on the intellectual property
rights of others, other parties may claim that we have violated their
intellectual property rights. These claims, even if not true, could result in
significant legal and other costs and may distract our management.
OUR MANAGEMENT HAS BROAD DISCRETION OVER THE USE OF PROCEEDS FROM THIS OFFERING.
Our management has significant flexibility in using the net proceeds we
receive from this offering remaining after payment of the aggregate purchase
price for the eight companies we will acquire. You cannot determine the
propriety of management's use of the proceeds from this offering because the
proceeds are not required to be allocated to any specific investment or
transaction. The Company has not yet prepared a business plan which identifies
the specific working capital needs and other corporate purposes to which the net
proceeds of this offering will be allocated. See "Use of Proceeds" for a more
detailed description of how management intends to apply the proceeds of this
offering.
WE SOMETIMES AGREE NOT TO PERFORM SERVICES FOR OUR CLIENTS' COMPETITORS WHICH
COULD REDUCE THE NUMBER OF OUR PROSPECTIVE CLIENTS.
Many of the engagements we perform for clients are competitively sensitive.
As a result, we sometimes agree not to perform services for our clients'
competitors or in a particular field for limited periods of time. For example,
Multimedia Resources, LLC, or Multimedia, has entered into (1) an agreement with
MasterCard International Incorporated, or MasterCard International, which
prohibits Multimedia from accepting assignments or conducting work for
competitors of MasterCard International and (2) an agreement with Societe
Europrenne des Satellites S.A. which prohibits Multimedia from providing
consulting services to competing satellite-based network companies. Similarly,
InterActive8, Inc., or InterActive8, has entered into (1) an agreement with BFC,
Inc. (dba GetSmart.com) which prohibits Interactive8 from providing consulting
services to any other competitive mortgage, debt consolidation, credit card or
auto financing search sites that provide access to multiple lenders and (2) an
agreement with Mars, Incorporated, or Mars, which prohibits InterActive8 from
providing web site development services to companies that compete with the
confectionery, pet care and rice/sauces divisions of Mars that engaged
Interactive8 for the provision of services. We may enter into similar agreements
in the future. These agreements could preclude or reduce opportunities from
prospective clients and reinforce the importance of our client selection.
IF OUR CASH FROM OPERATIONS IS NOT SUFFICIENT TO MEET OUR NEEDS, WE MAY NEED TO
OBTAIN ADDITIONAL FINANCING IN THE FUTURE IN ORDER TO ACQUIRE ADDITIONAL
COMPANIES OR TO MEET OUR WORKING CAPITAL AND CAPITAL EXPENDITURE REQUIREMENTS.
We cannot be certain that we will be able to obtain additional financing on
favorable terms, if at all, which could adversely affect our ability to continue
operations. We expect that the net proceeds from this offering, after paying the
cash portion of the purchase price for our companies, will meet our working
capital and capital expenditure needs for at least the next 12 months. After
that, we may need to raise additional funds. Our lack of combined operating
history makes it difficult to predict whether our future financial condition,
revenues and profitability will be sufficient to obtain financing on reasonable
terms or at all. If we need additional capital and cannot raise it on acceptable
terms, we may not be able to acquire additional companies, open or expand
offices in the United States and abroad, make capital expenditures, hire and
train additional personnel or otherwise expand our business.
13
<PAGE>
A SIGNIFICANT PORTION OF OUR ASSETS ARE INTANGIBLE. WE MUST AMORTIZE OUR
INTANGIBLE ASSETS OVER A FIXED PERIOD EVEN IF WE NEVER REALIZE THEIR FULL VALUE.
THE AMORTIZATION CHARGES WE INCUR IN EACH PERIOD WILL REDUCE OUR NET INCOME.
The acquisition of our companies simultaneously with the closing of this
offering will create significant goodwill on our financial statements. We will
amortize this goodwill over a period of three years, which will negatively
affect our operating results in those periods. At March 31, 1999, after giving
pro forma effect to the acquisition of our companies, we would have had goodwill
net of accumulated amortization of approximately $243.3 million. We have agreed
to pay the former owners of our companies additional consideration if specified
conditions are met, payable in the form of cash and/or stock. Regardless of the
form of payment, any additional consideration will create additional goodwill
and increase the related amortization expense.
WE MAY EXPERIENCE PROBLEMS RELATED TO THE YEAR 2000 ISSUE THAT COULD ADVERSELY
AFFECT OUR BUSINESS.
Many currently installed computer systems and software products are coded to
accept only two-digit year entries in the date code field. Consequently, on
January 1, 2000, many of these systems could fail or malfunction because they
may not be able to distinguish 21st century dates from 20th century dates.
Although we believe that our principal internal systems are Year 2000 compliant,
some systems are not yet certified. We have relied on representations in the
acquisition agreements for each of our eight companies for much of our
assessment of our Year 2000 readiness. Because we depend substantially upon the
proper functioning of our computer systems, a failure of our systems to
correctly recognize dates beyond December 31, 1999 could materially disrupt our
operations and seriously harm our ability to compete.
The Year 2000 problem could also adversely affect our business by causing
the systems of our clients, potential clients, vendors or other business
partners to fail. The Year 2000 problem could result in systemic failures or
miscalculations. The Year 2000 problem may also affect third parties that
license software products which we incorporate into the business systems that we
create for our clients. We generally discuss Year 2000 issues with these
suppliers and sometimes perform internal testing on their products, but we
cannot guarantee that the software licensed by these suppliers is Year 2000
compliant. Any failure on our part to provide Year 2000 compliant systems to our
clients could result in financial loss, harm to our reputation and liability to
others and could seriously harm our business, financial condition and operating
results. For information on our efforts to handle the Year 2000 issue, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Readiness Disclosure Statement."
PREPARATION FOR OR CORRECTION OF YEAR 2000 PROBLEMS COULD CAUSE CLIENTS TO DEFER
OR REDUCE DEMAND FOR OUR SERVICES.
Our clients and prospective clients may have to devote considerable time and
resources in preparing for or correcting problems related to the Year 2000
issue. The demands posed by these Year 2000 problems may reduce the time and
resources clients have to devote to the projects and services we offer and may
reduce demand for our services.
THE SALE OR AVAILABILITY FOR SALE OF ADDITIONAL SHARES OF OUR COMMON STOCK AFTER
THIS OFFERING COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.
Sales of a substantial number of shares of common stock after this offering
could adversely affect the market price of our common stock. A reduction in the
price of our common stock could reduce the value of your investment in us,
impair our ability to raise capital through the sale of additional equity
securities or our ability to use shares as a currency to make acquisitions. For
a description of the shares of our common stock that will be available for sale
following this offering, see "Shares Eligible for Future Sales."
14
<PAGE>
Upon completion of this offering and the simultaneous acquisition of the
eight companies, 40,909,091 shares of our common stock will be outstanding.
28,334,091 of these shares, as well as the shares underlying the 1,000,000
options we will grant to Young & Rubicam and any shares we issue as contingent
consideration in connection with our acquisition of the eight companies, will be
"restricted securities" under Rule 144 and can only be sold under an exemption
from or a registration under the Securities Act. See "Shares Available for
Future Sale--Rule 144." Holders of these shares and options will be entitled to
have us register these shares under the Securities Act in specified
circumstances. See "Shares Available for Future Sale--Registration Rights."
Following this offering we intend to register under the Securities Act
approximately 12,838,602 shares of common stock underlying stock options
reserved for issuance under our long term incentive plan. Options for 6,803,917
of these shares will be outstanding upon the closing of this offering. See
"Shares Available for Future Sale--Common Stock and Options Issuable Under Our
Equity Compensation Plans." The 12,575,000 shares sold in this offering will, in
general, be freely tradeable without further restriction or registration under
the Securities Act.
WE FACE INTENSE COMPETITION IN OUR INDUSTRY AND LOW BARRIERS TO ENTRY MAY
ENCOURAGE ADDITIONAL COMPETITORS IN THE FUTURE, WHICH MAY NEGATIVELY IMPACT OUR
OPERATING RESULTS.
In light of the resources of our existing competitors and the likelihood
that new competitors will enter the market, we cannot assure you that we will
compete successfully in the Internet and electronic commerce services market.
Our failure to compete successfully could reduce our revenues and our
profitability.
Competition in the Internet and electronic commerce professional services
market is intense. We expect competition to persist and intensify in the future.
We compete against companies selling Internet and electronic commerce software
and services, and the in-house development efforts of companies seeking to
engage in electronic commerce. Our current competitors include, and may in the
future include, the following:
- Internet consulting firms and online agencies, including AGENCY.COM,
AppNet, iXL Enterprises, Modem Media . Poppe Tyson, Organic Online,
Proxicom, Razorfish, Scient, US Interactive, USWeb/CKS and Viant;
- general management consulting firms, including Bain & Company, Boston
Consulting Group, Booz Allen & Hamilton and McKinsey & Company, Inc.;
- the professional services groups of computer equipment companies,
including Compaq, Hewlett-Packard and IBM;
- systems integrators, including Andersen Consulting, Cambridge Technology
Partners, Sapient, and consulting arms of the "Big Five" accounting firms;
and
- internally developed solutions of current and potential clients.
Because barriers to entry in our market are low, we also expect other companies
to enter our market. In addition, current and potential competitors have
established, or may establish, cooperative relationships among themselves or
with vendors. Accordingly, new competitors or alliances among competitors may
emerge and rapidly acquire significant market share.
Most of our current competitors have longer operating histories than us.
Many of our competitors have larger client bases, larger professional staffs,
greater brand recognition and greater financial, technical, marketing and other
resources than us. Many of our competitors also have well-established
relationships with our current and potential clients and vendors and may be able
to respond more quickly to new or emerging technologies and changes in customer
requirements. Each of these factors may place us at a disadvantage in responding
to our
15
<PAGE>
competitors' pricing strategies, technological advances, marketing campaigns,
strategic partnerships and other initiatives.
TECHNOLOGY IN THE INTERNET AND ELECTRONIC COMMERCE INDUSTRY CHANGES RAPIDLY. IF
WE FAIL TO KEEP UP WITH THESE CHANGES, WE WILL NOT BE ABLE TO MEET OUR CLIENTS'
NEEDS AND OUR BUSINESS WILL SUFFER.
Rapid technological change and frequent introductions of new products and
services characterize our market and the technologies our clients use. Our
failure to successfully respond to these technological developments or to
respond in a timely or cost-effective way could substantially reduce our
revenues and adversely affect our profitability. Our success will depend on our
ability to rapidly master and develop an evolving set of capabilities and to
offer services that keep pace with continuing changes in technology, industry
standards and client preferences.
OUR GROWTH AND PROFITABILITY DEPEND ON CONTINUED AND EXPANDING DEMAND FOR OUR
SERVICES. THE DEMAND FOR OUR SERVICES DEPENDS ON THE CONTINUED GROWTH OF THE
INTERNET AND ELECTRONIC COMMERCE INDUSTRY.
If a viable and sustainable market for our Internet and electronic commerce
services does not continue to develop, or if we cannot differentiate our
services from those of our competitors, our revenue and operating margins may
decline and we may experience losses. We cannot be certain that the market for
Internet and electronic commerce services will continue to grow. Consumers and
businesses may reject the Internet or electronic commerce as viable commercial
mediums for a number of reasons, including:
- inadequate network infrastructure;
- insufficiency of telecommunications services to support electronic
commerce and the Internet;
- delays in the development of technologies that facilitate use, and improve
the security, of the Internet and electronic commerce;
- delays in the development of new conventions to handle increased levels of
Internet activity;
- increased governmental regulation;
- changes in sales tax laws; and
- failure of companies to meet their customers' expectations and service
requirements in delivering goods and services via electronic commerce and
over the Internet.
NEW LAWS OR REGULATIONS AFFECTING THE INTERNET, ELECTRONIC COMMERCE OR COMMERCE
IN GENERAL COULD REDUCE OUR REVENUES AND ADVERSELY AFFECT OUR GROWTH.
Congress and other domestic and foreign governmental authorities have
adopted and are considering legislation affecting use of the Internet, including
laws relating to the use of the Internet for commerce and distribution. The
adoption or interpretation of laws regulating the Internet, or of existing laws
governing such things as consumer protection, libel, property rights and
personal privacy, could hamper the growth of the Internet and its use as a
communications and commercial medium. If this occurs, companies may decide not
to use our services and our business and operating results would suffer.
16
<PAGE>
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH MAY NOT PROVE TO BE
ACCURATE OR COMPLETE.
Some of the statements under "Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and elsewhere in this prospectus constitute forward-looking
statements. These statements involve known and unknown risks, uncertainties and
other factors that may cause our or our industry's actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
such forward-looking statements. These forward-looking statements relate to
future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "intends," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue" or the negative of such terms or other
comparable terminology. These statements are only predictions. Moreover, neither
we nor any other person assumes responsibility for the accuracy and completeness
of such statements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform such statements to
actual results and do not intend to do so.
17
<PAGE>
ABOUT LUMINANT WORLDWIDE CORPORATION
We formed Luminant Worldwide Corporation in August 1998 for the purpose of
acquiring a group of existing Internet and electronic commerce professional
services businesses that provide a wide range of interactive services throughout
the United States. Simultaneously with the closing of this offering, we will
close the acquisitions of eight businesses as required by the terms of written
agreements negotiated with the current owners of these businesses. Except in the
case of Brand Dialogue-New York, the acquisitions have been structured as
mergers with the companies surviving as our wholly-owned subsidiaries. We will
acquire the assets of Brand Dialogue-New York at the closing of this offering
and will immediately contribute those assets to a newly formed subsidiary. The
acquisition consideration and the terms of the acquisition agreements have been
negotiated at arms-length.
The closings of the acquisitions of our eight companies are subject to
customary closing conditions, including that:
- this offering close by December 31, 1999;
- the representations and warranties made by the parties in the acquisition
agreements are accurate at the closing;
- the parties perform all of their covenants and obligations under the terms
of the acquisition agreements;
- no material adverse change has occurred in the financial condition or
business of the eight companies or in the financial condition, business or
prospects of Luminant Worldwide Corporation;
- employment agreements with the principal employees and owners of the eight
companies have been entered into on terms acceptable to us; and
- the initial public offering price is not less than $9.90 per share.
We cannot assure you that the conditions to the closing of the acquisition of
all of the eight companies will be satisfied or waived or that each acquisition
will close. If any of the acquisitions does not close for any reason, we will
not close this offering on the terms described in this prospectus.
OUR COMPANIES
The purchase price for the eight companies will consist of an initial
payment at the time of closing and the ability to earn contingent payments, as
follows:
PURCHASE PRICE
The initial purchase price for each company we will acquire has been
determined based upon a variety of factors, including that company's revenue and
pre-tax income. The initial purchase price will consist of a fixed number of
shares of common stock and a cash payment, except that the initial purchase
price for Brand Dialogue-New York will consist entirely of stock. The purchase
price for all of the eight companies, based on an assumed initial public
offering price of $12.00 per share, will be $343.4 million. An aggregate of
20,481,520 shares of common stock will be issued for all of the eight companies.
The number of shares of common stock payable for each company is fixed, except
in the case of RSI Group, Inc. and its subsidiaries, or RSI, where the number of
shares payable will increase if the initial public offering price is between
$9.90 and $11.00. If Luminant Worldwide Corporation issues any additional shares
to the stockholders of RSI, Commonwealth Principals II, LLC, or Commonwealth
Principals, will forfeit an equal number of shares to Luminant Worldwide
Corporation under a forfeiture agreement we expect to enter into with
Commonwealth Principals prior to the closing of this offering and the
simultaneous acquisition of the eight companies. Commonwealth Principals, a
Virginia limited liability company, is one of our shareholders. Based on a
$12.00 price per share, the aggregate cash consideration for all eight companies
will be $97.6 million. The cash portion
18
<PAGE>
of the purchase price will adjust so that it will always equal approximately
39.7% of the market value of the share portion of the purchase price as of the
closing of this offering.
CONTINGENT CONSIDERATION
The former owners of each company will be eligible to receive two payments
of contingent consideration: one based on the financial results of the
individual company and one based on the consolidated financial results of the
eight companies. The contingent consideration for each company will be based on
a percentage of the amount, if any, by which the actual revenues and actual
pre-tax income of the company for the period beginning July 1, 1999, and ending
December 31, 1999, exceeds the targeted revenue and targeted pre-tax income,
respectively, of the company for that period. The contingent consideration based
on the financial results of the combined companies will be a percentage of the
amount, if any, by which the combined actual revenue and combined actual pre-tax
income of the eight companies for the period beginning January 1, 2000, and
ending June 30, 2000, exceeds our targeted revenues and our targeted pre-tax
income, respectively, for that same period. The targeted revenues for the six
months ending December 31, 1999 for purposes of calculating the individual
company contingent considerations vary from company to company and on average
represent an increase over revenues for the six months ended December 31, 1998
of 134%. The targeted pre-tax incomes for the six months ending December 31,
1999 on average represent an increase over pre-tax incomes for the six months
ended December 31, 1998 of 334%. For purposes of calculating the combined
company contingent consideration, the targeted revenues for the combined
companies for the six months ending June 30, 2000 represent an 88% increase over
revenues for the six months ended June 30, 1999. The targeted pre-tax income for
the combined companies for the six months ending June 30, 2000 represents an
increase of 218% over the pre-tax income for the six months ended June 30, 1999
and does not take into consideration the impact of corporate overhead charges or
the additional costs of being a public company.
INDIVIDUAL COMPANY HURDLES:
Following are the targets for individual company performance for the period
July 1, 1999 to December 31, 1999 for purposes of calculating contingent
revenue:
<TABLE>
<CAPTION>
COMPANY REVENUE PRE-TAX INCOME
- ----------------------------------------------------------------- --------- ---------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Align Solutions Corp............................................. $ 15,946 $ 1,385
Brand Dialogue-New York.......................................... $ 8,470 $ 1,001
Free Range Media, Inc............................................ $ 5,200 $ 700
Integrated Consulting, Inc. dba i.con interactive................ $ 3,404 $ 374
InterActive8, Inc................................................ $ 5,500 $ 1,566
Multimedia Resources, LLC........................................ $ 2,431 $ 429
Potomac Partners Management Consulting, LLC...................... $ 7,980 $ 1,476
RSI Group, Inc. and subsidiaries................................. $ 8,664 $ 1,049
</TABLE>
The targets for the combined company's performance for the period from
January 1, 2000 to June 30, 2000 are revenue of $75.2 million and pre-tax income
of $13.8 million. Pre-tax income will be calculated excluding amortization of
goodwill incident to our acquisition of the eight companies.
The maximum aggregate contingent consideration that each company can earn
for individual company contingent consideration and combined company contingent
consideration is 50% of the initial purchase price for that company or total
contingent consideration of $171.7 million. In addition, the former owners of
Potomac Partners Management Consulting, LLC will be eligible to earn up to an
additional $25.0 million in contingent consideration as described below.
19
<PAGE>
The payment of the contingent consideration based on each company's
performance and on combined company performance will be made within 30 days
after the contingent consideration amount is finally determined, using a
combination of cash and stock. The portion of the contingent consideration to be
paid in stock will be determined by us, in our sole discretion, provided that
cash will comprise no less than 25% and no more than 50% of the contingent
consideration amount. The actual number of shares of common stock will be
determined based on the average closing price of our common stock for the 30
trading days prior to the day before these shares are issued.
In addition to the contingent consideration described above, former owners
of Potomac Partners will be eligible to receive contingent consideration based
on revenues derived from contracts entered into by us or Potomac Partners with
United Air Lines, Inc., or United, after the date of the Potomac Partners'
acquisition agreement. The former owners of Potomac Partners will receive
amounts equal to 150% of the revenues received for electronic commerce strategy,
business planning and design services provided to United, excluding such
revenues generated between July 1, 1999 and December 31, 1999, and 40% of the
revenues received for other services, rendered pursuant to contracts entered
into between July 1, 1999 and June 30, 2002, up to a maximum amount of $25.0
million. We will pay the contingent consideration within 30 days after
completion of our annual audit for each of our fiscal years ending December 31,
1999, December 31, 2000, December 31, 2001 and December 31, 2002.
For purposes of calculating the individual company contingent consideration
as described above that may be earned by the former owners of Potomac Partners
between July 1, 1999 and December 31, 1999, the revenues received by Potomac
Partners for management consulting services pursuant to the United contracts
referenced in the previous paragraph will be included in the actual revenue
amounts used in that calculation. For purposes of calculating the portion of the
combined company contingent consideration that may be earned by the former
owners of Potomac Partners, we will not include any revenues earned from these
contracts in determining Potomac Partners' portion of the combined company
contingent consideration. In determining the portion of combined company
contingent consideration that may be earned by the former owners of the other
companies, we will include all revenues earned from these contracts.
INDIVIDUAL COMPANY INFORMATION
The following shows the consideration to be paid in stock and cash for each
company based on an assumed initial public offering price of $12.00 per share:
<TABLE>
<CAPTION>
MAXIMUM REVENUES
CONTINGENT FOR THREE
INITIAL PURCHASE PRICE CONSIDERATION ASSUMED MONTHS
-------------------------------------- ------------------------ DEBT ENDED
VALUE TOTAL COMPANY COMBINED AS OF MARCH MARCH 31,
NAME CASH OF STOCK CONSIDERATION PORTION PORTION 31, 1999 1999
- ------------------------------ --------- ----------- -------------- ----------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Align Solutions Corp. $ 36,917 $ 73,702 $ 110,619 $ 27,655 $ 27,655 $ 2,054 $4,341,077
Brand Dialogue-New York -- 55,309 55,309 13,827 13,827 -- 2,701,000
Free Range Media, Inc. 10,156 23,007 33,163 8,291 8,291 -- 2,210,752
Integrated Consulting, Inc. 4,897 9,721 14,618 3,654 3,654 222 825,373
dba i.con interactive
InterActive8, Inc. 11,920 21,244 33,164 8,291 8,291 997 1,613,124
Multimedia Resources, LLC 3,436 8,018 11,454 2,864 2,864 -- 742,253
Potomac Partners Management 24,685 41,642 66,327 16,582 16,582 -- 2,059,514
Consulting, LLC
RSI Group, Inc. and 5,629 13,135 18,764 4,691 4,691 873 3,252,823
subsidiaries
--------- ----------- -------------- ----------- ----------- ------------- ----------
Total $ 97,640 $ 245,778 $ 343,418 $ 85,855 $ 85,855 $ 4,146 $17,745,916
--------- ----------- -------------- ----------- ----------- ------------- ----------
--------- ----------- -------------- ----------- ----------- ------------- ----------
<CAPTION>
NET ASSETS
AS OF
MARCH 31,
NAME 1999
- ------------------------------ ----------
<S> <C>
Align Solutions Corp. $10,796,968
Brand Dialogue-New York 2,350,000
Free Range Media, Inc. (3,058,982)
Integrated Consulting, Inc. 204,434
dba i.con interactive
InterActive8, Inc. (2,199,058)
Multimedia Resources, LLC 460,656
Potomac Partners Management (5,135,373)
Consulting, LLC
RSI Group, Inc. and 1,121,180
subsidiaries
----------
Total $4,539,825
----------
----------
</TABLE>
20
<PAGE>
In addition, the former owners of Potomac Partners are eligible to receive
up to $25.0 million in additional contingent consideration, as described above.
OPTION GRANTS
Preceding the trading of our common stock, we will grant to Young & Rubicam
Inc. an immediately exercisable ten year option to purchase 1,000,000 shares of
common stock at an exercise price equal to the initial public offering price.
In addition, immediately preceding the trading of our common stock, we
intend to grant options for an aggregate of 2,205,000 shares of common stock
exercisable at the initial public offering price to employees and officers of
the companies who will become our employees at the closing of the acquisitions.
One-sixth of the options will become exercisable every six months over 36 months
from the date of grant. We also intend to grant options for an aggregate of
3,028,141 shares of common stock exercisable at the initial public offering
price to our executive officers, directors and employees and a former officer,
983,316 of which options will be immediately exercisable, with one-sixth of the
remainder becoming exercisable every six months over 36 months from the date of
grant.
CONVERSION OF EXISTING OPTIONS
At the closing of the acquisitions of the eight companies, we will grant to
some former owners, employees and affiliates of one of our companies on
conversion of outstanding options issued by that company, options for 1,570,776
shares of our common stock.
21
<PAGE>
USE OF PROCEEDS
We estimate that we will receive approximately $133.3 million in net
proceeds, or $153.4 million net proceeds if the underwriters' over-allotment
option is exercised in full, from this offering assuming an initial public
offering price of $12.00 per share. This amount reflects deductions from the
gross proceeds of the offering of approximately $10.6 million, which will be
retained by the underwriters as discounts and commissions, and $7.0 million,
representing our estimated expenses for this offering and the acquisition of our
companies.
We expect to use approximately $4.5 million of the net proceeds from the
offering to repay advances made to us prior to closing by Commonwealth
Principals to fund a portion of the estimated $7 million of expenses for this
offering and the acquisition of the eight companies. These advances earn
interest at the prime rate, which was 8% at July 1, 1999.
We expect to use approximately $97.6 million of the net proceeds from the
offering to pay the cash portion of the purchase prices payable for the
acquisition of our companies based on an assumed initial public offering price
of $12.00 per share, of which $4.1 million will be used to repay assumed notes
payable to several former owners of our companies which are due on demand with
open maturity dates and accrue interest at rates ranging from 9.25% to prime
plus 1%. Prime plus 1% was equal to 9% at July 1, 1999. We will also assume
another $4.1 million of indebtedness in connection with closing of the
acquisition of the eight companies, which we do not expect to repay immediately
after the closing.
We will use the remainder of the net proceeds of approximately $35.7 million
for general corporate purposes, which may include future acquisitions, working
capital and the payment of any additional amounts payable to former owners of
our eight companies under the contingent consideration provisions of the
acquisition agreements. We have no current plans or agreements to acquire any
specific companies or businesses, other than the eight businesses we are
acquiring simultaneously with the closing of this offering. This use of proceeds
does not include the net proceeds from the exercise of the underwriters'
over-allotment option. Until we use the net proceeds of this offering, we intend
to invest these net proceeds in short-term, interest-bearing, investment-grade
securities.
DIVIDEND POLICY
We have not paid, and do not intend to pay, dividends on our common stock in
the foreseeable future. Instead, we will retain our earnings to finance the
expansion of our business and for general corporate purposes. Our Board of
Directors will have the authority to declare and pay dividends on the common
stock at any time, in its discretion, as long as there are funds legally
available for that distribution.
22
<PAGE>
CAPITALIZATION
The following table shows our capitalization at March 31, 1999 on an actual
basis, a pro forma combined basis and on a pro forma as adjusted basis assuming
an initial public offering price of $12.00 per share. The pro forma combined
presentation considers the combined historical balance sheets for Luminant and
the eight companies we will acquire simultaneously with the closing of this
offering, and applies pro forma adjustments to the historical information. The
pro forma as adjusted presentation reflects the pro forma adjustments and also
the closing of this offering, the acquisition of the eight companies
simultaneously with this offering and the application of the estimated net
proceeds we will receive in this offering. The pro forma combined and pro forma
as adjusted columns below assume that we will issue 20,481,520 shares of common
stock in connection with the acquisition of our eight companies. See "Use of
Proceeds," and "Summary Unaudited Pro Forma Combined Financial Data." For a
description of the pro forma adjustments, you should refer to our unaudited pro
forma combined financial statements and notes included elsewhere in this
prospectus.
The pro forma as adjusted column does not include 1,886,250 shares to be
issued if the underwriters exercise their over-allotment option in full;
7,803,917 shares of common stock issuable on exercise of stock options to be
outstanding at closing; and an indeterminable number of shares that may be
issued in payment of contingent consideration under the acquisition agreements
as described under "About Luminant Worldwide Corporation." See "Shares Available
for Future Sale."
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------------------
<S> <C> <C> <C>
PRO FORMA PRO FORMA
ACTUAL COMBINED AS ADJUSTED
--------- ----------- ------------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt and current portion of long-term debt........................ $ 50 $ 3,651 $ 3,601
Due to affiliates/stockholders and other acquisition-related obligations..... -- 97,640 --
Long-term debt, less current portion......................................... -- 1,405 1,405
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value per share:
10,000,000 shares authorized; no shares issued and outstanding on an actual
basis; no shares issued and outstanding on a pro forma combined basis; no
shares issued and outstanding on a pro forma as adjusted basis........... -- -- --
Common stock, $0.01 par value per share:
100,000,000 shares authorized; 7,852,571 shares issued and outstanding on
an actual basis; 28,334,091 shares issued and outstanding on a pro forma
combined basis; 40,909,091 shares issued and outstanding on a pro forma
as adjusted basis........................................................ 79 283 409
Additional paid-in capital................................................... 328 199,949 333,115
Retained earnings (deficit).................................................. (477) (41,808) (41,808)
--------- -----------
Total stockholders' equity................................................. (70) 158,424 291,716
--------- -----------
Total capitalization..................................................... $ (20) $ 261,120 $ 296,722
--------- -----------
--------- -----------
</TABLE>
23
<PAGE>
DILUTION
Our pro forma net tangible book value at March 31, 1999 was a negative $92.3
million, or a negative $3.26 per share of common stock. Pro forma net tangible
book value per share of common stock is calculated by dividing the pro forma net
tangible book value of our company by the number of shares of common stock
outstanding on a pro forma basis after giving effect to the acquisition of our
companies. Our pro forma as adjusted net tangible book value at March 31, 1999
would have been $41.0 million, or $1.00 per share of common stock, based on an
assumed initial public offering price of $12.00 per share, no exercise of the
underwriters' over-allotment option, no payments under the contingent
consideration provisions of the acquisition agreements for our companies, no
exercise of stock options outstanding at closing and no changes in the pro forma
net tangible book value of our company, other than to give effect to the sale of
the shares of common stock offered by this prospectus, and the application of
the net offering proceeds as described under "Use of Proceeds."
This pro forma as adjusted net tangible book value represents an immediate
increase in net tangible book value of $4.26 per share to our existing
stockholders, including the former owners of our companies who will receive
shares of our common stock as partial payment for their equity interests in the
companies upon completion of this offering, and an immediate dilution in pro
forma as adjusted net tangible book value of $11.00 per share to new investors
purchasing shares in this offering. The following table illustrates this pro
forma per share dilution as of March 31, 1999:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share....... $ 12.00
Pro forma net tangible book value per share at March
31, 1999............................................ $ (3.26)
Pro forma increase per share attributable to investors
who buy shares in this offering..................... 4.26
---------
Pro forma as adjusted net tangible book value per
share after the offering............................ $ 1.00
---------
Pro forma dilution per share to investors who buy
shares in this offering............................. $ 11.00
---------
---------
</TABLE>
If all our options to purchase 7,803,917 shares of common stock expected to
be outstanding at closing of this offering and the simultaneous acquisition of
the eight companies were exercised in accordance with their terms as of March
31, 1999, our pro forma net tangible book value, as adjusted, based on the
assumptions described above, would have been $2.41 per share of common stock,
representing immediate dilution of $9.59 per share to investors purchasing
shares in this offering.
The following table summarizes, as of March 31, 1999, on a pro forma as
adjusted basis, based upon the above assumptions:
- the number of shares of our common stock purchased by existing
stockholders, including the former owners of the eight companies who will
receive shares of common stock as a partial payment for their equity
interests in the eight companies upon completion of this offering and the
simultaneous acquisition of the eight companies;
- the number of shares of common stock purchased by investors who buy shares
in this offering;
- the total consideration paid to us;
- the average price per share paid to us; and
24
<PAGE>
- the percentage ownership held by existing stockholders, including the
former owners of the eight acquired companies, and by new investors who
buy shares in this offering:
<TABLE>
<CAPTION>
SHARES TOTAL
PURCHASED CONSIDERATION AVERAGE
------------------------- --------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------------- --------- ---------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders......................... 7,852,571 19.19% $ 200,001 .05% $ .03
Former owners of our companies................ 20,481,520 50.07 245,778,240 61.93 12.00
Investors who buy shares in this offering..... 12,575,000 30.74 150,900,000 38.02 12.00
-------------- --------- ---------------- ---------
Total................................... 40,909,091 100.00% $ 396,878,241 100.00%
-------------- --------- ---------------- ---------
-------------- --------- ---------------- ---------
</TABLE>
25
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
We will acquire eight companies simultaneously with and as a condition to
the closing of this offering. Align Solutions Corp., or Align, one of the eight
companies, has been identified as the accounting acquiror for financial
statement presentation purposes.
Our balance sheet data as of December 31, 1998 and the statement of
operations data for the period from our inception on August 21, 1998 to December
31, 1998 have been derived from our audited financial statements included
elsewhere in this prospectus.
The selected historical financial data of our companies are derived in part
from the more detailed historical financial statements and the related notes of
our companies included elsewhere in this prospectus. The balance sheet data as
of December 31, 1997 and 1998 and the statement of operations data for the years
ended December 31, 1996, 1997 and 1998 for Free Range Media, Inc.; Integrated
Consulting, Inc. dba i.con interactive; InterActive8, Inc.; Multimedia
Resources, LLC; and RSI Group, Inc. and subsidiaries have been derived from the
audited financial statements included elsewhere in this prospectus. The Selected
Historical Financial Data for the years ended December 31, 1994, 1995, and 1996
have been derived from unaudited financial statements not included elsewhere in
this Prospectus. These unaudited financial statements have been prepared on the
same basis as the audited financial statements and, in the opinion of
management, contain all adjustments and reclassifications necessary for a fair
presentation of the financial position and results of operations for the periods
presented.
The balance sheet data as of December 31, 1997 and 1998 and the statement of
operations data for the period from its inception on October 16, 1996 to
December 31, 1996 and the years ended December 31, 1997 and 1998 for Align
Solutions Corp. have been derived from the audited financial statements included
elsewhere in this prospectus.
The balance sheet data as of December 31, 1997 and 1998 and the statement of
operations data for the period from its inception on November 10, 1997 to
December 31, 1997 and the year ended December 31, 1998 for Potomac Partners
Management Consulting, LLC, have been derived from the audited financial
statements included elsewhere in this prospectus.
The balance sheet data as of December 31, 1997 and 1998 and the statement of
operations data for the period from its inception on April 1, 1996 to December
31, 1996 and the years ended December 31, 1997 and 1998 for Brand Dialogue-New
York have been derived from the audited financial statements included elsewhere
in this prospectus.
26
<PAGE>
The following selected historical financial data should be read together
with the historical financial statements and notes and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this prospectus. All our companies have fiscal years ending
December 31.
The following table shows selected historical financial data for Luminant
and our companies for the stated periods.
<TABLE>
<CAPTION>
FOR THE
THREE
MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED
MARCH 31,
COMMENCED ------------------------------- ---------
OPERATIONS 1994 1995 1996 1997 1998 1998
------------------ --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
LUMINANT WORLDWIDE CORPORATION August, 1998
Revenues............................ -- -- $ -- $ -- $ -- $ --
Gross profit........................ -- -- -- -- -- --
Operating loss...................... -- -- -- -- (245) --
ALIGN SOLUTIONS CORP. August, 1996
Revenues............................ -- -- $ 112 $ 3,268 $ 9,226 $ 1,299
Gross profit........................ -- -- 32 1,485 4,098 542
Operating income (loss)............. -- -- (201) (149) 1 (152)
BRAND DIALOGUE-NEW YORK April, 1996
Revenues............................ -- -- $ 1,922 $ 4,011 $ 7,237 $ 1,410
Operating income.................... -- -- 577 1,171 964 24
-- --
FREE RANGE MEDIA, INC. March, 1994
Revenues............................ $ 2,940 $ 1,982 $ 3,521 $ 338
Gross profit (loss)................. 924 341 272 (180)
Operating loss...................... (1,081) (2,644) (4,650) (1,270)
INTEGRATED CONSULTING, INC., DBA I.CON
INTERACTIVE August, 1994
Revenues............................ $ 443 $ 849 $ 2,140 $ 456
Gross profit........................ 311 582 1,424 343
Operating income (loss)............. (4) 32 41 127
INTERACTIVE8, INC. October, 1994
Revenues............................ $ 1,713 $ 2,818 $ 4,097 $ 737
Gross profit (loss)................. 657 1,184 2,064 304
Operating income (loss)............. 197 (198) (355) (386)
MULTIMEDIA RESOURCES, LLC March, 1995
Revenues............................ -- -- $ 1,928 $ 3,476 $ 2,068 $ 652
Gross profit........................ -- -- 943 1,039 312 213
Operating income.................... -- -- 523 502 37 132
POTOMAC PARTNERS MANAGEMENT
CONSULTING, LLC November, 1997
Revenues............................ -- -- $ -- $ 372 $ 4,886 $ 976
Gross profit (loss)................. -- -- -- 82 (200) 322
Operating income (loss)............. -- -- -- (4) (1,076) 142
RSI GROUP, INC. AND SUBSIDIARIES October, 1994
Revenues............................ $ 16,133 $ 15,724 $ 16,927 $ 4,338
Gross profit........................ 4,470 4,074 4,656 1,188
Operating income (loss)............. 365 329 403 227
<CAPTION>
1999
---------
<S> <C>
STATEMENT OF OPERATIONS DATA:
LUMINANT WORLDWIDE CORPORATION
Revenues............................ $ --
Gross profit........................ --
Operating loss...................... (232)
ALIGN SOLUTIONS CORP.
Revenues............................ $ 4,341
Gross profit........................ 1,974
Operating income (loss)............. (3,318)
BRAND DIALOGUE-NEW YORK
Revenues............................ $ 2,701
Operating income.................... 441
FREE RANGE MEDIA, INC.
Revenues............................ $ 2,211
Gross profit (loss)................. 749
Operating loss...................... (426)
INTEGRATED CONSULTING, INC., DBA I.CON
INTERACTIVE
Revenues............................ $ 825
Gross profit........................ 575
Operating income (loss)............. 120
INTERACTIVE8, INC.
Revenues............................ $ 1,613
Gross profit (loss)................. (1,489)
Operating income (loss)............. (1,953)
MULTIMEDIA RESOURCES, LLC
Revenues............................ $ 742
Gross profit........................ 428
Operating income.................... 336
POTOMAC PARTNERS MANAGEMENT
CONSULTING, LLC
Revenues............................ $ 2,060
Gross profit (loss)................. (4,171)
Operating income (loss)............. (4,660)
RSI GROUP, INC. AND SUBSIDIARIES
Revenues............................ $ 3,253
Gross profit........................ 889
Operating income (loss)............. (825)
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
COMMENCED --------------------
OPERATIONS 1994 1995 1996 1997 1998
------------------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA: August, 1998
LUMINANT WORLDWIDE CORPORATION
Total assets.................................... -- -- -- $ -- $ 162
Long-term debt.................................. -- -- -- -- --
Total equity (deficit).......................... -- -- -- -- 162
ALIGN SOLUTIONS CORP. August, 1996
Total assets.................................... -- -- $ 1,328 $ 3,066
Long-term debt.................................. -- -- 297 227
Total equity.................................... -- -- 601 1,468
BRAND DIALOGUE-NEW YORK April, 1996
Total assets.................................... -- -- $ 1,449 $ 2,127
Long-term debt.................................. -- -- -- --
Total equity.................................... -- -- 833 1,058
FREE RANGE MEDIA, INC. March, 1994
Total assets.................................... $ 900 $ 1,696
Long-term debt.................................. -- --
Total equity (deficit).......................... 577 (2,583)
INTEGRATED CONSULTING, INC., DBA I.CON INTERACTIVE August, 1994
Total assets.................................... $ 248 $ 498
Long-term debt.................................. -- 64
Total equity.................................... 63 103
INTERACTIVE8, INC. October, 1994
Total assets.................................... $ 793 $ 1,439
Long-term debt.................................. 178 723
Total deficit................................... (43) (246)
MULTIMEDIA RESOURCES, LLC March, 1995
Total assets.................................... -- $ 804 $ 346
Long-term debt.................................. -- -- --
Total equity.................................... -- 455 174
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC November, 1997
Total assets.................................... -- -- -- $ 427 $ 2,072
Long-term debt.................................. -- -- -- -- --
Total equity (deficit).......................... -- -- -- 297 (246)
RSI GROUP, INC. AND SUBSIDIARIES October, 1994
Total assets.................................... $ 3,533 $ 3,936
Long-term debt.................................. 89 98
Total equity.................................... 1,076 1,098
<CAPTION>
MARCH 31,
-----------
1999
-----------
<S> <C>
BALANCE SHEET DATA:
LUMINANT WORLDWIDE CORPORATION
Total assets.................................... $ 56
Long-term debt.................................. 50
Total equity (deficit).......................... (70)
ALIGN SOLUTIONS CORP.
Total assets.................................... $ 13,489
Long-term debt.................................. 254
Total equity.................................... 10,797
BRAND DIALOGUE-NEW YORK
Total assets.................................... $ 4,427
Long-term debt.................................. --
Total equity.................................... 2,350
FREE RANGE MEDIA, INC.
Total assets.................................... $ 2,772
Long-term debt.................................. --
Total equity (deficit).......................... (3,059)
INTEGRATED CONSULTING, INC., DBA I.CON INTERACTIVE
Total assets.................................... $ 772
Long-term debt.................................. 124
Total equity.................................... 204
INTERACTIVE8, INC.
Total assets.................................... $ 1,835
Long-term debt.................................. 947
Total deficit................................... (2,199)
MULTIMEDIA RESOURCES, LLC
Total assets.................................... $ 795
Long-term debt.................................. --
Total equity.................................... 461
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC
Total assets.................................... $ 2,133
Long-term debt.................................. --
Total equity (deficit).......................... (5,135)
RSI GROUP, INC. AND SUBSIDIARIES
Total assets.................................... $ 3,109
Long-term debt.................................. 84
Total equity.................................... 1,002
</TABLE>
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Historical Financial Data," "Pro Forma Selected Unaudited Combined Financial
Data," our unaudited pro forma combined financial statements and the related
notes and the historical financial statements and the related notes of our
companies appearing elsewhere in this prospectus. A number of statements in this
prospectus address activities, events or developments that we expect may occur
in the future, including such matters as our strategy for internal growth;
additional capital expenditures, including the amount and nature of the
expenditures; acquisitions of assets and businesses; industry trends; and other
similar matters. These statements are based on assumptions and analyses made in
light of our perception of historical trends, current business and economic
conditions, and expected future developments, as well as other factors we
believe are reasonable or appropriate. Whether actual results and developments
will conform with our expectations and predictions, however, is subject to a
number of risks and uncertainties, including those set forth in "Risk Factors;"
general economic, market or business conditions; the business opportunities we
may pursue; changes in laws or regulations; and other factors, many of which are
beyond our control. Consequently, we can not assure you that our actual results
or developments will be realized or, even if substantially realized, that they
will have the expected consequences to, or effects on, our business or
operations.
OVERVIEW
Luminant was established to provide one source of integrated Internet and
electronic commerce services to clients on a local and national level. Luminant
was formed in August 1998 to consolidate the operations of eight Internet and
electronic commerce businesses into a nationally recognized Internet and
electronic commerce services firm. Prior to the closing of this offering and the
simultaneous acquisition of the eight companies, we have not conducted any
material operations. The information relating to our clients, business and other
operations set forth under "Summary," "Management's Discussion and Analysis of
Financial Conditions and Results of Operations," "Business" and other places in
this prospectus assumes the closing of this offering and the acquisition of the
eight companies. Our services focus on strategy consulting and creative and
technology solutions. We also provide value-added services that assist clients
in establishing, developing and maintaining their Internet and electronic
commerce-related businesses. Our companies and their principal business
locations are:
<TABLE>
<S> <C>
Align Solutions Corp. Houston, Texas
Brand Dialogue-New York New York, New York
Free Range Media, Inc. Seattle, Washington
Integrated Consulting, Inc. dba i.con Dallas, Texas
interactive
InterActive8, Inc. New York, New York
Multimedia Resources, LLC Larchmont, New York
Potomac Partners Management Consulting, LLC Reston, Virginia
RSI Group, Inc. and subsidiaries Dallas, Texas
</TABLE>
Our customers generally retain us on a project-by-project basis. We
typically do not have material contracts that commit a customer to use our
services on a long-term basis. Revenue is recognized primarily using the
percentage of completion method on a contract-by-contract basis. Our use of the
percentage of completion method of revenue recognition requires management to
estimate the degree of completion of each project. To the extent these estimates
prove to be inaccurate, the revenues and gross profits reported for periods
during which work on the project is ongoing may not accurately reflect the final
financial results of the project. We make
29
<PAGE>
provisions for estimated losses on uncompleted contracts on a
contract-by-contract basis and recognize these provisions in the period in which
the losses are determined.
We provide our services primarily on a fixed-price, fixed-time frame basis.
We use internally developed processes to estimate and propose fixed prices for
our projects. The estimation process accounts for standard billing rates
particular to each project based upon the level of expertise and number of
consultants required, the technology environment, the overall technical
complexity and whether strategic, creative or technology solutions or
value-added services are being provided to the client. We also provide services
on a time and materials basis.
Align has been identified as the "accounting acquiror" for our financial
statement presentation, and its assets and liabilities are being recorded at
historical cost levels. Each of the remaining acquisitions of our companies will
be accounted for using the purchase method of accounting. Accordingly, the
purchase prices for those companies have been allocated based on preliminary
estimates of the fair value of the tangible assets and liabilities to be
assumed, as of March 31, 1999. The excess of the fair value of the consideration
paid over the fair value of the net assets to be acquired, other than those of
Align, totals approximately $228.5 million and is recorded as goodwill on our
pro forma balance sheet. Because the Internet and electronic commerce industries
are in the early stage of development and are continuing to evolve rapidly, the
recorded goodwill from the acquisitions will be amortized on a straight line
basis over three years, the estimated period of benefit. The pro forma impact of
this amortization expense is approximately $76.2 million per year. See the notes
to our unaudited pro forma combined financial statements. In addition, pro forma
amortization expense includes approximately $2.5 million per year related to the
estimated fair value of options to be granted to the owners of Brand
Dialogue-New York.
Subsequent to December 31, 1998, Align has acquired three businesses in
exchange for Align common stock. The Align acquisitions will be accounted for
using the purchase method of accounting. The excess of fair value of the
consideration paid over the fair value of the net assets to be acquired for
Fifth Gear Media Corporation, inmedia, inc. and Synapse Group, Inc. totals
approximately $15.1 million and is recorded as goodwill on our pro forma balance
sheet. Goodwill from the acquisitions will be amortized on a straight line basis
over three years, the estimated period of benefit. The pro forma impact of
amortization expense for Align's acquisitions is approximately $5.0 million per
year.
We have entered into an agreement in principle with United Airlines, Inc.
under which we have agreed to provide electronic commerce strategy, business
planning and design services to United until June 30, 2004, but United has no
obligation to purchase any services from us. Pursuant to this agreement, we have
agreed to issue to United a warrant to purchase up to 500,000 shares of our
common stock at an exercise price per share equal to the initial offering price.
Under the warrant, United will have the immediate right to purchase 83,333
shares of common stock. Over the five year term of the agreement, United will
obtain the right to purchase 8,333 shares of the remaining shares under the
warrant for every $1 million of revenues we receive from United up to $50
million of revenue.
PRO FORMA COMBINED RESULTS OF OPERATIONS
Our pro forma combined results of operations for the periods presented do
not represent combined results of operations presented in accordance with
generally accepted accounting principles, but are only a summation of the
revenues, operating expenses and general and administrative expenses of our
companies on a pro forma basis. The pro forma combined
30
<PAGE>
results may not be comparable to, and may not be indicative of, our
post-combination results of operations because:
- our companies were not under common control or management during the
periods presented;
- we will incur incremental costs related to our new corporate management
and the costs of being a public company; and
- the combined data do not reflect potential benefits and cost savings we
may realize when operating as a combined entity.
The following discussion should be read in conjunction with our unaudited pro
forma combined financial statements and the related notes and the historical
financial statements and the related notes of the eight companies we will
acquire appearing elsewhere in this prospectus. The following table sets forth
the combined results of operations of the companies we will acquire on a pro
forma basis:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED MARCH
DECEMBER 31, 31,
------------- ------------------------
1998 1998 1999
------------- ----------- -----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Revenues.............................................. $ 54,846 $ 11,563 $ 18,415
Cost of services...................................... 36,268 7,673 11,245
------------- ----------- -----------
Gross profit.......................................... 18,578 3,890 7,170
Selling, general and administrative................... 26,014 6,148 7,394
Equity based compensation expense..................... 8,186 7,361 284
Intangibles amortization.............................. 83,775 20,936 20,947
------------- ----------- -----------
Loss from operations.................................. $ (99,397) $ (30,555) $ (21,455)
------------- ----------- -----------
------------- ----------- -----------
</TABLE>
LUMINANT WORLDWIDE CORPORATION--UNAUDITED PRO FORMA COMBINED RESULTS OF
OPERATIONS-- THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED
MARCH 31, 1999
REVENUES. Revenues increased approximately $6.9 million, or 59%. This
increase resulted from an increase in the number and size of client projects
offset by a $1.1 million decline in revenues at RSI due to a decrease in
staffing related to a decrease in business with First Data Resources. No client
contributed in excess of 10% of our revenues during the period.
COST OF SERVICES. Cost of services increased approximately $3.6 million, or
47%. The increase resulted from direct costs related to the increased number of
client projects. Gross profit margins increased from 34% for the three months
ended March 1998 to 39% for the same period in 1999.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by approximately $1.2 million, or 20%. The increase resulted
from additional expenses needed to support sales growth. Selling, general and
administrative expenses as a percentage of revenues decreased from 53% for the
three months ended March 31, 1998 to 40% for the three months ended March 31,
1999.
EQUITY BASED COMPENSATION EXPENSE. Equity based compensation expense
decreased approximately $7.1 million, or 87%. The March 31, 1998 expense is
related to vested options granted at less than fair market value in connection
with Align's 1999 acquisitions. A significant number of options immediately
vested upon grant. The March 31, 1999 expense is related to the continued
vesting of the options granted at less than fair market value in connection with
Align's 1999 acquisitions. Included in the three months ended March 31, 1998,
equity based compensation expense are provisions for stock issuances at less
than fair market value to Luminant management.
31
<PAGE>
LUMINANT WORLDWIDE CORPORATION--UNAUDITED PRO FORMA COMBINED RESULTS OF
OPERATIONS FOR 1998
REVENUES. Pro forma consolidated revenues for the year ended December 31,
1998 were $54.8 million and cost of services for the same period were $36.3
million with a gross profit margin of 34%.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses were $26 million, for the year ended December 31, 1998, or 47% of
revenues.
EQUITY BASED COMPENSATION EXPENSE. Equity based compensation expense is
comprised of charges related to vested options granted at less than fair market
value related to Align's 1999 acquisitions and for stock issuances at less than
fair market value to Luminant management.
SEASONALITY AND CYCLICALITY; POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING
RESULTS
We believe that the market for Internet and electronic commerce related
professional services is influenced by general economic conditions and
particularly by the level of technological change in the industry. Increased
levels of technological change drive the need for professional services we
provide. We also believe that the industry tends to experience periods of
decline and recession during economic downturns. If the industry does experience
sustained periods of economic recessions, any decline may have a material
adverse effect on our operating results. We plan our operating expenditures
based on revenue forecasts, and a revenue shortfall below forecasts in any
quarter would likely adversely affect our operating results for that quarter.
For other factors which could cause quarterly fluctuations and influence
operating results, please see "Risk Factors--We are affected by seasonal factors
that could cause our revenues to fluctuate from quarter to quarter."
ALIGN SOLUTIONS CORP.--RESULTS OF OPERATIONS
Align has offices in Houston and Dallas, Texas and Atlanta, Georgia and has
205 employees. The following table sets forth certain selected financial data
for Align on a historical basis for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------- --------------------
1996(1) 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Revenues................................................... $ 112 $ 3,268 $ 9,226 $ 1,299 $ 4,341
Cost of services........................................... 80 1,783 5,128 757 2,367
--------- --------- --------- --------- ---------
Gross profit............................................... 32 1,485 4,098 542 1,974
Selling, general and administrative........................ 233 1,634 4,097 694 5,292
--------- --------- --------- --------- ---------
Operating income (loss).................................... $ (201) $ (149) $ 1 $ (152) $ (3,318)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Inception - October 1996
ALIGN SOLUTIONS CORP.--THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE
MONTHS ENDED MARCH 31, 1999
REVENUES. Revenues increased approximately $3.0 million, or 234%. This
increase resulted from an increase in the number and size of client projects.
These increases were driven by the addition of 61 consultants to meet the
increased demand for services in the three months ended March 31, 1999 from
customers such as Enron Energy Services which contributed 29% of total revenues.
No other client contributed 10% or more of Align's revenues during the period.
32
<PAGE>
COST OF SERVICES. Cost of services increased approximately $1.6 million, or
213%. The increase resulted from costs related to the addition of 61
consultants. Gross profit margin increased from 42% for the three months ended
March 31, 1998 to 45% for the same period in 1999.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by approximately $4.6 million, or 663%. The increase resulted
from compensation charges of $3.2 million for stock options issued below fair
market value during the three months ended March 31, 1999 and an increase in
personnel costs related to the addition of nine employees.
ALIGN SOLUTIONS CORP.--1997 COMPARED TO 1998
REVENUES. Revenues increased approximately $6.0 million, or 182%. This
increase resulted from an increase in the number and size of client projects
attributable to the addition of 51 consultants to meet the demand for services.
For the year ended December 31, 1998, Enron Energy Services contributed 19% of
total revenues and Administaff contributed 21% of total revenues. No other
client contributed 10% or more of Align's revenues during the period.
COST OF SERVICES. Cost of services increased approximately $3.3 million, or
188%. The increase resulted from costs related to the addition of 51 consultants
due to the increased number of client projects. Gross profit margin decreased
from 45% for the year ended December 31, 1997 to 44% for the same period in
1998.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by approximately $2.5 million, or 151%. The increase resulted
from the addition of personnel to support revenue growth targets.
ALIGN SOLUTIONS CORP.--1996 COMPARED TO 1997
REVENUES. Revenues increased approximately $3.2 million, or 2,818%. Align
was founded in October 1996 and thus 1996 reflects only three months of
operations.
For the period ended December 31, 1996, revenues from Chevron and Internet
Commerce Corporation accounted for 60% of total revenues. For the year ended
December 31, 1997, Nitro contributed 12% of total revenues and Chevron
contributed 14% of total revenues. No other client accounted for 10% or more of
Align's revenues in these periods.
COST OF SERVICES. Cost of services increased approximately $1.7 million, or
2,129%. The increase resulted from a full year's operations and expenses in 1997
compared to three months of operations in 1996. Gross profit margin increased
from 29% for the year ended December 31, 1996 to 45% for the same period in
1997.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by approximately $1.4 million, or 601%. The increase resulted
from 1997 being the first full year of Align's operations.
ALIGN SOLUTIONS CORP.--LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, Align had approximately $209,000 in cash and cash
equivalents compared to $0 at December 31, 1998. Cash used in operations was
$243,000 for the year ended December 31, 1998 and $234,000 for the three months
ended March 31, 1999. In all periods, the net cash used in operating activities
was due to a net loss, offset by adjustments for non-cash equity related
compensation charges, and growth in the business, resulting in increases in
accounts receivable and unbilled revenue.
33
<PAGE>
Cash used in investing activities was $767,000 for the year ended December
31, 1998 and $208,000 for the three months ended March 31, 1999. In all periods
cash used in financing activities was for capital expenditures for the purchase
of computer equipment, furniture and fixtures and leasehold improvements.
Cash from financing activities was $999,000 for the year ended December 31,
1998 and $652,000 for the three months ended March 31, 1999. Financing was
provided by borrowings on Align's line of credit and long-term debt during the
year ended $125,000 December 31, 1998 and $670,000 for the three months ended
March 31, 1999. Proceeds from the issuance of common stock were $944,000 during
the year ended December 31, 1998. At March 31, 1999, the Company's revolving
credit facilities provided for borrowings up to $1.2 million. At March 31, 1999,
approximately $225,000 remained available for borrowing under the credit
facilities.
In February 1999, Align acquired all of the capital stock of Synapse Group,
Inc., an Internet consulting company. The purchase was completed by the issuance
of 805,736 shares of Align's stock and 472,744 options, and resulted in goodwill
of approximately $9.4 million, which is being amortized on a straight-line basis
over an estimates useful life of three years.
Unbilled revenues increased approximately $795,000 from $11,000 on December
31, 1998 to $806,000 on March 31, 1999, due to the addition of new customer
accounts. Approximately $417,000 in unbilled revenues is due to a single
customer, Merrill Lynch.
Accrued bonus increased to approximately $668,000 at December 31, 1998 from
$0 at December 31, 1997. During 1998, Align accrued a monthly bonus based on
each employee's performance and paid it during 1999. Align has an accrued bonus
of approximately $327,000 at March 31, 1999.
Total stockholders' equity increased approximately $9.3 million from $1.5
million on December 31, 1998 to $10.8 million on March 31, 1999, due to the
additional paid-in capital from the purchase of Synapse Group Inc.
BRAND DIALOGUE-NEW YORK, THE NEW YORK BRANCH OF A YOUNG & RUBICAM
DIVISION,--RESULTS OF OPERATIONS
Brand Dialogue-New York, a wholly-owned business of Young & Rubicam Inc., is
located in New York City and has 70 employees. The following table shows certain
selected financial data for Brand Dialogue-New York on a historical basis for
the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER THREE MONTHS ENDED
31, MARCH 31,
-------------------- --------------------
1996(1) 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues.................................................... $ 1,922 $ 4,011 $ 7,237 $ 1,410 $ 2,701
Compensation expense, including employee benefits........... 943 1,842 4,596 1,005 1,560
General and administrative expenses......................... 402 998 1,677 381 700
--------- --------- --------- --------- ---------
Operating income............................................ $ 577 $ 1,171 $ 964 $ 24 $ 441
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Inception-April 1996
BRAND DIALOGUE-NEW YORK--THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE
MONTHS ENDED MARCH 31, 1999
REVENUES. Revenues increased approximately $1.3 million, or 92%. This
increase resulted from an increase in the number and size of client projects.
These increases resulted from the addition of 33 employees which were hired to
meet increased demand from clients in the three
34
<PAGE>
months ended March 31, 1999, including the United States Postal Service which
contributed 19% of total revenues, Citibank which contributed 14% of total
revenues, GeoCities which contributed 17% of total revenues and Pfizer which
contributed 11% of total revenues. No other client contributed 10% or more of
Brand Dialogue-New York's revenues during the period.
COMPENSATION EXPENSE, INCLUDING EMPLOYEE BENEFITS. Compensation expense
increased approximately $555,000, or 55%. The increase resulted from additional
costs associated with 33 employees hired during the period to support new
business.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by approximately $319,000, or 84%. This increase was a result of
additional overhead necessary to support Brand Dialogue-New York's growth.
BRAND DIALOGUE-NEW YORK--1997 COMPARED TO 1998
REVENUES. Revenues increased approximately $3.2 million, or 80%. This
increase resulted from an increase in the number and size of client projects
during 1998 including services performed for AT&T which contributed 29% of total
revenues, Pfizer which contributed 13% of total revenues, the United States
Postal Service which contributed 12% of total revenues and Citibank which
contributed 11% of total revenues. No other client contributed 10% or more of
Brand Dialogue-New York's revenues during the period.
COMPENSATION EXPENSE, INCLUDING EMPLOYEE BENEFITS. Compensation expense
increased approximately $2.8 million, or 150%. The increase resulted from the
addition of 31 employees and employee-related costs associated with the overall
growth in business.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by approximately $679,000, or 68%. The increase resulted from
additional costs associated with an increase in personnel.
BRAND DIALOGUE-NEW YORK--1996 COMPARED TO 1997
REVENUES. Revenues increased approximately $2.1 million, or 109%. This
increase was due to 1997 being the first full year of operations. Brand
Dialogue-New York was started in April 1996. During 1997, there was also an
increase in the number and size of projects including services for AT&T which
contributed 23% of total revenues, Cadbury Schweppes which contributed 15% of
total revenues, Ford Motor Company which contributed 11% of total revenues and
Whitehall which contributed 10% of total revenues. No other client contributed
10% or more of Brand Dialogue-New York's revenues during the period.
COMPENSATION EXPENSE, INCLUDING EMPLOYEE BENEFITS. Compensation expense
increased approximately $899,000, or 95%. The increase was proportionate with
revenue growth and the result of the addition of 20 personnel.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by approximately $596,000, or 148%. The increase resulted from higher
overhead associated with a 100% increase in personnel.
BRAND DIALOGUE-NEW YORK--LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations was $724,000 for the year ended December 31,
1998 due to a growth in the business offset by fluctuations in working capital.
Cash used in operations was $1.0 million for the three months ended March 31,
1999 due primarily to an increase in accounts receivable of $2.1 million offset
by an increase in accounts payable and accrued expenses of $1.0 million.
35
<PAGE>
Cash used in investing activities was $388,000 for the year ended December
31, 1998 and $28,000 for the three months ended March 31, 1999. In all periods
cash used in financing activities was for capital expenditures.
Cash used in financing activities was $336,000 for the year ended December
31, 1998 due to the return of cash received from Young & Rubicam. Cash flows
provided by financing activities was $1 million for the three months ended March
31, 1999 due to payments received from Young & Rubicam.
FREE RANGE MEDIA, INC.--RESULTS OF OPERATIONS
Free Range Media, Inc., or Free Range, is located in Seattle, Washington and
has 80 employees. The following table shows certain selected financial data for
Free Range on a historical basis for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues.................................................. $ 2,940 $ 1,982 $ 3,520 $ 338 $ 2,211
Cost of services.......................................... 2,016 1,641 3,248 518 1,462
--------- --------- --------- --------- ---------
Gross profit.............................................. 924 341 272 (180) 749
Selling, general and administrative....................... 2,005 2,985 4,922 1,090 1,175
--------- --------- --------- --------- ---------
Operating loss............................................ $ (1,081) $ (2,644) $ (4,650) $ (1,270) $ (426)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
FREE RANGE MEDIA, INC.--THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE
MONTHS ENDED MARCH 31, 1999
REVENUES. Revenues increased approximately $1.9 million, or 554%. This
increase resulted from an increase in the number and size of client projects
during the three months ended March 31, 1999, including services for Key Bank
which contributed 25% of total revenues. No other client contributed 10% or more
of Free Range's revenues during the period.
COST OF SERVICES. Cost of services increased approximately $944,000, or
182%. The increase resulted from direct costs related to the increased number
and size of client projects. Gross profit margin increased from a negative 53%
for the three months ended March 31, 1998 to 34% for the same period in 1999.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by approximately $85,000, or 8%. The increase resulted from
compensation expense recognized under the equity incentive plan.
FREE RANGE MEDIA, INC.--1997 COMPARED TO 1998
REVENUES. Revenues increased approximately $1.5 million, or 78%. This
increase resulted from an increase in the number and size of client projects
which was due to the hiring of 11 new consultants to meet the increased demand
for services. No client contributed 10% or more of Free Range's revenues during
the period.
COST OF SERVICES. Cost of services increased approximately $1.6 million, or
98%. The increase resulted from costs associated with the hiring of 11
consultants. Gross profit margin decreased from 17% for the year ended December
31, 1997, to 8% for the same period in 1998.
36
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by approximately $1.9 million, or 65%. This increase resulted
from opening sales offices throughout the U.S. to support anticipated growth.
Selling, general and administrative expenses as a percentage of revenues
decreased from 151% for the year ended December 31, 1997 to 140% for the year
ended December 31, 1998.
FREE RANGE MEDIA, INC.--1996 COMPARED TO 1997
REVENUES. Revenues decreased approximately $958,000, or 33%. No client
accounted for 10% or more of Free Range's revenues in these periods. This
decrease was due to Free Range stopping work for certain smaller clients so that
they could increase the number of repeat projects with larger clients.
COST OF SERVICES. Cost of services decreased approximately $375,000, or
19%. The decrease resulted from a decrease in direct costs associated with fewer
client projects. Gross profit margin decreased from 31% for the year ended
December 31, 1996 to 17% for the same period in 1997.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by approximately $980,000, or 49%. The increase was
attributable to additional personnel necessary to support anticipated growth.
FREE RANGE MEDIA, INC.--LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, Free Range had approximately $48,000 in cash and cash
equivalents compared to $30,000 at December 31, 1998. Cash used in operations
was $4.1 million and $815,000 for the period ended December 31, 1998 and March
31, 1999. In all periods, the net cash used in operating activities was due to a
net loss.
Cash used in investing activities was $247,000 for the year ended December
31, 1998 and $69,000 for the three months ended March 31, 1999. In all periods
cash used in financing activities was for capital expenditures for the purchase
of computer equipment, furniture and fixtures and leasehold improvements.
Additionally, in 1998, Free Range sold their interest in FreeZone, LLC for
$680,000.
Cash provided by financing activities was $4.5 million for the year ended
December 31, 1998 and $902,000 for the three months ended March 31, 1999. In
1998, cash was provided by borrowings of $3.2 million and issuance of $1.2
million aggregate liquidation preference of preferred stock to a related party.
In 1999, $902,000 of cash was provided from borrowings on a note payable with a
related party.
INTEGRATED CONSULTING, INC.--RESULTS OF OPERATIONS
Integrated Consulting, Inc. dba i.con interactive, or i.con, is
headquartered in Dallas, Texas, and has 36 employees. The following table sets
forth certain selected financial data for i.con on a historical basis for the
periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues....................................................... $ 443 $ 849 $ 2,140 $ 456 $ 825
Cost of services............................................... 132 267 716 113 250
--------- --------- --------- --------- ---------
Gross profit................................................... 311 582 1,424 343 575
Selling, general and administrative............................ 315 550 1,383 216 455
--------- --------- --------- --------- ---------
Operating income (loss)........................................ $ (4) $ 32 $ 41 $ 127 $ 120
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
37
<PAGE>
INTEGRATED CONSULTING, INC.--THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE
MONTHS ENDED MARCH 31, 1999
REVENUES. Revenues increased approximately $369,000 or 81%. This increase
resulted primarily from the hiring of 11 consultants to meet the increased
demands for services during the three months ended March 31, 1999, including
services for which Ericsson contributed 13% of total revenues and the Texas
Rangers contributed 12% of total revenues. No other client contributed 10% or
more of i.con's revenues during the period. i.con earned a portion of its
revenue under barter arrangements with certain customers in which i.con provided
website development and maintenance services in exchange for advertising. Barter
revenues increased approximately $92,000, or 167% from $55,000 for the three
months ended March 31, 1998 to $147,000 for the same period in 1999. This
increase resulted primarily from an increase in web development services for the
Texas Rangers Baseball Club and Dallas Stars Hockey Club.
COST OF SERVICES. Cost of services increased approximately $137,000, or
121%. The increase resulted from costs associated with the hiring of 11
consultants due to the increased number of client projects. Gross profit margin
decreased from 75% for the three months ended March 31, 1998 to 70% for the same
period in 1999.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by approximately $239,000, or 111%. The increase resulted
from the addition of five personnel.
INTEGRATED CONSULTING, INC.--1997 COMPARED TO 1998
REVENUES. Revenues increased approximately $1.3 million, or 152%. i.con
earned a portion of its 1998 revenue under barter arrangements with certain
customers for website development and maintenance services in exchange for
advertising. Barter revenues were $425,000 for the year ended December 31, 1998
and were $0 for the year ended December 31, 1997. This increase related
primarily to the recording of revenue for transactions with the Texas Rangers
Baseball Club and Dallas Stars Hockey Club. Barter revenue was not recorded for
year end December 31, 1997, as i.con had not entered into a formalized plan with
the Texas Rangers or Dallas Stars and did not meet requirements for recording
barter revenue in that period. The remaining amount of the increase in revenues
was attributable to a 70% increase in the number of consultants in order to meet
additional demand for services. For the year ended December 31, 1998, the Dallas
Stars contributed 12% of total revenues. No other client contributed 10% or more
of i.con's revenues during the period.
COST OF SERVICES. Cost of services increased approximately $449,000, or
168%. The increase resulted from costs associated with a 70% increase in the
number of consultants. Gross profit margin decreased from 69% for the year ended
December 31, 1997 to 67% for the same period in 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by approximately $833,000, or 151%. The
increase resulted from the addition of seven personnel.
INTEGRATED CONSULTING, INC.--1996 COMPARED TO 1997
REVENUES. Revenues increased approximately $406,000, or 92%. During 1997,
there was a 67% increase in the number of consultants in order to meet the
demand caused by the increased number and size of client projects, which
included services performed for S2 Systems which contributed 13% of total
revenues and Alcatel Network Systems which contributed 10% of total revenues. No
other client contributed 10% or more of i.con's revenues during the period.
38
<PAGE>
COST OF SERVICES. Cost of services increased approximately $135,000, or
102%. This increase was due to a 67% increase in the number of consultants.
Gross profit margin decreased from 70% for the year ended December 31, 1996 to
69% for the same period in 1997.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by approximately $235,000, or 75%. The increase resulted from
the addition of personnel.
INTEGRATED CONSULTING, INC.--LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, i.con had approximately $16,000 in cash and cash
equivalents compared to $9,000 at December 31, 1998. Cash provided by operations
was $49,000 in 1998, which was due to net income and other working capital
changes due to the overall growth in the Company. Cash used in operations was
$29,000 for the three months ended March 31, 1999, which was due to fluctuations
in working capital changes due to the growth in the business.
Cash used in investing activities was $147,000 for the year ended December
31, 1998 and $122,000 for the three months ended March 31, 1999. In all periods
cash used in financing activities was for capital expenditures for the purchase
of computer equipment, furniture and fixtures and leasehold improvements.
In 1998, cash provided from financing activities was $64,000 from proceeds
from long-term debt. For the three months ended March 31, 1999, cash of $97,000
was provided from borrowings on i.con's line of credit and proceeds from
long-term debt. At March 31, 1999, i.con's revolving credit facilities provided
for borrowings up to $100,000. There was no borrowing available under the credit
facility.
INTERACTIVE8, INC.--RESULTS OF OPERATIONS
InterActive8, Inc., or InterActive8, is located in New York, New York, and
has 68 employees. The following table sets forth certain selected financial data
for InterActive8 on a historical basis for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues................................................... $ 1,713 $ 2,818 $ 4,097 $ 737 $ 1,613
Cost of services........................................... 1,056 1,634 2,033 433 3,102
--------- --------- --------- --------- ---------
Gross profit............................................... 657 1,184 2,064 304 (1,489)
Selling, general and administrative........................ 460 1,382 2,419 690 464
--------- --------- --------- --------- ---------
Operating income (loss).................................... $ 197 $ (198) $ (355) $ (386) $ (1,953)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
INTERACTIVE8, INC.--THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS
ENDED MARCH 31, 1999
REVENUES. Revenues increased approximately $876,000, or 118%. This increase
resulted from an increase in the number of consultants to meet the demand caused
by additional client projects, including Maybelline. For the three months ended
March 31, 1999, A&E Television Networks contributed 33% of total revenues and
M&M/Mars contributed 15% of total revenues. No other client contributed 10% or
more of InterActive8's revenues during the period.
COST OF SERVICES. Cost of services increased approximately $2.7 million, or
616%. The increase resulted from direct costs related to the hiring of 22
consultants as well as the recognition of compensation expense for equity
appreciation rights in the amount of $2.2 million. Gross profit margin decreased
from 41% for the three months ended March 31, 1998 to
39
<PAGE>
a negative 92% for the same period in 1999. However, excluding equity related
compensation expense, the gross profit margin would have been 50%.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses decreased by approximately $226,000, or 33%. The decrease resulted from
a reduction in general and administrative personnel.
INTERACTIVE8, INC.--1997 COMPARED TO 1998
REVENUES. Revenues increased approximately $1.3 million, or 45%. This
increase was due to an increase in the number of consultants on staff to perform
services. For the year ended December 31, 1998, A&E Television Networks
contributed 35% of total revenues, which represented an increase of
approximately $559,000 over 1997, and M&M/Mars contributed 10% of total
revenues. No other client contributed 10% or more of InterActive8's revenues
during the period.
COST OF SERVICES. Cost of services increased approximately $399,000, or
24%. The increase resulted from costs related to the hiring of nine consultants
due to the increased number of client projects. Gross profit margin increased
from 42% for the year ended December 31, 1997 to 50% for the same period in
1998.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by approximately $1.0 million, or 75%. The increase resulted
from an increase in overhead associated with the increased volume of business.
INTERACTIVE 8, INC.--1996 COMPARED TO 1997
REVENUES. Revenues increased approximately $1.1 million, or 65%. This
increase resulted from an increase in the number and size of client projects
during the year ended December 31, 1997, including projects for A&E Television
Networks which contributed 31% of total revenues, AT&T which contributed 14% of
total revenues and M&M/Mars which contributed 21% of total revenues. No other
client contributed 10% or more of InterActive8's revenues during the period.
COST OF SERVICES. Cost of services increased approximately $578,000, or
55%. The increase resulted from the addition of professional consulting
personnel. Gross profit margin increased from 38% for the year ended December
31, 1996 to 42% for the same period in 1997.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by approximately $922,000, or 200%. The increase resulted
from increased personnel costs.
INTERACTIVE8, INC.--LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, InterActive8, Inc. had approximately $461,000 in cash and
cash equivalents compared to $130,000 at December 31, 1998. Cash provided by
operations was $648,000 for the three months ended March 31, 1999. Cash used in
operations was $549,000 for the year ended December 31, 1998. In all periods,
cash from/used in operations was due to InterActive8, Inc.'s net loss offset by
working capital changes due to the growth of the business. Additionally, for the
three months ended March 31, 1999, the net loss of $2.0 million was offset by a
non-cash compensation charge of $2.2 million.
Cash used in investing activities was $151,000 for the year ended December
31, 1998 and $278,000 for the three months ended March 31, 1999. In all periods
cash used in financing activities was for capital expenditures for the purchase
of computer equipment and leasehold improvements.
40
<PAGE>
Cash used in financing activities was $37,000 for the three months ended
March 31, 1999 due to payment on InterActive8, Inc.'s line of credit and
long-term debt. Cash provided by financing activities for the period ended
December 31, 1998 was $738,000, due to borrowings on InterActive8, Inc.'s credit
facility and long-term debt of $746,000 and the issuance of common stock for
$50,000. At March 31, 1999, InterActive8, Inc.'s revolving credit facilities
provided for borrowings up to $250,000. There was no borrowing available under
the credit facility.
MULTIMEDIA RESOURCES, LLC--RESULTS OF OPERATIONS
Multimedia Resources, LLC, or Multimedia, is located in Larchmont, New York
and has 14 employees. The following table sets forth certain selected financial
data for Multimedia on a historical basis for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues....................................................... $ 1,928 $ 3,476 $ 2,068 $ 652 $ 742
Cost of services............................................... 985 2,437 1,756 439 314
--------- --------- --------- --------- ---------
Gross profit................................................... 943 1,039 312 213 428
Selling, general and administrative............................ 420 537 275 81 92
--------- --------- --------- --------- ---------
Operating income (loss)........................................ $ 523 $ 502 $ 37 $ 132 $ 336
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
MULTIMEDIA RESOURCES, LLC--THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE
MONTHS ENDED MARCH 31, 1999
REVENUES. Revenues increased approximately $90,000, or 14%. This increase
resulted from an increase in the number of clients as well as growth in services
to MasterCard International. For the three months ended March 31, 1999,
MasterCard International contributed 52% of total revenue. No other client
contributed 10% or more of Multimedia's revenues during the period.
COST OF SERVICES. Cost of services decreased approximately $125,000, or
28%. The decrease resulted from lower outside consultant costs of $86,000. Gross
profit margin increased from 33% for the three months ended March 31, 1998 to
58% for the same period in 1999.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by approximately $11,000, or 14%. The increase resulted from
an increase in overhead associated with the increased volume of business.
MULTIMEDIA RESOURCES, LLC--1997 COMPARED TO 1998
REVENUES. Revenues decreased approximately $1.4 million, or 41%. This
decrease resulted from the temporary loss of MasterCard International as a
client. Multimedia resumed providing services to MasterCard International during
the first quarter of 1999. For the year ended December 31, 1998, MasterCard
International still contributed 34% of total revenues. No other client
contributed 10% or more of Multimedia's revenues during the period.
COST OF SERVICES. Cost of services decreased approximately $681,000, or
28%. The decrease resulted from the temporary loss of MasterCard International,
a significant client. Gross profit margin decreased from 30% for the year ended
December 31, 1997 to 15% for the same period in 1998.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses decreased by approximately $262,000, or 49%. The decrease resulted from
decreases in owner salaries as a result of a decrease in volume.
41
<PAGE>
MULTIMEDIA RESOURCES, LLC--1996 COMPARED TO 1997
REVENUES. Revenue increased approximately $1.5 million, or 80%. This
increase resulted from Internet development projects for MasterCard
International, MSNBC and the Society of European Satellites, or SES. For the
year ended December 31, 1997, MasterCard International contributed 63% of total
revenues and SES contributed 14% of total revenues. No other clients contributed
10% or more of Multimedia's revenues during the period.
COST OF SERVICES. Cost of services increased approximately $1.5 million, or
147%. The increase resulted from additional personnel and $1.2 million for
contract employees to support Internet development work for MasterCard
International. Gross profit margin decreased from 49% for the year ended
December 31, 1996 to 30% for the same period in 1997.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by approximately $117,000, or 28%.
MULTIMEDIA RESOURCES, LLC--LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, Multimedia had approximately $344,000 in cash and cash
equivalents compared to $121,000 at December 31, 1998. Cash provided by
operations was $348,000 for the year ended December 31, 1998 and $273,000 for
the three months ended March 31, 1999. In all periods, the net cash provided by
operating activities was due to Multimedia generating net income and
fluctuations in working capital changes due to the growth in the business.
Cash used in investing activities was $4,000 for the year ended December 31,
1998 and was used for capital expenditures.
Cash from financing activities was $324,000 for the year ended December 31,
1998 and $50,000 for the three months ended March 31, 1999 representing
distributions to members.
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC--RESULTS OF OPERATIONS
Potomac Partners Management Consulting, LLC, or Potomac Partners, is located
in Reston, Virginia, has operations in eight states, and has 37 employees. The
following table sets forth certain selected financial data for Potomac Partners
on a historical basis for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------- --------------------
1997(1) 1998 1998 1999
----------- ------------- --------- ---------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Revenues.............................................. $ 372 $ 4,886 $ 976 $ 2,060
Cost of services...................................... 290 5,086 654 6,231
----- ------------- --------- ---------
Gross profit.......................................... 82 (200) 322 (4,171)
Selling, general and administrative................... 86 876 180 489
----- ------------- --------- ---------
Operating income (loss)............................... $ (4) $ (1,076) $ 142 $ (4,660)
----- ------------- --------- ---------
----- ------------- --------- ---------
</TABLE>
- ------------------------
(1) Inception--November 1997
42
<PAGE>
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC--THREE MONTHS ENDED MARCH 31, 1998
COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
REVENUES. Revenues increased approximately $1.1 million, or 111%. This
increase resulted from an increase in the number and size of client projects
which was driven by the addition of 10 consultants to meet the increased demand
for services. For the three months ended March 31, 1999, United contributed 39%
of total revenues and Wells Fargo contributed 39% of total revenues. No other
client contributed 10% or more of Potomac Partners' revenues during the period.
COST OF SERVICES. Cost of services increased approximately $5.6 million, or
853%. Approximately $5.0 million, or 88%, of the increase was due to
compensation expense for the value of equity participation rights. The remaining
portion of the increase is attributable to the hiring of 10 consultants. Gross
profit margin decreased from 33% for the three months ended March 31, 1998 to a
negative 202% for the same period in 1999. However, excluding equity related
compensation expense, the gross profit margin would have been 35% for 1999.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by approximately $309,000, or 172%. The increase resulted
from a $160,000 increase in bad debt expense and $53,000 increase in personnel
costs. No other individual expense items comprised a significant portion of the
remaining charge.
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC--1997 COMPARED TO 1998
REVENUES. Revenues increased approximately $4.5 million, or 1,213%. The
increase resulted from having a full year of operations for the year ended
December 31, 1998, during which there was an increase in the number of clients.
For the year ended December 31, 1998, Norwest contributed 18% of total revenues,
United contributed 26% of total revenues, Japan Malls contributed 17% of total
revenues and Western Development contributed 13% of total revenues. No other
client contributed 10% or more of Potomac Partners' revenues during the period.
COST OF SERVICES. Cost of services increased approximately $4.8 million, or
1,654%. Approximately $1.5 million of the increase was due to compensation
expense related to the value of equity participation rights. The remaining
increase resulted from costs associated with the hiring of 14 consultants due to
the increased number of projects. Gross profit margin decreased from 22% for the
year ended December 31, 1997 to a negative 4% for the same period in 1998.
However, excluding equity related compensation expense, the gross profit margin
would have been 27% for 1998.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by approximately $790,000, or 919%. The increase was due to a
full year's operations in 1998 compared with two months in 1997.
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC--LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, Potomac Partners had approximately $971,000 in cash and
cash equivalents compared to $892,000 at December 31, 1998. Cash provided by
operations was $278,000 for the year ended December 31, 1998 due to a
fluctuation in working capital due to the growth of the business. Cash used in
operations was $127,000 for the three months ended March 31, 1999 due to a net
loss of $4.7 million offset by a $4.9 million non-cash compensation charge and
other working capital changes due to the growth of the business.
43
<PAGE>
Cash used in investing activities was $53,000 in December 31, 1998 for
capital expenditures. There was no capital expenditures in the year ended
December 31, 1999.
Cash from financing activities was $502,000 for the year ended December 31,
1998 and $205,000 for the three months ended March 31, 1999 due to the capital
contributions by the members. In January 1999, Potomac Partners redeemed the
interests of several members, resulting in a distribution of Potomac Partners
assets including cash of $184,000.
RSI GROUP, INC. AND SUBSIDIARIES--RESULTS OF OPERATIONS
RSI Group, Inc., or RSI, is headquartered in Dallas, Texas, and has four
additional offices in Omaha, Nebraska; Poughkeepsie, New York; Herndon, Virginia
and Research Triangle Park, North Carolina. RSI has 126 employees. The following
table sets forth certain selected financial data for RSI on a historical basis
for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Revenues................................................. $ 16,133 $ 15,724 $ 16,927 $ 4,338 $ 3,253
Cost of services......................................... 11,663 11,650 12,271 3,150 2,364
--------- --------- --------- --------- ---------
Gross profit............................................. 4,470 4,074 4,656 1,188 889
Selling, general and administrative...................... 4,105 3,745 4,253 961 1,714
--------- --------- --------- --------- ---------
Operating income (loss).................................. $ 365 $ 329 $ 403 $ 227 $ (825)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
RSI GROUP, INC. AND SUBSIDIARIES--THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO
THREE MONTHS ENDED MARCH 31, 1999
REVENUES. Revenues decreased approximately $1.1 million, or 25%. This
decrease resulted from a decrease in staffing related to a decrease in business
with First Data Resources. During the period RSI reduced the volume for services
performed for First Data Resources in order to concentrate on a Long-term
strategy of focusing its business on more profitable services for other clients.
For the three months ended March 31, 1999, IBM contributed 44% of total revenues
and MCI contributed 11% of total revenues. No other client contributed 10% or
more of RSI's revenues during the period.
COST OF SERVICES. Cost of services decreased approximately $786,000, or
25%. The decrease resulted from a reduction of costs associated with a 16%
decrease in the number of consultants. Gross profit margin remained unchanged at
27% for the three months ended March 31, 1998 and the same period in 1999.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased approximately $753,000, or 78%. The increase resulted from an
equity based compensation charge in 1999.
RSI GROUP, INC. AND SUBSIDIARIES--1997 COMPARED TO 1998
REVENUES. Revenues increased approximately $1.2 million, or 8%. This
increase resulted from an increase in services performed for IBM. For the year
ended December 31, 1998, IBM contributed 34% of total revenues and First Data
Resources contributed 13% of total revenues. No other client contributed 10% or
more of RSI's revenues during the period.
44
<PAGE>
COST OF SERVICES. Cost of services increased approximately $621,000, or 5%.
The increase resulted from a slight increase in the average number on staff in
1998. Gross profit margin increased from 26% for the year ended December 31,
1997 to 28% for the same period in 1998.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by approximately $508,000, or 14%. The increase resulted from
the addition of personnel necessary to support higher volume of business.
RSI GROUP, INC. AND SUBSIDIARIES--1996 COMPARED TO 1997
REVENUES. Revenues decreased approximately $409,000, or 3%. This decrease
resulted primarily from a decline in staffing to First Data Resources. During
the period RSI reduced the volume of services performed for First Data Resources
in order to concentrate on a long-term strategy of focusing its business on more
profitable services for other clients. For the year ended December 31, 1997, IBM
contributed 28% of total revenues, First Data Resources contributed 17% of total
revenues and Computer Associates contributed 10% of total revenues. No other
client contributed 10% or more of RSI's revenues during the period.
COST OF SERVICES. Cost of services decreased approximately $13,000 or less
than 1%, which was a direct result of the slight decrease in the volume of
business. Gross profit margin decreased from 28% for the year ended December 31,
1996 to 26% for the same period in 1997.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses decreased by approximately $360,000, or 9%. The decrease was primarily
due to a reduction in staffing.
RSI GROUP, INC. AND SUBSIDIARIES--LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, RSI had approximately $31,000 in cash and cash
equivalents compared to $30,000 at December 31, 1998. Cash provided by
operations was $38,000 for the year ended December 31, 1998 and $981,000 for the
three months ended March 31, 1999. In 1998, the net cash used in operating
activities was due to fluctuations in working capital due to growth of the
business. For the three months ended March 31, 1999, the cash provided by
operating activities was due to a $854,000 reduction in accounts receivable.
Cash used in investing activities was $199,000 for the year ended December
31, 1998 and $5,000 for the three months ended March 31, 1999. In all periods
cash used in financing activities was for capital expenditures for the purchase
of computer equipment and furniture fixtures.
Cash used in financing activities was $976,000 for the three months ended
March 31, 1999 due to repayments on the line of credit of $961,000. Cash
provided by financing activities was $179,000 in 1998 due to borrowing under the
line of credit of $220,000. At March 31, 1999, RSI's revolving credit facilities
provided for borrowings up to $2.4 million. At March 31, 1999, approximately
$1.6 million remained available for borrowing under the credit facility.
PRO FORMA COMBINED LIQUIDITY AND CAPITAL RESOURCES
On a historical basis the eight companies and Luminant used $3,300,000 and
$500,000 of cash in its operations for the year ended December 31, 1998 and the
three months ended March 31, 1999.
Of the $3,300,000 and $500,000 of cash used in operations on a historical
basis, one company, Free Range, used $4,200,000 and $815,000 for the year ended
December 31, 1998 and the three months ended March 31, 1999. Exclusive of Free
Range, the other companies as a
45
<PAGE>
group provided cash flows from operations of $900,000 and $315,000 for the year
ended December 31, 1998 and three months ending March 31, 1999. We believe that
the matching of payments to vendor due dates, acceleration of cash receipts from
customers, restricting additions of personnel and restricting other cash
operating expenditures to those required to generate immediate revenue will
reduce the uses of cash by Free Range to less than $1.0 million per year. These
changes in the use of cash at Free Range should allow the companies as a group
to have positive operating cash flows.
For the period ended March 31, 1999 Brand Dialogue used $1,000,000 of cash
in its operations. This was the first use of cash by Brand Dialogue in any of
the periods presented and was the result of a temporary increase in accounts
receivables and faster than normal payment of short term liabilities.
Luminant intends to implement a unified budgetary system to ensure that
unexpected uses of cash flows in operations are kept to a minimum.
After the closing of the acquisitions and this offering, we will have
approximately $37.9 million in cash and cash equivalents and approximately $5.0
million of indebtedness outstanding, on a pro forma basis.
Upon completion of this offering and the simultaneous acquisition of the
eight companies, we intend to consolidate any assumed debt of our companies into
a new credit arrangement. We have initiated preliminary discussions with First
Union Corporation to obtain a senior credit facility sufficient to provide
working capital for all our companies and to finance potential acquisitions, but
we cannot assure you that we will obtain a credit facility. If a credit facility
can be obtained, it is likely that it would require us to comply with various
loan covenants including maintenance of specified financial ratios; restrictions
on additional indebtedness; and restrictions on liens, guarantees, advances and
dividends. The facility would be intended to be used for working capital and
general corporate purposes, including the contingent consideration from the
current acquisitions and any future acquisitions. We cannot assure you that we
will obtain a credit facility on advantageous terms, if at all. If we are unable
to obtain a credit facility, we may not be able to acquire additional companies,
open or expand offices, make capital expenditures, hire and train additional
personnel or otherwise expand our business.
On a pro forma basis, we made capital expenditures of approximately $2.6
million during the year-ended December 31, 1998 and approximately $694,000
during the three months ended March 31, 1999. These capital expenditures were
primarily for computer equipment, internally used software purchases and
leasehold improvements. We expect to make capital expenditures of approximately
$3.2 million for hardware, software, and leasehold improvements during the next
12 months. No assurance can be made with respect to the actual timing and amount
of these expenditures.
As a result of this offering Luminant will have approximately $37.9 million
in cash and cash equivalents and expects to make capital expenditures of $3.2
million in the next 12 months. Luminant intends to minimize the operating uses
of cash by Free Range as described above; however, even if these improvements
take longer than expected the available cash and cash equivalents will be
sufficient to finance operations for the next 12 months. As part of the
acquisition agreements, targets were established that would provide additional
purchase consideration. If the companies achieve the targets that would cause
contingent consideration to be paid, we believe that the operating cash flows
that would result directly from those increases would provide approximately 20%
of the cash needed to satisfy those of the contingent consideration liabilities.
If all targets were met Luminant would be required to pay $49.1 million in the
first quarter of 2000 and $49.1 million in the third quarter of 2000. If the
contingent consideration is paid, Luminant must seek additional debt or equity
financing for that portion of
46
<PAGE>
the contingent consideration that would not be covered by the increased
operating cash flows from meeting these targets.
We intend to pursue acquisition opportunities. The timing, size or success
of any acquisition and the associated potential capital expenditures and
commitments are unpredictable. We believe that cash flow from operations,
borrowings under the proposed line of credit and the unallocated net proceeds of
this offering will be sufficient to fund our capital requirements for at least
the next 12 months, excluding potential acquisitions. To the extent that we are
successful in closing acquisitions, it may be necessary to finance the
acquisitions through the issuance of additional equity securities, incurrence of
indebtedness, or both. In addition, we cannot assure you that our working
capital needs will not exceed anticipated levels or working capital generated
will be sufficient to fund our operations. As a result, we may be required to
obtain additional financing from bank borrowings or debt or equity offerings.
YEAR 2000 READINESS DISCLOSURE STATEMENT
The Year 2000 issue is the result of computer programs using two digits
rather than four to define the applicable year. As a result, date-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in system failures or miscalculations causing
disruptions of operations, including, among others, a temporary inability to
process transactions, send invoices or engage in similar business activities.
Although we have discussed the Year 2000 readiness of each company with the
management of the eight companies, we will not conduct an independent
investigation of the Year 2000 readiness of the eight companies prior to the
closing of the offering and the simultaneous acquisition of the eight companies.
In connection with the acquisitions of our eight companies, however, we have
received a representation from the former owners of each company that their
company does not face material unresolved Year 2000 issues. To the extent these
representations are breached and we suffer damages, our operating results and
financial condition may be adversely affected. Additionally, many of our
companies have contacted their major clients and vendors to assess their Year
2000 readiness.
We depend on smooth and timely interactions with our vendors, clients and
other third parties. Any unexpected costs or disruption in the operations or
activities of such vendors, clients or other third parties as a result of Year
2000 compliance issues within such entities could materially adversely affect
our business, operating results or financial condition. We intend to continue
identifying Year 2000 problems related to our clients and vendors and to
formulate a system of working with key third parties to understand their ability
to continue providing services and products through the change to Year 2000. We
intend to work directly with our key vendors, including financial institutions
and utility providers, and partner with them if necessary, to avoid any business
interruptions.
We believe the most likely worst case scenario related to Year 2000 risks is
a material business interruption that leads to client dissatisfaction and the
termination of an engagement or engagements by dissatisfied clients. Such an
interruption in services could occur due to a breakdown in any number of our
computer systems and applications on other systems, or the systems of third
parties. Examples are failures in our application software, computer chips
embedded in equipment, supply of materials from our suppliers, or lack of
adequate telecommunications, power, or other utilities. Any such failure could
prevent us from being able to deliver our services as expected, which could
materially adversely affect our business, operating results and financial
condition.
Based upon the representations made and information supplied by the former
owners of the eight companies, we do not anticipate costs associated with the
Year 2000 issue to have a
47
<PAGE>
material adverse financial impact on us. There may, however, be interruptions or
other limitations of financial and operating systems' functionality, and we may
incur additional costs to avoid these interruptions or limitations. Our
expectations about future costs associated with the Year 2000 issue are limited
by uncertainties that could cause actual results to have a greater financial
impact than currently anticipated. Factors that could influence the amount and
timing of future costs include:
- our success in identifying systems and programs that contain two-digit
year codes;
- the nature and amount of programming required to upgrade or replace each
of the affected programs;
- the rate and magnitude of related labor and consulting costs; and
- our success in addressing Year 2000 issues with our clients, vendors and
other third parties with which we do business.
RECENT ACCOUNTING PRONOUNCEMENT
In March 1998, the American Institute of Certified Public Accountants issued
SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use", or SOP 98-1. SOP 98-1 requires companies to capitalize
qualifying computer software costs that are incurred during the application
development stage and amortize them over the software's estimated useful life.
The adoption of SOP 98-1 is not expected to have a material adverse impact on
our financial position or results of operations.
48
<PAGE>
BUSINESS
OVERVIEW
We provide professional services to Fortune 500 companies, Internet and
electronic commerce-based companies and other organizations that use or want to
use the Internet and electronic commerce in their businesses. We help
traditional businesses incorporate the Internet and electronic commerce into
their businesses. We also help primarily Internet-based businesses conduct their
business more effectively. We provide the following Internet and electronic
commerce professional services:
- strategy consulting, which helps clients understand how to use the
Internet and electronic commerce to operate their businesses more
competitively and interact with their customers and suppliers more
effectively;
- creative solutions, which involves web site designing, creating marketing
programs for attracting customers to web sites, and developing a web site
"look and feel" that projects a client's identity and serves a client's
business goals;
- technology solutions, which involves the actual building and installation
of Internet and electronic commerce software applications, including web
sites and interfaces to mainframes and existing systems; and
- ongoing services, which are continuing services we provide that support
and complement our clients' Internet and electronic commerce businesses,
such as ongoing Internet site management.
Our services are designed to rapidly improve a client's competitive position
in their field. We provide a wide range of services from assisting our clients
conceive how to use the Internet and electronic commerce in their business, to
building their Internet and electronic commerce applications. We believe that
our approach, which integrates our strategy consulting services, creative
solutions and technology solutions, allows us to deliver in a timely manner
reliable, comprehensive, secure and expandable Internet and electronic commerce
business solutions.
We perform services for more than 100 clients, including the following, each
of which contributed at least $1.0 million to, and accounted for at least one
percent of, our pro forma combined revenues for the 15 months ended March 31,
1999:
- A&E Television Networks
- Bell Atlantic Network Services, Inc.
- International Business Machines Corporation
- MasterCard International Incorporated
- Mars, Incorporated
- United Air Lines Inc.
- Wells Fargo Bank, N.A.
Our clients are diversified across many industries, including technology,
financial, retailing, media and communications. We also work with companies that
do business primarily over the Internet.
49
<PAGE>
As of July 1, 1999, our 641 employees were located throughout the U.S. in
- California
- Colorado
- the District of Columbia
- Florida
- Georgia
- Illinois
- Maryland
- Massachusetts
- Missouri
- Nebraska
- New York
- North Carolina
- Pennsylvania
- Texas
- Virginia
- Washington
- Wisconsin
On a pro forma combined basis, we had $54.8 million of revenues for the 12
months ended December 31, 1998 and $18.4 million of revenues for the three
months ended March 31, 1999.
OUR COMPANY
Simultaneously with the closing of this offering we expect to acquire the
following eight companies:
ALIGN SOLUTIONS CORP.'S services include creating Internet site content and
advertisements; multimedia presentations; Internet site design; document
services, maintenance of databases and workflow automation; and systems
integration services. Align has special expertise in the energy and financial
services industries.
BRAND DIALOGUE-NEW YORK is presently the New York branch of a Young &
Rubicam division. The services offered by the Brand Dialogue-New York business
that we intend to acquire include strategic consulting in the technology and
marketing areas, Internet site development and on-going Internet site
management, on-line media strategy and planning, on-line advertising campaigns
and development of Internet-based branding applications. Brand Dialogue-New York
has provided services to customers in the financial, pharmaceuticals, media and
communications industries.
FREE RANGE MEDIA, INC. provides strategic consulting and creative solutions
that address a client's overall business objectives. Free Range has special
expertise in the financial services, health care and communications industries.
INTEGRATED CONSULTING, INC. DBA I.CON INTERACTIVE, offers creative
solutions, online brand development and ongoing maintenance of Internet site
content. i.con has special expertise in the entertainment, hospitality,
technology and telecommunications industries.
INTERACTIVE8, INC.'S services include strategic consulting, development of
Internet site content, applications development, database and electronic
commerce integration, account management, Internet site hosting, tracking and
analysis, and Internet marketing. InterActive8 has special expertise in the
media and communications and consumer products industries.
MULTIMEDIA RESOURCES, LLC'S services include strategic consulting, business
development, and development of Internet marketing programs. Multimedia has
special expertise in media, retailing and financial services industries.
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC'S professional services include
the formulation of electronic commerce strategy, program management, development
of strategic partnerships, and business process design. Potomac Partners has
special industry expertise in the financial services, retailing, media,
entertainment, communications and transportation industries.
50
<PAGE>
RSI GROUP, INC. AND SUBSIDIARIES' services include the distribution and
decentralization of computing systems, including the integration of electronic
commerce systems, providing mission-critical Internet process services,
application development, and professional staffing and technology support. RSI
has special expertise in the technology, transportation, telecommunications,
financial and consumer goods industries.
INDUSTRY BACKGROUND
The Internet is continuing its rapid development from primarily an
information delivery medium to an interactive platform through which companies
market, operate and manage their businesses and conduct transactions. As a
result of its widespread adoption, the Internet has been the catalyst for an
evolution of business to business, business to consumer and employer to employee
relationships and communications. The explosive growth of the Internet and its
potential to create new opportunities and pose fundamental threats to the
competitive positions of traditional businesses presents enormous challenges for
the managers of companies. This is leading to the rapid growth of, and demand
for, professional services relating to the Internet and electronic commerce.
Companies are using the Internet to restructure the way they conduct their
businesses. The Internet provides new ways for companies to market their
products and services, manage their operations and employees, and improve their
financial results. Through the Internet, companies have the ability to improve
their competitive positions, reduce operating, transaction and overhead costs;
shorten product and marketing cycle times; create and strengthen business
alliances; and improve and accelerate the flow of information both internally
and externally. Through electronic commerce and the Internet, organizations are
identifying, developing and expanding product and service offerings and creating
new innovative strategies and operating models. This ability has led to the
emergence of new businesses.
The emergence of the Internet and electronic commerce creates significant
challenges for virtually all companies regardless of industry or location. In
many industries traditional barriers to entry, such as physical or capital
assets, are becoming less important, and the traditional competitive advantages
and business models that companies relied on to sustain their profitability are
diminishing. The Internet and other technologies reduce the effect of geographic
barriers, price discrimination and other factors and are changing the way many
businesses have historically competed. Forrester Research, an industry research
firm, estimates the revenues generated from Internet commerce will grow from $55
billion in 1998 to $1.4 trillion in 2003. This represents a compound annual
growth rate of 91%.
In order to successfully develop Internet businesses and conduct electronic
commerce, companies need to understand how the Internet will fit in with their
overall long and short term business plans, and how business over the Internet
differs from conventional business operations to be successful. Internet sites
must be distinctive, attractive, engaging and easy to use. Companies need to use
the right tools to successfully achieve their goals and develop effective
technology systems.
Generally, companies do not have the internal resources necessary to
establish an electronic commerce presence on the Internet in the rapid time
frames needed to meet their business goals. We believe that companies will focus
on their core competencies and will not make the time or financial commitment
necessary to hire and train the professionals needed to build in-house
capabilities. International Data Corporation, or IDC, an industry research firm,
forecasts that the market for Internet and electronic commerce professional
services worldwide will grow to $78.5 billion by 2003.
51
<PAGE>
The need for organizations to act quickly and effectively has led to the
demand for coordinated strategic, creative and technology services. Many
traditional professional services firms can provide services in strategy
consulting, creative solutions or in technology solutions. The need to integrate
these disciplines is beyond the capabilities of most traditional service firms,
however, especially given the rapid time frames for developing Internet and
electronic commerce businesses. As a result, we believe there is great demand
for professional services firms that can effectively provide services in all
three disciplines in the rapid time frame and focus that the Internet and
electronic commerce business environment demands.
THE LUMINANT SOLUTION
We are a leading provider of Internet and electronic commerce solutions for
clients in diversified industries located throughout the United States and
abroad. We are able to provide the combination of strategy consulting, creative
solutions and technology solutions that clients need to create and expand their
Internet and electronic commerce businesses. We also provide on-going services
needed to manage and operate our clients' Internet businesses.
We concentrate on providing clients with a broad range of capabilities which
blend the disciplines of strategy consulting, creative solutions and technology
solutions. Our work is focused on:
- LEADING INDUSTRY SOLUTIONS. We believe that we provide clients with
leading edge solutions critical to their success. Our strategy consulting
practice helps clients develop and sharpen their strategic vision in order
to capitalize on Internet and electronic commerce opportunities. Our
creative solutions practice then provides web site design, marketing
programs for attracting customers to web sites, and the development of a
web site "look and feel" that projects a client's identity and serves a
client's business goals. Our technology solutions practice builds and
installs the Internet and electronic commerce software applications
necessary to successfully operate Internet businesses. In addition, we
provide ongoing services that support and complement our clients' Internet
and electronic commerce businesses, including ongoing Internet site
management.
- INTEGRATED DELIVERY MODEL. We are able to deliver strategy consulting,
creative solutions and technology solutions in an integrated coordinated
manner that addresses our clients' Internet and electronic
commerce-related business challenges in rapid time frames.
- LONG-TERM CLIENT RELATIONSHIPS. Our extensive understanding of our
clients' needs and objectives allows us to provide integrated Internet and
electronic commerce professional services that help our clients grow
revenues and reduce costs. Our strategy consulting, creative and
technology services and skills are geared to establishing multi-year and
multi-project relationships with our clients.
- STRONG MANAGEMENT TEAMS. We have a highly experienced group of Internet
and electronic commerce professionals in each of our practice areas. These
professionals combine to form a knowledgeable client management team with
many years of professional experience. These teams offer seamless client
solutions that address a client's strategic vision, sales and marketing
objectives. Our breadth of experience and skills allows us to provide
multifaceted assistance to our clients.
STRATEGY
We intend to strengthen our position as a provider of professional services
to Fortune 500 companies, Internet and electronic commerce-based companies and
other organizations who
52
<PAGE>
use or want to use the Internet and electronic commerce in their business. Our
strategy for achieving this objective is based on the following key elements:
- LEVERAGE OUR THREE MAIN PRACTICE AREAS. Through our three main practice
areas, strategy consulting, creative solutions and technology solutions,
we are able to deliver valuable services to our clients. These practice
areas allow us to fully capture our collective expertise and channel those
skills to deliver our solutions in an effective, consistent, disciplined
and integrated manner to our clients. In addition, given the need for
rapid business development in the Internet arena, our ability to integrate
our three main practices will be an important feature of our services and
a key point of differentiation in the marketplace.
- EXPAND LONG-TERM CLIENT RELATIONSHIPS. We have a number of established
long-term client relationships and we intend to develop and sustain
additional client relationships over time. Our client service teams are
able to integrate strategic solutions, creative solutions and technology
solutions at each stage of our client engagements. We believe that by
offering our clients coordinated strategy consulting, creative and
technology services we are able to help our clients grow revenues and
reduce expenses. Furthermore, we believe that maintaining a reputation for
being an innovative Internet and electronic commerce professional services
firm will increase our ability to attract new clients, including by
referral from our existing clients.
- OPERATE AS A SINGLE, FULLY INTEGRATED FIRM. We are creating a strong,
dynamic, united platform for our business based on an integrated firm
concept. We intend to leverage our strong executive leadership to project
a unified mission and integrated operating model. All of our businesses
are adopting a single corporate vision, name, identity and brand. Our
management and our employees will be provided incentives that are based on
overall corporate performance. We believe it is critical to establish
strong internal management systems and processes in order to maintain a
high, consistent level of client service and efficient utilization of the
skills of our people. The key management infrastructure will be centered
on financial and management information, communications, incentives,
recruiting, training and knowledge management.
- MAINTAIN LEADING EDGE PROFESSIONAL CAPABILITIES AND TECHNOLOGY SOLUTIONS.
In order to provide our clients with the industry's leading edge solutions
and our integrated approach to their Internet and electronic commerce
professional services needs, we place a strong focus on attracting,
hiring, developing and retaining outstanding personnel. We focus on
keeping the skills of our employees in-line with the industry's most
current standards, and on developing management and leadership skills
among a broad cross-section of our people. To facilitate ongoing
professional development and innovation, we focus on several key skill
sets: problem solving, analysis, communications, creativity, team work and
effectiveness with our clients.
- EXPAND OUR BREADTH OF SERVICE AND GEOGRAPHIC SCOPE. As our clients' needs
broaden and expand, we intend to enhance our set of service capabilities,
improve our geographic reach and strengthen our management team. We intend
to build our capabilities through organic growth and through selective
strategic acquisitions in the United States and internationally.
- PROVIDE ONGOING SERVICES. As part of our comprehensive, integrated
approach to our long-term client relationships, we provide clients with
ongoing services which enhance a clients' ability to operate their
Internet and electronic commerce businesses. Those services include
managing the content of Internet sites and providing placement of
advertising media. We believe that these ongoing services are critical to
seamlessly
53
<PAGE>
providing a client with the best possible Internet and electronic commerce
professional services and are a principal factor that enables us to
attract and retain our clients.
SERVICES
We offer a wide range of Internet and electronic commerce professional
services to traditional businesses as well as new Internet-based businesses.
These services fall into a number of categories, including strategy consulting,
creative solutions, technology solutions and ongoing services, which involve the
following activities:
STRATEGY CONSULTING
Strategy consulting includes services that help our clients understand how
to use the Internet and electronic commerce to achieve operating efficiencies,
open new and more effective ways to communicate with customers and suppliers,
enhance competitive advantages and otherwise incorporate the Internet and
electronic commerce into their businesses. Our strategy consulting practice area
includes:
- BUSINESS STRATEGY. We analyze the economic structures of industries and
particular businesses and help our clients establish financial and
non-financial goals. We also screen alliance and acquisition choices,
analyze customers and markets, conduct competitive and pricing analyses
and advise clients regarding pricing.
- MARKETING STRATEGY. We provide profiles and advice about the make-up of
our clients' markets and suggest ways to promote and distribute a client's
products and services. We also identify and construct opportunities for
partnering with other businesses, and develop ways to increase Internet
site traffic.
- TECHNOLOGY STRATEGY. We provide advice regarding technology systems,
selection of tools for managing an Internet site, ways to communicate with
customers and suppliers, and technology-related partnerships and
alliances.
- BRANDING AND IDENTITY. We identify branding goals and analyze market
positioning for our clients and plan for the development, testing and
establishment of their online brands. We also coordinate the Internet and
non-Internet branding efforts of our clients, and develop plans for
communicating to their customers.
CREATIVE SOLUTIONS
Creative solutions involve designing Internet sites that visually engage the
targeted end-user and are consistent with a client's branding, identity and
overall business strategy. Our creative practice area includes:
- INTELLECTUAL PRODUCT DEVELOPMENT. We create designs, graphics and Internet
site plans. We also help clients develop and install the content on their
Internet sites.
- INTERNET MARKETING. We create marketing programs for our clients' Internet
sites which focus on increasing customers and improving revenues, market
positions and profitability.
- CUSTOMER DEVELOPMENT, MEASUREMENTS AND ANALYSIS. We develop methods for
measuring and analyzing the effectiveness of the client's Internet
enterprise. We design and install Internet and electronic commerce
software applications to help clients target, acquire and retain
customers, expand customer relationships and generate new business and
demand for services. We also design and install Internet and electronic
commerce software applications to measure sales cycles, manage the life
cycle of a customer relationship, analyze pricing and tactics and evaluate
sales force efficiency and effectiveness.
54
<PAGE>
TECHNOLOGY SOLUTIONS
We use leading technologies to deliver solutions that fulfill our clients'
strategic objectives. We assist our clients in building new Internet and
electronic commerce software applications and integrating these applications
into our clients' existing systems. Our technology practice area includes:
- TECHNOLOGY DEVELOPMENT. We build and install the Internet and electronic
commerce software applications needed by our clients to achieve their
marketplace goals. We help our clients set forth all requirements for
building and maintaining an Internet site. We also help our clients use
Internet and electronic commerce technology to build flexible, adaptable
systems.
- INTERNET INTEGRATION. We integrate the Internet software applications with
existing systems in other areas of the client's business. We integrate
Internet software applications for back office systems relating to
customer service, pricing, purchasing, shipping, inventory, order
fulfillment and information systems. We also integrate corporate intranets
and extranets.
- ELECTRONIC COMMERCE MANAGEMENT. We help clients design and install
Internet based software applications for handling electronic order
management and transaction processing.
- CONTENT AND PRODUCT DEVELOPMENT MANAGEMENT TOOLS. We help clients create,
support and manage their Internet sites and electronic commerce systems,
perform quality control on, and automatically update, electronic content,
and develop databases to support current and archived electronic content.
- SECURITY. We plan, implement and audit security practices to protect our
clients' systems from unauthorized access and intrusion.
ONGOING SERVICES
Our clients engage us to perform ongoing services, which enables us to
maintain long-term client relationships and to support their Internet and
electronic commerce business operations. The ongoing services that we provide
include:
- CONTENT SERVICES. We manage some or all of the content on our clients'
Internet sites, including static or continuously updated content for
entire sites or subsections of sites.
- RESEARCH SERVICES AND MARKET ANALYSIS. We prepare ongoing studies of the
effectiveness of the Internet site. We provide focus groups, surveys, and
analyses comparing our clients' sites with those of their competitors
using sophisticated research and analysis techniques.
- PLACEMENT OF ADVERTISING MEDIA. We help clients place their advertising
media by designing and creating advertisements, identifying where to place
advertisements and procuring space for the media.
- BUSINESS PROCESSES. We assess the various business processes of an
electronic enterprise and advise clients how the processes should be
performed or improved. The areas we assess include order fulfillment,
billing, human resources, customer order flow, public relations and
warehousing.
55
<PAGE>
EXAMPLES OF OUR SERVICES AND SOLUTIONS
The following examples illustrate the kinds of services and solutions that
we have developed for specific clients:
M&M/MARS
M&M/Mars is one of the leading candy and confectionery firms, and owns a
number of established consumer brands. In 1996, M&M/Mars retained us to bring
the M&M's Brand to the World Wide Web. Since then, we have provided the company
with a wide range of Internet solutions, cutting across multiple brands and
divisions, that opened up new avenues of business.
From creating brand-building sites that provide rich interactive media
experiences, such as the M&M Studios site and the SKITTLES-Registered Trademark-
Portal, to electronic commerce solutions like the newly relaunched M&M's Network
Online Store, to online recruiting sites and beyond, we have helped M&M/Mars do
business in countries around the world faster and more flexibly than before. As
a result, M&M/Mars has discovered new business opportunities and new ways to
communicate with the world, helping it to remain a world leader in a competitive
industry.
MASTERCARD INTERNATIONAL
MasterCard International Incorporated retained us to help build its
electronic commerce business. We have developed several new interactive
programs, games and partnerships designed to increase site traffic for the
MasterCard.com web site. We conceived and implemented a brand-building program
entitled "See the Future Now" and an educational program called "Shopping Now?
Here's How," to educate consumers about the benefits of shopping in stores and
online with MasterCard. Features of the program include an "instant win game"
that showcases MasterCard benefits that can be realized now and in the future,
and a "ShopSmart" program that educates consumers how to shop effectively and
safely on the Internet.
We have also worked on MasterCard International's behalf with other sites to
create custom-developed media partnerships. We worked with Excite, Inc. to
create a "ShopSmart" decal awareness program. The program helped MasterCard
secure decal participation relationships with over 100 merchants. We have also
worked to develop media partnerships with key commerce merchants, including
Preview Travel, Netscape, ZDNet's, NetBuyer and GolfWeb.
STERLING SOFTWARE, INC.
Sterling Software, Inc. engaged us late in 1998 to redesign their current
Internet site. Sterling sought a site that pulled together all of its existing
Internet sites into a common look and feel, offered common, shared databases
among the sites, allowed for local content updates and reflected Sterling's
quality and progressiveness. We began to redesign Sterling's Internet sites in
early 1999. Over the span of several months, our team redesigned, reorganized
and rebuilt thousands of pages from more than a dozen different product lines
and international Internet sites.
The look and feel of the revised site reflects the state-of-the-art
technology that underlies Sterling's solution-based products. The site now
features a consistent overall design and common navigation and data structures
throughout all of its sections. Each main section in the site incorporates
custom photography, marketing information and background color elements.
Sterling's new site also incorporates state-of-the-art Web technology such as
Dynamic HTML, Flash animation, a dynamic menu system, mechanisms for local
content providers to input and
56
<PAGE>
update dynamic content and a central administration system for reviewing and
posting new content.
CLIENTS
Our companies have provided professional services for a variety of clients
in many industries. The following is a partial list of our clients that we
believe is representative of our overall client base:
<TABLE>
<CAPTION>
MEDIA AND TRAVEL AND
COMMUNICATIONS TECHNOLOGY FINANCIAL TRANSPORTATION
- ----------------------- ----------------------- ----------------------------- ------------------------
<S> <C> <C> <C>
A&E Television International Business First Data Resources United Air Lines Inc.
Networks Machines Corporation MasterCard International
AT&T Corp. Microsoft Corporation Incorporated
Bell Atlantic Network Sterling Software, Inc. National Association of
Services, Inc. Securities Dealers, Inc.
MCI Worldcom, Inc. Wells Fargo
</TABLE>
<TABLE>
<CAPTION>
INTERACTIVE CONSUMER ENERGY
- ------------------------------ -------------------- --------------------
<S> <C> <C>
JuniorNet Corporation Maybelline, Inc. Chevron U.S.A. Inc.
Mars, Incorporated Enron Corp.
Office Depot, Inc. Halliburton Company
</TABLE>
For the 12 months ended December 31, 1998, IBM, our largest client,
accounted for approximately 12.4% of our pro forma combined revenues. No other
client accounted for 10% or more of our pro forma combined revenues for the 12
months ended December 31, 1998 and no client accounted for 10% or more of our
pro forma combined revenues for the three months ended March 31, 1999.
SALES AND MARKETING
Our sales approach is based on developing long-term consultative
relationships with our clients. We intend to integrate the sales and marketing
functions of the companies we acquire to provide for client focused professional
marketing organization targeted toward developing existing client relationships
by expanding the services provided to those clients as well as adding new
clients. In addition to our direct sales force which will market our service
along those lines, our management will actively market to companies with which
they have a relationship. We will employ a team selling approach, in which our
sales people collaborate with our business unit professionals and management to
identify prospects, conduct sales and manage client relationships, particularly
at core client relationships. We and Young & Rubicam intend to cooperate in
marketing our respective services to each others' clients in order to increase
the range, breadth and depth of services available to these clients.
In addition, we integrate the discipline of strategic, creative and
technical solutions into our clients' sale processes. We assign senior
executives to each account to ensure the multi-disciplinary sales approach. This
process identifies major cross-disciplinary client issues early in the process,
which saves the client time and money and allows us to provide more effective
services to our clients. Most of our senior executives are involved in the sales
process.
COMPETITION
The market for our services is highly fragmented and can be characterized by
intense competition and rapid technological change. We have many competitors
including large and well-established firms, new entrants attracted by low
barriers to entry and prospective clients who have used their internal resources
to develop an Internet presence.
57
<PAGE>
Our current competitors include, and may in the future include, the
following:
- Internet consulting firms and online agencies, including AGENCY.COM,
AppNet, iXL Enterprises, Modem Media . Poppe Tyson, Organic Online,
Proxicom, Razorfish, Scient, US Interactive, USWeb/CKS and Viant;
- general management consulting firms, including Bain & Company, Boston
Consulting Group, Booz Allen & Hamilton and McKinsey & Company;
- the professional services groups of computer equipment companies,
including Compaq, Hewlett-Packard and IBM;
- systems integrators, including Andersen Consulting, Cambridge Technology
Partners, Sapient, and consulting arms of the "Big Five" accounting firms;
and
- internally developed solutions of current and potential clients.
The principal competitive factors in the Internet professional services
market include Internet expertise and talent, client references, integrated
strategy, technology and creative design services, quality, pricing and speed of
service delivery and vertical industry knowledge. We believe we compete
favorably with respect to these factors and are in a good position to attract
talent with our growth and entrepreneurial culture. We believe we have
established ourselves as a leader in Internet-specific industry and domain
expertise. Through our solutions and our attention to client satisfaction, we
have created a strong track record of customer successes. We believe the market
will continue to offer significant opportunity for multiple players on the short
and medium-term.
INTELLECTUAL PROPERTY
We utilize intellectual property in our business, some of which we consider
proprietary. We generally rely on trade secret law to protect our proprietary
interests. We cannot guarantee that the steps we have taken to protect our
proprietary rights will be adequate to deter misappropriation of our
intellectual property, and we may not be able to detect unauthorized use and
take appropriate steps to enforce our intellectual property rights. If third
parties infringe or misappropriate our trade secrets, copyrights, trademarks or
other proprietary information, our business could be seriously harmed. In
addition, although we believe that our proprietary rights do not infringe on the
intellectual property rights of others, other parties may assert infringement
claims against us or claim that we have violated their intellectual property
rights. These claims, even if not true, could result in significant legal and
other costs and may be a distraction to management. Protection of intellectual
property in many foreign countries is weaker and less reliable than in the
United States, so if our business expands into foreign countries, risks
associated with protecting our intellectual property will increase.
EMPLOYEES
As of July 1, 1999, we had a total of 641 employees, of which 41 were in
management, 498 in professional services, 40 in sales and marketing and 62 in
administration. Success will depend in part on our ability to attract, retain
and motivate highly qualified technical and management personnel, for whom
competition is intense. None of our employees are represented by labor unions.
We believe our relationship with our employees is good.
To succeed, we must continue to hire, retain and train outstanding
professionals. We believe that our success retaining these individuals will
depend significantly on our ability to provide a rich learning environment, to
provide a one-firm culture and to offer continued professional development as
well as economic incentives.
58
<PAGE>
We believe that developing our one-firm concept with a shared culture is
critical to our ability to attract top management, strategic, technology,
design, sales, marketing and support professionals. Our core values include a
dedication to maintaining an innovative and team-based environment in order to
achieve total client satisfaction and provide our employees with personal and
professional growth opportunities.
FACILITIES
We lease offices located in Atlanta, Georgia; Chicago, Illinois; Dallas,
Texas; Houston, Texas; Herndon, Virginia; Larchmont, New York; New York City,
New York; San Francisco, California; and Seattle, Washington. Our headquarters
are located in Dallas, Texas at the facilities of RSI under a month to month
lease.
LEGAL PROCEEDINGS
We and our companies are not parties to any pending material legal
proceedings.
59
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors and their ages as of July 1, 1999 are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- -----------------------------------------------
<S> <C> <C>
Michael H. Jordan (1)(2)(3)......... 63 Chairman and Director
Guillermo G. Marmol (4)............. 46 Chief Executive Officer, President and Director
Derek R. Reisfield.................. 36 Vice Chairman and Executive Vice President
Thomas G. Bevivino.................. 44 Vice President of Finance
George P. Stamas.................... 48 Director
Randolph Austin (2)(3)(5)........... 35 Director
Michael J. Dolan (5)................ 52 Director
James R. Corey (5).................. 45 Director
Richard M. Scruggs (5).............. 43 Director
</TABLE>
- ------------------------
(1) Mr. Jordan will be elected a director and Chairman effective on the closing
of this offering.
(2) Member of the Board of Directors' audit committee effective on the closing
of this offering.
(3) Member of the Board of Directors' compensation committee effective on the
closing of this offering.
(4) Mr. Marmol will serve as Chairman until the closing of this offering. Mr.
Marmol will remain as a director following his resignation as Chairman.
(5) Messrs. Austin, Dolan, Corey and Scruggs will be appointed as directors
effective on the closing of this offering.
MICHAEL H. JORDAN will be our Chairman effective upon the closing of this
offering and the simultaneous acquisition of the eight companies, having served
as an advisor to us since January 1, 1999. Mr. Jordan retired in December 1998
as Chairman and Chief Executive Officer of CBS Corporation, formerly
Westinghouse Electric Corporation, positions he held since June 1993. Prior to
joining Westinghouse, he was a principal with the investment firm of Clayton,
Dubilier & Rice, Inc. from September 1992 through June 1993. From 1974 until
1992, Mr. Jordan held various management positions at PepsiCo, Inc., his last
position being Chief Executive Officer of PepsiCo International. From 1964 to
1974, Mr. Jordan held various positions, including Partner at McKinsey &
Company, Inc., an international management consulting firm. Mr. Jordan is also a
member of the Boards of Directors of Aetna, Inc., Dell Computer Corp. and
Marketwatch.com. Mr. Jordan is a member of the President's Export Council; is
the Chairman of the U.S.-Japan Business Council; Chairman of The College
Fund/UNCF; and Chairman of the Policy Board of the Americans for the Arts.
GUILLERMO G. MARMOL has been our Chief Executive Officer and President since
August 1998 and a director since June, 1999. Previously, Mr. Marmol was a Vice
President of Perot Systems, Inc., Chairman of its Operating Committee and
responsible for corporate development from January 1996 to May 1998. Prior to
joining Perot Systems, Mr. Marmol held a variety of positions during an 18-year
career with McKinsey & Company, Inc. He was elected a director and senior
partner in 1991 and most recently held leadership positions in the firm's senior
partner election committee, its Dallas, Texas office and its global organization
practice.
DEREK R. REISFIELD has been our non-director Vice Chairman and Executive
Vice President since April 1999, having served as an advisor since January 1999.
Mr. Reisfield held a variety of positions with CBS Corporation, formerly
Westinghouse Electric Corporation, from May 1996 to January 1999, where he held
the positions of Vice President, Business Development and then President of the
CBS New Media Group. While at CBS, Mr. Reisfield created CBS.Marketwatch.com and
served as the Chairman of the Board of Marketwatch.com, LLC. He was also
responsible for the development of CBS.Sportsline.com, and served on the Board
of Directors of Sportsline USA, Inc. From May 1995 to April 1996, Mr. Reisfield
was a Partner of
60
<PAGE>
Mitchell Madison Group, a management consulting company, where he was a
co-founder and co-leader of the firm's Media and Telecommunications Practice.
From August 1987 to June 1995, Mr. Reisfield served in various capacities,
including Senior Manager, at McKinsey & Company, Inc. Mr. Reisfield serves on
the board of directors of Pictet & Cie. Global Leisure Fund, S.A., a Swiss based
mutual fund.
THOMAS G. BEVIVINO has been our Vice President of Finance since July, 1999.
In March, 1999, Mr. Bevivino formed ARC Group LLC, a specialist financial
advisory and transactions support firm, and since that date he has been engaged
full-time in supervising our financial due diligence efforts and preparing our
financial statements. From June 1986 to June 1988, Mr. Bevivino served as a
staff accountant at Kreischer Miller & Co., an accounting, auditing and
financial advisory firm. After receiving his CPA in June 1988, Mr. Bevivino
served as a Senior Accountant at Kreischer Miller from June 1988 to August 1990.
From August 1990 to December, 1991, Mr. Bevivino served as the corporate
controller of Realen Homes, a real estate developer. In December, 1991, Mr.
Bevivino rejoined Kreischer Miller where he worked until March 1999, departing
as a Senior Engagement Manager. Mr. Bevivino is a member of the American
Institute of Certified Public Accountants and the Pennsylvania Institute of
Certified Public Accountants.
GEORGE P. STAMAS has been a director since May 1999. Mr. Stamas is a partner
with the law firm of Wilmer, Cutler & Pickering and Co-Chairman of that firm's
Corporate Department. Prior to joining Wilmer, Cutler & Pickering as a partner
in April 1996, he was a partner at Piper & Marbury L.L.P. since 1983. Mr. Stamas
is counsel to, and a limited partner of, the Washington Capitals hockey team and
the Baltimore Orioles baseball team. Mr. Stamas also serves on the Board of
Directors of FTI Consulting, Inc., a provider of litigation support services.
RANDOLPH AUSTIN will become a director effective upon the closing of this
offering and the simultaneous acquisition of the eight companies. From January
1999 until present Mr. Austin has been an advisor to Bertelsmann Ventures. From
January 1998 to December 1998, Mr. Austin was President and Chief Executive
Officer of BOL, Bertelsmann Online, Bertelsmann's global electronic commerce
business. From November 1995 to December 1997, Mr. Austin held various positions
with Prodigy, Inc., his last position being Senior Vice President, Sales &
Business Development. From September 1990 to November 1995, Mr. Austin served in
various capacities, including Senior Engagement Manager, at McKinsey & Company,
Inc.
MICHAEL J. DOLAN will become a director effective upon the closing of this
offering and the simultaneous acquisition of the eight companies. Since July
1996, Mr. Dolan has served as Vice Chairman, Chief Financial Officer and a
director of Young & Rubicam Inc., an international marketing and communications
services firm. From August 1991 to July 1996, Mr. Dolan was President and Chief
Executive Officer of the joint venture, Snack Ventures Europe, between PepsiCo
Foods International and General Mills.
JAMES R. COREY will become a director effective upon the closing of this
offering and the simultaneous acquisition of the eight companies. Mr. Corey has
served as Managing Director of Potomac Partners since September 1997. Prior to
joining Potomac Partners, Mr. Corey served as Co-Chief Operating Officer of AT&T
Solutions and Managing Partner of their Consulting Division from June 1995 until
September 1997. From June 1994 to June 1995, Mr. Corey served as President of
the Worldwide Services Organization of Unisys Corporation. From December 1989
until June 1994 Mr. Corey was a partner in the Los Angeles office of McKinsey &
Company, Inc. Previously, Mr. Corey was a Partner at Andersen Consulting in
Chicago.
RICHARD M. SCRUGGS will become a director effective upon the closing of this
offering and the simultaneous acquisition of the eight companies. Mr. Scruggs
has served as President, Chief Executive Officer and Chairman of the Board of
Align since October 1996. From January 1996 until October 1996, Mr. Scruggs
served as Chief Operating Officer of Rothwell Systems, which
61
<PAGE>
was later purchased by Perot Systems,. From May 1990 until January 1996, Mr.
Scruggs served in a variety of capacities at BSG Alliance/IT, including Managing
Director of Business Development and Managing Director of the Houston office.
At the closing of this offering and the simultaneous acquisition of the
eight companies, our Board of Directors will consist of seven directors, which
number may be changed by the Board of Directors. Mr. Dolan is being appointed to
our Board of Directors pursuant to an agreement between us and Young & Rubicam.
If the size of the Board is increased to ten or more, Young & Rubicam will have
the right to nominate an additional director to our Board. Messrs. Corey and
Scruggs are being appointed to our Board of Directors pursuant to the agreements
we have entered into to acquire their companies. In addition, we currently
expect that Mr. Corey will be appointed our President, and Mr. Scruggs will be
appointed a Vice Chairman, following the closing of this offering and the
simultaneous acquisition of the eight companies.
KEY PRACTICE LEADERS
The following persons held the positions indicated opposite their names in
the companies that we will acquire:
<TABLE>
<CAPTION>
NAME FORMER POSITION IN ACQUIRED COMPANY
- ------------------------ ---------------------------------------------------------
<S> <C>
Lynn J. Branigan........ Managing Partner, Multimedia
Calvin W. Carter........ President and Chief Executive Officer, i.con
James R. Corey.......... Managing Director, Potomac Partners
John B. Dimmer.......... President, Free Range
Bruce D. Grant.......... President, RSI
Henry Heilbrunn......... Managing Partner, Multimedia
William Markel.......... Managing Partner, InterActive8
Andreas Panayi.......... President, Brand Dialogue-New York
Douglas Rice............ President and Chief Executive Officer, InterActive8
Richard M. Scruggs...... President, Chief Executive Officer and Chairman of the
Board, Align
</TABLE>
LYNN J. BRANIGAN has served as Managing Partner of Multimedia since she
co-founded the company with Henry Heilbrunn in 1993. Ms. Branigan specializes in
marketing, media and business development at Multimedia. Prior to forming
Multimedia, Ms. Branigan served as Director, Sales and Marketing for the
commercial unit of Prodigy Services Company, Inc. from February 1985 until
January 1993.
CALVIN W. CARTER has served as the President and Chief Executive Officer of
i.con since he co-founded the company in August 1994. From May 1993 until August
1994, Mr. Carter served as a management consultant for PricewaterhouseCoopers
LLP.
JAMES R. COREY will become a director of Luminant effective upon the closing
of this offering and the simultaneous acquisition of the eight companies. Mr.
Corey has served as Managing Director of Potomac Partners since September 1997.
Prior to joining Potomac Partners, Mr. Corey served as Co-Chief Operating
Officer of AT&T Solutions and Managing Partner of their Consulting Division from
June 1995 until September 1997. From June 1994 to June 1995, Mr. Corey served as
President of the Worldwide Services Organization of Unisys Corporation. From
December 1989 until June 1994, Mr. Corey was a partner in the Los Angeles office
of McKinsey & Company, Inc. Previously, Mr. Corey was a Partner at Andersen
Consulting in Chicago.
JOHN B. DIMMER has served as President of Free Range since May 1998. From
June 1995 until May 1998, Mr. Dimmer served as Vice President and Chief
Financial Officer of Free Range.
62
<PAGE>
From March 1986 until June 1995, Mr. Dimmer served as Assistant Secretary and
Manager of Commercial Surety at Reliance Surety Company.
BRUCE D. GRANT has served as President of RSI since January 1999. From
January 1997 until December 1998, Mr. Grant served as President of RSI East, and
from January 1992 until December 1996, Mr. Grant served as Vice President of RSI
East. From 1984 until January 1992, Mr. Grant served in various capacities with
RSI and its affiliates.
HENRY HEILBRUNN has served as Managing Partner of Multimedia since he
co-founded the company with Ms. Branigan in 1993. Mr. Heilbrunn specializes in
business planning and product development at Multimedia Resources. Prior to
forming Multimedia, Mr. Heilbrunn served as Senior Vice President, Product
Management and Retention Marketing at Prodigy Services Company, Inc. from
September 1990 until January 1993, and in various other capacities with Prodigy
from February 1984 until August 1990.
WILLIAM MARKEL has served as Managing Partner of InterActive8 since 1998.
From February 1995 until 1997, Mr. Markel provided business development
consulting for InterActive8, and from 1994 until February 1995 he served as a
sales executive for Harrington Righter and Parsons, a television sales division
of Cox Broadcasting.
ANDREAS PANAYI has served as President of Brand Dialogue-New York, Young &
Rubicam's digital interactive branding unit, since 1998. From 1989 until 1998,
Mr. Panayi worked in various capacities at Poppe Tyson, the global interactive
marketing arm of True North, including most recently as Senior Partner, Director
of International Operations.
DOUGLAS RICE has served as InterActive8's President and Chief Executive
Officer since he founded the company in 1994. From 1994 to 1997, Mr. Rice also
served as the Creative Director for InterActive8.
RICHARD M. SCRUGGS will become a director of Luminant effective upon the
closing of this offering and the simultaneous acquisition of the eight
companies. Mr. Scruggs has served as President, Chief Executive Officer and
Chairman of the Board of Align since October 1996. From January 1996 until
October 1996, Mr. Scruggs served as Chief Operating Officer of Rothwell Systems
(which was later purchased by Perot Systems). From May 1990 until January 1996,
Mr. Scruggs served in a variety of capacities at BSG Alliance/IT, including
Managing Director of Business Development and Managing Director of the Houston
office.
COMMITTEES OF THE BOARD OF DIRECTORS
Our Board of Directors intends to establish an audit committee which will be
comprised solely of independent directors. The responsibilities of the audit
committee will include: (1) recommending to our board of directors the
independent public accountants to conduct the annual audit of our books and
records; (2) reviewing the proposed scope of the audit; (3) approving the audit
fees to be paid; (4) reviewing accounting and financial controls with the
independent public accountants and our financial and accounting staff; and (5)
reviewing and approving transactions between us and our directors, officers and
affiliates. Messrs. Jordan and Austin will be members of the audit committee as
of the closing of this offering and the simultaneous acquisition of the eight
companies.
Our Board of Directors also intends to establish a compensation committee to
consist solely of non-employee directors. The compensation committee will (1)
provide a general review of our compensation plans to ensure that they meet
corporate objectives and (2) administer our stock plans. Messrs. Jordan and
Austin will be members of the compensation committee as of the closing of this
offering and the simultaneous acquisition of the eight companies.
63
<PAGE>
DIRECTOR COMPENSATION Directors who are also our employees will not receive
additional compensation for serving as directors. Each person serving or who has
agreed to serve as a non-employee director as of the closing of this offering
and the simultaneous acquisition of the eight companies will be automatically
granted an option to purchase 15,000 shares of common stock under our long-term
incentive plan. In addition, under the long-term incentive plan each
non-employee director will be granted an annual option to purchase 10,000 shares
at each annual meeting of our stockholders at which the director is re-elected
or remains a director. Each of these options will have an exercise price equal
to the market value per share of common stock on the date of grant. A director
who receives formula options can generally exercise them beginning six months
after receipt, as to one-sixth of the shares and as to an additional one-sixth
every following six months. Directors will also be reimbursed for out-of-pocket
expenses incurred in attending meetings of the Board of Directors or committees
of the Board of Directors, in their capacity as directors. Mr. Jordan will also
be granted options to purchase 200,000 shares of common stock in consideration
for services to be rendered exercisable at a price equal to the initial public
offering price per share. The options will become exercisable one-sixth every
six months over 36 months from the date of grant.
Mr. Dolan, who is Vice Chairman, Chief Financial Officer and a director of
Young & Rubicam, has agreed to serve on our Board of Directors at the request of
Young & Rubicam. Mr. Dolan has assigned to Young & Rubicam the net proceeds
received by him in connection with any exercise of options we grant to him for
serving on our Board of Directors and sale by him of the underlying shares.
EXECUTIVE COMPENSATION We were founded in August 1998, did not conduct any
operations in 1998 and, accordingly, did not pay any compensation to our
executive officers for the year ended December 31, 1998. The following table
sets forth the annual base salary rates and other compensation expected to be
paid in 1999 to our chief executive officer and our two most highly compensated
officers. Joseph W. Autem served as our chief financial officer from January
1999 until July 1999 and has entered into an agreement to provide consulting
services to us in the future. In 1999, we expect to pay Mr. Autem an aggregate
of approximately $150,000 and grant options to purchase 20,833 shares of our
common stock, assuming an initial offering price of $12 per share, exercisable
at $.01 per share, for services rendered by Mr. Autem to us in 1999 as chief
financial officer and as a consultant.
Each of the officers listed in the table below is entitled to an annual
bonus up to an amount equal to his base salary based on our performance measured
against annual objectives to be determined by the compensation committee of the
Board of Directors. See "--Employment Agreements."
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
---------------------------------------- ----------------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS/SARS (#) COMPENSATION
- ------------------------------------ ----------- ----------- -------------- ---------------------- --------------
<S> <C> <C> <C> <C> <C>
Guillermo G. Marmol,................ $ 300,000 $ 300,000 $ -- 2,139,767 $ --
Chief Executive Officer
and President
Derek R. Reisfield,................. 250,000 250,000 -- 427,541 --
Vice Chairman and
Executive Vice President
Thomas G. Bevivino,................. 150,000 150,000 -- 100,000 --
Vice President of Finance
</TABLE>
64
<PAGE>
EMPLOYMENT AGREEMENTS
On September 1, 1998, we entered into an employment agreement with Mr.
Marmol as our Chief Executive Officer and President for a term of three years
and four months. The agreement will automatically renew for successive one-year
periods beginning January 1, 2002, unless we or Mr. Marmol provides the other
with written notice that the Agreement will not renew within 90 days of the
expiration date. This agreement provides that Mr. Marmol will devote
substantially all of his time to the operation of our business. The agreement
establishes the initial base salary set forth in the table above and eligibility
for up to an equal annual bonus. We have also agreed to grant options
immediately before trading begins to purchase 2,139,767 shares of common stock,
at an exercise price equal to the initial public offering price, of which 25%
will be immediately exercisable and the remainder will become exercisable at the
rate of 25% on the first, second and third anniversaries of the date of grant
and will remain exercisable for up to 10 years after the date of grant. We may
terminate the agreement for cause or upon death or disability. Cause means a
final non-appealable conviction for, or plea of no contest to, a charge of
commission of a felony, the good faith determination by the Board of Directors
that Mr. Marmol has committed any act in the course of employment constituting
fraud or dishonesty on 20 days' notice, or a determination by a court of
competent jurisdiction that Mr. Marmol has breached his non-compete agreement;
his confidentiality agreement; or interfered with our relationship with any
client, supplier or other person. In the case of a termination due to disability
we will continue to pay Mr. Marmol his salary and benefits for a period of six
months. Mr. Marmol has the right to terminate his employment with us at any time
for any reason. If we terminate Mr. Marmol's agreement for any reason other than
for cause, or Mr. Marmol terminates his employment for good reason, Mr. Marmol
will be entitled to receive severance pay equal to his base salary and maximum
bonus for the period remaining under the term of the agreement, continuation of
benefits for that period and automatic vesting of all stock options. Good reason
includes a change of control; material breach of the employment agreement by us;
relocation of our principal business office to more than 35 miles outside
Dallas; or Mr. Marmol's duties are diminished or he is not elected Chairman,
unless he consents otherwise. Mr. Marmol has consented in writing to the
election of Michael H. Jordan as our Chairman and a director upon the closing of
this offering. Mr. Marmol will be subject to covenants intended to bar his
competition and solicitation of clients or employees through one year after his
employment ends for any reason.
As of June 28, 1999, we entered into an employment agreement with Thomas G.
Bevivino as our Vice President, Finance for the period through June 28, 2002.
Mr. Bevivino will receive an annual salary of $150,000 plus a bonus of up to the
same amount. We will grant Mr. Bevivino options to acquire 100,000 shares of
common stock under the long-term incentive plan, exercisable at the initial
public offering price. The options will become exercisable in sixths every sixth
months after the date we grant them and will remain exercisable for up to 10
years after the date of the grant. Mr. Bevivino will receive the same benefits
as our other employees. We may terminate Mr. Bevivino's agreement for cause or
upon death or disability. Cause includes a material breach of Mr. Bevivino's
obligations or Mr. Bevivino's gross negligence, conviction for, or plea of no
contest to, a charge of commission of a felony, a breach by Mr. Bevivino of his
non-compete or confidentiality agreement, or if Mr. Bevivino interfered with our
relationship with any client, supplier or other person. Mr. Bevivino may
terminate his employment with us with or without good reason. Good reason means
if we materially violate the employment agreement or if within the first
anniversary of the initial public offering we relocate his primary office by
more than 35 miles from Horsham, Pennsylvania. If Mr. Bevivino resigns or we
terminate his employment with or without cause or because of death or
disability, we will pay Mr. Bevivino any unpaid portion of his salary pro-rated
through the date of actual termination, reimburse business expenses, pay accrued
vacation and pay health insurance premiums for that period. In
65
<PAGE>
addition, if we terminate Mr. Bevivino's employment without cause or he resigns
for good reason, Mr. Bevivino will receive a severance payment equal to his base
salary and the pro rata share of the bonus for the year of his termination,
continuation of his benefits and acceleration of the next sixth of his options.
Mr. Bevivino will be subject to covenants intended to bar his competition and
solicitation of clients or employees during his employment and for one year
after his employment ends for any reason.
On July 23, 1999, we entered into an employment agreement with Derek
Reisfield to serve as our Vice Chairman and Executive Vice President through
July 23, 2002. Until the closing of this offering and the simultaneous
acquisition of the eight companies, Mr. Reisfield is receiving a monthly salary
of $20,000, with a special bonus at the closing equal to $333 per day between
February 15, 1999 and closing plus reimbursement of limited expenses incurred
during this period. Beginning with the closing of this offering, Mr. Reisfield
will have an annual salary of $250,000 and be eligible for an annual bonus of up
to the same amount. We have also agreed to grant options, immediately before
trading begins, to purchase 1% of the shares of common stock outstanding
immediately after the offering. The exercise price for the options will be the
initial public offering price. The options will be immediately exercisable and
will remain exercisable for up to 10 years after the date of grant or until we
terminate all options under the long-term incentive plan if earlier than 10
years after the date of grant. During the term of his employment, Mr. Reisfield
may not engage in activities that would interfere with the performance of his
duties for us but may engage in other business ventures. We may terminate Mr.
Reisfield's agreement for cause or upon death or disability. Cause includes a
material breach of Mr. Reisfield's obligations, Mr. Reisfield's gross
negligence, or his conviction for, or plea of no contest to a charge of
commission of a felony. If we terminate Mr. Reisfield's agreement for any reason
other than for cause or Mr. Reisfield terminates his employment for good reason,
Mr. Reisfield will be entitled to receive severance pay for 18 months equal to
his base salary as well as his pro rata share of his bonus for the year of his
termination and health insurance premium for that period. Good reason includes a
material breach of the employment agreement by us or relocation of his principal
business location outside Dallas, Texas and surrounding counties or New York
City, New York if Mr. Reisfield relocates back to New York City. Mr. Reisfield
is subject to covenants that bar his competition and solicitation of clients or
employees for the earliest of nine months after his employment ends, our failure
to complete the initial public offering by December 31, 1999, and the date of
termination of employment by disability.
SEVERANCE AGREEMENT
Joseph Autem resigned as our Chief Financial Officer effective as of July
23, 1999. In connection with Mr. Autem's resignation, we entered into a
severance agreement with him effective July 23, 1999. Under the severance
agreement, Mr. Autem is entitled to the following:
- Mr. Autem will serve as a financial consultant to Luminant for a period of
six years. He will be compensated at the rate of $13,888.89 per month. Mr.
Autem will receive an acquisition fee if we acquire any company Mr. Autem
refers to us as an acquisition candidate after July 23, 1999.
- Upon the closing of this offering, we will grant Mr. Autem immediately
exercisable and fully vested options for shares of our common stock in an
amount equal to the quotient of $250,000 divided by the initial public
offering price per share. The exercise price for these options will be
$0.01 per share. These options will remain exercisable until the earlier
of the tenth anniversary of the date of the grant or the termination date
of all other options under our long-term incentive plan.
66
<PAGE>
- Payment of $56,249.75 as reimbursement of Mr. Autem's fees and expenses
incurred in furtherance of our business, and an additional $25,000 in
deferred consulting fees is payable to Mr. Autem within 15 days of the
closing of this offering provided that the closing occurs on or before
June 30, 2000.
1999 LONG-TERM INCENTIVE PLAN
We intend to adopt and to submit to our stockholders prior to the offering a
long-term incentive plan to promote our long-term growth and profitability,
improve stockholder value, and attract, retain and reward highly motivated and
qualified employees and directors. The compensation committee of our Board of
Directors will administer the long-term incentive plan unless the Board of
Directors specifies another committee of the Board of Directors or chooses to
act itself as administrator.
Under the long-term incentive plan, we can grant options for approximately
12,838,602 shares of common stock, which number will adjust automatically to be
30% of our outstanding common stock from time to time. We can grant options to
employees in the form of incentive stock options for up to 6,000,000 shares, but
may choose not to do so. Any options we grant that are not incentive stock
options will be nonqualified stock options.
All of our employees, directors, and certain service providers are eligible
to receive options under the long-term incentive plan. For tax reasons, the
long-term incentive plan limits the number of shares covered by options that an
individual can receive in a calendar year to 50% of the total initial pool. The
administrator will determine the prices, exercise schedules, expiration dates,
and other material conditions under which optionees other than non-employee
directors may exercise their options. Except with respect to replacement
options, which we grant to replace options at companies we acquire, the exercise
price of these options may not be less than the fair market value of the common
stock on the date of grant. The long-term incentive plan also provides for
formula option grants for 15,000 shares to each person serving or who has agreed
to serve as a non-employee director as of the closing of this offering and for
10,000 shares annually thereafter at each annual meeting of our stockholders,
that happens at least six months after the closing of the offering, at which the
director is re-elected or remains a director. A director who receives formula
options can generally exercise them beginning six months after receipt, as to
one-sixth of the shares and as to an additional one-sixth every following six
months.
All options will become exercisable if we have a change of control. In
general, we will have a change of control if, after our initial public offering:
- anyone acquires or holds more than 50% of our voting securities, excluding
holdings by our benefit plans and some other related parties;
- we complete a merger or consolidation, unless, in general, our pre-merger
shareholders own at least 50% of the voting securities of the merged
companies; or
- if, with shareholder approval, we complete a liquidation or dissolution or
sell or otherwise dispose of all or substantially all of our assets.
In addition, unless we provide otherwise, the long-term incentive plan and all
options will terminate in defined circumstances if:
- we are not the surviving company in a merger, consolidation, or
reorganization;
- we complete a liquidation or dissolution or sell substantially all our
assets; or
67
<PAGE>
- our board approves and we complete a transaction that results in a person
or entity's owning all of our stock, unless the person or entity is
related to us in specified ways.
However, before the long-term incentive plan would terminate for one of those
reasons, we would either agree that our successor would assume the options
and/or the long-term incentive plan, allow optionees to exercise the options, or
cancel the options by paying the amount, if any, by which the value determined
with respect to that transaction exceed the exercise price of the options.
The long-term incentive plan limits the time during which an optionee can
exercise an option to no more than 10 years. In addition, an optionee who leaves
employment will generally have no more than 90 days to exercise an option,
reduced to no days after employment in terminations for cause, and additional
rules apply to death and disability. The compensation committee may, however,
override the plan's rules, other than the 10 year limit. We cannot grant
additional options under the long-term incentive plan after the tenth
anniversary of its adoption.
SENIOR BONUS PLAN
We expect to adopt a senior bonus plan and to obtain approval of that plan
from our shareholders prior to the closing of this offering. A special tax rule
in Section 162(m) of the Internal Revenue Code of 1986, as amended, limits the
compensation that we can deduct for payments to our chief executive officer and
the four other most highly compensated executive officers to $1 million per
officer per year. We intend the senior bonus plan to provide incentive
compensation that does not count against each executive's deduction limit. We
may choose to use the senior bonus plan, or we may pay bonuses under some other
future plan to which the tax deduction limits will apply, as long as we do not
use the other payments to make up bonuses a participant loses under the senior
bonus plan.
Unless our Board of Directors selects another committee, the compensation
committee will administer the senior bonus plan and select participants from our
key employees and those of our subsidiaries, although we expect that most
participants will be executive officers. When we refer to the "compensation
committee" in discussing the senior bonus plan, we also mean any other committee
that administers this plan. Only "outside directors" under the tax rules can
determine the participants, set the performance goals, and certify that we or
the participants have met those goals. The compensation committee will either
consist solely of two or more outside directors or those members who do not
satisfy the definition of an outside director will either abstain from voting or
refrain from serving on a subcommittee that then administers this plan. The
compensation committee has broad administrative authority to, among other
things, designate participants, establish performance goals and performance
periods, determine the effect of participant termination of employment and
"change in control' transactions before paying an award, and generally interpret
and administer the senior bonus plan. Neither we nor the Board has designated
any participants or established any performance goals under the senior bonus
plan.
The compensation committee will select participants for any given time
period based primarily on its judgment as to which executive officers are likely
to be named in our proxy statement as the chief executive officer or one of our
other four most highly compensated executive officers as of the end of the
performance period and that the compensation committee reasonably expects to
have compensation in excess of $1 million. We do not expect any of our employees
or those of our subsidiaries to exceed that limit in 1999.
In setting performance goals, the compensation committee will specify the
applicable performance criteria and targets it will use for such performance
period, which may vary from
68
<PAGE>
participant to participant. The performance criteria and targets will measure
one or more of the following Luminant, subsidiary, operating unit, or division
financial performance measures:
- pre-tax or after-tax net income;
- operating income or gross revenue;
- profit margin;
- stock price;
- cash flows; or
- strategic business criteria consisting of one or more objectives based
upon meeting specified revenue, market penetration, geographic business
expansion goals, cost targets, and goals relating to acquisitions or
divestitures.
The compensation committee may set these goals (1) on an absolute or
stand-alone basis, or on a relative basis in comparison to others, (2) based on
internal targets, (3) based on comparison with prior performance, (4) based on
comparison to capital, shareholders' equity, shares outstanding, assets or net
assets, and/or (5) based on comparison to the performance of other companies.
For example, the compensation committee could express an income-based
performance measure in a number of ways, such as net earnings per share, or
return on equity, or with reference to meeting or exceeding a specific target,
or with reference to growth above a specified level, such as prior year's
performance or peer group performance. The compensation committee can also
ignore unusual or nonrecurring accounting effects. The senior bonus plan
provides that achieving these goals must be substantially uncertain at the time
the goals are established and are subject to the committee's right to reduce the
amount of any award payable as a result of the performance as discussed below.
The compensation committee may set a participant's target bonus, that is,
the amount the participant will receive if the targets are met, as a dollar
amount or in a formula, for example as a percentage share of a bonus pool,
provided that, if the committee uses a pool approach, the total bonus
opportunity for all participants who are part of the pool may not total more
than 100% of the pool. The committee has the sole discretion to reduce, but not
increase, the actual bonus awarded under the plan. The committee must determine
the extent to which the performance goals are met and the participant becomes
entitled to a bonus.
The maximum bonus payable under the senior bonus plan to any one individual
in any one calendar year is $3 million, although we have no plans or
expectations at this time to pay bonuses of that size.
Our Board or the committee may at any time amend the senior bonus plan, and
our Board may terminate the plan. However, without a participant's written
consent, no amendment or termination may adversely affect the annual bonus
rights, if any, of any already designated participant for a given performance
period after the participants and targets are set. Our Board may make any
amendments necessary to comply with applicable regulatory requirements,
including the tax deduction limit for senior executives. If necessary to
preserve the intended tax treatment, the Board may submit future amendments of
the senior bonus plan to our shareholders for approval.
69
<PAGE>
CERTAIN TRANSACTIONS WITH RELATED PARTIES
On August 22, 1998, we issued 7,138,701 shares of common stock to
Commonwealth Principals II, LLC, a Virginia based merchant banking firm, in
exchange for $1.00. Commonwealth Principals will own approximately 17.45% of
Luminant after this offering, which shares are indirectly held by its members,
including Messrs. Jordan, Marmol and Reisfield and their affiliates as described
below. In September 1998, Guillermo G. Marmol, who is our Chief Executive
Officer and President, acquired a limited liability company interest in
Commonwealth Principals equating to an indirect pecuniary interest in 738,856
shares of Luminant for a purchase price of $1.00. In December 1998, Michael H.
Jordan, who will be our Chairman and a director at the closing of this offering,
acquired a limited liability company interest in Commonwealth Principals
equating to an indirect pecuniary interest in 314,103 shares of Luminant for a
purchase price of $400,000. In April 1999, Derek R. Reisfield, our Vice Chairman
and Executive Vice President, acquired a limited liability company interest in
Commonwealth Principals equating to an indirect pecuniary interest in 157,051
shares of Luminant for a purchase price of $200,000. In addition, in May 1999,
R4 Venture Partners I, of which Mr. Reisfield is a general partner and holds a
31.25% pecuniary interest, acquired a limited liability company interest in
Commonwealth Principals equating to an indirect pecuniary interest in 157,051
shares of Luminant for a purchase price of $200,000.
The following table shows the number and percentage of outstanding shares of
our common stock that were indirectly owned by our affiliates through other
entities as of July 1, 1999 and that will be indirectly owned by our affiliates
through other entities immediately following the closing of this offering and
the simultaneous acquisition of the eight companies.
<TABLE>
<CAPTION>
AFTER OFFERING
(FULL EXERCISE
AFTER OFFERING OF OVER-
(NO EXERCISE OF OVER- ALLOTMENT
BEFORE OFFERING ALLOTMENT OPTION) OPTION)
----------------------------- ----------------------------- ---------------
NUMBER OF NUMBER OF NUMBER OF
SHARES OWNED SHARES OWNED SHARES OWNED
THROUGH ANOTHER PERCENTAGE THROUGH ANOTHER PERCENTAGE THROUGH ANOTHER
NAME AND ADDRESS ENTITY OWNERSHIP ENTITY OWNERSHIP ENTITY
- ---------------------------------------------- --------------- ------------ --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Michael H. Jordan, Chairman and Director...... 314,103 4.00% 314,103 .77% 314,103
Guillermo G. Marmol, Chief Executive Officer, 738,856 9.41 738,856 1.81 738,856
President and Director.......................
Derek R. Reisfield, Vice Chairman and 314,102 4.00 314,102 .77 314,102
Executive Vice President.....................
<CAPTION>
PERCENTAGE
NAME AND ADDRESS OWNERSHIP
- ---------------------------------------------- ------------
<S> <C>
Michael H. Jordan, Chairman and Director...... .73%
Guillermo G. Marmol, Chief Executive Officer, 1.73
President and Director.......................
Derek R. Reisfield, Vice Chairman and .73%
Executive Vice President.....................
</TABLE>
Commonwealth Principals secured, for our benefit, loans for an aggregate of
$3.0 million to pay expenses of this offering and the acquisition of the eight
companies. The loans secured by Commonwealth Principals accrue interest at the
prime rate, which was 8% at July 1, 1999, are payable on demand and will be
repaid from the proceeds of this offering. At March 31, 1999, Commonwealth
Principals had advanced a total of $50,000. By closing of the offering and the
simultaneous acquisition of the eight companies, Commonwealth Principals expects
to advance a total of approximately $4.5 million, which includes the $3.0
million loan secured for our benefit, in order to pay expenses of this offering
and the acquisition of the eight companies.
In September 1998, we entered into a management services agreement with
Commonwealth Principals to provide us with consulting and financial advisory
services. The agreement terminates at the earlier of the closing of our initial
public offering or 24 months after the date of the agreement. For the period
ended December 31, 1998, we paid $49,000 to Commonwealth Principals under that
agreement. No amounts have been paid for the six months ended June 30, 1999.
On September 1, 1998, Mr. Marmol purchased 713,870 shares of our common
stock for a purchase price of $200,000 in cash.
70
<PAGE>
We have entered into employment agreements with each of Messrs. Marmol,
Reisfield and Bevivino. For the details of these agreements, please refer to
"Management--Employment Agreements."
James R. Corey will be appointed a director effective on the closing of this
offering and the simultaneous acquisition of the eight companies. Mr. Corey is a
Managing Director and owner of Potomac Partners. We will acquire Potomac
Partners simultaneously with the closing of this offering and the acquisition of
the other seven companies. Mr. Corey will receive 2,015,367 shares of common
stock and $10.2 million in cash, based on an assumed initial public offering
price of $12.00 per share, for his ownership interest in Potomac Partners.
On February 1, 1998, Potomac Partners loaned $150,000 to Mr. Corey pursuant
to a note that bore interest at the rate of 6% per annum and was payable on
demand. This note was paid in full on December 31, 1998.
Richard M. Scruggs will be appointed a director effective on the closing of
this offering and the simultaneous acquisition of the eight companies. Mr.
Scruggs is President, Chief Executive Officer and Chairman of the Board of
Align. We will acquire Align simultaneously with the closing of this offering
and the acquisition of the other seven companies. Mr. Scruggs will receive
971,216 shares of common stock and $5.5 million in cash, based on an initial
public offering price of $12.00 per share, for his ownership interest in Align.
In addition, Mr. Scruggs will receive options to purchase 61,833 shares of our
common stock at exercise prices ranging from $0.18 to $2.03 per share in
exchange for outstanding options for Align shares.
Mr. Scruggs is the guarantor of $550,000 of indebtedness of Align under its
bank line of credit. The line of credit is due on demand, matures in July 1999,
and accrues interest at the rate of prime plus 1%, which was equal to 9% at July
1, 1999. Mr. Scruggs will be released from his guaranty upon the closing of this
offering and the simultaneous acquisition of the eight companies.
Mr. Corey and Scruggs are also eligible to receive an indeterminable number
of shares of common stock and cash under the contingent consideration provisions
of the acquisition agreement for their respective company. See "About Luminant
Worldwide Corporation."
We entered into an agreement with ARC Group LLC and Commonwealth Principals,
dated March 8, 1999, under which ARC Group agreed to provide consulting services
to us in exchange for a payment of $80,000, an additional payment of $240,000
upon closing of our initial public offering and reimbursement of their fees and
expenses. Commonwealth Principals agreed to guarantee our performance under this
agreement. Mr. Bevivino, our Vice President of Finance, is a managing member of
ARC Group.
Luminant has retained the law firm of Wilmer, Cutler & Pickering,
Washington, D.C., as its outside legal counsel in connection with this offering
and the acquisition of the eight companies. George P. Stamas, a director of
Luminant, is a partner with Wilmer, Cutler & Pickering.
YOUNG & RUBICAM
Simultaneously with the closing of this offering and the acquisition of the
other seven companies, we will acquire assets of Brand Dialogue-New York from
Young & Rubicam for a purchase price of approximately $55.3 million, which will
be paid through the issuance of 4,609,091 shares of common stock. We will also
grant to Young & Rubicam an option immediately exercisable for 1,000,000 shares
of our common stock at an exercise price equal to the initial public offering
price. Young & Rubicam will own approximately 11.27% of Luminant after this
offering, or 13.38% assuming the Young & Rubicam option is exercised in full.
Michael J. Dolan will become a director effective upon the closing of this
offering and the acquisition of
71
<PAGE>
the other seven companies under an agreement with Young & Rubicam. Mr. Dolan is
Vice Chairman, Chief Financial Officer and a director of Young & Rubicam.
We have entered into an agreement with Young & Rubicam to acquire some
assets of Brand Dialogue-New York, the New York branch of a Young & Rubicam
division. Young & Rubicam has agreed that it will ask AT&T, the United States
Postal Service, Citigroup, Dr. Pepper/7-Up, Inc., Sony Corporation, Showtime
Networks, Inc., Phillip Morris Companies Inc. and Pfizer Inc., as well as other
clients who may be identified in the future by Luminant and Young & Rubicam
together or by Young & Rubicam under the procedures set forth in the Brand
Dialogue-New York acquisition agreement, to select us to perform services in
connection with on-going engagements and future engagements substantially
similar to the type of work performed by Brand Dialogue-New York prior to the
closing of this offering and the acquisition of the assets of Brand Dialogue-New
York. Young & Rubicam has the right not to recommend us or to terminate our
involvement in an existing engagement if in its judgment recommending or
retaining us is not in the best interests of its clients or if we fail to
perform our obligations or default under the terms of any client engagement. A
Young & Rubicam client can also cancel the engagement. We and Young & Rubicam
intend to cooperate in marketing our respective services to each others' clients
in order to increase the range, breadth and depth of services available to such
clients.
In addition, upon the closing of this offering and the acquisition of the
assets of Brand Dialogue-New York, we will enter into a Transition Services
Agreement with Young & Rubicam under which Young & Rubicam will grant us a
license to use, for a term not to exceed 12 months, office space used by Brand
Dialogue-New York prior to the closing of this offering and the acquisition of
the assets of Brand Dialogue-New York. Young & Rubicam will also agree to
provide us with specified services in connection with our use of this space. In
consideration for providing the space, we will pay to Young & Rubicam $33,072
per month plus expenses. Additional fees will be paid to Young & Rubicam for the
provision of specified services.
72
<PAGE>
PRINCIPAL STOCKHOLDERS
The table at the end of this section shows the number and percentage of
outstanding shares of our common stock that were owned as of July 1, 1999 and
that will be owned immediately following the closing of this offering and the
simultaneous acquisition of the eight companies by:
- all persons known by us to own beneficially more than 5% of the common
stock;
- each director, director nominee and executive officer; and
- all directors, director nominees and executive officers as a group.
As of July 1, 1999, there were 7,852,571 shares of common stock outstanding.
Following the closing of this offering and the simultaneous acquisition of the
eight companies, we will have outstanding 40,909,091 shares of common stock,
assuming the underwriters do not exercise their over-allotment option, and
42,795,341 shares assuming the underwriters exercise their over-allotment option
in full, including 20,481,520 shares of common stock we will issue as a portion
of the initial purchase prices for the acquisitions of our companies. At the
time of the closing of this offering and the simultaneous acquisition of the
eight companies we will also have outstanding options to purchase 7,803,917
shares of common stock, including options to purchase 1,983,316 shares of common
stock which will be exercisable immediately following this offering. No other
options, warrants or rights to acquire shares of common stock will become
exercisable within 60 days of this offering.
On August 22, 1998, Commonwealth Principals acquired 7,138,701 shares of our
common stock, which are beneficially held by its members, including Messrs.
Jordan, Marmol and Reisfield and their affiliates. The beneficial ownership of
Commonwealth Principals shown in the table at the end of this section does not
include the shares of Luminant that are held indirectly through Commonwealth
Principals by Messrs. Jordan, Marmol and Reisfield and their affiliates, as
those shares will be distributed to those individuals as soon as practicable
after closing of this offering:
- The number of shares of common stock owned by Mr. Jordan includes 314,103
shares of common stock indirectly owned through his ownership of a limited
liability company interest in Commonwealth Principals.
- The number of shares of common stock owned by Mr. Marmol includes 738,856
shares of common stock indirectly owned through his ownership of a limited
liability company interest in Commonwealth Principals and options to
purchase 534,942 shares that will be exercisable on the closing of this
offering.
- The number of shares of common stock owned by Mr. Reisfield includes
options to purchase 427,541 shares of common stock, that will be
exercisable on the closing of this offering; 157,051 shares indirectly
owned through his ownership of a limited liability company interest in
Commonwealth Principals; and 157,051 shares indirectly owned by R4 Venture
Partners I through its ownership of a limited liability company interest
in Commonwealth Principals. Mr. Reisfield is a general partner of R4
Venture Partners I.
Other members of Commonwealth Principals who will indirectly own shares of
Luminant through their ownership interest in Commonwealth Principals do not
include any executive officers or directors of Luminant or any persons who would
have an indirect ownership interest in Luminant after completion of the offering
equal to 5% or more of its outstanding shares. The management committee of
Commonwealth Principals, which has the power to vote and make decisions
regarding the disposition of the Luminant shares, consists of J. Marshall
Coleman, Sean Coleman, and Santanu Sarkar.
73
<PAGE>
The number of shares of common stock owned by Young & Rubicam includes
options for 1,000,000 shares of common stock that will be exercisable on the
closing of this offering and the simultaneous acquisition of assets of
Brand-Dialogue-New York.
The shares beneficially owned by Richard M. Scruggs include 1,000,000 shares
owned by Commonwealth Principals as to which Mr. Scruggs has full voting power
on all matters under the terms of an Agreement and Irrevocable Proxy by and
between Commonwealth Principals and Mr. Scruggs, dated July 23, 1999.
Under its terms, the proxy will expire upon the earliest to occur of:
- the sale or disposition of the shares by Commonwealth; or
- the third anniversary of the closing of this offering.
We originally issued 7,852,571 shares of common stock to our initial
stockholder and an executive officer after giving effect to the 71,387-for-one
stock split.
Following this offering, the former owners of our eight companies may be
entitled to contingent consideration under the terms of the acquisition
agreements that we entered into with them. The number of shares that could be
issued as payment of contingent consideration are not now determinable and no
assumptions regarding those issuances have been included in the pro forma
financial statements included in this prospectus.
The address for our officers and directors is c/o Luminant Worldwide
Corporation, 4100 Spring Valley Road, Suite 750 Dallas, Texas 75244.
An asterisk indicates ownership of less than 1%.
<TABLE>
<CAPTION>
AFTER OFFERING AFTER OFFERING
(NO EXERCISE OF OVER- (FULL EXERCISE OF OVER-
BEFORE OFFERING ALLOTMENT OPTION) ALLOTMENT OPTION)
------------------------ ------------------------ ------------------------
NUMBER NUMBER NUMBER
OF SHARES OF SHARES OF SHARES
BENEFICIALLY PERCENTAGE BENEFICIALLY PERCENTAGE BENEFICIALLY PERCENTAGE
NAME AND ADDRESS OWNED OWNERSHIP OWNED OWNERSHIP OWNED OWNERSHIP
- ----------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Michael H. Jordan........................ 314,103 4.00% 314,103 *% 314,103 *%
Guillermo G. Marmol...................... 1,987,668 23.70 1,987,668 4.80 1,987,668 4.59
Derek R. Reisfield....................... 741,644 8.96 741,644 1.79 741,644 1.72
Thomas G. Bevivino....................... -- -- -- -- -- --
George P. Stamas......................... -- -- -- -- -- --
James R. Corey........................... -- -- 2,015,367 4.93 2,015,367 4.71
Richard M. Scruggs....................... -- -- 1,971,216 4.82 1,971,216 4.61
Randolph Austin.......................... -- -- -- -- -- --
Michael J. Dolan......................... -- -- -- -- -- --
Young & Rubicam Inc. -- -- 5,609,091 13.38 5,609,091 12.81
285 Madison Avenue
New York, New York 10017................
Commonwealth Principals II, LLC 5,221,960 66.50 5,221,960 12.76 5,221,960 12.20
1650 Tysons Blvd.
McLean, Va 22102........................
All executive officers, directors and 3,043,415 34.53% 7,029,998 16.79% 7,029,998 16.07%
director nominees as a group (nine
persons)................................
</TABLE>
74
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our authorized capital stock consists of 100,000,000 shares of common stock,
par value $0.01 per share, and 10,000,000 shares of preferred stock, par value
$0.01 per share. As of July 1, 1999, there were 7,852,571 shares of our common
stock outstanding, held by two holders of record, and no shares of preferred
stock outstanding.
Following the closing of this offering and the simultaneous acquisition of
our eight companies, we will have outstanding 40,909,091 shares of common stock,
including 20,481,520 shares issued as part of the purchase price for our eight
companies, assuming the underwriters do not exercise their over-allotment
option. In addition, we may issue additional shares of common stock to the
former owners of our companies as contingent consideration under the terms of
the acquisition agreements that we entered into with them. The number of shares
that could be issued as payment of contingent consideration are not now
determinable and no assumptions regarding those issuances have been included in
the pro forma financial statements included in this prospectus. Following
completion of this offering, no shares of preferred stock will be outstanding.
The following is a description of our capital stock.
COMMON STOCK
We are authorized to issue, without further stockholder approval, up to
100,000,000 shares of common stock. Holders of record of common stock are
entitled to one vote for each share held on all matters properly submitted to a
vote of stockholders. Holders of our common stock do not have cumulative voting
rights. As a result, holders of a plurality of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled ratably to any
dividend declared by the Board of Directors out of funds legally available for
this purpose, subject to any preferential dividend rights of any
then-outstanding preferred stock. Upon our liquidation, dissolution or winding
up, holders of common stock are entitled to receive ratably our remaining net
assets available after payment of or provision for all debts and other
liabilities, subject the prior rights of any then-outstanding preferred stock.
Holders of common stock have no redemption or conversion rights and no
preemptive right to subscribe for or purchase additional shares of any class of
our capital stock. The outstanding shares of common stock are, and the shares of
common stock offered in this offering will be, when issued and paid for, fully
paid and nonassessable. The rights, preferences and privileges of holders of
common stock may be adversely affected by the rights of the holders of shares of
any series of preferred stock that we may designate and issue in the future. See
"--Preferred Stock."
PREFERRED STOCK
We are authorized to issue, without further stockholder approval, up to
10,000,000 shares of preferred stock in one or more series, which can have
rights senior to those of the common stock. Our Board of Directors may fix or
alter the powers, designation, dividend rights, dividend rate, conversion
rights, voting rights, rights and terms of redemption, including sinking fund
provisions, redemption price or prices, liquidation and other preferences, and
other special rights of any wholly unissued series of preferred stock, and the
number of shares constituting any such series.
Our issuance of preferred stock could adversely affect holders of common
stock. These effects could include the following:
75
<PAGE>
- if dividends on the preferred stock have not been made, dividends on the
common stock may be restricted;
- to the extent the preferred stock has voting rights, the voting rights of
the common stock will be diluted;
- if holders of preferred stock are entitled to preferred dividends or
liquidation preferences, the amount of earnings and assets available for
distribution to holders of common stock may be reduced; and
- the issuance of preferred stock could decrease the market price of the
common stock.
In addition, our issuance of preferred stock may have the effect of delaying or
preventing a change in control. We currently have no plans to issue any shares
of preferred stock.
LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS
As permitted by the Delaware General Corporation Law, our certificate of
incorporation provides that our directors will not be personally liable to us or
our stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (1) for any breach of the director's duty of
loyalty to us or our stockholders, (2) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (3) under
Section 174 of the Delaware General Corporation Law, relating to unlawful
dividends or unlawful stock purchases or redemptions, or (4) for any transaction
from which the director derives an improper personal benefit. As a result of
this provision, we and our stockholders may be unable to obtain monetary damages
from a director for breach of his or her duty of care.
Our certificate of incorporation and by-laws provide for the indemnification
of our directors and officers to the fullest extent authorized by the Delaware
General Corporation Law, except that we will indemnify a director or officer in
connection with an action initiated by that person only if the action was
authorized by our Board of Directors. The indemnification provided under our
certificate of incorporation and by-laws includes the right to be paid expenses
in advance of any proceeding for which indemnification may be had, provided that
such advance payment may be made only if the director or officer seeking such
advance payment delivers to us an undertaking to repay all amounts paid in
advance if it is ultimately determined that the director or officer is not
entitled to be indemnified. Under our by-laws, if we do not pay a claim for
indemnification within 60 days after we have received a written claim, the
director or officer may bring an action to recover the unpaid amount of the
claim and, if successful, the director or officer also will be entitled to be
paid the expense of prosecuting the action to recover these unpaid amounts.
Under our by-laws, we have the power to purchase and maintain insurance on
behalf of any person who is or was one of our directors, officers, employees or
agents, or is or was serving at our request as a director, officer, employee,
limited partner, general partner, manager, trustee or agent of another
corporation or of a partnership, joint venture, limited liability company, trust
or other enterprise, against any liability asserted against the person or
incurred by the person in any of these capacities, or arising out of the
person's fulfilling one of these capacities, and related expenses, whether or
not we would have the power to indemnify the person against the claim under the
provisions of the Delaware General Corporation Law. We intend to purchase
director and officer liability insurance on behalf of our directors and
officers.
ANTI-TAKEOVER PROVISIONS
Our certificate of incorporation and by-laws contain provisions that are
intended to enhance the likelihood of continuity and stability in the
composition of our Board of Directors and in the
76
<PAGE>
policies formulated by our Board of Directors. In addition, provisions of
Delaware law may hinder or delay an attempted takeover of Luminant other than
through negotiation with our Board of Directors. These provisions could have the
effect of discouraging attempts to acquire us or remove incumbent management
even if some or a majority of our stockholders believe this action to be in
their best interest, including attempts that might result in the stockholders'
receiving a premium over the market price for the shares of common stock held by
stockholders.
REMOVAL AND REPLACEMENT OF DIRECTORS. Under our by-laws, directors may only
be removed, with or without cause, by the affirmative vote of two-thirds of the
outstanding voting stock. In addition, a majority of the directors then in
office can fill board vacancies and newly-created directorships resulting from
any increase in the size of the Board of Directors, even if those directors do
not constitute a quorum or only one director is left in office. These provisions
could prevent stockholders, including parties who want to take over or acquire
us, from removing incumbent directors without cause and filling the resulting
vacancies with their own nominees.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER PROPOSALS AND STOCKHOLDER
NOMINATIONS OF DIRECTORS. The by-laws establish an advance notice procedure
regarding stockholder proposals and nominations for director. The advance notice
procedure will not apply to proposals by our Board of Directors or management.
Any stockholder that wishes to make a proposal, or nominate a director for
election, at an annual meeting must deliver us notice of the proposal or the
nomination not less than 90 days nor more than 120 days before the first
anniversary of the preceding year's annual meeting. The stockholder must put
information in the notice regarding:
- the stockholder and its holdings;
- the background of any nominee for director;
- any business desired to be brought before the meeting;
- the reasons for conducting the business at the meeting; and
- any material interest of the stockholder in the business proposed.
SPECIAL MEETINGS OF STOCKHOLDERS. Our certificate of incorporation and
by-laws permit special meetings of the stockholders to be called only by the
Board of Directors, the Chairman of the Board or the President or holders of at
least 75% of our securities that are outstanding and entitled to vote generally
in an election of directors. This provision may make it more difficult for
stockholders to take actions opposed by the Board of Directors.
PROHIBITION ON STOCKHOLDER ACTION BY WRITTEN CONSENT. Our certificate of
incorporation and by-laws prohibit stockholders from taking action by written
consent. By requiring stockholders to take actions at an annual or special
meeting, rather than by written consent, our certificate of incorporation and
by-laws may discourage stockholder actions that are opposed by our board of
directors.
AUTHORIZED BUT UNISSUED SHARES. Without further stockholder approval, we can
issue shares of common stock and preferred stock up to the number of shares
authorized for issuance in our certificate of incorporation, except as limited
by Nasdaq rules. We could use these additional shares for a variety of corporate
purposes. These purposes include future public offerings to raise additional
capital, corporate acquisitions and employee benefit plans. Our ability to issue
these shares of common stock and preferred stock could make it more difficult or
discourage an attempt to obtain control of Luminant by means of a proxy contest,
tender offer, merger or otherwise.
77
<PAGE>
SECTION 203 OF DELAWARE LAW. In addition to the foregoing provisions of our
certificate of incorporation and by-laws, we will be subject to the provisions
of Section 203 of the Delaware General Corporation Law. Section 203 prohibits
publicly-held Delaware corporations from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in a
financial benefit to the interested stockholder. Generally, an "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within three years did own, 15% or more of the corporation's voting stock. These
provisions could have the effect of delaying, deferring or preventing a change
in control of Luminant or reducing the price that investors might be willing to
pay in the future for shares of our common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company.
SHARES AVAILABLE FOR FUTURE SALE
Following the closing of this offering and the simultaneous acquisition of
the eight companies, we will have 40,909,091 shares of common stock outstanding,
assuming no exercise of the underwriters' over-allotment option, or 42,795,341
shares, assuming the underwriters' over-allotment option is exercised in full.
All the shares we sell in this offering will be freely tradable without
restriction or further registration under the Securities Act, except that any
shares purchased by our affiliates, as that term is defined in Rule 144, may
generally only be sold in compliance with the limitations of Rule 144 described
below.
28,334,091 shares of common stock outstanding following the closing of this
offering and the simultaneous acquisition of the eight companies, including
20,481,520 shares of common stock we issue to former owners of our companies
under the acquisition agreements we entered into with them, will be restricted
securities under the terms of the Securities Act. Sales of a portion of the
restricted shares to be outstanding upon completion of this offering will be
limited by lock-up agreements with the underwriters and with us as described
below.
We may also issue an indeterminable number of shares of common stock under
the contingent consideration provisions of the acquisition agreements which
would be "restricted securities," and which may be resold if registered under
applicable registration rights or if an exemption from registration is
available. See "About Luminant Worldwide Corporation."
RULE 144
In general, under Rule 144, a stockholder who owns restricted shares that
have been outstanding for at least one year is entitled to sell, within any
three-month period, a number of these restricted shares that does not exceed the
greater of:
- one percent of the then outstanding shares of common stock, or
approximately 409,091 shares immediately after this offering; or
- the average weekly trading volume in the common stock on the Nasdaq
National Market during the four calendar weeks preceding the sale.
In addition, our affiliates must comply with the restrictions and
requirements of Rule 144, other than the one-year holding period requirement, to
sell shares of common stock which are not restricted securities unless we
register those securities for resale by the affiliate.
78
<PAGE>
Under Rule 144(k), a stockholder who is not currently, and who has not been
for at least three months before the sale, an affiliate of ours and who owns
restricted shares that have been outstanding for at least two years may resell
these restricted shares without compliance with the above requirements. The one-
and two-year holding periods described above do not begin to run until the full
purchase price is paid by the person acquiring the restricted shares from us or
an affiliate of ours.
REGISTRATION RIGHTS
The former owners of the companies that we acquire at the closing of this
offering and the simultaneous acquisition of the eight companies will have
piggyback registration rights to register the shares of common stock that they
receive pursuant to the acquisition agreements, including those issued as
contingent consideration, whenever we propose to register any shares of common
stock for our own or another's account under the Securities Act for a public
offering, other than:
- any shelf registration of shares of common stock to be used as
consideration for acquisitions of additional businesses;
- registrations relating to employee benefit plans; and
- registrations relating to rights offerings made to our stockholders.
Under a registration rights agreement we expect to enter into prior to the
closing of this offering, Commonwealth Principals and Mr. Marmol will also have
piggyback registration rights to register the shares of common stock which they
hold or which they have a right to acquire under options granted in connection
with this offering, whenever we propose to register any shares of common stock
for our own or another's account under the Securities Act for public offering,
other than:
- any shelf registration of shares of common stock to be used as
consideration for acquisitions of additional businesses;
- registrations relating to employee benefit plans; and
- registrations relating to rights offerings made to our stockholders.
In addition, Young & Rubicam will have the right, on one occasion that can
be no earlier than 18 months after the closing of this offering and the
simultaneous acquisition of the eight companies, to require that we register
under the Securities Act any or all of the shares of common stock they receive
in connection with their aquisition, including shares issued as contingent
consideration and shares issued upon exercise of options granted to Young &
Rubicam. We have agreed to pay all costs of this registration and to keep the
registration effective for at least 120 days, or whatever shorter period may be
required to sell the registered shares.
COMMON STOCK AND OPTIONS ISSUABLE UNDER OUR EQUITY COMPENSATION PLANS
Before the closing of this offering and the simultaneous acquisition of the
eight companies, we will issue options to acquire 7,803,917 shares of common
stock, of which options to acquire 1,570,776 shares will be issued to employee
participants in Align's option plan on conversion of outstanding Align options,
and options to purchase 1,000,000 shares to Young & Rubicam.
We intend to file one or more registration statements under the Securities
Act after the closing of the initial public offering to register 12,838,602
shares of common stock underlying outstanding stock options or reserved for
issuance under our long-term incentive plan. We
79
<PAGE>
expect these registration statements will become effective upon filing, and
shares covered by these registration statements will be eligible for sale in the
public market immediately after the effective dates of these registration
statements.
LOCK-UP AGREEMENTS
We have agreed with the underwriters that we will not issue any additional
shares of common stock or securities convertible into, exercisable for or
exchangeable for shares of common stock for 180 days following the date of this
prospectus, except that we may grant options or warrants to purchase shares of
common stock under the long-term incentive plan or in connection with the
acquisitions of companies, and issue shares of common stock upon the exercise of
outstanding options and warrants and in connection with the acquisition of
companies.
Our executive officers, directors and our large stockholders have agreed
with the underwriters that they will not offer, sell, contract to sell or
otherwise dispose of or enter into any transaction which is designed to or could
be expected to result in the disposition of any common stock for a period of 180
days after the date of this prospectus without the prior written consent of
Deutsche Bank Securities Inc., except that nothing will prevent any of them from
exercising outstanding options or warrants.
80
<PAGE>
UNDERWRITING
The underwriters named below, through their representatives Deutsche Bank
Securities Inc., Hambrecht & Quist LLC and SoundView Technology Group, Inc.,
have severally agreed to purchase from us the following numbers of shares of
common stock at the public offering price less the underwriting discounts and
commissions shown on the cover page of this prospectus.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- -----------
<S> <C>
Deutsche Bank Securities Inc.....................................................
Hambrecht & Quist LLC............................................................
SoundView Technology Group, Inc..................................................
-----------
Total.......................................................................... 12,575,000
-----------
-----------
</TABLE>
We have entered into an underwriting agreement with the underwriters which
provides that the underwriters are obligated to purchase all of the shares of
common stock we are offering to sell in this offering, other than shares covered
by the over-allotment option described below, if any of the shares are
purchased. We expect to issue these shares on , 1999.
The underwriters propose to offer the shares of common stock to the public
at the public offering price set forth on the cover page of this prospectus and
to dealers at a price that represents a concession not in excess of $ per
share under the public offering price. The underwriters may allow, and dealers
may re-allow, a concession not in excess of $ per share to other dealers.
After the initial offering, the offering price and other selling terms may be
changed by the representatives of the underwriters.
We have granted to the underwriters an option, exercisable not later than 30
days after the date of this prospectus, to purchase up to 1,886,250 additional
shares of common stock at the public offering price less the underwriting
discounts and commissions set forth on the cover page of this prospectus. The
underwriters may exercise this option only to cover over-allotments made in
connection with the sale of the common stock in this offering. To the extent
that the underwriters exercise this option, each of the underwriters will become
obligated to purchase approximately the same percentage of additional shares of
common stock as the number of shares of common stock to be purchased by it in
the above table bears to 12,575,000, and we will be obligated to sell these
shares to the underwriters to the extent they exercise the option. If any
additional shares of common stock are purchased, the underwriters will offer
these additional shares on the same terms as those on which the 12,575,000
shares are being offered.
At our request the underwriters have reserved for sale at the initial public
offering price up to shares of common stock for our officers,
directors, employees, clients, friends and related persons who express an
interest in purchasing these shares. The number of shares of our common stock
available for sale to the general public will be reduced to the extent these
persons purchase these reserved shares. The underwriters will offer any reserved
shares not so purchased by these persons to the general public on the same basis
as the other shares in this initial public offering.
We have agreed to indemnify the underwriters against liabilities in
connection with this initial public offering, including liabilities under the
Securities Act.
We have agreed with the underwriters that we will not issue any additional
shares of common stock or securities convertible into, exercisable for or
exchangeable for shares of common stock for 180 days following the date of this
prospectus, except that we may grant options or warrants to purchase shares of
common stock under the long-term incentive plan or in connection with the
acquisitions of companies, and issue shares of common stock upon the
81
<PAGE>
exercise of outstanding options and warrants, and in connection with the
acquisition of companies.
Each of our executive officers and directors and our large stockholders have
agreed with the underwriters that they will not offer, sell, contract to sell or
otherwise dispose of or enter into any transaction which is designed to or could
be expected to result in the disposition of any common stock for a period of 180
days after the date of this prospectus without the prior written consent of
Deutsche Bank Securities Inc., except that nothing will prevent any of them from
exercising outstanding options or warrants.
The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
To facilitate the offering of the common stock, the underwriters may engage
in transactions that stabilize, maintain or otherwise affect the market price of
the common stock. Specifically, the underwriters may over-allot shares of the
common stock in connection with this offering by creating a short position in
the common stock for their own accounts. Additionally, to cover these
over-allotments or to stabilize the market price of the common stock, the
underwriters may bid for, and purchase, shares of common stock in the open
market. Finally, the representatives, on behalf of the underwriters, also may
reclaim selling concessions allowed to an underwriter or dealer if the
underwriting syndicate repurchases shares distributed by that underwriter or
dealer. Any of these activities may maintain the market price of our common
stock at a level above that which might otherwise prevail in the open market.
The underwriters are not required to engage in these activities and, if
commenced, may end any of these activities at any time.
PRICING OF THIS OFFERING
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for our common stock will
be determined by negotiation between us and the representatives of the
underwriters. Among the factors to be considered in determining the public
offering price will be:
- the history and prospects of our business and the industry in which we
compete;
- an assessment of our management and the present state of our development;
- prevailing market conditions in the United States economy and the industry
in which we compete;
- our revenues, operating cash flow and earnings in recent periods;
- the market capitalizations and stages of development of other companies
which the representatives of the underwriters believe to be comparable to
us; and
- estimates of our business potential.
LEGAL MATTERS
The validity of the shares of our common stock offered by this prospectus
will be passed upon for us by Wilmer, Cutler & Pickering, Washington, D.C. The
underwriters have been represented by Piper & Marbury L.L.P., Baltimore,
Maryland.
82
<PAGE>
EXPERTS
The audited financial statements and schedules of Luminant Worldwide
Corporation; Align Solutions Corp.; Free Range Media Inc.; Integrated Consulting
Inc.; InterActive8, Inc.; Multimedia Resources, LLC; Potomac Partners Management
Consulting, LLC; RSI Group, Inc. and subsidiaries, Fifth Gear Media Corporation,
inmedia, inc. and Synapse Group, Inc. included in this prospectus and elsewhere
in the registration statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of Arthur
Andersen LLP as experts in giving these reports.
The financial statements of Brand Dialogue-New York (a wholly-owned business
of Young & Rubicam Inc.) as of December 31, 1997 and 1998 and for the period
from April 1, 1996 (inception) through December 31, 1996, and for each of the
two years in the period ended December 31, 1998 included in this prospectus have
been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
You may rely on the information contained in this prospectus. Neither we nor
the underwriters has authorized anyone to provide information different from
that contained in this prospectus. When you make a decision about whether to
invest in our common stock, you should not rely upon any information other than
the information in this prospectus. Neither the delivery of this prospectus nor
sale of common stock means that information contained in this prospectus is
correct after the date of this prospectus. This prospectus is not an offer to
sell or solicitation of an offer to buy these shares of our common stock in any
circumstances under which the offer or solicitation is unlawful.
We have filed with the Securities and Exchange Commission a registration
statement, which includes exhibits, schedules and amendments. This prospectus is
a part of the registration statement and includes all of the information which
we believe is material to an investor considering whether to make an investment
in our common stock. We refer you to the registration statement for additional
information about Luminant, our common stock and this offering, including the
full texts of the exhibits, some of which have been summarized in this
prospectus. The registration statement is available for inspection and copying
at Securities and Exchange Commission's following locations:
1. Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549;
2. New York Regional Office, Seven World Trade Center, Suite 1300, New
York, New York 10048; and
3. Chicago Regional Officer, Citicorp Center, 500 West Madison Street,
Chicago, Illinois 60661-2511
You may obtain copies by mail from the Public Reference Room by calling the
Securities and Exchange Commission at 1-800-SEC-0330. In addition, the
Securities and Exchange Commission maintains an Internet site that contains the
registration statement. The address of the Securities and Exchange Commission's
Internet site is "http://www.sec.gov."
We intend to furnish our stockholders annual reports containing financial
statements audited by our independent accountants.
83
<PAGE>
LUMINANT WORLDWIDE CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
LUMINANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Introduction to Unaudited Pro Forma Combined Financial Statements.................................... F-4
Unaudited Pro Forma Combined Balance Sheets.......................................................... F-5
Unaudited Pro Forma Combined Statements of Operations................................................ F-6
Unaudited Historical Balance Sheets Excluding Align Solutions Corp................................... F-9
Unaudited Historical Statements of Operations Excluding Align Solutions Corp......................... F-10
Notes to Unaudited Pro Forma Combined Financial Statements........................................... F-13
ALIGN SOLUTIONS CORP.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Introduction to Unaudited Pro Forma Financial Statements............................................. F-20
Unaudited Pro Forma Balance Sheets................................................................... F-21
Unaudited Pro Forma Statements of Operations......................................................... F-22
Notes to Unaudited Pro Forma Financial Statements.................................................... F-25
LUMINANT WORLDWIDE CORPORATION
Report of Independent Public Accountants............................................................. F-26
Balance Sheets....................................................................................... F-27
Statements of Operations............................................................................. F-28
Statements of Stockholders' Equity................................................................... F-29
Statements of Cash Flows............................................................................. F-30
Notes to Financial Statements........................................................................ F-31
OUR EIGHT COMPANIES
ALIGN SOLUTIONS CORP.
Report of Independent Public Accountants............................................................. F-36
Balance Sheets....................................................................................... F-37
Statements of Operations............................................................................. F-38
Statements of Stockholders' Equity................................................................... F-39
Statements of Cash Flows............................................................................. F-40
Notes to Financial Statements........................................................................ F-41
BRAND DIALOGUE-NEW YORK
Report of Independent Accountants.................................................................... F-49
Balance Sheets....................................................................................... F-50
Statements of Operations............................................................................. F-51
Statements of Cash Flows............................................................................. F-52
Notes to Financial Statements........................................................................ F-53
FREE RANGE MEDIA, INC.
Report of Independent Public Accountants............................................................. F-58
Consolidated Balance Sheets.......................................................................... F-59
Consolidated Statements of Operations................................................................ F-60
Consolidated Statements of Stockholders' Equity...................................................... F-61
Consolidated Statements of Cash Flows................................................................ F-62
Notes to Consolidated Financial Statements........................................................... F-63
</TABLE>
F-1
<PAGE>
LUMINANT WORLDWIDE CORPORATION
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
INTEGRATED CONSULTING, INC. dba I.CON INTERACTIVE
Report of Independent Public Accountants............................................................. F-71
Balance Sheets....................................................................................... F-72
Statements of Operations............................................................................. F-73
Statements of Stockholders' Equity................................................................... F-74
Statements of Cash Flows............................................................................. F-75
Notes to Financial Statements........................................................................ F-76
INTERACTIVE8, INC.
Report of Independent Public Accountants............................................................. F-82
Balance Sheets....................................................................................... F-83
Statements of Operations............................................................................. F-84
Statements of Stockholders' Equity................................................................... F-85
Statements of Cash Flows............................................................................. F-86
Notes to Financial Statements........................................................................ F-87
MULTIMEDIA RESOURCES, LLC
Report of Independent Public Accountants............................................................. F-94
Balance Sheets....................................................................................... F-95
Statements of Operations............................................................................. F-96
Statements of Members' Equity........................................................................ F-97
Statements of Cash Flows............................................................................. F-98
Notes to Financial Statements........................................................................ F-99
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC
Report of Independent Public Accountants............................................................. F-103
Balance Sheets....................................................................................... F-104
Statements of Operations............................................................................. F-105
Statements of Members' Equity........................................................................ F-106
Statements of Cash Flows............................................................................. F-107
Notes to Financial Statements........................................................................ F-108
RSI GROUP, INC. AND SUBSIDIARIES
Report of Independent Public Accountants............................................................. F-116
Consolidated Balance Sheets.......................................................................... F-117
Consolidated Statements of Operations................................................................ F-118
Consolidated Statements of Stockholders' Equity...................................................... F-119
Consolidated Statements of Cash Flows................................................................ F-120
Notes to Consolidated Financial Statements........................................................... F-121
ACQUISITIONS OF ALIGN SOLUTIONS CORP. SUBSEQUENT TO DECEMBER 31, 1998
FIFTH GEAR MEDIA CORPORATION
Report of Independent Public Accountants............................................................. F-127
Balance Sheets....................................................................................... F-128
Statements of Operations............................................................................. F-129
Statements of Stockholders' Equity................................................................... F-130
Statements of Cash Flows............................................................................. F-131
Notes to Financial Statements........................................................................ F-132
</TABLE>
F-2
<PAGE>
LUMINANT WORLDWIDE CORPORATION
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
INMEDIA, INC.
Report of Independent Public Accountants............................................................. F-139
Balance Sheets....................................................................................... F-140
Statements of Operations............................................................................. F-141
Statements of Stockholders' Equity................................................................... F-142
Statements of Cash Flows............................................................................. F-143
Notes to Financial Statements........................................................................ F-144
SYNAPSE GROUP INC.
Report of Independent Public Accountants............................................................. F-152
Balance Sheets....................................................................................... F-153
Statements of Operations............................................................................. F-154
Statements of Stockholders' Equity................................................................... F-155
Statements of Cash Flows............................................................................. F-156
Notes to Financial Statements........................................................................ F-157
</TABLE>
F-3
<PAGE>
LUMINANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements give effect
to the acquisitions by Luminant Worldwide Corporation ("Luminant") of the
outstanding capital stock of Align Solutions Corp.; Free Range Media, Inc.;
Integrated Consulting, Inc.; InterActive8, Inc; Multimedia Resources, LLC;
Potomac Partners Management Consulting, LLC; and RSI Group, Inc. and the assets
and certain liabilities of Brand Dialogue-New York (a wholly owned subsidiary of
Young and Rubicam Inc.) (the "eight companies"). These acquisitions will occur
simultaneously with the closing of this offering and will be accounted for using
the purchase method of accounting. Align, one of the eight companies we will
acquire, has been identified as the "accounting acquiror." Align is deemed to be
the accounting acquiror since its shareholder group's voting rights of 6,141,805
shares, combined with the irrevocable voting proxy granted by Commonwealth
Partners of 1,000,000 shares, totals 7,141,805 voting shares. This total gives
the Align shareholder group the greatest portion of voting rights. Subsequent to
the combination, the historical financial statements before the combination will
be those of Align. Under APB 16, the shareholder group receiving the largest
number of voting rights is presumptive evidence that it is the accounting
acquiror. In addition, Align shareholders receive the largest portion of total
consideration, have the largest revenue for the three months ended March 31,
1999, and Align and two other operating companies have three members of the
board of directors.
The unaudited pro forma combined balance sheet gives effect to the
acquisitions and the offering as if they had occurred on March 31, 1999. The
unaudited pro forma combined statements of operations gives effect to these
transactions as if they had occurred on January 1, 1998. Certain
reclassifications to the historical statements of operations for Brand
Dialogue-New York have been made in order to present information that is
consistent with the Luminant statement of operations presentation.
Luminant has preliminarily analyzed the savings or increases that it expects
to realize from changes in salaries and certain benefits to the stockholders and
management of the eight companies. To the extent the stockholders and management
of the eight companies have agreed prospectively to reductions or increases in
salary, bonuses and benefits, these changes have been reflected in the pro forma
combined statements of operations. With respect to other potential cost savings,
Luminant has not and cannot quantify these savings until completion of the
acquisition of the eight companies. It is anticipated that these savings will be
partially offset by the costs of being a publicly held company and the
incremental increase in costs related to Luminant's new management. The
anticipated savings have not been included in the unaudited pro forma combined
financial statements of Luminant.
The pro forma adjustments are based on estimates, available information and
certain assumptions and may be revised as additional information becomes
available. The pro forma financial data do not purport to represent what
Luminant's financial position or results of operations would actually have been
if such transactions in fact had occurred on those dates and are not necessarily
representative of Luminant's financial position or results of operations for any
future period. Since the eight companies were not under common control or
management, historical combined results may not be comparable to, or indicative
of, future performance. The unaudited pro forma combined financial statements
should be read in conjunction with the other financial statements and notes
thereto included elsewhere in this prospectus. See "Risk Factors" included
elsewhere in this prospectus.
F-4
<PAGE>
LUMINANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEETS
MARCH 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
PRO FORMA TOTAL ACQUISITION PRO FORMA OFFERING PRO FORMA
ALIGN W/O ALIGN ADJUSTMENTS COMBINED ADJUSTMENTS AS ADJUSTED
--------- ---------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(SEE
F-21)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................. $ 352 $ 1,878 $ -- $ 2,230 $ 35,652(d)(e) $ 37,882
Accounts receivable, net................... 2,649 8,796 -- 11,445 -- 11,445
Unbilled revenues.......................... 816 637 -- 1,453 -- 1,453
Employee and other receivables............. 35 1,352 (1,138)(a) 249 -- 249
Deferred income taxes...................... 125 33 (68)(a) 90 -- 90
Deferred income tax valuation.............. (125) (21) 56(a) (90) -- (90)
Prepaid expenses and other assets.......... 86 403 -- 489 (50)(d) 439
--------- ---------- ----------- --------- ----------- -----------
Total current assets..................... 3,938 13,078 (1,150) 15,866 35,602 51,468
PROPERTY AND EQUIPMENT, net.................. 1,033 2,517 -- 3,550 -- 3,550
OTHER ASSETS:
Goodwill, net.............................. 14,688 28 228,545(a) 243,261 -- 243,261
Other Intangible........................... -- -- 7,470(c) 7,470 -- 7,470
Deferred income taxes...................... 92 3,081 55(a) 3,228 -- 3,228
Deferred income tax valuation.............. (92) (3,067) (69)(a) (3,228) -- (3,228)
Other...................................... 28 263 -- 291 -- 291
--------- ---------- ----------- --------- ----------- -----------
Total assets............................. $19,687 $ 15,900 $234,851 $270,438 $ 35,602 $306,040
--------- ---------- ----------- --------- ----------- -----------
--------- ---------- ----------- --------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................... $ 1,139 $ 3,010 $ -- $ 4,149 $ -- $ 4,149
Payable for eight companies' stock and
other acquisition-related obligations.... -- -- 97,640(b) 97,640 (97,640)(e) --
Customer deposits.......................... 146 455 -- 601 -- 601
Accrued liabilities........................ 742 12,408 (8,670)(b) 4,480 -- 4,480
Unearned revenues.......................... -- 88 -- 88 -- 88
Notes payable.............................. 1,111 5,101 (4,114)(b) 2,098 (50)(d) 2,048
Current maturities of long-term debt....... 722 703 128(b) 1,553 -- 1,553
--------- ---------- ----------- --------- ----------- -----------
Total current liabilities................ 3,860 21,765 84,984 110,609 (97,690) 12,919
LONG-TERM LIABILITIES:
Long-term debt, net of current
maturities............................... 221 452 732(b) 1,405 -- 1,405
Deferred income taxes...................... -- 9 (9)(a) -- -- --
--------- ---------- ----------- --------- ----------- -----------
Total liabilities........................ 4,081 22,226 85,707 112,014 (97,690) 14,324
--------- ---------- ----------- --------- ----------- -----------
MINORITY INTEREST............................ -- 119 (119) -- -- --
STOCKHOLDERS' EQUITY:
Preferred stock............................ -- 3,728 (3,728)(b) -- -- --
Members' equity............................ -- (4,674) 4,674(a) -- -- --
Common stock............................... 68 125 90(a) 283 126(d) 409
Additional paid-in capital................. 19,319 4,285 176,345 (a)(b)(c 199,949 133,166(d) 333,115
Young & Rubicam Inc. investment............ -- 2,350 (2,350)(a) -- -- --
Subscription receivable from officers...... -- (10) 10(a) -- -- --
Retained earnings (deficit)................ (3,781) (11,819) (26,208)(a)(b) (41,808) -- (41,808)
Treasury stock............................. -- (430) 430(a) -- -- --
--------- ---------- ----------- --------- ----------- -----------
Total stockholders' equity............... 15,606 (6,445) 149,263 158,424 133,292 291,716
--------- ---------- ----------- --------- ----------- -----------
Total liabilities and stockholders'
equity................................. $19,687 $ 15,900 $234,851 $270,438 $ 35,602 $306,040
--------- ---------- ----------- --------- ----------- -----------
--------- ---------- ----------- --------- ----------- -----------
</TABLE>
F-5
<PAGE>
LUMINANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
PRO FORMA TOTAL W/O ACQUISITION PRO FORMA
ALIGN ALIGN ADJUSTMENTS COMBINED
----------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
(SEE F-22)
REVENUES................................ $ 14,188 $ 40,877 $ (219)(e) $ 54,846
COST OF SERVICES........................ 8,582 29,297 (1,611)(c)(e) 36,268
----------- -------------- -------------- -----------
GROSS PROFIT............................ 5,606 11,580 1,392 18,578
SELLING, GENERAL AND ADMINISTRATIVE..... 5,631 16,425 3,958(c)(e)(g)(h) 26,014
EQUITY BASED COMPENSATION EXPENSE....... 4,562 -- 3,624(h) 8,186
INTANGIBLES AMORTIZATION................ 5,068 35 78,672(a) 83,775
OTHER INCOME (EXPENSE):
Interest income....................... -- 37 -- 37
Interest expense...................... (155) (351) 182(f) (324)
Gain on sale of affiliate............. -- 430 -- 430
Loss on disposition of assets......... (28) -- 5(e) (23)
Other, net............................ 1 28 -- 29
----------- -------------- -------------- -----------
LOSS BEFORE INCOME TAXES................ (9,837) (4,736) (84,675) (99,248)
INCOME TAXES............................ -- 481 (481)(b) --
MINORITY INTEREST....................... -- 162 (162)(d) --
----------- -------------- -------------- -----------
LOSS BEFORE NONRECURRING CHARGES........ $ (9,837) $ (5,379) $ (84,032) $ (99,248)
----------- -------------- -------------- -----------
----------- -------------- -------------- -----------
LOSS BEFORE NONRECURRING CHARGES PER
SHARE................................. $ (2.43)
SHARES USED IN COMPUTING PRO FORMA LOSS
BEFORE NONRECURRING CHARGES PER SHARE
(see note 5):......................... 40,909,091
</TABLE>
F-6
<PAGE>
LUMINANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
PRO FORMA TOTAL ACQUISITION PRO FORMA
ALIGN W/O ALIGN ADJUSTMENTS COMBINED
----------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
(SEE F-23)
REVENUES................................ $ 5,051 $ 13,405 $ (41)(f) $ 18,415
COST OF SERVICES........................ 3,037 15,415 (7,207)(c)(d) 11,245
----------- -------------- -------------- -----------
GROSS PROFIT............................ 2,014 (2,010) 7,166 7,170
SELLING, GENERAL AND ADMINISTRATIVE..... 2,025 5,181 188(c)(f)(h) 7,394
EQUITY BASED COMPENSATION EXPENSE....... 244 -- 40(d) 284
INTANGIBLES AMORTIZATION................ 1,270 9 19,668(a) 20,947
OTHER INCOME (EXPENSE):
Interest income....................... 4 1 -- 5
Interest expense...................... (38) (116) 89(g) (65)
Net transactions with affiliate....... -- -- -- --
Loss on disposition of assets......... -- -- -- --
Other, net............................ 4 (17) -- (13)
----------- -------------- -------------- -----------
LOSS BEFORE INCOME TAXES................ (1,555) (7,332) (12,641) (21,528)
INCOME TAXES............................ -- 57 (57)(b) --
MINORITY INTEREST....................... -- (24) 24(e) --
----------- -------------- -------------- -----------
LOSS BEFORE NONRECURRING CHARGES........ $ (1,555) $ (7,365) $ (12,608) $ (21,528)
----------- -------------- -------------- -----------
----------- -------------- -------------- -----------
LOSS BEFORE NONRECURRING CHARGES PER
SHARE................................. $ (0.53)
SHARES USED IN COMPUTING PRO FORMA
LOSS BEFORE NONRECURRING CHARGES PER
SHARE (see note 5):................... 40,909,091
</TABLE>
F-7
<PAGE>
LUMINANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA HISTORICAL ACQUISITION PRO FORMA
ALIGN TOTAL W/O ALIGN ADJUSTMENTS COMBINED
--------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
(SEE
F-24)
REVENUES......................................................... $ 2,659 $ 8,907 $ (3)(d) $ 11,563
COST OF SERVICES................................................. 1,594 6,099 (20)(d) 7,673
--------- --------------- ----------- -----------
GROSS PROFIT..................................................... 1,065 2,808 17 3,890
SELLING, GENERAL AND ADMINISTRATIVE.............................. 1,125 3,813 1,210(d)(f) 6,148
EQUITY BASED COMPENSATION EXPENSE................................ 3,737 -- 3,624(g) 7,361
INTANGIBLES AMORTIZATION......................................... 1,268 -- 19,668(a) 20,936
OTHER INCOME (EXPENSE):
Interest income................................................ -- 4 -- 4
Interest expense............................................... (34) (50) 9(e) (75)
Net transactions with affiliate................................ -- -- -- --
Loss on disposition of assets.................................. -- -- -- --
Other, net..................................................... -- 22 -- 22
--------- --------------- ----------- -----------
LOSS BEFORE INCOME TAXES......................................... (5,099) (1,029) (24,476) (30,604)
INCOME TAXES..................................................... -- 115 (115)(b) --
MINORITY INTEREST................................................ -- 33 (33)(c) --
--------- --------------- ----------- -----------
LOSS BEFORE NONRECURRING CHARGES................................. $(5,099) $(1,177) $(24,328) $(30,604)
--------- --------------- ----------- -----------
--------- --------------- ----------- -----------
LOSS BEFORE NONRECURRING CHARGES PER SHARE....................... $ (0.75)
SHARES USED IN COMPUTING PRO FORMA LOSS BEFORE NONRECURRING
CHARGES PER SHARE
(see note 5):.................................................. 40,909,091
</TABLE>
F-8
<PAGE>
LUMINANT WORLDWIDE CORPORATION
UNAUDITED HISTORICAL BALANCE SHEETS
EXCLUDING ALIGN SOLUTIONS CORP.
MARCH 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BRAND POTOMAC
LUMINANT DIALOGUE FREE RANGE I.CON INTERACTIVE8 MULTIMEDIA PARTNERS
------------- ----------- ------------- ----- ------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents............. $ 6 $ -- $ 48 $ 16 $ 462 $ 344 $ 971
Accounts receivable, net.. -- 2,867 1,477 377 532 369 879
Unbilled revenues......... -- -- 404 -- -- -- 171
Employee and other
receivables............. -- 1,138 -- -- 110 -- --
Deferred income taxes..... -- -- 21 12 -- -- --
Deferred income tax
valuation............... -- -- (21) -- -- -- --
Prepaid expenses and other
assets.................. 50 -- 76 5 62 14 66
----- ----------- ------------- ----- ------------- ----- -----------
Total current assets.... 56 4,005 2,005 410 1,166 727 2,087
PROPERTY AND EQUIPMENT,
net....................... -- 408 768 345 597 55 46
OTHER ASSETS:
Goodwill, net............. -- -- -- -- -- -- --
Deferred income taxes..... -- 14 3,067 -- -- -- --
Deferred income tax
valuation............... -- -- (3,067) -- -- -- --
Other..................... -- -- -- 17 72 13 --
----- ----------- ------------- ----- ------------- ----- -----------
Total assets............ $ 56 $ 4,427 $ 2,773 $ 772 $ 1,835 $ 795 $ 2,133
----- ----------- ------------- ----- ------------- ----- -----------
----- ----------- ------------- ----- ------------- ----- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......... $ 76 $ 1,274 $ 383 $ 48 $ 274 $ 96 $ 322
Customer deposits......... 425 30 --
Accrued liabilities....... -- 803 909 259 2,763 150 6,946
Unearned revenues......... 88 --
Notes payable............. 50 -- 4,114 98 50 -- --
Current maturities of
long-term debt.......... -- -- -- 17 617 -- --
----- ----------- ------------- ----- ------------- ----- -----------
Total current
liabilities............. 126 2,077 5,831 452 3,704 334 7,268
----- ----------- ------------- ----- ------------- ----- -----------
LONG TERM LIABILITIES:
Long-term debt, net of
current maturities...... -- -- -- 107 330 -- --
Deferred income taxes..... -- -- -- 9 -- -- --
----- ----------- ------------- ----- ------------- ----- -----------
Total liabilities....... 126 2,077 5,831 568 4,034 334 7,268
----- ----------- ------------- ----- ------------- ----- -----------
MINORITY INTEREST........... -- -- -- -- -- -- --
STOCKHOLDERS' EQUITY:
Preferred stock........... -- -- 3,728 -- -- -- --
Members' equity........... -- -- -- -- -- 461 (5,135)
Common stock.............. 79 -- -- 10 1 -- --
Additional paid-in
capital................. 328 -- 2,806 14 185 -- --
Young & Rubicam Inc.
investment.............. -- 2,350 -- -- -- -- --
Subscription receivable
from officers........... -- -- -- (10) -- -- --
Retained earnings
(deficit)............... (477) -- (9,369) 190 (2,385) -- --
Treasury stock............ -- -- (223) -- -- -- --
----- ----------- ------------- ----- ------------- ----- -----------
Total stockholders'
equity.................. (70) 2,350 (3,058) 204 (2,199) 461 (5,135)
----- ----------- ------------- ----- ------------- ----- -----------
Total liabilities and
stockholders' equity.... $ 56 $ 4,427 $ 2,773 $ 772 $ 1,835 $ 795 $ 2,133
----- ----------- ------------- ----- ------------- ----- -----------
----- ----------- ------------- ----- ------------- ----- -----------
<CAPTION>
HISTORICAL
RSI TOTAL
--------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents............. $ 31 $ 1,878
Accounts receivable, net.. 2,295 8,796
Unbilled revenues......... 62 637
Employee and other
receivables............. 104 1,352
Deferred income taxes..... -- 33
Deferred income tax
valuation............... -- (21)
Prepaid expenses and other
assets.................. 130 403
--------- -----------
Total current assets.... 2,622 13,078
PROPERTY AND EQUIPMENT,
net....................... 298 2,517
OTHER ASSETS:
Goodwill, net............. 28 28
Deferred income taxes..... -- 3,081
Deferred income tax
valuation............... -- (3,067)
Other..................... 161 263
--------- -----------
Total assets............ $ 3,109 $ 15,900
--------- -----------
--------- -----------
LIABILITIES AND STOCKHOLDERS
CURRENT LIABILITIES:
Accounts payable.......... $ 537 $ 3,010
Customer deposits......... 455
Accrued liabilities....... 578 12,408
Unearned revenues......... -- 88
Notes payable............. 789 5,101
Current maturities of
long-term debt.......... 69 703
--------- -----------
Total current
liabilities............. 1,973 21,765
--------- -----------
LONG TERM LIABILITIES:
Long-term debt, net of
current maturities...... 15 452
Deferred income taxes..... -- 9
--------- -----------
Total liabilities....... 1,988 22,226
--------- -----------
MINORITY INTEREST........... 119 119
STOCKHOLDERS' EQUITY:
Preferred stock........... -- 3,728
Members' equity........... -- (4,674)
Common stock.............. 35 125
Additional paid-in
capital................. 952 4,285
Young & Rubicam Inc.
investment.............. -- 2,350
Subscription receivable
from officers........... -- (10)
Retained earnings
(deficit)............... 222 (11,819)
Treasury stock............ (207) (430)
--------- -----------
Total stockholders'
equity.................. 1,002 (6,445)
--------- -----------
Total liabilities and
stockholders' equity.... $ 3,109 $ 15,900
--------- -----------
--------- -----------
</TABLE>
F-9
<PAGE>
LUMINANT WORLDWIDE CORPORATION
UNAUDITED HISTORICAL STATEMENTS OF OPERATIONS
EXCLUDING ALIGN SOLUTIONS CORP.
FOR THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BRAND POTOMAC
LUMINANT DIALOGUE FREE RANGE I.CON INTERACTIVE8 MULTIMEDIA PARTNERS RSI
----------- ----------- ----------- --------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES................ $ -- $ 7,237 $ 3,521 $ 2,140 $ 4,097 $ 2,068 $ 4,887 $ 16,927
COST OF SERVICES........ -- 4,186 3,248 716 2,033 1,756 5,087 12,271
----------- ----------- ----------- --------- ------------- ------------- ----------- -----------
GROSS PROFIT............ -- 3,051 273 1,424 2,064 312 (200) 4,656
SELLING, GENERAL AND
ADMINISTRATIVE........ 245 2,087 4,922 1,383 2,419 275 876 4,218
INTANGIBLES
AMORTIZATION.......... -- -- -- -- -- -- -- 35
OTHER INCOME (EXPENSE):
Interest income....... -- -- -- -- -- 6 31 --
Interest expense...... -- -- (182) -- -- -- -- (169)
Gain on sale of
affiliate........... -- -- 430 -- -- -- -- --
Loss on disposition of
assets.............. -- -- -- -- -- -- -- --
Other, net............ -- -- 28 -- -- -- -- --
----------- ----------- ----------- --------- ------------- ------------- ----------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES.......... (245) 964 (4,373) 41 (355) 43 (1,045) 234
INCOME TAXES............ -- 403 -- 6 33 10 -- 29
MINORITY INTEREST....... -- -- -- -- -- -- -- 162
----------- ----------- ----------- --------- ------------- ------------- ----------- -----------
NET INCOME (LOSS)....... $ (245) $ 561 $ (4,373) $ 35 $ (388) $ 33 $ (1,045) $ 43
----------- ----------- ----------- --------- ------------- ------------- ----------- -----------
----------- ----------- ----------- --------- ------------- ------------- ----------- -----------
<CAPTION>
HISTORICAL
TOTAL
-----------
<S> <C>
REVENUES................ $ 40,877
COST OF SERVICES........ 29,297
-----------
GROSS PROFIT............ 11,580
SELLING, GENERAL AND
ADMINISTRATIVE........ 16,425
INTANGIBLES
AMORTIZATION.......... 35
OTHER INCOME (EXPENSE):
Interest income....... 37
Interest expense...... (351)
Gain on sale of
affiliate........... 430
Loss on disposition of
assets.............. --
Other, net............ 28
-----------
INCOME (LOSS) BEFORE
INCOME TAXES.......... (4,736)
INCOME TAXES............ 481
MINORITY INTEREST....... 162
-----------
NET INCOME (LOSS)....... $ (5,379)
-----------
-----------
</TABLE>
F-10
<PAGE>
LUMINANT WORLDWIDE CORPORATION
UNAUDITED HISTORICAL STATEMENTS OF OPERATIONS
EXCLUDING ALIGN SOLUTIONS CORP.
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BRAND POTOMAC
LUMINANT DIALOGUE FREE RANGE I.CON INTERACTIVE8 MULTIMEDIA PARTNERS
----------- ----------- ------------- ----- ------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES.................... $ -- $ 2,701 $ 2,211 $ 825 $ 1,613 $ 742 $ 2,060
COST OF SERVICES............ -- 1,692 1,462 250 3,102 314 6,231
----------- ----------- ------------- ----- ------------- ----- -----------
GROSS PROFIT................ -- 1,009 749 575 (1,489) 428 (4,171)
SELLING, GENERAL AND
ADMINISTRATIVE............ 232 568 1,176 455 464 92 489
INTANGIBLES AMORTIZATION.... -- -- -- -- -- -- --
OTHER INCOME (EXPENSE):
Interest income........... -- -- -- -- -- 1 --
Interest expense.......... -- -- (89) (3) -- -- --
Net transactions with
affiliate............... -- -- -- -- -- -- --
Loss on disposition of
assets.................. -- -- -- -- -- -- --
Other, net................ -- -- (7) -- -- -- (10)
----------- ----------- ------------- ----- ------------- ----- -----------
INCOME (LOSS) BEFORE INCOME
TAXES..................... (232) 441 (523) 117 (1,953) 337 (4,670)
INCOME TAXES................ -- 184 -- 16 -- 135 --
MINORITY INTEREST........... -- -- -- -- -- -- --
----------- ----------- ------------- ----- ------------- ----- -----------
NET INCOME (LOSS)........... $ (232) $ 257 $ (523) $ 101 $ (1,953) $ 202 $ (4,670)
----------- ----------- ------------- ----- ------------- ----- -----------
----------- ----------- ------------- ----- ------------- ----- -----------
<CAPTION>
HISTORICAL
RSI TOTAL
--------- -----------
<S> <C> <C>
REVENUES.................... $ 3,253 $ 13,405
COST OF SERVICES............ 2,364 15,415
--------- -----------
GROSS PROFIT................ 889 (2,010)
SELLING, GENERAL AND
ADMINISTRATIVE............ 1,705 5,181
INTANGIBLES AMORTIZATION.... 9 9
OTHER INCOME (EXPENSE):
Interest income........... -- 1
Interest expense.......... (24) (116)
Net transactions with
affiliate............... -- --
Loss on disposition of
assets.................. -- --
Other, net................ -- (17)
--------- -----------
INCOME (LOSS) BEFORE INCOME
TAXES..................... (849) (7,332)
INCOME TAXES................ (278) 57
MINORITY INTEREST........... (24) (24)
--------- -----------
NET INCOME (LOSS)........... $ (547) $ (7,365)
--------- -----------
--------- -----------
</TABLE>
F-11
<PAGE>
LUMINANT WORLDWIDE CORPORATION
UNAUDITED HISTORICAL STATEMENTS OF OPERATIONS
EXCLUDING ALIGN SOLUTIONS CORP.
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BRAND FREE POTOMAC
LUMINANT DIALOGUE RANGE I.CON INTERACTIVE8 MULTIMEDIA PARTNERS
------------- ----------- --------- ----- --------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES................... $ -- $ 1,410 $ 338 $ 456 $ 737 $ 652 $ 976
COST OF SERVICES........... -- 791 518 113 433 440 654
--- ----------- --------- ----- ------ ----- -----
GROSS PROFIT............... -- 619 (180) 343 304 212 322
SELLING, GENERAL AND
ADMINISTRATIVE........... -- 595 1,090 216 690 81 180
INTANGIBLES AMORTIZATION... -- -- -- -- -- -- --
OTHER INCOME (EXPENSE):
Interest income.......... -- -- -- -- -- 4 --
Interest expense......... -- -- (9) -- -- -- --
Other, net............... -- -- 20 -- -- -- 2
--- ----------- --------- ----- ------ ----- -----
INCOME (LOSS) BEFORE INCOME
TAXES.................... -- 24 (1,259) 127 (386) 135 144
INCOME TAXES............... -- 7 -- 16 -- 31 --
MINORITY INTEREST.......... -- -- -- -- -- -- --
--- ----------- --------- ----- ------ ----- -----
NET INCOME (LOSS).......... $ -- $ 17 $ (1,259) $ 111 $ (386) $ 104 $ 144
--- ----------- --------- ----- ------ ----- -----
--- ----------- --------- ----- ------ ----- -----
<CAPTION>
HISTORICAL
RSI TOTAL
--------- -----------
<S> <C> <C>
REVENUES................... $ 4,338 $ 8,907
COST OF SERVICES........... 3,150 6,099
--------- -----------
GROSS PROFIT............... 1,188 2,808
SELLING, GENERAL AND
ADMINISTRATIVE........... 961 3,813
INTANGIBLES AMORTIZATION... -- --
OTHER INCOME (EXPENSE):
Interest income.......... -- 4
Interest expense......... (41) (50)
Other, net............... -- 22
--------- -----------
INCOME (LOSS) BEFORE INCOME
TAXES.................... 186 (1,029)
INCOME TAXES............... 61 115
MINORITY INTEREST.......... 33 33
--------- -----------
NET INCOME (LOSS).......... $ 92 $ (1,177)
--------- -----------
--------- -----------
</TABLE>
F-12
<PAGE>
LUMINANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. GENERAL:
Luminant was established to create a leading single-source Internet service
company that provides electronic commerce professional services to Fortune 1000
companies, Internet based companies and other organizations. Luminant has
conducted no operations to date and will acquire its eight companies
concurrently with and as a condition to the closing of the offering.
The historical financial statements reflect the financial position and
results of operations of Luminant and the eight companies it will acquire on the
consummation of this offering. The audited historical financial statements of
Luminant and the eight companies are included elsewhere in this prospectus.
2. ACQUISITION OF THE EIGHT COMPANIES:
Concurrent with and as a condition to the closing of the offering, Luminant
will acquire eight companies. Seven companies will be acquired by merging each
into newly formed subsidiaries of Luminant. In addition, Luminant will acquire
the assets of Brand Dialogue-New York and will contribute those assets to a
newly formed subsidiary. The acquisitions will be accounted for using the
purchase method of accounting with Align Solutions Corp. the accounting
acquiror. Accredited shareholders of Align common stock will receive .8639
shares of Luminant common stock for each share of Align common stock they own.
Unaccredited shareholders will receive cash for each share of Align common stock
they own.
The following table sets forth the consideration to be paid in cash and
shares of common stock to the stockholders of each company. For purposes of
computing the estimated purchase price, the value of shares is determined using
the assumed initial public offering price of $12.00 per share. Adjusted net
assets represent the stockholders equity of each company adjusted for: 1) the
note payable of $4,114,000 at Free Range repaid as a part of the transaction, 2)
the accrued liabilities of $2,205,000 at InterActive8 and $6,465,000 at Potomac
funded as part of the transaction, 3) establishment of valuation allowances for
historical deferred tax assets, and 4) the receivable from related parties at
Brand Dialogue retained by the seller.
In addition to the purchase price, the purchase agreements include
provisions for contingent consideration based on achievement of financial goals
of the individual companies and consolidated results of the eight companies.
Maximum contingent consideration is $196.7 million. Contingent consideration to
any of the companies may not exceed 50% of the total consideration to the
company. See page 21 for full details. This amount also includes the $25 million
potentially payable to the members of Potomac Partners related to business with
one of its clients. Payments made to the shareholders of Align will be treated
as a return of capital. Payments to shareholders of the other companies will
result in additional goodwill and will be amortized over the remaining life of
goodwill associated with the acquisitions. The estimated purchase prices for the
acquisitions are based upon preliminary estimates and are subject to certain
purchase price adjustments at and following the closing. Luminant does not
anticipate
F-13
<PAGE>
LUMINANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITION OF THE EIGHT COMPANIES: (CONTINUED)
that the final allocation of purchase price between tangible assets and goodwill
will differ significantly from that presented.
<TABLE>
<CAPTION>
NUMBER VALUE OF TOTAL ADJUSTED
CASH OF SHARES SHARES CONSIDERATION NET ASSETS GOODWILL LIFE
--------- ----------- --------- -------------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Align......... $ 36,917 6,142 $ 73,702 $ 110,619 $ 15,606 N/A N/A
Brand
Dialogue.... -- 4,609 55,309 55,309 1,198 $ 54,111 3 years
Free Range.... 10,156 1,917 23,007 33,163 1,056 32,107 3 years
i.con......... 4,897 810 9,721 14,618 201 14,417 3 years
InterActive8.. 11,920 1,770 21,244 33,164 6 33,158 3 years
Multimedia.... 3,436 668 8,018 11,454 461 10,993 3 years
Potomac
Partners.... 24,685 3,470 41,642 66,327 1,330 64,997 3 years
RSI........... 5,629 1,095 13,135 18,764 1,002 17,762 3 years
--------- ----------- --------- -------------- ----------- -----------
$ 97,640 20,481 $ 245,778 $ 343,418 $ 20,860 227,545
--------- ----------- --------- -------------- -----------
--------- ----------- --------- -------------- -----------
Acquisition-
related
fees........ 1,000
-----------
$ 228,545
-----------
-----------
</TABLE>
If the maximum amount of contingent consideration was earned, approximately
$29.1 million of goodwill would have been recorded in the second half of 1998,
and $29.1 million in the first quarter of 1999. This additional goodwill would
result in an increase in amortization expense of $9.7 million for the year ended
December 31, 1998, and $9.7 million for the three months ended March 31, 1999.
F-14
<PAGE>
LUMINANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
The following table summarizes unaudited pro forma combined balance sheet
adjustments:
<TABLE>
<CAPTION>
OFFERING ADJUSTMENTS
ACQUISITION ADJUSTMENTS PRO FORMA POST
------------------------------- ACQUISITION -------------------- ACQUISITION
(A) (B) (C) ADJUSTMENTS (D) (E) ADJUSTMENTS
--------- --------- --------- ------------ --------- --------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.............. $ -- $ -- $ -- $ -- $ 133,292 $ (97,640) $ 35,652
Accounts receivable, net............... -- -- -- -- -- -- --
Unbilled revenues...................... -- -- -- -- -- -- --
Employee and other receivables......... (1,138) -- -- (1,138) -- -- --
Deferred income taxes.................. (68) -- -- (68) -- -- --
Deferred income tax valuation.......... 56 56
Prepaid expenses and other assets...... -- -- -- -- (50) -- (50)
--------- --------- --------- ------------ --------- --------- ------------
Total current assets..................... (1,150) -- -- (1,150) 133,242 (97,640) 35,602
PROPERTY AND EQUIPMENT, net.............. -- -- -- -- -- -- --
OTHER ASSETS:
Goodwill, net.......................... 228,545 -- -- 228,545 -- -- --
Other Intangible....................... -- -- 7,470 7,470 -- -- --
Deferred income taxes.................. 55 55
Deferred income tax valuation.......... (69) (69)
Other.................................. -- -- -- -- -- -- --
--------- --------- --------- ------------ --------- --------- ------------
Total assets............................. $ 227,381 $ -- $ 7,470 $ 234,851 $ 133,242 $ (97,640) $ 35,602
--------- --------- --------- ------------ --------- --------- ------------
--------- --------- --------- ------------ --------- --------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....................... $ -- $ -- $ -- $ -- $ -- $ -- $ --
Payable for eight companies' common
stock and other acquisition-related
obligations.......................... -- 97,640 -- 97,640 -- (97,640) (97,640)
Customer deposits...................... -- -- -- -- -- -- --
Accrued liabilities.................... -- (8,670) -- (8,670) -- -- --
Unearned revenues...................... -- -- -- -- -- -- --
Notes payable.......................... -- (4,114) -- (4,114) (50) -- (50)
Current maturities of long-term debt... -- 128 -- 128 -- -- --
--------- --------- --------- ------------ --------- --------- ------------
Total current liabilities................ -- 84,984 -- 84,984 (50) (97,640) (97,690)
LONG-TERM LIABILITIES:
Long-term debt, net of current
maturities........................... -- 732 -- 732 -- -- --
Deferred income taxes.................. (9) -- -- (9) -- -- --
--------- --------- --------- ------------ --------- --------- ------------
Total liabilities........................ (9) 85,716 -- 85,707 (50) (97,640) (97,690)
--------- --------- --------- ------------ --------- --------- ------------
MINORITY INTEREST........................ (119) -- -- (119) -- -- --
STOCKHOLDERS' EQUITY:
Preferred stock........................ -- (3,728) -- (3,728) -- -- --
Members' equity........................ 4,674 -- -- 4,674 -- -- --
Common stock........................... 90 -- -- 90 126 -- 126
Additional paid-in capital............. 212,836 (43,961) 7,470 176,345 133,166 -- 133,166
Young & Rubicam Inc. investment........ (2,350) -- -- (2,350) -- -- --
Subscription receivable from
officers............................. 10 -- -- 10 -- -- --
Retained earnings (deficit)............ 11,819 (38,027) -- (26,208) -- -- --
Treasury stock......................... 430 -- -- 430 -- -- --
--------- --------- --------- ------------ --------- --------- ------------
Total stockholders' equity............... 227,509 (85,716) 7,470 149,263 133,292 -- 133,292
--------- --------- --------- ------------ --------- --------- ------------
Total liabilities and stockholders'
equity................................. $ 227,381 $ -- $ 7,470 $ 234,851 $ 133,242 $ (97,640) $ 35,602
--------- --------- --------- ------------ --------- --------- ------------
--------- --------- --------- ------------ --------- --------- ------------
</TABLE>
F-15
<PAGE>
LUMINANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
- ------------------------
(a) Reflects the acquisitions of the eight companies and the elimination of
equity balances of the companies. The purchase price in excess of estimated
fair market value of assets acquired has been allocated to goodwill. The
seller of Brand Dialogue is retaining the Young & Rubicam receivable of
$1,138,000 that represents Brand Dialogue funds advanced to the seller.
Deferred income taxes have been recorded for LLC and S Corporation entities
and a valuation allowance has been increased due to the lack of history of
combined income.
(b) Records the liabilities for the cash portion of the consideration to be paid
for the common stock of the eight companies in connection with the
acquisitions, payments to Align shareholders of $36,917,000 (accounted for
as a dividend from retained earnings), payments to redeem $4,114,000 of
notes payable and $3,728,000 of preferred stock related to Free Range, and
payments for the accrued liabilities related to equity compensation rights
of Potomac Partners and Interactive8 of $6,465,000 and $2,205,000,
respectively. Additionally records $250,000 as the effect of a non-cash,
non-recurring compensation charge for the issuance of 20,833 options to a
former officer and a liability and non-recurring charge of $860,000 related
to an agreement to end the former officer's employment.
(c) Represents the estimated value of stock options granted to Young & Rubicam,
Inc. using the Modified Black-Scholes European Model. The following
assumptions were used: exercise price of $12.00, five-year life, 5.26%
interest rate, and 70% volatility factor.
(d) Records the cash proceeds from the issuance of shares of Luminant common
stock net of estimated offering costs and the repayment of advances from a
stockholder (based on an assumed initial public offering price of $12.00 per
share). Offering costs primarily consist of underwriting discounts and
commissions, accounting fees, legal fees and printing expenses.
(e) Records the cash portion of the acquisition consideration to be paid for the
stock of the eight companies and acquisition-related obligations from
proceeds of the offering as described in adjustment (b).
4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS:
The following tables summarize unaudited adjustments to the pro forma
combined statements of operations:
For the year ended December 31, 1998:
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E) (F) (G)
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES............................................. $ -- $ -- $ -- $ -- $ (219) $ -- $ --
COST OF SERVICES..................................... -- -- (1,533) -- (78) -- --
SELLING, GENERAL AND ADMINISTRATIVE.................. -- -- (383) -- (924) -- 5,472
EQUITY BASED COMPENSATION EXPENSE.................... -- -- -- -- -- -- --
INTANGIBLES AMORTIZATION............................. 78,672 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS........................ (78,672) -- 1,916 -- 783 -- (5,472)
OTHER INCOME (EXPENSE):
Interest expense..................................... -- -- -- -- -- 182 --
Net transactions with affiliate...................... -- -- -- -- -- -- --
Loss on disposition of assets........................ -- -- -- -- 5 -- --
--------- --------- --------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES.................... (78,672) -- 1,916 -- 788 182 (5,472)
INCOME TAXES......................................... -- (481) -- -- -- -- --
MINORITY INTEREST.................................... -- -- -- (162) -- -- --
--------- --------- --------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE NONRECURRING CHARGES............ $ (78,672) $ 481 $ 1,916 $ 162 $ 788 $ 182 $ (5,472)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
PRO FORMA
(H) ADJUSTMENTS
--------- -------------
<S> <C> <C>
REVENUES............................................. $ -- $ (219)
COST OF SERVICES..................................... -- (1,611)
SELLING, GENERAL AND ADMINISTRATIVE.................. (207) 3,958
EQUITY BASED COMPENSATION EXPENSE.................... 3,624 3,624
INTANGIBLES AMORTIZATION............................. -- 78,672
--------- -------------
INCOME (LOSS) FROM OPERATIONS........................ (3,417) (84,862)
OTHER INCOME (EXPENSE):
Interest expense..................................... -- 182
Net transactions with affiliate...................... --
Loss on disposition of assets........................ -- 5
--------- -------------
INCOME (LOSS) BEFORE INCOME TAXES.................... (3,417) (84,675)
INCOME TAXES......................................... -- (481)
MINORITY INTEREST.................................... -- (162)
--------- -------------
INCOME (LOSS) BEFORE NONRECURRING CHARGES............ $ (3,417) $ (84,032)
--------- -------------
--------- -------------
</TABLE>
- ------------------------------
(a) Reflects the amortization of goodwill and other intangible to be recorded as
a result of these acquisitions over a period of three years. These
amortization periods were determined based on an analysis of the
characteristics of the combined company.
(b) Reflects the reversal of the eight companies' income tax provision. Luminant
has not demonstrated that it will generate future taxable income; therefore,
an asset for the pro forma loss before taxes has not been recorded.
(c) Reflects the reduction in compensation expense related to the non-recurring,
non-cash compensation charges of $248,000, $30,000 and $1,503,000 recorded
by Free Range, InterActive8 and Potomac Partners, respectively, in the
fourth quarter of 1998
F-16
<PAGE>
LUMINANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS:
(CONTINUED)
related to equity appreciation rights issued to employees and owners of
those entities and the non-recurring, non-cash charge of $135,000 recorded
by InterActive8 related to the below fair market value issuance of equity.
The rights become exercisable upon the consummation of the acquisitions.
(d) Reflects elimination of minority interest in one of the eight companies.
(e) Reflects the elimination of revenues and expenses related to a division of
Free Range that will be distributed to Free Range's stockholders concurrent
with the acquisitions. It is estimated that the assets distributed will
equal the liabilities assumed.
(f) Reflects the elimination of interest expense for Free Range's note payable
that is to be redeemed as part of the acquisition.
(g) Includes adjustments to increase expenses related to additional compensation
expense of $1,996,000, board of directors' expense of $432,000,
administrative and other expense of $2,044,000 and additional expense
associated with being a public entity of $1,000,000. These adjustments were
based on budgeted amounts that have been annualized. These additional costs
are a direct result of the combination of these companies and the offering
of the securities to the public.
(h) Reflects a compensation charge for shares sold subsequent to March 31, 1999
to Luminant management at less than fair market value and the
reclassification of compensation expense related to shares sold to Luminant
management at less than fair market value in 1998.
For the three months ended March 31, 1999:
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E) (F) (G)
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
REVENUES........................................... $ -- $ -- $ -- $ -- $ -- $ (41) $ --
COST OF SERVICES................................... -- -- (7,167) (40) -- -- --
SELLING, GENERAL AND ADMINISTRATIVE................ -- -- (863) -- -- (317) --
EQUITY BASED COMPENSATION EXPENSE.................. -- -- -- 40 -- -- --
INTANGIBLES AMORTIZATION........................... 19,668 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS...................... (19,668) -- 8,030 -- -- 276 --
OTHER INCOME (EXPENSE):
Interest expense................................... -- -- -- -- -- -- 89
Net transactions with affiliate.................... -- -- -- -- -- -- --
Loss on disposition of assets...................... -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES.................. (19,668) -- 8,030 -- -- 276 89
INCOME TAXES....................................... -- (57) -- -- -- -- --
MINORITY INTEREST.................................. -- -- -- -- 24 -- --
--------- --------- --------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE NONRECURRING
CHARGES.......................................... $ (19,668) $ 57 $ 8,030 $ -- $ (24) $ 276 $ 89
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
PRO FORMA
(H) ADJUSTMENTS
--------- -------------
<S> <C> <C>
REVENUES........................................... $ -- $ (41)
COST OF SERVICES................................... -- (7,207)
SELLING, GENERAL AND ADMINISTRATIVE................ 1,368 188
EQUITY BASED COMPENSATION EXPENSE.................. -- 40
INTANGIBLES AMORTIZATION........................... -- 19,668
--------- -------------
INCOME (LOSS) FROM OPERATIONS...................... (1,368) (12,730)
OTHER INCOME (EXPENSE):
Interest expense................................... -- 89
Net transactions with affiliate.................... -- --
Loss on disposition of assets...................... -- --
--------- -------------
INCOME (LOSS) BEFORE INCOME TAXES.................. (1,368) (12,641)
INCOME TAXES....................................... -- (57)
MINORITY INTEREST.................................. -- 24
--------- -------------
INCOME (LOSS) BEFORE NONRECURRING
CHARGES.......................................... $ (1,368) $ (12,608)
--------- -------------
--------- -------------
</TABLE>
- ------------------------------
(a) Reflects the amortization of goodwill and other intangible to be recorded as
a result of these acquisitions over a period of three years. These
amortization periods were determined based on an analysis of the
characteristics of the combined company.
(b) Reflects the reversal of the eight companies' income tax provision. Luminant
has not demonstrated that it will generate future taxable income; therefore,
a net deferred tax asset for the pro forma loss before taxes has not been
recognized.
(c) Reflects the reduction in 1999 compensation expense related to the
non-recurring, non-cash charges of $133,000, $2,205,000 and $4,962,000
recorded by Free Range, InterActive8 and Potomac Partners, respectively, in
the first quarter of 1999 related to equity appreciation rights issued to
employees and owners of those entities and the non-recurring, non-cash
compensation charge of $730,000 recorded by RSI in the first quarter of 1999
related to the issuance of additional minority interest. The rights become
exercisable upon the consummation of the acquisitions.
(d) Reflects the reclassification of compensation expense related to stock
options granted at prices below fair market value for the accounting
acquiror Align.
(e) Reflects the elimination of minority interest in one of the eight companies.
(f) Reflects the elimination of revenues and expenses related to a division of
Free Range that will be distributed to Free Range's stockholders concurrent
with the acquisitions. It is estimated that the assets distributed will
equal the liabilities assumed.
F-17
<PAGE>
LUMINANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS:
(CONTINUED)
(g) Reflects the elimination of interest expense for Free Range's note payable
that is to be redeemed as part of the acquisition.
(h) Includes adjustments to increase expenses related to additional compensation
expense of $499,000, board of directors' expense of $108,000, administrative
and other expense of $511,000 and additional expense associated with being a
public entity of $250,000. These adjustments were based on budgeted amounts
that have been annualized. These additional costs are a direct result of the
combination of these companies and the offering of the securities to the
public.
For the three months ended March 31, 1998:
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E) (F)
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
REVENUES................................................... $ -- $ -- $ -- $ (3) $ -- $ --
COST OF SERVICES........................................... -- -- -- (20) -- --
SELLING, GENERAL AND ADMINISTRATIVE........................ -- -- -- (158) -- 1,368
EQUITY BASED COMPENSATION EXPENSE.......................... -- -- -- -- -- --
INTANGIBLES AMORTIZATION................................... 19,668 -- -- -- -- --
--------- --------- --------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS.............................. (19,668) -- -- 175 -- (1,368)
OTHER INCOME (EXPENSE):
Interest expense........................................... -- -- -- -- 9 --
Net transactions with affiliate............................ -- -- -- -- -- --
Loss on disposition of assets.............................. -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES.......................... (19,668) -- -- 175 9 (1,368)
INCOME TAXES............................................... -- (115) -- -- -- --
MINORITY INTEREST.......................................... -- -- (33) -- -- --
--------- --------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE NONRECURRING CHARGES.................. $ (19,668) $ 115 $ 33 $ 175 $ 9 $ (1,368)
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
<CAPTION>
PRO FORMA
(G) ADJUSTMENTS
--------- ----------------
<S> <C> <C>
REVENUES................................................... $ -- $ (3)
COST OF SERVICES........................................... -- (20)
SELLING, GENERAL AND ADMINISTRATIVE........................ -- 1,210
EQUITY BASED COMPENSATION EXPENSE.......................... 3,624 3,624
INTANGIBLES AMORTIZATION................................... -- 19,668
--------- --------
INCOME (LOSS) FROM OPERATIONS.............................. (3,624) (24,485)
OTHER INCOME (EXPENSE):
Interest expense........................................... -- 9
Net transactions with affiliate............................ -- --
Loss on disposition of assets.............................. -- --
--------- --------
INCOME (LOSS) BEFORE INCOME TAXES.......................... (3,624) (24,476)
INCOME TAXES............................................... -- (115)
MINORITY INTEREST.......................................... -- (33)
--------- --------
INCOME (LOSS) BEFORE NONRECURRING CHARGES.................. $ (3,624) $ (24,328)
--------- --------
--------- --------
</TABLE>
- ------------------------------
(a) Reflects the amortization of goodwill and other intangible to be recorded as
a result of these acquisitions over a period of three years. These
amortization periods were determined based on an analysis of the
characteristics of the combined company.
(b) Reflects the reversal of the eight companies' income tax provision. Luminant
has not demonstrated that it will generate future taxable income; therefore,
an asset for the pro forma loss before taxes has not been recorded.
(c) Reflects the elimination of minority interest in one of the eight companies.
(d) Reflects the elimination of revenues and expenses related to a division of
Free Range that will be distributed to Free Range's stockholders concurrent
with the acquisitions. It is estimated that the assets distributed will
equal the liabilities assumed.
(e) Reflects the elimination of interest expense for Free Range's note payable
that is to be redeemed as part of the acquisition.
(f) Includes adjustments to increase expense related to additional compensation
expense of $499,000, board of director's expense of $108,000, administrative
and other expense of $511,000 and additional expense associated with being a
public entity of $250,000. These adjustments were based on budgeted amounts
that have been annualized. These additional costs are a direct result of the
combination of these companies and the offering of the securities to the
public.
(g) Reflects a compensation charge for options granted and shares sold to
Luminant management at less than fair market value.
5. SHARES USED IN COMPUTING PRO FORMA LOSS BEFORE NONRECURRING CHARGES PER
SHARE:
Includes (i) 7,852,571 shares issued to the initial stockholders and
management of Luminant; (ii) 20,481,520 shares issued to the former owners of
the eight companies; and (iii) 12,575,000 shares sold in the offering, without
regard to exercise of underwriters' overallotment option and payment of any
contingent consideration. Options for the purchase of 7,803,917 shares of common
stock that are to be outstanding at the closing could potentially dilute basic
earnings per share in the future. These options were not included in the
computation of loss before nonrecurring charges per share because to do so would
have been antidilutive for the periods presented.
F-18
<PAGE>
LUMINANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. SHARES USED IN COMPUTING PRO FORMA LOSS BEFORE NONRECURRING CHARGES PER
SHARE: (CONTINUED)
At the time of the closing of this offering and the simultaneous acquisition
of the eight companies the Company will also have outstanding options to
purchase 7,803,917 shares of common stock, including options to purchase
1,983,316 shares of common stock which will be exercisable immediately following
this offering. With the exception of options to purchase 1,570,776 common shares
that will be issued on the conversion of outstanding Align options, all of the
options will have an exercise price equal to the initial offering price. The
1,570,776 common shares outstanding for Align will have exercise prices ranging
from $0.16 to $3.24.
6. SUPPLEMENTAL PRO FORMA DATA
The Company has excluded charges of $248,000, $30,000, and $1,503,000 for
the year ended December 31, 1998, reflected in the historical financial
statements of Free Range, InterActive8 and Potomac Partners, respectively,
related to equity appreciation rights issued to employees and owners of those
entities.
The Company has excluded non-cash charges of $135,000 for the year ended
December 31, 1998, related to the below fair market value issuance of equity,
reflected in the historical financial statements of InterActive8.
The Company has excluded charges of $133,000, $2,205,000, and $4,962,000 for
the three months ended March 31, 1999, reflected in the historical financial
statements of Free Range, InterActive8 and Potomac Partners, respectively,
related to equity appreciation rights issued to employees and owners of those
entities.
The Company has excluded non-cash charges of $730,000 for the three months
ended March 31, 1999, related to the issuance of additional minority interest,
reflected in the historical financial statements of RSI.
Before completion of the acquisition, the Company will record a charge of
$250,000 related to the issuance of 20,833 options to a former officer and a
liability and non-recurring charge of $860,000 related to an agreement to end
the former officer's employment.
F-19
<PAGE>
ALIGN SOLUTIONS CORP.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma financial statements give effect to the
acquisitions by Align Solutions Corp. (Align) of the outstanding capital stock
of Fifth Gear Media Corporation (Fifth Gear) and Synapse Group Inc. (Synapse),
and the assets and certain liabilities of inmedia, inc. (inmedia) (the three
companies). The acquisition of Synapse occurred on February 15, 1999, the
acquisition of Fifth Gear occurred on May 26, 1999 and the acquisition of
inmedia occurred on May 27, 1999.
The unaudited pro forma balance sheet gives effect to the acquisition of
Fifth Gear and inmedia as if they had occurred on March 31, 1999. Synapse is
included in Align's historical balance sheet at March 31, 1999. The unaudited
pro forma statements of operations gives effect to these transactions as if they
had occurred on January 1, 1998.
The pro forma adjustments are based on estimates, available information and
certain assumptions and may be revised as additional information becomes
available. The pro forma financial data do not purport to represent what Align's
financial position or results of operations would actually have been if such
transactions in fact had occurred on those dates and are not necessarily
representative of Align's financial position or results of operations for any
future period. Since the companies were not under common control or management,
historical combined results may not be comparable to, or indicative of, future
performance. The unaudited pro forma financial statements should be read in
conjunction with the other financial statements and notes thereto included
elsewhere in this prospectus. See "Risk Factors" included elsewhere in this
prospectus.
F-20
<PAGE>
ALIGN SOLUTIONS CORP.
UNAUDITED PRO FORMA BALANCE SHEETS
MARCH 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA ADJUSTMENTS
------------------------------------------------ --------------------------
ALIGN FIFTH GEAR INMEDIA TOTAL FIFTH GEAR(A) INMEDIA(B) PRO FORMA
--------- ------------- ----------- --------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......... $ 209 $ 143 $ -- $ 352 $ -- $ -- $ 352
Accounts receivable, net.......... 2,397 127 125 2,649 -- -- 2,649
Unbilled revenues................. 806 -- 10 816 -- -- 816
Employee and other receivables.... 35 -- -- 35 -- -- 35
Deferred income taxes............. -- 9 125 134 (9) -- 125
Deferred income tax valuation..... -- -- (125) (125) -- -- (125)
Prepaid expenses and other
assets.......................... 81 -- 5 86 -- -- 86
--------- ----- ----------- --------- ------------- ----------- -----------
Total current assets............ 3,528 279 140 3,947 (9) -- 3,938
PROPERTY AND EQUIPMENT, net......... 908 91 73 1,072 (23) (16) 1,033
OTHER ASSETS:
Goodwill, net..................... 9,040 -- - 9,040 3,469 2,179 14,688
Deferred income taxes............. -- -- 103 103 (11) -- 92
Deferred income tax valuation..... -- -- (103) (103) 11 -- (92)
Other............................. 14 10 12 36 -- (8) 28
--------- ----- ----------- --------- ------------- ----------- -----------
Total assets.................... $ 13,490 $ 380 $ 225 $ 14,095 $ 3,437 $ 2,155 $ 19,687
--------- ----- ----------- --------- ------------- ----------- -----------
--------- ----- ----------- --------- ------------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................. $ 896 $ 25 $ 218 $ 1,139 $ -- $ -- $ 1,139
Customer deposits................. -- -- 265 265 -- (119) 146
Accrued liabilities............... 431 103 108 642 50 50 742
Notes payable..................... 1,111 -- -- 1,111 -- -- 1,111
Current maturities of long-term
debt............................ 112 57 553 722 -- -- 722
--------- ----- ----------- --------- ------------- ----------- -----------
Total current liabilities....... 2,550 185 1,144 3,879 50 (69) 3,860
LONG-TERM LIABILITIES:
Long-term debt, net of current
maturities...................... 143 78 -- 221 -- -- 221
Deferred income taxes............. -- 11 -- 11 (11) -- --
--------- ----- ----------- --------- ------------- ----------- -----------
Total liabilities............... 2,693 274 1,144 4,111 39 (69) 4,081
--------- ----- ----------- --------- ------------- ----------- -----------
STOCKHOLDERS' EQUITY:...............
Common stock...................... $ 64 $ 2 $ 3 $ 69 $ 1 $ (2) $ 68
Additional paid-in capital........ 14,514 -- 30 14,544 3,501 1,274 19,319
Retained earnings (deficit)....... (3,781) 104 (952) (4,629) (104) 952 (3,781)
--------- ----- ----------- --------- ------------- ----------- -----------
Total stockholders' equity...... 10,797 106 (919) 9,984 3,398 2,224 15,606
--------- ----- ----------- --------- ------------- ----------- -----------
Total liabilities and
stockholders' equity.......... $ 13,490 $ 380 $ 225 $ 14,095 $ 3,437 $ 2,155 $ 19,687
--------- ----- ----------- --------- ------------- ----------- -----------
--------- ----- ----------- --------- ------------- ----------- -----------
</TABLE>
F-21
<PAGE>
ALIGN SOLUTIONS CORP.
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------------------------------- PRO FORMA
ALIGN FIFTH GEAR INMEDIA SYNAPSE TOTAL ADJUSTMENTS PRO FORMA
--------- ----------- ----------- ----------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES............................ $ 9,226 $ 1,227 $ 1,195 $ 2,540 $ 14,188 $ -- $ 14,188
COST OF SERVICES.................... 5,128 603 943 1,908 8,582 -- 8,582
--------- ----------- ----------- ----------- --------- ------------ -----------
GROSS PROFIT........................ 4,098 624 252 632 5,606 -- 5,606
SELLING, GENERAL AND
ADMINISTRATIVE..................... 4,047 402 512 670 5,631 -- 5,631
EQUITY BASED COMPENSATION EXPENSE... -- -- -- -- -- 4,562(c) 4,562
INTANGIBLES AMORTIZATION............ 50 -- -- -- 50 5,018(d) 5,068
OTHER INCOME (EXPENSE):
Interest expense.................. (50) (6) (83) (16) (155) -- (155)
Loss on disposition of assets..... (28) -- -- -- (28) -- (28)
Other, net........................ -- -- -- 1 1 -- 1
--------- ----------- ----------- ----------- --------- ------------ -----------
LOSS BEFORE INCOME TAXES............ (77) 216 (343) (53) (257) (9,580) (9,837)
INCOME TAXES........................ -- 71 -- -- 71 (71)(e) --
--------- ----------- ----------- ----------- --------- ------------ -----------
NET INCOME (LOSS)................... $ (77) $ 145 $ (343) $ (53) $ (328) $ (9,509) $ (9,837)
--------- ----------- ----------- ----------- --------- ------------ -----------
--------- ----------- ----------- ----------- --------- ------------ -----------
</TABLE>
F-22
<PAGE>
ALIGN SOLUTIONS CORP.
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------------------------------- PRO FORMA
ALIGN FIFTH GEAR INMEDIA SYNAPSE TOTAL ADJUSTMENTS PRO FORMA
--------- ----------- ----------- ----------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES............................ $ 4,341 $ 277 $ 154 $ 279 $ 5,051 $ -- $ 5,051
COST OF SERVICES.................... 2,367 204 206 263 3,040 (3)(c) 3,037
--------- ----- ----------- ----- --------- ------------ -----------
GROSS PROFIT........................ 1,974 73 (52) 16 2,011 3 2,014
SELLING, GENERAL AND
ADMINISTRATIVE.................... 4,884 90 145 111 5,230 (3,205)(c) 2,025
EQUITY BASED COMPENSATION EXPENSE... -- -- -- -- -- 244(c) 244
INTANGIBLES AMORTIZATION............ 407 -- -- -- 407 863(d) 1,270
OTHER INCOME (EXPENSE):
Interest income................... -- 1 3 -- 4 -- 4
Interest expense.................. (13) (3) (21) (1) (38) -- (38)
Other, net........................ -- 4 -- -- 4 -- 4
--------- ----- ----------- ----- --------- ------------ -----------
LOSS BEFORE INCOME TAXES............ (3,330) (15) (215) (96) (3,656) 2,101 (1,555)
INCOME TAXES........................ -- (5) -- -- (5) 5(e) --
--------- ----- ----------- ----- --------- ------------ -----------
NET INCOME (LOSS)................... $ (3,330) $ (10) $ (215) $ (96) $ (3,651) $ 2,096 $ (1,555)
--------- ----- ----------- ----- --------- ------------ -----------
--------- ----- ----------- ----- --------- ------------ -----------
</TABLE>
F-23
<PAGE>
ALIGN SOLUTIONS CORP.
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------------------------------- PRO FORMA
ALIGN FIFTH GEAR INMEDIA SYNAPSE TOTAL ADJUSTMENTS PRO FORMA
--------- ----------- ----------- ----------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES..................... $ 1,300 $ 263 $ 449 $ 647 $ 2,659 $ -- $ 2,659
COST OF SERVICES............. 757 115 252 470 1,594 -- 1,594
--------- ----- ----- ----- --------- ------------ -----------
GROSS PROFIT................. 543 148 197 177 1,065 -- 1,065
SELLING, GENERAL AND
ADMINISTRATIVE............. 681 75 123 246 1,125 -- 1,125
EQUITY BASED COMPENSATION
EXPENSE.................... -- -- -- -- -- 3,737(c) 3,737
INTANGIBLES AMORTIZATION..... 13 -- -- -- 13 1,255(d) 1,268
OTHER INCOME (EXPENSE):
Interest expense........... (13) (1) (18) (2) (34) -- (34)
--------- ----- ----- ----- --------- ------------ -----------
LOSS BEFORE INCOME TAXES..... (164) 72 56 (71) (107) (4,992) (5,099)
INCOME TAXES................. -- 24 -- -- 24 (24)(e) --
--------- ----- ----- ----- --------- ------------ -----------
NET INCOME (LOSS)............ $ (164) $ 48 $ 56 $ (71) $ (131) $ (4,968) $ (5,099)
--------- ----- ----- ----- --------- ------------ -----------
--------- ----- ----- ----- --------- ------------ -----------
</TABLE>
F-24
<PAGE>
ALIGN SOLUTIONS CORP.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. UNAUDITED PRO FORMA BALANCE SHEET ADJUSTMENTS:
The following summarizes the unaudited pro forma balance sheet adjustments:
(a) Align has entered into an agreement to acquire Fifth Gear. The
acquisition is to be accounted for as a purchase business combination.
The purchase price, including acquisition costs and using a share value
for Align common stock derived from the pending Luminant acquisition of
Align, is estimated to be $3.6 million and has been allocated as follows
(in thousands):
<TABLE>
<S> <C>
Tangible assets purchased.................................................. $ 85
Purchase price in excess of net tangible assets (goodwill)................. 3,469
</TABLE>
(b) Align has entered into an agreement to acquire inmedia. The acquisition
is to be accounted for as a purchase business combination. The purchase
price, including acquisition costs and using a share value for Align
common stock derived from the pending Luminant acquisition of Align, is
estimated to be $1.7 million and has been allocated as follows (in
thousands):
<TABLE>
<S> <C>
Tangible assets purchased.................................................. $ 563
Liabilities assumed........................................................ 1,057
Purchase price in excess of net tangible assets (goodwill)................. 2,179
</TABLE>
2. UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS ADJUSTMENTS:
The following summarizes the unaudited pro forma statements of operations
adjustments:
(c) Reflects a compensation charge for options granted to Synapse and
inmedia at less than fair market value upon the consummation of the
acquisition. The adjustment also changes the timing of the Synapse
compensation charge recorded in the three months ended March 31, 1999
historical Align statements of operations.
(d) Reflects the amortization of goodwill to be recorded as a result of
Align's acquisitions over a period of three years. These amortization
periods were determined based on an analysis of the characteristics of
the combined company.
(e) Reflects the reversal of Fifth Gear's income tax provision. Align has
not demonstrated that it will generate future taxable income; therefore,
an asset for the pro forma loss before taxes has not been recorded.
F-25
<PAGE>
AFTER THE STOCK SPLIT AND INCREASE IN THE NUMBER OF AUTHORIZED COMMON STOCK
DISCUSSED IN NOTE 5 TO THE COMPANY'S FINANCIAL STATEMENTS IS EFFECTED, WE EXPECT
TO BE IN A POSITION TO RENDER THE FOLLOWING AUDIT REPORT.
ARTHUR ANDERSEN LLP
Dallas, Texas,
July 23, 1999
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Luminant Worldwide Corp.:
We have audited the accompanying balance sheet of Luminant Worldwide Corp.
as of December 31, 1998, and the related statements of operations, stockholders'
equity, and cash flows for the period from inception (August 21, 1998), to
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Luminant Worldwide Corp. as
of December 31, 1998, and the results of its operations and its cash flows for
the period from inception (August 21, 1998), to December 31, 1998, in conformity
with generally accepted accounting principles.
F-26
<PAGE>
LUMINANT WORLDWIDE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------- ------------
<S> <C> <C>
(UNAUDITED)
ASSETS
CASH AND CASH EQUIVALENTS........................................................... $ 111,919 $ 6,261
DEFERRED COSTS...................................................................... 49,729 49,729
------------- ------------
Total assets.................................................................... $ 161,648 $ 55,990
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
ACCOUNTS PAYABLE.................................................................... $ -- $ 76,250
NOTES PAYABLE....................................................................... -- 50,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock: $.01 par value, 100,000,000 shares authorized; 7,852,571 shares
issued and outstanding as of 1998 and 1999 (unaudited).......................... 78,526 78,526
Additional paid-in capital........................................................ 328,475 328,475
Retained deficit.................................................................. (245,353) (477,261)
------------- ------------
Total stockholders' equity...................................................... 161,648 (70,260)
------------- ------------
Total liabilities and stockholders' equity...................................... $ 161,648 $ 55,990
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
LUMINANT WORLDWIDE CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD
FROM INCEPTION
(AUGUST 21, 1998) THREE MONTHS
TO ENDED
DECEMBER 31, MARCH 31,
1998 1999
----------------- --------------
<S> <C> <C>
(UNAUDITED)
REVENUES....................................................................... $ -- $ --
COST OF SERVICES............................................................... -- --
----------------- --------------
GROSS PROFIT................................................................... -- --
SELLING, GENERAL AND ADMINISTRATIVE............................................ 245,353 231,908
----------------- --------------
LOSS BEFORE INCOME TAXES....................................................... (245,353) (231,908)
INCOME TAXES................................................................... -- --
----------------- --------------
NET LOSS....................................................................... $ (245,353) $ (231,908)
----------------- --------------
----------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
LUMINANT WORLDWIDE CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL DEFICIT
------------ --------- ----------- ------------
<S> <C> <C> <C> <C>
BALANCE, August 21, 1998 (inception)......................... -- $ -- $ -- $ --
Issuance of common stock................................... 7,852,571 78,526 121,475 --
Equity related compensation................................ -- -- 207,000 --
Net loss................................................... -- -- -- (245,353)
------------ --------- ----------- ------------
BALANCE, December 31, 1998................................... 7,852,571 78,526 328,475 (245,353)
Net loss (unaudited)....................................... -- -- -- (231,908)
------------ --------- ----------- ------------
BALANCE, March 31, 1999 (unaudited).......................... 7,852,571 $ 78,526 $ 328,475 $ (477,261)
------------ --------- ----------- ------------
------------ --------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
LUMINANT WORLDWIDE CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD
FROM INCEPTION
(AUGUST 21, 1998) THREE MONTHS
TO ENDED
DECEMBER 31, MARCH 31,
1998 1999
----------------- --------------
<S> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................................................... $ (245,353) $ (231,908)
Equity related compensation.................................................. 207,000 --
Adjustments to reconcile net loss to net cash used in operating activities-
Changes in assets and liabilities-
Deferred costs........................................................... (49,729) --
Accounts payable......................................................... -- 76,250
----------------- --------------
Net cash used in operating activities.................................. (88,082) (155,658)
----------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable.................................................. -- 50,000
Proceeds from issuance of common stock....................................... 200,001 --
----------------- --------------
Net cash provided by financing activities.............................. 200,001 50,000
----------------- --------------
NET INCREASE (DECREASE) IN CASH................................................ 111,919 (105,658)
CASH AND CASH EQUIVALENTS, beginning of period................................. -- 111,919
----------------- --------------
CASH AND CASH EQUIVALENTS, end of period....................................... $ 111,919 $ 6,261
----------------- --------------
----------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
LUMINANT WORLDWIDE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
Luminant Worldwide Corporation, a Delaware corporation (the "Company"), was
founded in August 1998, to provide a new category of professional services
called Internet-centric professional services, enabling businesses centered
primarily or exclusively on the Internet to conduct their business.
The Company's operations to date have consisted primarily of identifying and
negotiating for the acquisition of existing Internet consulting companies. The
Company plans to make an initial public offering and simultaneously exchange
cash and shares of its common stock for the acquisition of eight Internet
consulting companies (the "Companies").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
DEFERRED COSTS
As of December 31, 1998, costs of $49,729 have been incurred in connection
with this offering. Such costs will be recorded as a reduction to equity upon
consummation of this offering.
INCOME TAXES
Income taxes are accounted for using an asset and liability approach which
requires the recognition of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
The measurement of current and deferred tax liabilities and assets is based on
provisions of the enacted tax law. The effects of future changes in tax laws or
rates are not anticipated. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefit that, based on available evidence,
is not expected to be realized. Due to the uncertainty of the ability of the
Company to generate future taxable income, the tax benefit of the Company's loss
has been fully reserved.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
ACCOUNTING FOR LONG-LIVED ASSETS
The Company will periodically assess long-lived assets, including goodwill.
Whenever circumstances suggest that an asset may be impaired, an analysis will
be performed to compare the estimated future undiscounted cash flows associated
with the asset to the asset's carrying value. If the carrying value is in excess
of the undiscounted cash flow value, the asset will be
F-31
<PAGE>
LUMINANT WORLDWIDE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
written down to fair value. The goodwill associated with an impaired asset will
be evaluated using the undiscounted future cash flows as the basis for
determining if impairment exists. To the extent impairment is indicated to
exist, an impairment loss will be recognized based on fair value.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments have carrying amounts which approximate
fair value due to their relative short maturity and/or their variable interest
rates.
ACCOUNTING FOR EQUITY BASED COMPENSATION
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 allows either adoption of a fair value
based method of accounting for stock-based compensation or continuation under
Accounting Principles Board opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). The Company has chosen to account for stock-based
compensation using the intrinsic value based method prescribed in APB 25 and to
provide the pro forma disclosure provision of SFAS 123. Accordingly,
compensation cost for stock options and other equity related transactions is
measured as the excess, if any, of the fair market value of the Company's stock
over the exercise price at the date of the grant.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, ("SFAS No. 130"), "REPORTING
COMPREHENSIVE INCOME," which is required to be adopted in the period ended
December 31, 1998. SFAS No. 130 requires that an enterprise (a) classify items
of other comprehensive income by their nature in the financial statements, and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in-capital in the Statement of
Stockholders' Equity. The adoption of SFAS 130 did not have any effect on the
Company's financial statements as the Company does not have any elements of
comprehensive income other than net income.
3. DEBT:
The Company has a line of credit with a maximum availability of $3 million,
with its largest stockholder, Commonwealth Principals II LLC ("Commonwealth").
Interest is at prime (7.75% at December 31, 1998), and the line of credit
matures on the closing of this offering. There are no outstanding borrowings as
of December 31, 1998.
4. EQUITY INCENTIVE PLANS:
Under the terms of an employment agreement, the Company's Chief Executive
Officer will be issued on the effective date of a public offering options to
purchase 5% of the total outstanding shares of common stock at the offering
price. One-fourth of the options will vest immediately and the remainder will
vest at a rate of 25% per year. The options will have a term of six years.
F-32
<PAGE>
LUMINANT WORLDWIDE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. EQUITY INCENTIVE PLANS: (CONTINUED)
As of December 31, 1998, there are no options outstanding.
In January 1999, under the terms of an employment agreement, the Company's
former Chief Financial Officer was to be issued certain options to purchase
common stock at $.01 per share (See Note 7).
In February 1999, under the terms of an employment agreement, as of the
effective date of the offering, the Company's Executive Vice President, will be
issued options to purchase 1% of the total outstanding shares of common stock at
the offering price. The options will become exercisable upon the Offering and
have a term of ten years.
5. EQUITY:
The Company intends to effect a stock split and increase the number of
authorized common stock effective on the day preceding the completion of the
offering. The effects of the common stock split and the increase in the shares
of authorized common stock have been retroactively reflected in the balance
sheet and the accompanying notes.
In connection with the organization of the Company, 7,138,701 shares of
common stock were issued to Commonwealth. Upon signing his employment agreement
in September 1998, 713,870 shares of common stock were issued to the President
of the Company for $200,000. The Board of Directors has determined that these
shares were issued at fair market value. In addition in September 1998,
Commonwealth transferred 738,856 shares to the President resulting in an equity
related compensation expense of approximately $207,000.
6. RELATED-PARTY TRANSACTIONS:
In September 1998, the Company entered into a management services agreement
with Commonwealth to provide consulting and financial advisory services. The
agreement terminates at the earlier of the closing of the offering or September
2000. For the period ended December 31, 1998, approximately $49,000 was paid to
Commonwealth for providing services. These costs are related to the offering and
are included in deferred costs in the accompanying balance sheet. In addition,
Commonwealth has provided the Company with a line of credit as discussed in Note
3.
7. SUBSEQUENT EVENTS:
The Company has signed definitive agreements to acquire all of the common
stock and ownership interests of the Companies to be consummated simultaneously
with the closing of the offering. The companies to be acquired are Align
Solutions Corp., Brand Dialogue New York, Free Range Media, Inc., Integrated
Consulting, Inc. (dba as i.con interactive), Interactive8, Inc., Multimedia
Resources, LLC, Potomac Partners Management Consulting, LLC, and RSI Group, Inc.
In April and May 1999, the former Chief Financial Officer and a current
officer of the Company purchased 549,680 shares and 314,103 shares of common
stock for $500,000 and $400,000. The former Chief Financial Officer committed to
the purchase of shares in January of 1999 and the Board of Directors determined
the fair market value of the shares to be $3.67 which was in excess of the
issuance price. The current officer committed to the purchase of shares in April
and May of 1999 and the Board of Directors determined the fair market value of
F-33
<PAGE>
LUMINANT WORLDWIDE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. SUBSEQUENT EVENTS: (CONTINUED)
the shares to be $7.33 which was in excess of the issuance price. As the actual
transactions occurred subsequent to March 31, 1999, the Company will recognize
compensation expense of approximately $3,400,000 in the second quarter of 1999
related to these issuances.
In July of 1999, the Company and the former Chief Financial Officer entered
into an agreement to end the Chief Financial Officer's employment with the
Company. The former Chief Financial Officer will receive options to purchase
20,833 shares of common stock at $.01 per share. The options will become
exerciseable upon the Offering and have a term of ten years. In addition, the
former Chief Financial Officer will be paid $1,000,000 over six years in equal
monthly installments for financial consulting services. The Company will record
the liability for the net present value of these payments of $860,000 assuming a
discount rate of 5.26%, and record a non-recurring charge of the same amount in
the third quarter of 1999.
We have entered into an agreement in principle with United Airlines, Inc.
under which we have agreed to provide electronic commerce strategy, business
planning and design services to United until June 30, 2004, but United has no
obligation to purchase any services from us. Pursuant to this agreement, we have
agreed to issue to United a warrant to purchase up to 500,000 shares of our
common stock at an exercise price per share equal to the initial offering price.
Under the warrant, United will have the immediate right to purchase 83,333
shares of common stock. Over the five year term of the agreement, United will
obtain the right to purchase 8,333 shares of the remaining shares under the
warrant for every $1 million of revenues we receive from United up to $50
million of revenue.
The following pro forma information shows the Company's revenues and net
income as if the transaction referred to above had occurred on January 1, 1998.
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1998 MARCH 31, 1999
------------------- ---------------
Pro forma revenues (unaudited).......................... $ 54,846 $ 18,415
Pro forma net loss (unaudited).......................... (93,238) (20,960)
</TABLE>
F-34
<PAGE>
LUMINANT WORLDWIDE CORP.
NOTES TO THE UNAUDITED MARCH 31, 1999 FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION:
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Rule 10-01 of Regulation S-X.
Accordingly, they do not contain all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the accompanying unaudited financial statements
reflect all adjustments (consisting of only normal recurring adjustments)
considered necessary for a fair presentation of the Company's financial
condition as of March 31, 1999, the results of its operations and its cash flows
for the three-month period ended March 31, 1999. These financial statements
should be read in conjunction with the Company's audited 1998 financial
statements, including the notes thereto. Operating results for the three-month
period ended March 31, 1999, are not necessarily indicative of the operating
results that may be expected for the year ending December 31, 1999.
F-35
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Align Solutions Corp.:
We have audited the accompanying balance sheets of Align Solutions Corp. (a
Delaware S Corporation) as of December 31, 1997 and 1998, and the related
statements of operations, stockholders' equity, and cash flows for each of the
two years in the period ended December 31, 1998, and for the period from
inception (October 16, 1996), to December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Align Solutions Corp. as of
December 31, 1997 and 1998, and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 1998, and for the
period from inception (October 16, 1996), to December 31, 1996, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
May 4, 1999
F-36
<PAGE>
ALIGN SOLUTIONS CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- MARCH 31,
1997 1998 1999
------------- ------------- --------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................ $ 10,977 $ -- $ 208,700
Accounts receivable, net of allowance for doubtful accounts of
$71,229, $115,068, and $145,068 (unaudited).................... 880,085 2,161,521 2,396,769
Note receivable.................................................. -- -- 35,000
Unbilled revenues................................................ 43,860 10,520 805,559
Prepaid expenses and other....................................... 37,778 74,219 81,174
------------- ------------- --------------
Total current assets........................................... 972,700 2,246,260 3,527,202
PROPERTY AND EQUIPMENT, net........................................ 259,901 776,185 908,405
OTHER ASSETS:
Goodwill, net of amortization of $58,333, $108,333, and $515,186
(unaudited).................................................... 91,667 41,667 9,040,419
Other............................................................ 3,500 1,673 13,910
------------- ------------- --------------
Total assets................................................... $ 1,327,768 $ 3,065,785 $ 13,489,936
------------- ------------- --------------
------------- ------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, including cash overdraft of $0, $105,191, and
$0 (unaudited)................................................. $ 144,994 $ 332,021 $ 895,962
Accrued liabilities.............................................. 85,343 713,842 431,263
Notes payable.................................................... 200,000 325,000 1,111,274
Current maturities of long-term debt............................. 64,191 70,870 111,851
------------- ------------- --------------
Total current liabilities...................................... 494,528 1,441,733 2,550,350
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities........................ 232,573 155,791 142,618
------------- ------------- --------------
Total liabilities.............................................. 727,101 1,597,524 2,692,968
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock: $.01 par value, 1,000,000 shares authorized,
none issued and outstanding as of 1997, 1998 and 1999.......... -- -- --
Common stock: $.01 par value, 10,000,000 shares authorized,
4,875,000, 5,584,804 and 6,390,540 (unaudited) shares issued
and outstanding as of 1997, 1998, and 1999..................... 48,750 55,848 63,905
Additional paid-in capital....................................... 926,250 1,863,192 14,514,270
Retained deficit................................................. (374,333) (450,779) (3,781,207)
------------- ------------- --------------
Total stockholders' equity..................................... 600,667 1,468,261 10,796,968
------------- ------------- --------------
Total liabilities and stockholders' equity..................... $ 1,327,768 $ 3,065,785 $ 13,489,936
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
ALIGN SOLUTIONS CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE
FROM INCEPTION FOR THE YEAR ENDED THREE MONTHS ENDED
(OCTOBER 16, 1996) DECEMBER 31, MARCH 31,
TO DECEMBER 31, ---------------------------- ------------------------------
1996 1997 1998 1998 1999
------------------ ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
REVENUES....................... $ 111,858 $ 3,268,071 $ 9,226,127 $ 1,299,492 $ 4,341,077
COST OF SERVICES............... 79,702 1,783,336 5,128,460 757,071 2,366,986
---------- ------------- ------------- -------------- --------------
GROSS PROFIT................... 32,156 1,484,735 4,097,667 542,421 1,974,091
SELLING, GENERAL AND
ADMINISTRATIVE............... 233,104 1,634,220 4,096,638 693,862 5,291,795
OTHER INCOME (EXPENSE):
Interest expense............. -- (26,145) (49,825) (12,750) (12,724)
Loss on disposition of
assets..................... -- -- (27,650) -- --
Other income................. 399 1,846 -- -- --
---------- ------------- ------------- -------------- --------------
NET LOSS....................... $ (200,549) $ (173,784) $ (76,446) $ (164,191) $ (3,330,428)
---------- ------------- ------------- -------------- --------------
---------- ------------- ------------- -------------- --------------
PRO FORMA INCOME TAX
(UNAUDITED).................. -- -- -- -- --
---------- ------------- ------------- -------------- --------------
PRO FORMA NET LOSS
(UNAUDITED).................. $ (200,549) $ (173,784) $ (76,446) $ (164,191) $ (3,330,428)
---------- ------------- ------------- -------------- --------------
---------- ------------- ------------- -------------- --------------
Basic and diluted net loss per
share........................ $ (0.11) $ (0.09) $ (0.03) $ (0.08) $ (1.47)
---------- ------------- ------------- -------------- --------------
---------- ------------- ------------- -------------- --------------
Shares used in the calculation
of basic and diluted net loss
per share.................... 1,907,827 2,037,854 2,244,700 2,037,854 2,262,803
---------- ------------- ------------- -------------- --------------
---------- ------------- ------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE>
ALIGN SOLUTIONS CORP.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL DEFICIT
------------ --------- -------------- --------------
<S> <C> <C> <C> <C>
BALANCE, October 16, 1996 (inception).................. -- $ -- $ -- $ --
Issuance of common stock............................. 3,845,200 38,452 730,588 --
Net loss............................................. -- -- -- (200,549)
------------ --------- -------------- --------------
BALANCE, December 31, 1996............................. 3,845,200 38,452 730,588 (200,549)
Issuance of common stock............................. 1,029,800 10,298 195,662 --
Net loss............................................. -- -- -- (173,784)
------------ --------- -------------- --------------
BALANCE, December 31, 1997............................. 4,875,000 48,750 926,250 (374,333)
Issuance of common stock............................. 709,804 7,098 936,942 --
Net loss............................................. -- -- -- (76,446)
------------ --------- -------------- --------------
BALANCE, December 31, 1998............................. 5,584,804 55,848 1,863,192 (450,779)
Issuance of common stock (unaudited)................. 805,736 8,057 9,402,939 --
Equity related compensation (unaudited).............. -- -- 3,248,139 --
Net loss (unaudited)................................. -- -- -- (3,330,428)
------------ --------- -------------- --------------
BALANCE, March 31, 1999 (unaudited).................... 6,390,540 $ 63,905 $ 14,514,270 $ (3,781,207)
------------ --------- -------------- --------------
------------ --------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE>
ALIGN SOLUTIONS CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION FOR THE
(OCTOBER 16, 1996) FOR THE YEAR ENDED THREE MONTHS ENDED
TO DECEMBER 31, MARCH 31,
DECEMBER 31, ---------------------- ----------------------
1996 1997 1998 1998 1999
------------------ --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................. $ (200,549) $(173,784) $ (76,446) $(164,191) $(3,330,428)
Equity related compensation.............. -- -- -- -- 3,248,139
Adjustments to reconcile net loss to net
cash used in operating activities--
Depreciation and amortization.......... 14,816 129,184 272,588 47,297 505,747
Loss on disposition of assets.......... -- -- 27,650 -- --
Changes in assets and liabilities--
Accounts receivable.................. (60,615) (819,470) (1,281,436) (163,821) 142,450
Unbilled revenues.................... (43,288) (572) 33,340 43,860 (608,871)
Prepaid expenses and other........... (16,051) (21,727) (36,441) (32,802) 9,623
Other assets......................... -- (3,500) 1,827 (1,498) (124,875)
Accounts payable, including cash
overdraft.......................... 17,351 127,643 187,027 (9,713) 332,521
Accrued liabilities.................. 8,862 76,481 628,499 98,842 (408,537)
---------- --------- ----------- --------- -----------
Net cash used in operating
activities....................... (279,474) (685,745) (243,392) (182,026) (234,231)
---------- --------- ----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Note receivable.......................... -- -- -- -- (35,000)
Capital expenditures..................... (122,072) (158,211) (766,522) (238,841) (173,655)
---------- --------- ----------- --------- -----------
Net cash used in investing
activities....................... (122,072) (158,211) (766,522) (238,841) (208,655)
---------- --------- ----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable.............. 48,602 151,398 125,000 201,294 629,998
Proceeds from long-term debt............. -- 300,000 -- -- 39,619
Payments on long-term debt............... -- (18,521) (70,103) (17,330) (18,031)
Proceeds from issuance of common stock... 569,040 205,960 944,040 240,000 --
---------- --------- ----------- --------- -----------
Net cash provided by financing
activities....................... 617,642 638,837 998,937 423,964 651,586
---------- --------- ----------- --------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.............................. 216,096 (205,119) (10,977) 3,097 208,700
CASH AND CASH EQUIVALENTS,
beginning of period...................... -- 216,096 10,977 10,977 --
---------- --------- ----------- --------- -----------
CASH AND CASH EQUIVALENTS,
end of period............................ $ 216,096 $ 10,977 $ -- $ 14,074 $ 208,700
---------- --------- ----------- --------- -----------
---------- --------- ----------- --------- -----------
SUPPLEMENTAL INFORMATION:
Cash paid for interest..................... $ -- $ 24,931 $ 48,813 $ 12,525 $ 12,724
---------- --------- ----------- --------- -----------
---------- --------- ----------- --------- -----------
NON-CASH TRANSACTIONS:
Common stock issued for tangible and
intangible assets........................ $ 200,000 $ -- $ -- $ -- $ --
---------- --------- ----------- --------- -----------
---------- --------- ----------- --------- -----------
Capital expenditures financed with
long-term debt........................... $ -- $ 15,285 $ -- $ -- $ --
---------- --------- ----------- --------- -----------
---------- --------- ----------- --------- -----------
Acquisition of Synapse through issuance of
common stock............................. $ -- $ -- $ -- $ -- $ 9,402,939
---------- --------- ----------- --------- -----------
---------- --------- ----------- --------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE>
ALIGN SOLUTIONS CORP.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
Align Solutions Corp. (the "Company") is an interactive services and
information technology consulting firm focused on helping companies achieve
their Internet and e-commerce business objectives through the use of enabling
technologies. The areas of focus include Internet and intranet applications,
document management, system integration, and creative/new media. The Company was
incorporated in the State of Delaware in October 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using a
straight-line method over the estimated useful lives of the assets. The costs
and related accumulated depreciation of property and equipment sold, retired, or
disposed of are removed from the accounts and any gains or losses are reflected
in the statements of operations. Expenditures for major acquisitions and
improvements are capitalized while expenditures for maintenance and repairs are
expensed as incurred.
GOODWILL
Goodwill represents the excess of the aggregate consideration paid by the
Company over the fair value of assets acquired. Goodwill is amortized on a
straight-line basis over three years. Amortization expense totaled $8,667,
$50,000, and $50,000 for the periods ended December 31, 1996, 1997, and 1998,
respectively.
INCOME TAXES
As an S corporation, the Company pays no federal income tax but rather the
stockholders are taxed individually on the Company's taxable income or loss.
Accordingly, no provisions for federal income taxes are reflected in the
accompanying financial statements.
The unaudited pro forma tax information included in the accompanying
statements of operations reflect estimates of the Company's tax provision or
benefit as if it had been a C corporation in fiscal years 1996, 1997, and 1998.
In accordance with SFAS No. 109, "Accounting for Income Taxes," no pro forma tax
benefit was reflected due to the Company's recurring losses and the uncertainty
related to the realization of any tax assets.
REVENUE RECOGNITION
Revenues are recognized for time and materials-based arrangements as
services are performed and fixed fee arrangements on the
percentage-of-completion method. Under this approach, revenues and gross profit
are recognized as the work is performed, based on the ratio of costs incurred to
total estimated costs. Unbilled revenues on contracts are comprised of labor
costs incurred, plus earnings on certain contracts which have not been billed.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined.
F-41
<PAGE>
ALIGN SOLUTIONS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
COST OF SERVICES
Cost of services is comprised primarily of salaries, employee benefits,
incentive compensation of billable employees, and a proportionate share of
depreciation and facilities costs based on the ratio of billable employees to
total employees.
ACCOUNTING FOR STOCK BASED COMPENSATION
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 allows either adoption of a fair value
based method of accounting for stock-based compensation or continuation under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). The Company has chosen to account for stock-based
compensation using the intrinsic value based method prescribed in APB 25 and
provide the pro forma disclosure provision of SFAS 123. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
fair market value of the Company's stock over the exercise price at the date of
the grant.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments have carrying amounts which approximate
fair value due to their relative short maturity and/or their variable interest
rates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, ("SFAS No. 130"), "REPORTING
COMPREHENSIVE INCOME" which is required to be adopted in the period ended
December 31, 1998. SFAS No. 130 requires that an enterprise (a) classify items
of other comprehensive income by their nature in the financial statements, and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in-capital in the Statement of
Stockholders' Equity. The adoption of SFAS 130 did not have any effect on the
Company's financial statements as the Company does not have any elements of
comprehensive income other than net income.
3. SIGNIFICANT CUSTOMERS:
During the year ended December 31, 1997, sales to the Company's two largest
customers accounted for 14% and 12% of revenues. During the year ended December
31, 1998, sales to the Company's two largest customers accounted for 21% and 19%
of revenue.
As of December 31, 1998, accounts receivable from two customers accounted
for 17% and 30% of total accounts receivable.
F-42
<PAGE>
ALIGN SOLUTIONS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT:
Property and equipment is comprised of the following as of December 31, 1997
and 1998:
<TABLE>
<CAPTION>
USEFUL
LIFE 1997 1998
----------- ----------- -------------
<S> <C> <C> <C>
Furniture and fixtures....................................................... 5-7 $ 55,656 $ 140,781
Computers and equipment...................................................... 2-4 289,912 781,505
Leasehold improvements....................................................... 3-4 -- 63,497
Construction-in-progress..................................................... -- -- 75,278
----------- -------------
345,568 1,061,061
Less--Accumulated depreciation............................................... (85,667) (284,876)
----------- -------------
Property and equipment, net.................................................. $ 259,901 $ 776,185
----------- -------------
----------- -------------
</TABLE>
Depreciation expense was $6,483, $79,184 and $222,588 for the periods ended
December 31, 1996, 1997, and 1998, respectively.
5. ACCRUED LIABILITIES:
Accrued liabilities is comprised of the following as of December 31, 1997
and 1998:
<TABLE>
<CAPTION>
1997 1998
--------- -----------
<S> <C> <C>
Accrued bonus............................................................................ $ -- $ 667,870
Accrued salaries......................................................................... 33,775 --
Accrued legal............................................................................ 4,602 38,822
Accrued property and sales taxes......................................................... 9,610 7,150
Other.................................................................................... 37,356 --
--------- -----------
Accrued liabilities...................................................................... $ 85,343 $ 713,842
--------- -----------
--------- -----------
</TABLE>
6. DEBT:
NOTES PAYABLE
The Company has a bank line of credit with a maximum availability of
$550,000. Interest is at prime plus 1% (8.75% at December 31, 1998), and is
payable monthly. The line of credit is due on demand, matures in July 1999, and
is secured by accounts receivable and the personal guarantees of certain
stockholders. The terms of the line of credit agreement include customary
covenants that limit the Company's ability to incur further debt and require the
Company to maintain certain minimum levels of tangible net worth and liquidity
ratios. Subsequent to year-end, the Company renewed the line of credit with a
new maturity date of March 2000.
F-43
<PAGE>
ALIGN SOLUTIONS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. DEBT: (CONTINUED)
LONG-TERM DEBT
Long-term debt is comprised of the following as of December 31, 1997 and
1998:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Note payable to a bank bearing interest at prime plus 1% (8.75% at December 31, 1998),
payable in monthly installments of principal and interest of $7,557, maturing October
2001; secured by accounts receivable, equipment, and the personal guarantees of
certain stockholders.................................................................. $ 284,489 $ 217,982
Equipment financing, non-interest bearing, payable in monthly installments of $384,
maturing February 2001, secured by certain equipment 12,275 8,679
----------- -----------
296,764 226,661
Less--Current portion................................................................... (64,191) (70,870)
----------- -----------
Long-term debt.......................................................................... $ 232,573 $ 155,791
----------- -----------
----------- -----------
</TABLE>
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ---------------------------------------------------------------------------------
<S> <C>
1999......................................................................... $ 70,870
2000......................................................................... 84,085
2001......................................................................... 71,706
-----------
$ 226,661
-----------
-----------
</TABLE>
7. COMMITMENTS AND CONTINGENCIES:
The Company leases office space in Houston and Dallas, Texas, under
operating lease agreements.
Future minimum annual lease payments under these leases are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
-----------
<S> <C>
1999......................................................................... $ 182,739
2000......................................................................... 181,241
2001......................................................................... 120,827
2002......................................................................... --
2003 and thereafter.......................................................... --
-----------
Total future minimum lease payments.......................................... $ 484,807
-----------
-----------
</TABLE>
Rent expense for the periods ended December 31, 1996, 1997, and 1998 under
these agreements was $7,898, $42,130 and $107,194, respectively.
In the ordinary course of business, the Company may be subject to legal
actions and claims. Management does not believe litigation or claims will have a
material effect on financial position or results of operations.
F-44
<PAGE>
ALIGN SOLUTIONS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. EQUITY INCENTIVE PLANS:
Effective August 26, 1997, the Company approved the 1997 Stock Option Plan
(the "1997 Plan") authorizing the Board of Directors to grant incentive or
nonqualified options to purchase common stock of the Company. The total number
of shares of common stock that may be issued under the 1997 Plan is 2,500,000.
The 1997 Plan is administered by the Compensation Committee of the Board of
Directors which determines the number of stock options to be granted, the
exercise or purchase price, vesting terms, and expiration date. Nonqualified
stock options may be granted at exercise prices which are greater than or equal
to 80% of the fair market value of the common stock on the grant date.
The exercise price of options qualifying as incentive stock options under
Section 422 of the Internal Revenue Code may not be less than the fair market
value of the common stock on the grant date. Incentive stock options granted to
any 10% stockholder may not be less than 110% of the fair market value of the
common stock on the grant date. Stock options granted under the 1997 Plan are
nontransferable and generally expire ten years after the date of grant, except
in the case of a 10% stockholder whose incentive stock options shall expire five
years from the date of grant. Upon certain events in which all of the
outstanding shares of common stock of the Company are acquired by an unrelated
party, the optionee's schedule shall be accelerated to provide that optionee
with immediate exercisability of the unexercisable options granted. All options
granted become exercisable over a five-year period of continued employment.
Options outstanding at December 31, 1996, 1997, and 1998, and granted,
exercised and cancelled during those years were as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
----------- -------------------
<S> <C> <C>
Options outstanding at December 31, 1996......................................... -- $ --
Granted........................................................................ 613,000 .20
Exercised...................................................................... -- --
Canceled....................................................................... -- --
-----------
Options outstanding at December 31, 1997......................................... 613,000 .20
Granted........................................................................ 393,800 1.19
Exercised...................................................................... -- --
Canceled....................................................................... (53,200) .25
-----------
Options outstanding at December 31, 1998......................................... 953,600 $ .61
-----------
-----------
</TABLE>
Following is summary information about stock options outstanding at December
31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C>
WEIGHTED AVERAGE
RANGE OF NUMBER OF REMAINING WEIGHTED AVERAGE NUMBER OF
EXERCISE PRICES SHARES CONTRACT LIFE EXERCISE PRICE SHARES EXERCISE PRICE
- ----------------- ----------- --------------------- ------------------- --------------- ---------------
$0.20 to $0.22 622,000 9.00 $ 0.20 -- $ --
$1.33 to $2.50 331,600 9.45 $ 1.37 -- $ --
</TABLE>
F-45
<PAGE>
ALIGN SOLUTIONS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. EQUITY INCENTIVE PLANS: (CONTINUED)
Pro forma information regarding net income has been determined as if the
Company has accounted for its stock options under the fair value method of SFAS
123. The fair value of these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions used for 1997:
an exercisable event occurring in five years; a risk-free interest rate of
6.25%; a dividend yield of 0%; and an expected option life with graded vesting.
The assumptions used to price options granted during 1998 were: an exercisable
event occurring in four years; risk-free interest rates ranging from 4.38% to
5.72%; a dividend yield of 0%; and an expected option life with graded vesting.
The average Black-Scholes fair values at date of grant for options granted
during the years ended December 31, 1997 and 1998, were $0.05 and $0.25 per
option, respectively.
Had compensation cost for the Company's stock option plan been determined
based on the fair value at the grant date consistent with the provisions of SFAS
123, the Company's net loss would have been as follows:
<TABLE>
<CAPTION>
1997 1998
------------ ----------
<S> <C> <C>
Net loss--as reported............................................... $ (173,784) $ (76,446)
Net loss--pro forma................................................. (176,734) (90,143)
</TABLE>
9. RELATED-PARTY TRANSACTIONS:
The Company uses a third party to administer the Company's payroll and
related benefits. The Company also provides consulting services to its payroll
and benefits provider. The Company provided services of $1,908,278 to this
entity during the year ended December 31, 1998 (included in revenues for the
year ended December 31, 1998). The Company believes these services are stated at
fair market value.
The Company has an outstanding accounts receivable balance of $375,008 at
December 31, 1998, from its payroll and benefits provider for services provided.
10. SUBSEQUENT EVENTS:
On February 16, 1999, the Company acquired Synapse Group, Inc. ("Synapse")
in a business combination accounted for as a purchase. Synapse engages in
Internet consulting and was purchased by the Company through the issuance of
805,736 shares of the Company's common stock.
On April 30, 1999, the Company signed a letter of intent to acquire Fifth
Gear Media Corporation ("Fifth Gear") for 300,000 shares of common stock. Fifth
Gear engages in Internet consulting. The Company anticipates this transaction
will be completed by May 31, 1999.
On April 28, 1999, the Company signed a letter of intent to acquire inmedia,
inc ("inmedia") for 140,000 shares of common stock and approximately $660,000 in
cash. inmedia is a provider of interactive multimedia training. The Company
anticipates this transaction will be completed by May 31, 1999.
The Company has entered into an agreement to be acquired by Luminant. This
acquisition is subject to successful completion of an initial public offering of
the common stock of Luminant.
F-46
<PAGE>
ALIGN SOLUTIONS CORP.
NOTES TO THE UNAUDITED MARCH 31, 1998 AND 1999 FINANCIAL STATEMENTS:
A. BASIS OF PRESENTATION:
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to and Rule 10-01 of Regulation S-X.
Accordingly, they do not contain all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the accompanying unaudited financial statements
reflect all adjustments (consisting of only normal recurring adjustments)
considered necessary for a fair presentation of the Company's financial
condition as of March 31, 1999, the results of its operations and its cash flows
for the three-month periods ended March 31, 1998 and 1999. These financial
statements should be read in conjunction with the Company's audited 1998
financial statements, including the notes thereto. Operating results for the
three-month period ended March 31, 1999, are not necessarily indicative of the
operating results that may be expected for the year ending December 31, 1999.
B. BUSINESS COMBINATION:
On February 16, 1999, the Company acquired Synapse in a business combination
accounted for as a purchase. Synapse engages in Internet consulting and was
purchased by the Company through the issuance of 805,736 shares of the Company's
common stock. The estimated fair market value of the shares of common stock used
to purchase Synapse was $11.68. The Company issued 472,744 options, all with an
exercise price of $2.50, to Synapse option holders as part of the consideration
of this acquisition. Goodwill of approximately $9,406,000 was recorded in
connection with this transaction, and is being amortized on a straight-line
basis with a useful life of three years.
C. NOTE RECEIVABLE:
The Company advanced $35,000 to inmedia, inc. during the period ended March
31, 1999. The note is due on February 18, 2000. Interest is payable on September
1, 1999 and at maturity at a rate of 8%.
D. DEBT:
The Company renewed its bank line of credit during the first quarter. The
bank line of credit has a maximum availability of $1,200,000, is due on demand,
and matures in March 2000. Interest is at prime plus 1% (8.75% at March 31,
1999) and is payable monthly.
F-47
<PAGE>
ALIGN SOLUTIONS CORP.
NOTES TO THE UNAUDITED MARCH 31, 1998 AND 1999 FINANCIAL STATEMENTS: (CONTINUED)
E. EQUITY INCENTIVE PLANS:
Options outstanding at December 31, 1998 and March 31, 1999 (unaudited) and
granted, exercised and cancelled during this period were as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------------ -------------------
<S> <C> <C>
Options outstanding at December 31, 1998........................................ 953,600 $ 0.61
Granted......................................................................... 728,124 2.50
Exercised....................................................................... -- --
Canceled........................................................................ (932) 2.50
------------
Options outstanding at March 31, 1999........................................... 1,680,792 $ 1.43
------------
------------
</TABLE>
Options granted during the three months ended March 31, 1999, had exercise
prices less than the fair market value on the date of grant. Total compensation
expense to be recognized over the vesting period of these options is
approximately $6,680,000. Align recognized $3,243,968 of compensation expense in
the three months ended March 31, 1999, for stock options that vested during this
period. Of this amount, approximately $3,100,000 related to options granted to
shareholders of Synapse that vested immediately.
F. SUBSEQUENT EVENTS:
On May 26, 1999, the Company acquired Fifth Gear Media Corporation ("Fifth
Gear") in a business combination accounted for as a purchase. Fifth Gear engages
in Internet consulting and was purchased by the Company through the issuance of
300,000 shares of the Company's common stock. The estimated fair market value of
each share of common stock used to purchase Fifth Gear was $11.68. The Company
estimates that goodwill of approximately $3,471,000 will be recorded in
connection with this transaction, and will be amortized on a straight-line basis
with a useful life of three years.
On May 27, 1999, the Company acquired inmedia, inc. ("inmedia") in a
business combination accounted for as a purchase. inmedia engages in Internet
consulting and the assets were purchased and certain liabilities assumed by the
Company through the issuance of 140,000 shares of the Company's common stock.
The estimated fair market value of each share of common stock used to purchase
inmedia was $11.68. The Company estimates that goodwill of approximately
$2,179,000 will be recorded in connection with this transaction, and will be
amortized on a straight-line basis with a useful life of three years.
F-48
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Young & Rubicam Inc.
In our opinion, the accompanying balance sheets and related statements of
operations and of cash flows present fairly, in all material respects, the
financial position of Brand Dialogue - New York (a wholly owned business of
Young & Rubicam Inc.), at December 31, 1997 and 1998 and the results of its
operations and its cash flows for the period April 1, 1996 (inception) through
December 31, 1996, and for the years ended December 31, 1997 and 1998 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of Brand Dialogue - New York's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Brand Dialogue - New York is a wholly owned business of Young & Rubicam Inc.,
and as further described in the notes to the financial statements, has extensive
transactions with Young & Rubicam Inc., its subsidiaries, affiliates, and
clients. Because of these relationships, it is possible that the terms of these
transactions are not the same as those that would result from transactions among
unrelated parties.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York
May 24, 1999, except for Note 8 which
is as of June 3, 1999
F-49
<PAGE>
BRAND DIALOGUE - NEW YORK
(A WHOLLY OWNED BUSINESS OF YOUNG & RUBICAM INC.)
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1997 1998 1999
--------- --------- ------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Accounts receivable............................................................ $ 645 $ 683 $ 2,867
Costs billable to clients...................................................... 21 17
Due from related parties, net.................................................. 546 973 1,138
--------- --------- ------------
TOTAL CURRENT ASSETS....................................................... 1,212 1,673 4,005
--------- --------- ------------
Computer equipment, net of accumulated depreciation of $109, $288, and $350,
respectively................................................................. 233 442 408
Deferred income taxes.......................................................... 4 12 14
--------- --------- ------------
TOTAL ASSETS............................................................... $ 1,449 $ 2,127 $ 4,427
--------- --------- ------------
--------- --------- ------------
LIABILITIES AND INVESTMENT
Accounts payable............................................................... $ 206 $ 820 $ 1,274
Accrued expenses............................................................... 410 249 803
--------- --------- ------------
TOTAL CURRENT LIABILITIES.................................................. 616 1,069 2,077
--------- --------- ------------
Young & Rubicam Inc. Investment................................................ 833 1,058 2,350
--------- --------- ------------
TOTAL LIABILITIES AND YOUNG & RUBICAM INC. INVESTMENT...................... $ 1,449 $ 2,127 $ 4,427
--------- --------- ------------
--------- --------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE>
BRAND DIALOGUE-NEW YORK
(A WHOLLY OWNED BUSINESS OF YOUNG & RUBICAM INC.)
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE THREE MONTHS
PERIOD FROM ENDED
APRIL 1, 1996 DECEMBER 31, MARCH 31,
(INCEPTION) THROUGH -------------------- --------------------
DECEMBER 31, 1996 1997 1998 1998 1999
------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues........................................... $ 1,922 $ 4,011 $ 7,237 $ 1,410 $ 2,701
Compensation expense, including employee
benefits.......................................... 943 1,842 4,596 1,005 1,560
General and administrative expenses................ 402 998 1,677 381 700
------- --------- --------- --------- ---------
OPERATING EXPENSES................................. 1,345 2,840 6,273 1,386 2,260
------- --------- --------- --------- ---------
Income before income taxes......................... 577 1,171 964 24 441
Income tax provision............................... 243 492 403 7 184
------- --------- --------- --------- ---------
NET INCOME......................................... $ 334 $ 679 $ 561 $ 17 $ 257
------- --------- --------- --------- ---------
------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE>
BRAND DIALOGUE - NEW YORK
(A WHOLLY OWNED BUSINESS OF YOUNG & RUBICAM INC.)
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
PERIOD FROM FOR THE YEAR ENDED ENDED
APRIL 1, 1996 DECEMBER 31, MARCH 31,
(INCEPTION) THROUGH --------------------- ---------------------
DECEMBER 31, 1996 1997 1998 1998 1999
------------------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net income..................................... $ 334 $ 679 $ 561 $ 17 $ 257
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense......................... 26 83 179 22 62
Change in assets and liabilities:
Accounts receivable.......................... (548) (97) (38) (627) (2,184)
Costs billable to clients.................... (132) 111 4 21 17
Due from related parties, net................ (327) (219) (427) 21 (165)
Accounts payable and accrued expenses........ 695 (79) 453 710 1,008
Deferred income taxes........................ (1) (3) (8) (3) (2)
------ --------- ---------- --------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES............................... 47 475 724 161 (1,007)
------ --------- ---------- --------- ----------
Cash flows from investing activities:
Purchases of computer equipment.............. (156) (186) (388) -- (28)
------ --------- ---------- --------- ----------
NET CASH USED IN INVESTING ACTIVITIES...... (156) (186) (388) -- (28)
------ --------- ---------- --------- ----------
Cash flows from financing activities:
Cash receipts and cash disbursements, net...... (165) (808) (1,232) (341) 627
Amounts paid by Young & Rubicam Inc............ 274 519 896 180 408
------ --------- ---------- --------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES............................... 109 (289) (336) (161) 1,035
------ --------- ---------- --------- ----------
Net change in cash............................... -- -- -- -- --
Cash at beginning of year........................ -- -- -- -- --
------ --------- ---------- --------- ----------
Cash at end of year.............................. $ -- $ -- $ -- $ -- $ --
------ --------- ---------- --------- ----------
------ --------- ---------- --------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-52
<PAGE>
BRAND DIALOGUE - NEW YORK
(A WHOLLY OWNED BUSINESS OF YOUNG & RUBICAM INC.)
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION
Brand Dialogue - New York (a wholly owned business of Young & Rubicam Inc.)
(the "Company") was organized on April 1, 1996 and provides digital interactive
branding services and digital commerce solutions to its clients. The Company's
primary offerings consist of:
- Web advertising, including the design, creation and production of
websites, banners, home pages and comprehensive interactive campaigns;
- Digital commerce applications;
- The development of corporate intranets to improve communications and
productivity within and among a defined set of users; and
- Interactive marketing consulting services.
The accompanying financial statements include the accounts of Brand Dialogue
- - New York and reflect the historical results of operations, financial position
and cash flows of Brand Dialogue - New York. These financial statements,
however, may not be indicative of the results that would have occurred if Brand
Dialogue - New York operated as a stand-alone entity during the periods
presented, the future results of Brand Dialogue - New York or the costs which
may be incurred by an unaffiliated entity to achieve similar results.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues earned and expenses incurred
during the reporting period. While actual results could differ from these
estimates, management believes that the estimates are reasonable. The
significant estimates that affect the financial statements include, but are not
limited to, revenues earned pursuant to Young & Rubicam Inc. multi-disciplinary
global client contracts and corporate overhead allocations.
INTERIM FINANCIAL INFORMATION (UNAUDITED)
In the opinion of management, the March 31, 1998 and 1999 unaudited interim
financial statements include all adjustments, consistency of normal recurring
adjustments, necessary for a fair presentation of such financial statements. The
results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results to be expected for the full year.
REVENUE RECOGNITION
Revenues from interactive branding and digital commerce solutions are
derived from billings to clients for media and production activities, generally
on the basis of negotiated fees. Revenues are recognized in the period when the
underlying services are rendered.
F-53
<PAGE>
BRAND DIALOGUE - NEW YORK
(A WHOLLY OWNED BUSINESS OF YOUNG & RUBICAM INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION
Depreciation is computed using the straight-line method over the estimated
useful life of three years. During the period from April 1, 1996 (inception)
through December 31, 1996, and for the years ended December 31, 1997 and 1998,
depreciation expense amounted to $26, $83, and $179, respectively.
FINANCIAL INSTRUMENTS
The fair values of accounts receivable, trade accounts payable and accrued
expenses are equal to their carrying amounts as reported at December 31, 1996,
1997, and 1998.
CONCENTRATION OF CREDIT RISK
The Company's clients are engaged in various businesses and the Company
performs ongoing credit evaluations of its clients. Additionally, consistent
with the Young & Rubicam Inc. strategy, the Company is dependent upon a
relatively small number of clients who purchase services under short-term
contracts and contribute a significant percentage of revenues. Significant
client revenues as a percentage of total Company revenues are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
PERIOD FROM
APRIL 1, 1996 DECEMBER 31,
(INCEPTION) THROUGH --------------------
DECEMBER 31, 1996 1997 1998
--------------------- --------- ---------
<S> <C> <C> <C>
Client A......................................... 33% 23% 29%
Client B......................................... 0% 0% 13%
Client C......................................... 0% 5% 12%
Client D......................................... 0% 5% 11%
Client E......................................... 28% 15% 6%
Client F......................................... 16% 10% 5%
Client G......................................... 0% 11% 0%
----- --------- ---------
77% 69% 76%
----- --------- ---------
----- --------- ---------
</TABLE>
SEGMENT REPORTING
The Company is centrally managed and operates in one business segment:
digital interactive branding services and digital commerce solutions.
3. CORPORATE OVERHEAD ALLOCATIONS
Young & Rubicam Inc. and its subsidiaries and affiliates provide certain
administrative and corporate services which have been charged to Brand Dialogue
- - New York and are included in the results of operations for the periods
presented. Such services include executive management, information technology,
facilities and key client account management. Costs are allocated on a
proportionate basis as a function of revenues or headcount. These corporate
F-54
<PAGE>
BRAND DIALOGUE - NEW YORK
(A WHOLLY OWNED BUSINESS OF YOUNG & RUBICAM INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. CORPORATE OVERHEAD ALLOCATIONS (CONTINUED)
overhead allocations do not necessarily reflect the amount of expenses that
would have been incurred by Brand Dialogue - New York on a stand-alone basis.
The costs of certain financing activities, administrative, and other corporate
functions, which did not benefit Brand Dialogue - New York, were absorbed by
Young & Rubicam Inc.
Management believes that the methodologies used to allocate charges for the
services described above from Young & Rubicam Inc. are reasonable. However, it
is impractical to determine whether such costs are comparable to those that
would have been incurred by the Company on a stand-alone basis.
Charges allocated to Brand Dialogue - New York are summarized as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
PERIOD FROM
APRIL 1, 1996 DECEMBER 31,
(INCEPTION) THROUGH --------------------
DECEMBER 31, 1996 1997 1998
--------------------- --------- ---------
<S> <C> <C> <C>
Compensation, including employee benefits.............. $ 64 $ 133 $ 269
General and administrative............................. 210 386 627
----- --------- ---------
$ 274 $ 519 $ 896
----- --------- ---------
----- --------- ---------
</TABLE>
4. YOUNG & RUBICAM INC. INVESTMENT
Brand Dialogue - New York participates in Young & Rubicam Inc.'s centralized
treasury and cash management system. Cash generated from operations is
transferred to Young & Rubicam Inc. on a daily basis. Cash disbursements for
operations are funded as needed from Young & Rubicam Inc. No interest was
charged or earned on the Company's outstanding balance with Young & Rubicam Inc.
An analysis of the Young & Rubicam Inc. investment activity is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
PERIOD FROM
APRIL 1, 1996 DECEMBER 31,
(INCEPTION) THROUGH --------------------
DECEMBER 31, 1996 1997 1998
------------------- --------- ---------
<S> <C> <C> <C>
Balance at the beginning of the period............. $ -- $ 443 $ 833
Net income......................................... 334 679 561
Corporate overhead allocations..................... 274 519 896
Cash receipts and cash disbursements, net.......... (165) (808) (1,232)
------ --------- ---------
Balance at the end of the period................... $ 443 $ 833 $ 1,058
------ --------- ---------
------ --------- ---------
</TABLE>
5. EMPLOYEE BENEFITS
Substantially all employees of Brand Dialogue - New York are eligible to
participate in the Young & Rubicam Inc. Career Cash Balance Plan (the "Plan").
The benefits under the Plan are
F-55
<PAGE>
BRAND DIALOGUE - NEW YORK
(A WHOLLY OWNED BUSINESS OF YOUNG & RUBICAM INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
5. EMPLOYEE BENEFITS (CONTINUED)
based on, among other things, age at retirement, years of service and salary
levels. Upon retirement, these benefits will be based upon the benefit formula
of the Plan. Benefits are generally paid from funds previously provided to
trustees. Funds are contributed to a trustee as necessary to provide for current
service and for any unfunded projected benefit obligation. To the extent that
these requirements are fully covered by assets on hand, a contribution may not
be made in a particular year. At December 31, 1996, 1997 and 1998, assets were
held in equity securities and fixed income-type securities.
The Plan's net periodic pension cost and the Plan's funded status and
related amounts recognized are determined on a consolidated basis by Young &
Rubicam Inc. and allocated to its subsidiaries and affiliates based on the
number of participants as determined by an actuary. As a result, the components
of the Plan's net periodic pension cost and the actuarial present value of
benefit obligations are not determinable on a subsidiary or affiliate basis and,
therefore, not disclosed separately. The difference between the fair value of
the Plan assets and the projected benefit obligation was ($446), ($615), and
$784 at December 31, 1996, 1997 and 1998, respectively. The Plan's net periodic
pension cost was $5,920, $2,779, and 4,127 for the years ended December 31,
1996, 1997 and 1998, respectively.
The Company provides healthcare benefits to certain active employees. The
cost of providing these benefits, compiled by Young & Rubicam Inc. on an
aggregate basis, is recognized when incurred and has been allocated to Brand
Dialogue - New York as a function of headcount.
Employees of Brand Dialogue - New York participate in an employee savings
plan, sponsored by Young & Rubicam Inc., that qualifies as a defined
contribution plan under section 401(k) of the Internal Revenue Code. Under the
plan, participating employees may defer a portion of their pre-tax earnings up
to the Internal Revenue Service annual contribution limits. The Company matches
100% of each employee's contribution up to a maximum of 5% of the employee's
earnings up to $150.
Certain employees of Brand Dialogue - New York participate in various stock
compensation programs sponsored by Young & Rubicam Inc. Young & Rubicam Inc.
measures compensation cost using the method prescribed by Accounting Principles
Board Opinion No 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its stock plans as the exercise price on the date of
grant approximated the fair value of the common stock.
Charges associated with employee benefits, which are included as a component
of compensation expense, are summarized as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
PERIOD FROM
APRIL 1, 1996 DECEMBER 31,
(INCEPTION) THROUGH --------------------
DECEMBER 31, 1996 1997 1998
--------------------- --------- ---------
<S> <C> <C> <C>
Medical and dental................................. $ 29 $ 58 $ 153
Employee savings plan.............................. 29 58 118
Career cash balance plan........................... 9 17 53
Other.............................................. 25 49 86
----- --------- ---------
$ 92 $ 182 $ 410
----- --------- ---------
----- --------- ---------
</TABLE>
F-56
<PAGE>
BRAND DIALOGUE - NEW YORK
(A WHOLLY OWNED BUSINESS OF YOUNG & RUBICAM INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. INCOME TAXES
Brand Dialogue--New York has been included in the consolidated federal
income tax returns and certain state and local income tax returns filed by Young
& Rubicam Inc. or its subsidiaries.
Income taxes have been provided on a separate return basis for all periods
presented. Income taxes payable of $243, $653, and $1,186 as of December 31,
1996, 1997, and 1998, respectively, are included in due from related parties,
net.
The reconciliation of the United States statutory rate to the effective tax
rate is as follows:
<TABLE>
<CAPTION>
PERIOD FROM FOR THE YEARS ENDED
APRIL 1, 1996 DECEMBER 31,
(INCEPTION) THROUGH --------------------
DECEMBER 31, 1996 1997 1998
------------------- --------- ---------
<S> <C> <C> <C>
Percent of Income
Before Income Taxes
United States statutory rate............... 35.0% 35.0% 35.0%
State and local income taxes............... 7.0 7.0 7.0
Travel, entertainment and other
non-deductible expenses.................. 0.3 0.3 0.7
Excess of book over tax
depreciation expense..................... (0.2) (0.4) (0.8)
------ --------- ---------
Effective tax rate............................. 42.1% 41.9% 41.9%
------ --------- ---------
</TABLE>
Brand Dialogue - New York's deferred income tax asset arises from temporary
differences which represent the cumulative deductible or taxable amounts
recorded in the financial statements in different years than recognized in the
tax returns and relate to the excess book over tax depreciation of computer
equipment.
7. ACCRUED EXPENSES
The components of accrued expenses are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
PERIOD FROM
APRIL 1, 1996 DECEMBER 31,
(INCEPTION) THROUGH --------------------
DECEMBER 31, 1996 1997 1998
--------------------- --------- ---------
<S> <C> <C> <C>
Compensation, including benefits............... $ 21 $ 131 $ 165
Information technology services................ -- 35 --
Professional services.......................... -- 118 --
Travel expenses................................ 40 20 --
Deferred income................................ 136 -- --
Other.......................................... -- 106 84
----- --------- ---------
$ 197 $ 410 $ 249
----- --------- ---------
----- --------- ---------
</TABLE>
8. SUBSEQUENT EVENT
The Company has agreed upon the terms of a transaction whereby Young &
Rubicam Inc. will sell certain net assets, as defined, to Luminant Worldwide
Corporation. This transaction is subject to the successful completion of an
initial public offering of the common stock of Luminant.
F-57
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Free Range Media, Inc.:
We have audited the accompanying consolidated balance sheets of Free Range
Media, Inc. (a Washington corporation) and subsidiary as of December 31, 1997
and 1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Free Range Media, Inc. and
subsidiary as of December 31, 1997 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
May 7, 1999
F-58
<PAGE>
FREE RANGE MEDIA, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------ MARCH 31,
1997 1998 1999
-------------- -------------- --------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................... $ 5,963 $ 30,397 $ 47,893
Accounts receivable, net of allowance for doubtful accounts of
$47,008, $0, and $60,360 (unaudited).......................... 294,232 734,416 1,477,129
Unbilled revenues............................................... 31,713 96,753 403,785
Prepaid expenses and other...................................... 121,541 36,479 76,046
-------------- -------------- --------------
Total current assets.......................................... 453,449 898,045 2,004,853
PROPERTY AND EQUIPMENT, net....................................... 446,389 798,234 767,599
-------------- -------------- --------------
Total assets.................................................. $ 899,838 $ 1,696,279 $ 2,772,452
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................ $ 207,627 $ 118,682 $ 383,300
Customer deposits............................................... 76,061 335,038 424,933
Accrued liabilities............................................. 38,777 613,159 908,737
Notes payable................................................... -- 3,212,273 4,114,464
-------------- -------------- --------------
Total liabilities............................................. 322,465 4,279,152 5,831,434
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock: $2.75 par value, 2,400,000 shares authorized,
908,923, 1,359,460, and 1,359,460 (unaudited) shares issued
and outstanding as of 1997, 1998, and 1999.................... 2,488,538 3,727,514 3,727,514
Common stock, voting: no par value, 6,400,000 shares authorized,
6,400,000 shares issued as of 1997 and 1998 and 6,243,408,
6,238,808, and 6,238,808 (unaudited) shares outstanding as of
1997, 1998, and 1999.......................................... 2,424,760 2,672,536 2,805,872
Retained deficit................................................ (4,116,186) (8,759,879) (9,369,324)
Less--Treasury stock at cost, 152,192, 156,792 and 156,792
(unaudited) shares as of 1997, 1998 and 1999.................. (219,739) (223,044) (223,044)
-------------- -------------- --------------
Total stockholders' equity.................................... 577,373 (2,582,873) (3,058,982)
-------------- -------------- --------------
Total liabilities and stockholders' equity.................... $ 899,838 $ 1,696,279 $ 2,772,452
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-59
<PAGE>
FREE RANGE MEDIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------- -----------------------------
1996 1997 1998 1998 1999
-------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
REVENUES.......................... $ 2,939,746 $ 1,982,288 $ 3,520,514 $ 337,684 $ 2,210,752
COST OF SERVICES.................. 2,016,218 1,641,493 3,248,161 517,653 1,462,020
-------------- -------------- -------------- -------------- -------------
GROSS PROFIT...................... 923,528 340,795 272,353 (179,969) 748,732
SELLING, GENERAL AND
ADMINISTRATIVE.................. 2,005,332 2,984,957 4,922,329 1,090,388 1,175,341
OTHER INCOME (EXPENSE):
Interest expense................ (45,196) (107,475) (181,673) (8,928) (89,233)
Gain on sale of affiliate....... -- -- 429,996 -- --
Other (expense) income.......... (48,792) (34,581) 28,422 19,732 (7,196)
-------------- -------------- -------------- -------------- -------------
LOSS BEFORE INCOME TAXES.......... (1,175,792) (2,786,218) (4,373,231) (1,259,553) (523,038)
INCOME TAXES...................... -- -- -- -- --
-------------- -------------- -------------- -------------- -------------
NET LOSS.......................... $ (1,175,792) $ (2,786,218) $ (4,373,231) $ (1,259,553) $ (523,038)
-------------- -------------- -------------- -------------- -------------
-------------- -------------- -------------- -------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-60
<PAGE>
FREE RANGE MEDIA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------------------- --------------------------- RETAINED TREASURY
SHARES AMOUNT SHARES AMOUNT DEFICIT STOCK
------------ ------------- ------------ ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995...... -- $ -- 3,700,000 $ 240,000 $ (154,176) $ (2,487,149)
Issuance of common stock...... -- -- 3,073,940 2,079,759 -- 3,126,357
Exercise of stock options..... -- -- 4,800 (5,506) -- 9,570
Purchase of treasury stock.... -- -- (533,332) -- -- (850,665)
Equity related compensation... -- -- -- 10,797 -- --
Net loss...................... -- -- -- -- (1,175,792) --
------------ ------------- ------------ ------------- -------------- --------------
BALANCE, December 31, 1996...... -- -- 6,245,408 2,325,050 (1,329,968) (201,887)
Issuance of preferred stock... 908,923 2,488,538 -- -- -- --
Exercise of stock options..... -- -- 2,400 (6,674) -- 8,932
Purchase of treasury stock.... -- -- (4,400) -- -- (26,784)
Equity related compensation... -- -- -- 106,384 -- --
Net loss...................... -- -- -- -- (2,786,218) --
------------ ------------- ------------ ------------- -------------- --------------
BALANCE, December 31, 1997...... 908,923 2,488,538 6,243,408 2,424,760 (4,116,186) (219,739)
Issuance of preferred stock... 450,537 1,238,976 -- -- -- --
Purchase of treasury stock.... -- -- (4,600) -- -- (3,305)
Equity related compensation... -- -- -- 247,776 -- --
Dividends..................... -- -- -- -- (270,462) --
Net loss...................... -- -- -- -- (4,373,231) --
------------ ------------- ------------ ------------- -------------- --------------
BALANCE, December 31, 1998...... 1,359,460 3,727,514 6,238,808 2,672,536 (8,759,879) (223,044)
Equity related compensation
(unaudited)................. -- -- -- 133,336 -- --
Dividends (unaudited)......... -- -- -- -- (86,407) --
Net loss (unaudited).......... -- -- -- -- (523,038) --
------------ ------------- ------------ ------------- -------------- --------------
BALANCE, March 31, 1999
(unaudited)................... 1,359,460 $ 3,727,514 6,238,808 $ 2,805,872 $ (9,369,324) $ (223,044)
------------ ------------- ------------ ------------- -------------- --------------
------------ ------------- ------------ ------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-61
<PAGE>
FREE RANGE MEDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- ----------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................... $(1,175,792) $(2,786,218) $(4,373,231) $(1,259,553) $(523,038)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation................................ 119,271 210,064 324,982 63,623 99,952
Equity related compensation................. 10,797 106,384 247,776 61,944 133,336
Gain on sale of affiliate................... -- -- (429,996) -- --
Changes in assets and liabilities-
Accounts receivable....................... (61,879) 176,562 (440,184) 65,299 (742,713)
Unbilled revenues......................... 73,519 3,835 (65,040) 15,214 (307,032)
Prepaid expenses and other................ 5,990 235,604 85,061 106,948 (39,567)
Accounts payable.......................... (13,120) 76,342 (88,944) 101,981 264,618
Customer deposits......................... 6,268 (108,186) 258,977 71,342 89,895
Accrued liabilities....................... (597,289) (23,111) 303,920 8,501 209,171
----------- ----------- ----------- ----------- ---------
Net cash used in operating activities..... (1,632,235) (2,108,724) (4,176,679) (764,701) (815,378)
----------- ----------- ----------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................... (187,003) (282,085) (676,827) (175,436) (69,317)
Investment in affiliate (disposed of in
1998)....................................... -- -- (250,000) -- --
Proceeds from disposition of affiliate........ -- -- 679,996 -- --
----------- ----------- ----------- ----------- ---------
Net cash used in investing activities..... (187,003) (282,085) (246,831) (175,436) (69,317)
----------- ----------- ----------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments on) proceeds from notes payable... (2,534,413) (73,104) 3,212,273 934,174 902,191
Proceeds from issuance of preferred stock..... -- 2,488,538 1,238,976 -- --
Proceeds from issuance of common stock........ 2,074,253 -- -- -- --
Proceeds from issuance of treasury stock...... 3,135,927 2,258 -- -- --
Purchases of treasury stock................... (850,665) (26,784) (3,305) -- --
----------- ----------- ----------- ----------- ---------
Net cash provided by financing
activities.............................. 1,825,102 2,390,908 4,447,944 934,174 902,191
----------- ----------- ----------- ----------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................... 5,864 99 24,434 (5,963) 17,496
CASH AND CASH EQUIVALENTS, beginning of
period........................................ -- 5,864 5,963 5,963 30,397
----------- ----------- ----------- ----------- ---------
CASH AND CASH EQUIVALENTS, end of period........ $ 5,864 $ 5,963 $ 30,397 $ -- $ 47,893
----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ---------
SUPPLEMENTAL INFORMATION:
Cash paid for interest........................ $ 935 $ 101,667 $ 179,032 $ -- $ --
----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-62
<PAGE>
FREE RANGE MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
Free Range Media, Inc. and its subsidiary (the "Company") specializes in the
design of World Wide Web pages on the Internet. The Company is a full service
developer of Internet and intranet sites, offering services in four areas:
website design and implementation, hosting, consulting, and maintenance. The
Company's wholly owned subsidiary is Lariat, Inc. The Company was incorporated
in the State of Washington in March 1994.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using a
straight-line method over the estimated useful lives of the assets. The costs
and related accumulated depreciation of property and equipment sold, retired, or
disposed of are removed from the accounts and any gains or losses reflected in
the consolidated statements of operations. Expenditures for major acquisitions
and improvements are capitalized while expenditures for maintenance and repair
costs are expensed as incurred.
INCOME TAXES
Income taxes are accounted for using an asset and liability approach that
requires the recognition of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
The measurement of current and deferred tax liabilities and assets is based on
provisions of the enacted tax law; the effects of future changes in tax laws or
rates are not anticipated. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available evidence,
is not expected to be realized.
REVENUE RECOGNITION
Revenues are recognized for time and materials-based arrangements as
services are performed and fixed fee arrangements on the
percentage-of-completion method. Under this approach, revenues and gross profit
are recognized as the work is performed, based on the ratio of costs incurred to
total estimated costs. Unbilled revenues on contracts are comprised of labor
costs incurred, plus earnings on certain contracts which have not been billed.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Customer deposits represent the amount of
customer payments received in advance of services being performed.
COST OF SERVICES
Cost of services is comprised primarily of salaries, employee benefits, and
incentive compensation of billable employees and a proportionate share of
depreciation and facilities costs based on the ratio of billable employees to
total employees.
F-63
<PAGE>
FREE RANGE MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
GAIN ON SALE OF AFFILIATE
On September 17, 1998, the Company sold its interest in Free Zone, LLC
("Free Zone") to an unrelated third party for $679,996 and recognized a gain of
$429,996.
ACCOUNTING FOR STOCK BASED COMPENSATION
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 allows either adoption of a fair value
based method of accounting for stock-based compensation or continuation under
Accounting Principles Board Option No. 25, "Accounting for Stock Issued to
Employees ("APB 25")." The Company has chosen to account for stock-based
compensation using the intrinsic value based method prescribed in APB 25 and
provides the pro forma disclosure provision of SFAS 123. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
fair market value of the Company's stock over the exercise price at the date of
the grant.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments have carrying amounts which approximate
fair value due to their relatively short maturity and/or their variable interest
rates.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary. An investment in a company that is
50% owned is accounted for using the equity method. All significant intercompany
transactions and balances have been eliminated.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, ("SFAS No. 130"), "REPORTING
COMPREHENSIVE INCOME," which is required to be adopted in the period ended
December 31, 1998. SFAS No. 130 requires that an enterprise (a) classify items
of other comprehensive income by their nature in the financial statements, and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in-capital in the Statement of
Stockholders' Equity. The adoption of SFAS 130 did not have any effect on the
Company's financial statements as the Company does not have any elements of
comprehensive income other than net income.
F-64
<PAGE>
FREE RANGE MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment is comprised of the following as of December 31, 1997
and 1998:
<TABLE>
<CAPTION>
USEFUL
LIFE 1997 1998
------ ------------ -------------
<S> <C> <C> <C>
Computers and equipment................................. 3 $ 646,966 $ 1,253,290
Furniture and fixtures.................................. 5 195,678 256,777
Leasehold improvements.................................. 5 20,108 29,512
------------ -------------
862,752 1,539,579
Less- Accumulated depreciation.......................... (416,363) (741,345)
------------ -------------
Property and equipment, net...................... $ 446,389 $ 798,234
------------ -------------
------------ -------------
</TABLE>
Depreciation expense was $119,271, $210,064, and $324,982 for the periods
ended December 31, 1996, 1997, and 1998, respectively.
4. ACCRUED LIABILITIES:
Accrued liabilities is comprised of the following as of December 31, 1997
and 1998:
<TABLE>
<CAPTION>
1997 1998
--------- -----------
<S> <C> <C>
Accrued compensation................................................. $ 36,587 $ 141,385
Accrued dividends.................................................... -- 270,462
Accrued interest..................................................... -- 179,844
Other................................................................ 2,190 21,468
--------- -----------
Accrued liabilities.................................................. $ 38,777 $ 613,159
--------- -----------
--------- -----------
</TABLE>
5. DEBT:
The Company has two notes payable of $3,212,273 as of December 31, 1998,
with related parties with interest at 9.25% and prime plus 1% (8.75% at December
31, 1998). The notes payable are due on demand, have an "open ended" maturity,
and are general obligations of the Company.
6. INCOME TAXES:
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to the effective income tax
rate is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Tax at U.S. statutory rates....................................... (35)% (35 )% (35 )%
Meals and entertainment........................................... 1% 1% 1%
Net operating loss carryforward................................... 34% 34% 34%
-- -- --
Effective income tax rate......................................... --% --% --%
-- -- --
-- -- --
</TABLE>
F-65
<PAGE>
FREE RANGE MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES: (CONTINUED)
Significant components of the Company's deferred tax liabilities and assets
as of December 31, 1997 and 1998, are shown below.
<TABLE>
<CAPTION>
1997 1998
-------------- --------------
<S> <C> <C>
Deferred tax assets-
Book depreciation in excess of tax depreciation............. $ 12,293 $ 40,883
Accruals.................................................... 26,268 26,268
Net operating loss carryforward............................. 1,332,143 2,832,630
-------------- --------------
Total deferred tax assets..................................... 1,370,704 2,899,781
Deferred tax liabilities-
Other....................................................... (9,293) (9,293)
-------------- --------------
Net deferred tax assets....................................... 1,361,411 2,890,488
Valuation allowance........................................... (1,361,411) (2,890,488)
-------------- --------------
Net deferred tax assets....................................... $ -- $ --
-------------- --------------
-------------- --------------
</TABLE>
The Company's net operating loss carryforwards expire in years 2009 through
2018.
Management periodically reviews the expected realization of the Company's
deferred tax assets and records a valuation allowance, as appropriate, when
existing conditions impact the probability of ultimate realization of the
deferred tax asset. Due to the Company's recurring losses before income taxes,
management believes it is more likely than not that the Company will not realize
the net deferred tax asset. Accordingly, the Company has recorded a valuation
allowance to reflect uncertainties associated with the ultimate realization of
certain deferred tax assets.
7. COMMITMENTS AND CONTINGENCIES:
The Company sponsors 401(k) cash or deferred retirement plans that cover
substantially all of its ongoing employees. The Company has not made matching
contributions.
The Company leases its office facilities under noncancelable operating
leases that expire in January 2005. The leases require the payment of property
taxes, insurance, and maintenance. The Company also has operating lease
agreements related to certain equipment which expire at various dates.
F-66
<PAGE>
FREE RANGE MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Future minimum lease payments under these leases are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
-------------
<S> <C>
1999........................................................................... $ 263,994
2000........................................................................... 274,860
2001........................................................................... 288,512
2002........................................................................... 294,216
2003........................................................................... 297,570
Thereafter..................................................................... 338,834
-------------
Total future minimum lease payments............................................ $ 1,757,986
-------------
-------------
</TABLE>
Rent expense for the years ended December 1996, 1997, and 1998 totaled
$146,212, $255,285, and $279,510, respectively.
In the ordinary course of business, the Company may be subject to legal
actions and claims. Management does not believe litigation or claims will have a
material effect on the Company's financial condition or results of operations.
8. EQUITY INCENTIVE PLANS:
Effective November 1, 1995, the Company approved the 1995 Stock Option Plan
(the "Plan") authorizing the Board of Directors to grant incentive or
nonqualified options to purchase common stock of the Company. Effective April 1,
1998, the Plan was converted into a nonqualified option plan. The Board of
Directors has authorized shares to be issued under the Plan. The Plan is
administered by the Board of Directors, which determines the number of stock
options to be granted, the exercise or purchase price, exercise schedule, and
expiration date of such options.
The exercise price of options qualifying as incentive stock options under
Section 422 of the Internal Revenue Code may not be less than the grant date
fair market value of the common stock. Incentive stock options granted to any
10% stockholder may not be less than 110% of the fair market value of the common
stock on the grant date. Stock options granted under the Plan are
nontransferable and generally expire ten years after the date of grant. Upon the
event that all of the outstanding shares of common stock of the Company are
acquired by an unrelated party, the optionee's exercise schedule shall be
accelerated to provide that optionee with immediate exercisability of fifty
percent of the options granted. All options granted become exercisable over a
five-year period of continued employment.
F-67
<PAGE>
FREE RANGE MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. EQUITY INCENTIVE PLANS: (CONTINUED)
Options outstanding at December 31, 1996, 1997, and 1998, were as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
----------- ---------------------
<S> <C> <C>
Options outstanding at December 31, 1995..................... 135,550 $ .25
Granted.................................................... 181,750 .25
Exercised.................................................. (4,800) .25
Canceled................................................... (49,250) .25
----------- ---
Options outstanding at December 31, 1996..................... 263,250 .25
Granted.................................................... 336,250 .25
Exercised.................................................. (2,400) .25
Canceled................................................... (205,750) .25
----------- ---
Options outstanding at December 31, 1997..................... 391,350 .25
Granted.................................................... 465,250 .25
Exercised.................................................. -- --
Canceled................................................... (279,450) .25
----------- ---
Options outstanding at December 31, 1998..................... 577,150 $ .25
----------- ---
----------- ---
</TABLE>
The following is summary information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C>
WEIGHTED AVERAGE
NUMBER OF REMAINING WEIGHTED AVERAGE NUMBER OF
EXERCISE PRICES SHARES CONTRACT LIFE EXERCISE PRICE SHARES EXERCISE PRICE
- ----------------- ----------- ------------------------- --------------------- ----------- -----------------
$ .25 577,150 5 $ .25 4,890 $ .25
</TABLE>
Additionally, the Company had 680 and 1,260 options exercisable at December
31, 1996 and 1997. Included in the above options granted during the three years
ended December 31, 1998, were options granted with an exercise price less than
fair market value on the grant date. The Company recognized $10,797, $106,384,
and $247,776 in connection with these stock option grants in compensation
expense for 1996, 1997, and 1998, respectively.
Pro forma information regarding net income has been determined as if the
Company accounted for its stock options under the fair value method of SFAS 123.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option-pricing model with the following assumptions used for 1996:
an exercisable event occurring in five years; risk-free interest rates ranging
from 5.42% to 6.71%; a dividend yield of 0%; a volatility factor of zero; a
weighted-average expected life of five years; and an average Black-Scholes fair
value at the date of grant of $2.44 per option. The assumptions used to price
options granted during 1997 were: an exercisable event occurring in five years;
risk-free interest rates ranging from 5.42% to 5.83%; dividend yield of 0%; a
volatility factor of zero; a weighted-average expected life of five years; and
average Black-Scholes fair value at the date of grant of $2.56 per option. The
assumptions used to price options granted during 1998 were: an exercisable event
occurring in five years; risk-free interest rates ranging from 4.68% to 5.63%; a
dividend yield of 0%; a
F-68
<PAGE>
FREE RANGE MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. EQUITY INCENTIVE PLANS: (CONTINUED)
volatility factor of zero; a weighted-average expected life of five years; and
an average Black-Scholes fair value at the date of grant of $2.56 per option.
Had compensation cost for the Company's stock option plan been determined
based on the fair value at the date of grant consistent with SFAS 123, the
Company's net loss would have been as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Net loss--As reported......................... $ (1,175,792) $ (2,786,218) $ (4,373,231)
Net loss--Pro forma........................... (1,237,468) (2,819,098) (4,417,297)
</TABLE>
9. EQUITY:
PREFERRED STOCK
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 2,400,000 shares of convertible Class A Preferred Stock ("Preferred
Stock"). In the event of liquidation, each holder of Preferred Stock will be
entitled to receive, as a preferential distribution, $2.75 for each outstanding
share and an amount equal to the accumulated but unpaid dividends, if any, on
such share. If the assets of the Company are insufficient to permit the payment
of full preferential amounts previously described, then all assets of the
Company legally available for distribution to its stockholders will be
distributed ratably among the holders of Preferred Stock.
The holders of Preferred Stock will be entitled to receive, when declared by
the Board of Directors, cumulative preferred dividends in the amount of a
percentage which is equal to the prime lending rate for Key Bank of Washington
multiplied by the par value per year on each share.
Each share of Preferred Stock is convertible into the number of shares of
Common Stock which is equal to $2.75 divided by the conversion price in effect
at the time of the conversion.
The Company has recognized cumulative dividends for the Preferred Stock in
the amount of $270,462.
COMMON STOCK
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 6,400,000 shares of Common Stock having no par value.
10. RELATED-PARTY TRANSACTIONS:
At December 31, 1998, the Company had notes payable to two stockholders
totaling $3,212,273 at December 31, 1998. The notes payable are "open-ended"
loans without set maturity dates.
11. AGREEMENT TO MERGE WITH LUMINANT:
The Company intends to enter into an agreement to be acquired by Luminant.
This acquisition is subject to successful completion of an initial public
offering of the common stock of Luminant.
F-69
<PAGE>
FREE RANGE MEDIA, INC.
NOTES TO THE UNAUDITED MARCH 31, 1998 AND 1999 FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION:
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Rule 10-01 of Regulation S-X. Accordingly,
they do not contain all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, the accompanying unaudited financial statements reflect all
adjustments (consisting of only normal recurring adjustments) considered
necessary for a fair presentation of the Company's financial condition as of
March 31, 1999, the results of its operations and its cash flows for the
three-month periods ended March 31, 1998 and 1999. These financial statements
should be read in conjunction with the Company's audited 1998 financial
statements, including the notes thereto. Operating results for the three-month
period ended March 31, 1999, are not necessarily indicative of the operating
results that may be expected for the year ending December 31, 1999.
B. DEBT:
The Company has notes payable amounting to $4,114,464 as of March 31, 1999,
with related parties, with interest at 9.25% and prime plus 1% (8.75% at March
31, 1999). The notes payable are due on demand, have an "open-ended" maturity,
and are general obligations of the Company.
C. RELATED-PARTY TRANSACTIONS:
In the three months ended March 31, 1999, approximately 25% of the Company's
revenues were with a customer of which the Company's Chairman of the Board is a
director.
F-70
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Integrated Consulting, Inc.:
We have audited the accompanying balance sheets of Integrated Consulting,
Inc., dba i.con interactive (a Texas corporation) as of December 31, 1997 and
1998, and the related statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Integrated Consulting, Inc.
as of December 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
May 7, 1999
F-71
<PAGE>
INTEGRATED CONSULTING, INC. DBA I.CON INTERACTIVE
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................... $ 42,566 $ 8,968 $ 15,717
Accounts receivable, net of allowance for doubtful accounts of $0,
$9,000, and $17,000 (unaudited)....................................... 39,842 209,198 376,972
Deferred income taxes................................................... 11,609 11,886 11,886
Prepaid expenses and other.............................................. 10,677 10,992 5,043
----------- ----------- ------------
Total current assets.................................................. 104,694 241,044 409,618
PROPERTY AND EQUIPMENT, net............................................... 135,453 239,382 344,662
OTHER ASSETS.............................................................. 7,622 17,367 17,367
----------- ----------- ------------
Total assets.......................................................... $ 247,769 $ 497,793 $ 771,647
----------- ----------- ------------
----------- ----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, including cash overdraft of $0, $74,810, and $0
(unaudited)........................................................... $ 10,762 $ 145,979 $ 47,543
Customer deposits....................................................... 83,164 57,946 29,900
Accrued liabilities..................................................... 86,240 119,872 259,319
Notes payable........................................................... -- -- 97,889
Current maturities of long-term debt.................................... -- 7,568 16,579
----------- ----------- ------------
Total current liabilities............................................. 180,166 331,365 451,230
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities............................... -- 56,453 107,459
Deferred income taxes................................................... 4,970 7,034 8,524
----------- ----------- ------------
Total liabilities..................................................... 185,136 394,852 567,213
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, Class A, voting: $.01 par value, 10,000,000 shares
authorized, 900,000, 1,000,000, and 1,000,000 (unaudited) issued and
outstanding as of 1997, 1998 and 1999................................. 9,000 10,000 10,000
Common stock, Class B, nonvoting: $.01 par value, 10,000,000 and 0
shares authorized, no shares issued and outstanding as of 1997, 1998
and 1999.............................................................. -- -- --
Additional paid-in capital.............................................. -- 14,000 14,000
Subscription receivable from officers................................... -- (10,000) (10,000)
Retained earnings....................................................... 53,633 88,941 190,434
----------- ----------- ------------
Total stockholders' equity............................................ 62,633 102,941 204,434
----------- ----------- ------------
Total liabilities and stockholders' equity............................ $ 247,769 $ 497,793 $ 771,647
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-72
<PAGE>
INTEGRATED CONSULTING, INC. DBA I.CON INTERACTIVE
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- ------------------------
1996 1997 1998 1998 1999
----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
REVENUES:
Trade revenues.............................. $ 442,924 $ 848,584 $ 1,715,591 $ 400,665 $ 678,660
Barter revenues............................. -- -- 424,900 55,000 146,713
----------- ----------- ------------- ----------- -----------
Total revenues............................ 442,924 848,584 2,140,491 455,665 825,373
COST OF SERVICES.............................. 132,172 266,774 716,209 112,711 250,301
----------- ----------- ------------- ----------- -----------
GROSS PROFIT.................................. 310,752 581,810 1,424,282 342,954 575,072
SELLING, GENERAL AND ADMINISTRATIVE........... 314,829 550,312 1,382,744 215,860 454,898
OTHER INCOME (EXPENSE):
Interest expense............................ -- -- -- -- (3,025)
Other income................................ -- 8,563 -- -- --
----------- ----------- ------------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES............. (4,077) 40,061 41,538 127,094 117,149
INCOME TAXES.................................. (612) 6,009 6,230 16,242 15,656
----------- ----------- ------------- ----------- -----------
NET INCOME (LOSS)............................. $ (3,465) $ 34,052 $ 35,308 $ 110,852 $ 101,493
----------- ----------- ------------- ----------- -----------
----------- ----------- ------------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-73
<PAGE>
INTEGRATED CONSULTING, INC. DBA I.CON INTERACTIVE
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------------- ADDITIONAL SUBSCRIPTION
NUMBER OF PAR PAID-IN RECEIVABLE RETAINED
SHARES VALUE CAPITAL FROM OFFICERS EARNINGS
------------ --------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995..................... 900,000 $ 9,000 $ -- $ -- $ 23,046
Net loss..................................... -- -- -- -- (3,465)
------------ --------- ----------- ------------- -----------
BALANCE, December 31, 1996..................... 900,000 9,000 -- -- 19,581
Net income................................... -- -- -- -- 34,052
------------ --------- ----------- ------------- -----------
BALANCE, December 31, 1997..................... 900,000 9,000 -- -- 53,633
Issuance of common stock..................... 100,000 1,000 14,000 (10,000) --
Net income................................... -- -- -- -- 35,308
------------ --------- ----------- ------------- -----------
BALANCE, December 31, 1998..................... 1,000,000 10,000 14,000 (10,000) 88,941
Net income (unaudited)....................... -- -- -- -- 101,493
------------ --------- ----------- ------------- -----------
BALANCE, March 31, 1999 (unaudited)............ 1,000,000 $ 10,000 $ 14,000 $ (10,000) $ 190,434
------------ --------- ----------- ------------- -----------
------------ --------- ----------- ------------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-74
<PAGE>
INTEGRATED CONSULTING, INC. DBA I.CON INTERACTIVE
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -------------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
--------- ----------- ------------ ----------- ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................ $ (3,465) $ 34,052 $ 35,308 $ 110,852 $ 101,493
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities-
Depreciation and amortization.............. 14,890 28,696 43,547 10,886 16,833
Equity related compensation................ -- -- 5,000 5,000 --
Deferred income taxes...................... (7,605) 966 1,787 523 1,490
Changes in assets and liabilities-
Accounts receivable...................... 9,597 (38,173) (169,356) (68,561) (167,774)
Prepaid expenses and other............... (1,093) (1,119) (315) (431) 5,949
Other assets............................. (6,222) -- (9,745) -- --
Accounts payable, including cash
overdraft.............................. 9,309 (2,464) 135,217 (4,114) (98,436)
Customer deposits........................ 63,711 19,453 (25,218) (55,041) (28,046)
Accrued liabilities...................... 18,454 62,111 33,632 17,999 139,447
--------- ----------- ------------ ----------- ------------
Net cash provided by (used in)
operating activities................. 97,576 103,522 49,857 17,113 (29,044)
--------- ----------- ------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures......................... (69,569) (81,745) (147,476) (10,519) (122,113)
--------- ----------- ------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayments on) notes
payable.................................... -- -- -- -- 97,889
Proceeds from long-term debt................. -- -- 64,021 -- 64,137
Payments on long-term debt................... -- -- -- -- (4,120)
--------- ----------- ------------ ----------- ------------
Net cash provided by financing
activities........................... -- -- 64,021 -- 157,906
--------- ----------- ------------ ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................. 28,007 21,777 (33,598) 6,594 6,749
CASH AND CASH EQUIVALENTS, beginning of
period....................................... (7,218) 20,789 42,566 42,566 8,968
--------- ----------- ------------ ----------- ------------
CASH AND CASH EQUIVALENTS, end of period....... $ 20,789 $ 42,566 $ 8,968 $ 49,160 $ 15,717
--------- ----------- ------------ ----------- ------------
--------- ----------- ------------ ----------- ------------
SUPPLEMENTAL INFORMATION:
Cash paid for income taxes................... $ 7,500 $ 6,500 $ 3,800 $ -- $ --
--------- ----------- ------------ ----------- ------------
--------- ----------- ------------ ----------- ------------
Cash paid for interest....................... $ -- $ -- $ -- $ -- $ 3,025
--------- ----------- ------------ ----------- ------------
--------- ----------- ------------ ----------- ------------
NON-CASH TRANSACTIONS:
Issuance of stock for notes receivable....... $ -- $ -- $ 10,000 $ 10,000 $ --
--------- ----------- ------------ ----------- ------------
--------- ----------- ------------ ----------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-75
<PAGE>
INTEGRATED CONSULTING, INC. DBA I.CON INTERACTIVE
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
Integrated Consulting, Inc. ("i.con") specializes in electronic marketing on
the Internet under the trade name "i.con interactive." i.con is a full service
Internet and multimedia development firm focusing on the corporate market
specializing in Internet, extranet, and intranet solutions, corporate
communications, marketing and sales tools, computer-based training, and on-line
marketing.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
i.con considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets. The
costs and related accumulated depreciation of property and equipment sold,
retired, or disposed of are removed from the accounts and any gains or losses
reflected in the statements of operations. Expenditures for major acquisitions
and improvements are capitalized while expenditures for maintenance and repairs
are expensed as incurred.
INCOME TAXES
Income taxes are accounted for using an asset and liability approach that
requires the recognition of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in i.con's financial statements or tax returns. The
measurement of current and deferred tax liabilities and assets are based on
provisions of the enacted tax law. The effects of future changes in tax laws or
rates are not anticipated.
REVENUE RECOGNITION
Revenues are recognized for time and materials-based arrangements as
services are performed and fixed fee arrangements on the
percentage-of-completion method. Under this approach, revenues are recognized as
the work is performed, based on the ratio of costs incurred to total estimated
costs. Customer deposits represent the amount of customer payments received in
advance of services being performed.
Revenues associated with hosting services are recognized when the services
are performed.
The Company earned a portion of its 1998 revenue under barter arrangements
with certain customers for website development and maintenance services in
exchange for advertising. The barter transactions are valued at the normal rates
per hour including a minimal discount provision in some instances and with
consideration of the costs of advertising and promotion that would have been
paid to the customers in an ordinary cash transaction. Advertising
F-76
<PAGE>
INTEGRATED CONSULTING, INC. DBA I.CON INTERACTIVE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
expense equal to the amount of barter revenue is recorded in selling, general
and administrative expense.
COST OF SERVICES
Cost of services are comprised primarily of salaries, employee benefits, and
incentive compensation of billable employees, and a proportionate share of
depreciation and facilities costs based on the ratio of billable employees to
total employees.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
i.con's financial instruments have carrying amounts which approximate fair
value due to the relatively short maturity of these instruments.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, ("SFAS No. 130"), "REPORTING
COMPREHENSIVE INCOME," which is required to be adopted in the period ended
December 31, 1998. SFAS No. 130 requires that an enterprise (a) classify items
of other comprehensive income by their nature in the financial statements, and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in-capital in the Statement of
Stockholders' Equity. The adoption of SFAS 130 did not have any effect on the
Company's financial statements as the Company does not have any elements of
comprehensive income other than net income.
3. SIGNIFICANT CUSTOMERS:
During the year ended December 31, 1996, sales to five customers accounted
for approximately 19%, 19%, 16%, 14%, and 14% of revenues. During the year ended
December 31, 1997, sales to two customers accounted for approximately 13% and
10% of revenues. During the year ended December 31, 1998, sales to one customer
accounted for approximately 12% of revenues.
As of December 31, 1997, accounts receivable from four customers accounted
for approximately 52%, 18%, 13%, and 12% of accounts receivable. As of December
31, 1998, accounts receivable from three customers accounted for approximately
12%, 10%, and 10% of accounts receivable.
F-77
<PAGE>
INTEGRATED CONSULTING, INC. DBA I.CON INTERACTIVE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT:
Property and equipment is comprised of the following as of December 31, 1997
and 1998:
<TABLE>
<CAPTION>
USEFUL
LIFE 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Computers and equipment.................................... 3-5 $ 145,520 $ 191,149
Furniture and fixtures..................................... 7 28,040 54,248
Autos...................................................... 5 -- 64,021
Leasehold improvements..................................... 7 -- 9,000
Other equipment............................................ 5-7 10,768 13,386
----------- -----------
184,328 331,804
Less--Accumulated depreciation............................. (48,875) (92,422)
----------- -----------
Property and equipment, net.............................. $ 135,453 $ 239,382
----------- -----------
----------- -----------
</TABLE>
Depreciation expense was $14,890, $28,696, and $43,547 for the periods ended
December 31, 1996, 1997, and 1998, respectively.
5. ACCRUED LIABILITIES:
Accrued liabilities is comprised of the following as of December 31, 1997
and 1998:
<TABLE>
<CAPTION>
1997 1998
--------- -----------
<S> <C> <C>
Sales tax payable.................................................... $ 15,134 $ 59,374
Franchise tax payable................................................ -- 1,097
Accrued compensation................................................. -- 57,062
Other................................................................ 71,106 2,339
--------- -----------
Total accrued liabilities.......................................... $ 86,240 $ 119,872
--------- -----------
--------- -----------
</TABLE>
6. DEBT:
Long-term debt is comprised of the following as of December 31, 1997 and
1998:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Note payable bearing interest at 10.05%, payable in monthly installments
of principal and interest of $1,138 with a balloon payment of $40,007,
maturing December 2001.................................................. $ -- $ 64,021
Less--Current maturities.................................................. -- (7,568)
--------- ---------
Long-term debt............................................................ $ -- $ 56,453
--------- ---------
--------- ---------
</TABLE>
F-78
<PAGE>
INTEGRATED CONSULTING, INC. DBA I.CON INTERACTIVE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. DEBT: (CONTINUED)
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- -----------------------------------------------------------------------------------
<S> <C>
1999............................................................................... $ 7,568
2000............................................................................... 8,357
2001............................................................................... 48,096
---------
$ 64,021
---------
---------
</TABLE>
7. INCOME TAXES:
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Current........................................................ $ 6,993 $ 5,043 $ 4,443
Deferred....................................................... (7,605) 966 1,787
--------- --------- ---------
Total current and deferred..................................... $ (612) $ 6,009 $ 6,230
--------- --------- ---------
--------- --------- ---------
</TABLE>
i.con's effective tax rate is equivalent to the statutory tax rate.
Significant components of i.con's deferred tax liabilities and assets as of
December 31, 1997 and 1998, are shown below:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax assets--
Accruals and reserves.................................................................... $ 11,609 $ 11,886
--------- ---------
Deferred tax liabilities--
Tax depreciation in excess of book value................................................. 4,970 7,034
--------- ---------
Net deferred tax assets.................................................................... $ 6,639 $ 4,852
--------- ---------
--------- ---------
</TABLE>
8. COMMITMENTS AND CONTINGENCIES:
i.con sponsors a 401(k) profit sharing plan that covers eligible employees.
Company discretionary contributions to the plan were $22,575, $31,747, and
$39,732 during 1996, 1997, and 1998, respectively.
On January 1, 1999, i.con amended the plan to provide for Company matching
of employee 401(k) contributions in the amount of 50% of employee contributions
up to 6% of an employee's salary. In addition, employees now participate in the
plan after six months of service and vest over a period of four years.
i.con leases its office facility under a noncancelable operating lease which
expires in January 2003. The lease requires the payment of property taxes,
insurance, and maintenance.
F-79
<PAGE>
INTEGRATED CONSULTING, INC. DBA I.CON INTERACTIVE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
i.con also has operating lease agreements related to certain equipment which
expire at various dates.
Future minimum lease payments under operating leases are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
-----------
<S> <C>
1999............................................................................. $ 180,180
2000............................................................................. 180,000
2001............................................................................. 186,000
2002............................................................................. 186,000
2003............................................................................. 7,000
Thereafter....................................................................... --
-----------
Total future minimum lease payments.............................................. $ 739,180
-----------
-----------
</TABLE>
Rent expense for the years ended December 1996, 1997, and 1998 totaled
$18,213, $87,234, and $121,669, respectively.
In the ordinary course of business, i.con may be subject to legal actions
and claims. Management does not believe litigation or claims will have a
material effect on financial position or results of operations.
9. EQUITY INCENTIVE PLAN:
In March 1998, an officer of i.con purchased 100,000 shares of common stock
for $10,000 cash or $.10 per share. At the time of the purchase, i.con
determined the fair market value of the stock to be $.15 per share. A
compensation charge of $5,000 was recorded in conjunction with the purchase of
the common stock.
10. RELATED-PARTY TRANSACTIONS:
At December 31, 1998, i.con had a $5,000 receivable included in prepaid
expenses and other, from one of its stockholders. This receivable bears no
interest and has no stated maturity.
11. AGREEMENT TO MERGE WITH LUMINANT WORLDWIDE CORPORATION:
i.con intends to enter into an agreement to be acquired by Luminant
Worldwide Corporation. This acquisition is subject to successful completion of
an initial public offering of the common stock of Luminant Worldwide
Corporation.
F-80
<PAGE>
INTEGRATED CONSULTING, INC. DBA I.CON INTERACTIVE
NOTES TO THE UNAUDITED MARCH 31, 1998 AND 1999 FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION:
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Rule10-01 of Regulation S-X.
Accordingly, they do not contain all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the accompanying unaudited financial statements
reflect all adjustments (consisting of only normal recurring adjustments)
considered necessary for a fair presentation of i.con's financial condition as
of March 31, 1999, the results of its operations, and its cash flows for the
three-month periods ended March 31, 1998 and 1999. These financial statements
should be read in conjunction with i.con's audited 1998 financial statements,
including the notes thereto. Operating results for the three-month period ended
March 31, 1999, are not necessarily indicative of the operating results that may
be expected for the year ending December 31, 1999.
B. DEBT:
NOTES PAYABLE
i.con has a bank line of credit with a maximum availability of $100,000,
upon which $97,889 was outstanding at March 31, 1999. Interest is at prime plus
1.75% (9.5% at March 31, 1999), and is payable monthly. The line of credit is
automatically renewable annually and is not restricted by any covenants, but is
guaranteed by certain stockholders.
LONG-TERM DEBT
Long-term debt is comprised of the following as of March 31, 1999:
<TABLE>
<CAPTION>
MARCH 31,
1999
-----------
<S> <C>
Note payable bearing interest at 10.05%, payable in monthly installments of
principal and interest of $1,138 with a balloon payment of $40,007, maturing
December 2001.................................................................. $ 62,194
Note payable bearing interest at 8.80%, payable in monthly installments of
principal and interest of $1,227 with a balloon payment of $34,322, maturing
January 2002................................................................... 61,844
-----------
124,038
Less--Current portion............................................................ (16,579)
-----------
Long-term debt................................................................... $ 107,459
-----------
-----------
</TABLE>
F-81
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To InterActive8, Inc.:
We have audited the accompanying balance sheets of InterActive8, Inc. (a New
York S corporation) as of December 31, 1997 and 1998, and the related statements
of operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of InterActive8, Inc. as of
December 31, 1997 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
May 14, 1999
F-82
<PAGE>
INTERACTIVE8, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1997 1998 1999
----------- ------------- ----------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................ $ 90,321 $ 129,573 $ 461,836
Accounts receivable, net of allowance for doubtful accounts of
$30,000, $80,000, and $80,000 (unaudited)...................... 403,949 724,963 531,974
State and local tax receivables.................................. 23,000 110,300 110,300
Prepaid expenses and other....................................... 15,296 88,315 62,153
----------- ------------- ----------------
Total current assets........................................... 532,566 1,053,151 1,166,263
PROPERTY AND EQUIPMENT, net........................................ 252,710 314,533 596,600
OTHER ASSETS:
Deposits and other............................................... 8,072 71,806 71,851
----------- ------------- ----------------
Total assets................................................... $ 793,348 $ 1,439,490 $ 1,834,714
----------- ------------- ----------------
----------- ------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................. $ 91,122 $ 183,698 $ 274,005
Accrued liabilities.............................................. 567,011 500,970 2,763,218
Customer deposits................................................ -- 45,130 --
Notes payable.................................................... -- 232,505 49,739
Current maturities of long-term debt............................. 164,080 700,709 616,439
----------- ------------- ----------------
Total current liabilities...................................... 822,213 1,663,012 3,703,401
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities........................ 13,968 22,599 330,371
----------- ------------- ----------------
Total liabilities.............................................. 836,181 1,685,611 4,033,772
----------- ------------- ----------------
COMMITMENT AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, voting: $0.001 par value, 2,000,000 shares
authorized, 641,567, 962,350 and 962,350 (unaudited) shares
issued and outstanding as of 1997, 1998 and 1999............... 642 962 962
Additional paid-in capital....................................... 358 185,038 185,038
Retained deficit................................................. (43,833) (432,121) (2,385,058)
----------- ------------- ----------------
Total stockholders' equity..................................... (42,833) (246,121) (2,199,058)
----------- ------------- ----------------
Total liabilities and stockholders' equity..................... $ 793,348 $ 1,439,490 $ 1,834,714
----------- ------------- ----------------
----------- ------------- ----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-83
<PAGE>
INTERACTIVE8, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------- -----------------------------
1996 1997 1998 1998 1999
------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
REVENUES............................ $ 1,713,303 $ 2,817,894 $ 4,097,448 $ 736,854 $ 1,613,124
COST OF SERVICES.................... 1,056,158 1,633,538 2,033,451 433,256 3,102,053
------------- ------------- ------------- ------------- --------------
GROSS PROFIT........................ 657,145 1,184,356 2,063,997 303,598 (1,488,929)
SELLING, GENERAL AND
ADMINISTRATIVE.................... 460,300 1,381,853 2,418,844 690,044 464,008
------------- ------------- ------------- ------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES... 196,845 (197,497) (354,847) (386,446) (1,952,937)
STATE AND LOCAL INCOME TAXES........ 18,063 43,900 33,441 -- --
------------- ------------- ------------- ------------- --------------
NET INCOME (LOSS)................... $ 178,782 $ (241,397) $ (388,288) $ (386,446) $ (1,952,937)
------------- ------------- ------------- ------------- --------------
------------- ------------- ------------- ------------- --------------
PRO FORMA INCOME TAXES
(UNAUDITED)....................... 52,975 (52,975) -- -- --
------------- ------------- ------------- ------------- --------------
PRO FORMA NET INCOME (LOSS)
(UNAUDITED)....................... $ 125,807 $ (188,422) $ (388,288) $ (386,446) $ (1,952,937)
------------- ------------- ------------- ------------- --------------
------------- ------------- ------------- ------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-84
<PAGE>
INTERACTIVE8, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
---------------------- PAID-IN EARNINGS
NUMBER AMOUNT CAPITAL (DEFICIT)
--------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995................................... 641,567 $ 642 $ 358 $ 18,782
Net income................................................. -- -- -- 178,782
--------- ----- ----------- ---------------
BALANCE, December 31, 1996................................... 641,567 642 358 197,564
Net loss................................................... -- -- -- (241,397)
--------- ----- ----------- ---------------
BALANCE, December 31, 1997................................... 641,567 642 358 (43,833)
Net loss................................................... -- -- -- (388,288)
Issuance of Common Stock................................... 320,783 320 184,680 --
--------- ----- ----------- ---------------
BALANCE, December 31, 1998................................... 962,350 962 185,038 (432,121)
Net loss (unaudited)....................................... -- -- -- (1,952,937)
--------- ----- ----------- ---------------
BALANCE, March 31, 1999 (unaudited).......................... 962,350 $ 962 $ 185,038 $ (2,385,058)
--------- ----- ----------- ---------------
--------- ----- ----------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-85
<PAGE>
INTERACTIVE8, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- ----------------------------
1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................. $ 178,782 $ (241,397) $ (388,288) $ (386,446) $ (1,952,937)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities-
Depreciation and amortization................ 59,598 125,765 178,001 39,278 74,705
Equity related compensation.................. -- -- 135,000 135,000 2,205,000
Changes in assets and liabilities-
Accounts receivable........................ 12,998 (293,714) (321,014) (40,860) 192,989
State and local tax receivable............. (23,000) -- (87,300) -- --
Prepaid expenses and other................. (47,025) 31,729 (73,019) (1,803) 26,162
Deposits and other......................... (9,413) 1,341 (63,734) -- (45)
Accounts payable........................... (1,846) 24,625 92,576 (45,216) 90,307
Accrued liabilities........................ (35,581) 551,979 (66,041) 8,834 57,248
Customer deposits.......................... -- -- 45,130 -- (45,130)
------------ ------------ ------------ ------------ --------------
Net cash provided by (used in) operating
activities............................... 134,513 200,328 (548,689) (291,213) 648,299
------------ ------------ ------------ ------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................... (233,722) (70,620) (150,875) (6,388) (278,079)
------------ ------------ ------------ ------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable.................... -- -- 232,505 -- 95,126
Proceeds from long-term debt................... 64,392 (37,246) 514,471 243,064 --
Payments on long-term debt..................... (16,570) (32,176) (58,160) (10,306) (133,083)
Proceeds from issuance of common stock......... -- -- 50,000 50,000 --
------------ ------------ ------------ ------------ --------------
Net cash provided by (used in) financing
activities............................... 47,822 (69,422) 738,816 282,758 (37,957)
------------ ------------ ------------ ------------ --------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... (51,387) 60,286 39,252 (14,843) 332,263
CASH AND CASH EQUIVALENTS,
beginning of period............................ 81,422 30,035 90,321 90,321 129,573
------------ ------------ ------------ ------------ --------------
CASH AND CASH EQUIVALENTS,
end of period.................................. $ 30,035 $ 90,321 $ 129,573 75,478 461,836
------------ ------------ ------------ ------------ --------------
------------ ------------ ------------ ------------ --------------
SUPPLEMENTAL INFORMATION:
Cash paid for state and local income taxes..... $ 40,796 $ 44,225 $ 120,741 $ -- $ --
------------ ------------ ------------ ------------ --------------
------------ ------------ ------------ ------------ --------------
Cash paid for interest......................... $ 2,392 $ 4,112 $ 7,457 $ -- $ 2,815
------------ ------------ ------------ ------------ --------------
------------ ------------ ------------ ------------ --------------
NONCASH TRANSACTIONS:
Capital expenditures financed with long-term
debt......................................... $ 39,768 $ 63,838 $ 88,949 $ -- $ 78,693
------------ ------------ ------------ ------------ --------------
------------ ------------ ------------ ------------ --------------
Noncash ownership donation..................... $ -- $ -- $ 135,000 $ -- $ --
------------ ------------ ------------ ------------ --------------
------------ ------------ ------------ ------------ --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-86
<PAGE>
INTERACTIVE8, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
InterActive8, Inc. (the "Company") was formed in 1994 for the purpose of
developing and maintaining Internet websites. The Company is a full-service
interactive marketing agency providing strategy, creative, technical, and media
services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets. The
costs and related accumulated depreciation of property and equipment sold,
retired or disposed of are removed from the accounts and any gains or losses
reflected in the statements of operations. Expenditures for major acquisitions
and improvements are capitalized while expenditures for maintenance and repairs
are expensed as incurred.
INCOME TAXES
As a S corporation, the Company pays no federal income tax, but rather the
stockholders are taxed individually on the Company's taxable income or loss.
Accordingly, no provisions for federal income taxes are reflected in the
accompanying financial statements. Provision has been made for state and local
income taxes.
The unaudited pro forma tax information included in the accompanying
statements of operations reflect estimates of the Company's tax provision or
benefit as if it had been a C corporation in fiscal years 1996, 1997, and 1998.
In accordance with SFAS No. 109, "Accounting for Income Taxes," no pro forma
benefit was reflected in 1998 due to the Company's losses and the uncertainty
related to the realization of any tax assets.
REVENUE RECOGNITION
Revenues are recognized for time and materials-based arrangements as
services are performed and fixed fee arrangements on the
percentage-of-completion method. Under this approach, revenues and gross profit
are recognized as the work is performed, based on the ratio of costs incurred to
total estimated costs. Provisions for estimated losses on uncompleted contracts
are made in the period in which such losses are determined. Customer deposits
represent the amount of customer payments received in advance of services being
performed.
COST OF SERVICES
Cost of services is comprised primarily of salaries, employee benefits and
incentive compensation of billable employees and a proportionate share of
depreciation and facilities costs based on the ratio of billable employees to
total employees.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported
F-87
<PAGE>
INTERACTIVE8, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments have carrying amounts which approximate
fair value due to their relative short maturity and/or their variable interest
rates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, ("SFAS No. 130"), "REPORTING
COMPREHENSIVE INCOME," which is required to be adopted in the period ended
December 31, 1998. SFAS No. 130 requires that an enterprise (a) classify items
of other comprehensive income by their nature in the financial statements, and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in-capital in the Statement of
Stockholders' Equity. The adoption of SFAS 130 did not have any effect on the
Company's financial statements as the Company does not have any elements of
comprehensive income other than net income.
3. SIGNIFICANT CUSTOMERS:
During the year ended December 31, 1996, sales to three customers accounted
for 26%, 16%, and 12% of revenue. During the year ended December 31, 1997, sales
to three customers accounted for 31%, 21%, and 14% of revenue. During the year
ended December 31, 1998, sales to two customers accounted for 35% and 10% of
revenue. At December 31, 1998, four customers accounted for 43%, 11%, 11%, and
11% of accounts receivable.
4. PROPERTY AND EQUIPMENT:
Property and equipment is comprised of the following as of December 31, 1997
and 1998:
<TABLE>
<CAPTION>
USEFUL
LIFE 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Computers and equipment.................................... 3-7 $ 326,930 $ 494,049
Leasehold improvements..................................... 10 140,455 213,160
----------- -----------
467,385 707,209
Less--Accumulated depreciation............................. (214,675) (392,676)
----------- -----------
Property and equipment, net.............................. $ 252,710 $ 314,533
----------- -----------
----------- -----------
</TABLE>
Depreciation and amortization expense was $59,599, $135,499, and $178,001
for the years ended December 31, 1996, 1997, and 1998, respectively.
F-88
<PAGE>
INTERACTIVE8, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. ACCRUED LIABILITIES:
Accrued liabilities is comprised of the following as of December 31, 1997
and 1998:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Accrued payroll..................................................... $ 37,679 $ --
Accrued payroll taxes............................................... 15,658 1,414
Consulting agreement................................................ 478,442 414,650
Accrued bonuses..................................................... 2,025 --
Accrued vacation.................................................... 15,825 29,906
Accrued professional fees........................................... 15,751 --
Accrued interest.................................................... -- 55,000
Other............................................................... 1,631 --
----------- -----------
Accrued liabilities............................................... $ 567,011 $ 500,970
----------- -----------
----------- -----------
</TABLE>
6. DEBT:
NOTES PAYABLE
As of December 31, 1998, the Company has available a $250,000 revolving line
of credit (of which $232,505 has been drawn) with a bank. The agreement provides
for interest at a rate of prime plus 1% (8.75% at December 31, 1998). The line
of credit is secured by certain defined assets of the stockholders, including
all personal property and fixtures, and matures during November 1999. In the
event that the line of credit is not renewed, it converts at maturity into an
installment note with a two-year maturity.
At December 31, 1998, the Company negotiated for a term loan of $300,000 to
help finance construction. The term loan has a fixed rate of 8% per annum. There
were no borrowings against this loan as of December 31, 1998. The term loan will
be repayable in 48 monthly installments commencing January 30, 2000. The term
loan is secured by certain defined assets of the stockholders, including all
personal property and fixtures.
LOANS PAYABLE TO STOCKHOLDERS
Loans payable to stockholders are demand obligations and bear interest at 8%
per annum.
Long-term debt is comprised of the following at December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Loans payable to stockholders....................................... $ 123,188 $ 637,659
Equipment financing, non-interest bearing payable in monthly
installments ranging from $175 to $1,695, maturing March 1999
through March 2001, secured by certain equipment.................. 54,860 85,649
----------- -----------
178,048 723,308
Less--Current maturities............................................ (164,080) (700,709)
----------- -----------
$ 13,968 $ 22,599
----------- -----------
----------- -----------
</TABLE>
F-89
<PAGE>
INTERACTIVE8, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. DEBT: (CONTINUED)
Maturities of long-term debt are as follows:
<TABLE>
<S> <C> <C>
1999.................................................. $ 700,709
2000.................................................. 22,599
---------
$ 723,308
---------
</TABLE>
7. COMMITMENTS AND CONTINGENCIES:
The Company adopted a 401(k) plan during 1997. The Company matches employees
contributions up to 2%. During 1998, the Company contributed $23,287. No
contributions were made during 1997.
At December 31, 1998, the Company had entered into a noncancelable operating
lease, expiring October 2008, to lease new office facilities. The leases require
the payment of property taxes, insurance, and maintenance.
Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
-------------
<S> <C>
1999........................................................................... $ 184,000
2000........................................................................... 252,000
2001........................................................................... 231,000
2002........................................................................... 252,000
2003........................................................................... 232,500
Thereafter..................................................................... 1,428,750
-------------
Total future minimum lease payments........................................ $ 2,580,250
-------------
-------------
</TABLE>
Rent expense for the years ended December 1996, 1997, and 1998 totaled
$47,274, $39,132, and $49,007, respectively.
In the ordinary course of business, the Company may be subject to legal
actions and claims. Management does not believe litigation or claims will have a
material effect on its financial condition or results of operations.
8. EQUITY INCENTIVE PLANS:
Effective July 1, 1998, the Company approved the 1998 Nonqualified Stock
Option Plan (the "1998 Plan"), authorizing the Board of Directors to grant
nonqualified options to purchase common stock of the Company. The total number
of shares of common stock which may be issued under the 1998 Plan is 237,650.
Under the terms of the 1998 Plan, the Company can offer certain
non-stockholder employees the right to share in the Company's value in the event
the Company goes public or is sold to a third party. These are effectively,
appreciation rights (the "Rights") that do not represent ownership or voting
interests in the Company. Employees, officers, and directors become eligible to
receive Rights six months after the commencement of their employment with the
Company. Rights vest 50% after six months from the grant date and a further 50%
after twelve months from the grant date. Upon a defined event, such as an
initial public offering of stock or a
F-90
<PAGE>
INTERACTIVE8, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. EQUITY INCENTIVE PLANS: (CONTINUED)
sale of the Company, Rights will be converted into a new combination of cash
and/or stock dependent upon the structure of the defined event. Prior to such an
event, the holders of the Rights cannot exercise the appreciation right. The
Rights are nontransferable, and will be forfeited immediately upon an employee's
departure from the Company prior to any defined event.
No Rights were issued prior to 1998. Rights outstanding during 1998, were as
follows:
<TABLE>
<CAPTION>
GRANT NUMBER OF
PRICE RIGHTS
--------- -----------
<S> <C> <C>
Rights outstanding at December 31, 1997................................. --
Granted............................................................... $ 2.50 94,500
Exercised............................................................. --
Canceled.............................................................. --
-----------
Rights outstanding at December 31, 1998................................. 94,500
-----------
-----------
</TABLE>
The Rights are considered compensatory equity instruments. As the Rights
will be exercisable only upon the occurrence of a defined event, compensation
expense is deferred under fixed plan accounting. The date the event is first
considered likely to occur, a compensation charge for the cumulative
appreciation in the Rights should be recognized. The Company believes that the
condition for recognition has been met but has not recognized a charge during
1998 as the fair market value of the Company stock as determined by capital
transactions in 1998 at year-end was less than the grant price.
In February 1998, the Company issued 320,783 shares of common stock to a new
stockholder, for cash consideration of $50,000. The Company estimated the fair
value of this stock at the date of the transaction and recorded compensation
expense of $135,000 for the excess of the fair value over the consideration
received, with a corresponding increase to additional paid-in capital.
9. RELATED-PARTY TRANSACTIONS:
The Company has a consulting agreement with a former stockholder that
provides for monthly payments of $7,000 commencing July 1, 1997, and ending June
30, 2005.
10. AGREEMENT TO MERGE WITH LUMINANT:
The Company intends to enter into an agreement to be acquired by Luminant.
This acquisition is subject to successful completion of an initial public
offering of the common stock of Luminant.
F-91
<PAGE>
INTERACTIVE8, INC.
NOTES TO THE UNAUDITED MARCH 31, 1998 AND 1999 FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION:
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Rule 10-01 of Regulation S-X. Accordingly,
they do not contain all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, the accompanying unaudited financial statements reflect all
adjustments (consisting of only normal recurring adjustments) considered
necessary for a fair presentation of the Company's financial condition as of
March 31, 1999, the results of its operations and its cash flows for the three
month periods ended March 31, 1998 and 1999. These financial statements should
be read in conjunction with the Company's audited 1998 financial statements,
including the notes thereto. Operating results for the three month period ended
March 31, 1999 are not necessarily indicative of the operating results that may
be expected for the year ending December 31, 1999. The following discussions may
contain forward-looking statements, which are subject to the risk factors set
forth in "Risk Factors" contained in Item 2.
B. ACCRUED LIABILITIES:
Accrued liabilities is comprised of the following as of March 31, 1999:
<TABLE>
<CAPTION>
MARCH 31,
1999
-------------
<S> <C>
Accrued payroll................................................................ $ 41,755
Accrued payroll taxes.......................................................... 5,256
Consulting agreement........................................................... 398,702
Accrued participation rights................................................... 2,205,000
Accrued vacation............................................................... 42,089
Accrued interest............................................................... 68,750
Other.......................................................................... 1,666
-------------
Accrued liabilities.......................................................... $ 2,763,218
-------------
-------------
</TABLE>
C. DEBT:
The Company has a term loan of $300,000 which bears interest at a fixed rate
of 8% per annum payable monthly. Borrowing against this loan was $277,892 at
March 31, 1999. The loan will be repayable in 48 monthly installments commencing
January 2000. The loan is secured by certain defined assets of the stockholders,
including all personal property and fixtures.
D. EQUITY INCENTIVE PLANS:
Effective July 1, 1998, the Company approved the 1998 Nonqualified Stock
Option Plan (the "1998 Plan"), authorizing the Board of Directors to grant
nonqualified options to purchase common stock of the Company. The total number
of shares of common stock that may be issued under the 1998 Plan is 237,650.
Under the terms of the 1998 Plan, the Company can offer certain
non-stockholder employees the right to share in the Company's value in the event
the Company goes public or is
F-92
<PAGE>
INTERACTIVE8, INC.
NOTES TO THE UNAUDITED MARCH 31, 1998 AND 1999 FINANCIAL STATEMENTS (CONTINUED)
D. EQUITY INCENTIVE PLANS: (CONTINUED)
sold to a third party. These are effectively, appreciation rights (the "Rights")
that do not represent ownership or voting interests in the Company. Employees,
officers, and directors become eligible to receive Rights grants six months
after the commencement of their employment with the Company. Rights vest 50%
after six months from the grant date and a further 50% after twelve months from
the grant date. Upon a defined event, such as an initial public offering of
stock or a sale of the Company, these rights will be converted into a new
combination of cash and/or stock dependent upon the structure of the defined
event. Prior to such an event, the holders of the Rights cannot exercise the
appreciation right. The Rights are nontransferable, and will be forfeited
immediately upon an employee's departure from the Company prior to any defined
event.
Rights outstanding at March 31, 1999, were as follows:
<TABLE>
<CAPTION>
GRANT NUMBER OF
PRICE RIGHTS
--------- -----------
<S> <C> <C>
Rights outstanding at December 31, 1998................................. 94,500
Granted............................................................... $ 7.00 6,550
Exercised............................................................. --
Canceled.............................................................. --
-----------
Rights outstanding at March 31, 1999.................................... 101,050
-----------
-----------
</TABLE>
The Rights are considered compensatory equity instruments. As the Rights
will be exercisable only upon the occurrence of a defined event, compensation
expense is deferred under fixed plan accounting. The date the event is first
considered likely to occur, a compensation charge for the cumulative
appreciation in the Rights should be recognized. The Company believes that the
condition for recognition has been met and has recognized a $2,205,000 cost of
services charge during the three months ended March 31, 1999, for the cumulative
appreciation in the Rights. Compensation expense recognized during the three
months ended March 31, 1999, is equal to the difference between the estimated
fair market value of the Company stock at March 31, 1999, and the exercise
price. The estimated fair market value is based on the per share value to be
received from the Luminant transaction.
F-93
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Multimedia Resources, LLC:
We have audited the accompanying balance sheets of Multimedia Resources, LLC
(a New York limited liability company) as of December 31, 1997 and 1998, and the
related statements of operations, members' equity, and cash flows for each of
the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Multimedia Resources, LLC as
of December 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
April 30, 1999
F-94
<PAGE>
MULTIMEDIA RESOURCES, LLC
(A LIMITED LIABILITY COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................... $ 100,824 $ 120,903 $ 343,926
Accounts receivable..................................................... 581,346 125,998 369,434
Unbilled revenues....................................................... 21,450 22,502 --
Prepaid expenses and other.............................................. 16,293 5,044 13,710
----------- ----------- ------------
Total current assets.................................................. 719,913 274,447 727,070
PROPERTY AND EQUIPMENT, net............................................... 72,206 58,886 54,512
OTHER ASSETS.............................................................. 12,315 13,045 13,045
----------- ----------- ------------
Total assets.......................................................... $ 804,434 $ 346,378 $ 794,627
----------- ----------- ------------
----------- ----------- ------------
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................ $ 118,652 $ 17,136 $ 96,127
Accrued liabilities..................................................... 231,021 155,202 150,344
Customer deposits....................................................... -- -- 87,500
----------- ----------- ------------
Total liabilities......................................................... 349,673 172,338 333,971
COMMITMENTS AND CONTINGENCIES
MEMBERS' EQUITY........................................................... 454,761 174,040 460,656
----------- ----------- ------------
Total liabilities and members' equity................................. $ 804,434 $ 346,378 $ 794,627
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-95
<PAGE>
MULTIMEDIA RESOURCES, LLC
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------- ------------------------
1996 1997 1998 1998 1999
------------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
REVENUES................................. $ 1,928,189 $ 3,476,221 $ 2,068,255 $ 652,099 $ 742,253
COST OF SERVICES......................... 985,282 2,437,132 1,755,896 439,372 314,397
------------- ------------- ------------- ----------- -----------
GROSS PROFIT............................. 942,907 1,039,089 312,359 212,727 427,856
SELLING, GENERAL AND ADMINISTRATIVE...... 420,406 536,503 275,199 81,386 91,950
INTEREST INCOME.......................... 737 4,576 6,319 3,888 810
------------- ------------- ------------- ----------- -----------
NET INCOME............................... $ 523,238 $ 507,162 $ 43,479 $ 135,229 $ 336,716
------------- ------------- ------------- ----------- -----------
------------- ------------- ------------- ----------- -----------
PRO FORMA INCOME TAX (UNAUDITED)......... 209,295 202,865 9,847 30,629 134,686
------------- ------------- ------------- ----------- -----------
PRO FORMA NET INCOME (UNAUDITED)......... $ 313,943 $ 304,297 $ 33,632 $ 104,600 $ 202,030
------------- ------------- ------------- ----------- -----------
------------- ------------- ------------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-96
<PAGE>
MULTIMEDIA RESOURCES, LLC
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF MEMBERS' EQUITY
<TABLE>
<S> <C>
BALANCE, December 31, 1995....................................................... $ 125,626
Distributions to members....................................................... (201,265)
Net income..................................................................... 523,238
---------
BALANCE, December 31, 1996....................................................... 447,599
Distributions to members....................................................... (500,000)
Net income..................................................................... 507,162
---------
BALANCE, December 31, 1997....................................................... 454,761
Distributions to members....................................................... (324,200)
Net income..................................................................... 43,479
---------
BALANCE, December 31, 1998....................................................... 174,040
Distributions to members (unaudited)........................................... (50,100)
Net income (unaudited)......................................................... 336,716
---------
BALANCE, March 31, 1999 (unaudited).............................................. $ 460,656
---------
---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-97
<PAGE>
MULTIMEDIA RESOURCES, LLC
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ ------------------------
1996 1997 1998 1998 1999
----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 523,238 $ 507,162 $ 43,479 $ 135,229 $ 336,716
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation.............................. 4,939 10,521 17,496 4,256 4,374
Changes in assets and liabilities-
Accounts receivable..................... (516,353) (11,784) 455,348 330,158 (243,436)
Unbilled revenues....................... -- 2,118 (1,052) 21,450 22,502
Prepaid expenses and other.............. (2,720) (13,573) 11,249 13,583 (8,666)
Other assets............................ (5,045) (6,875) (730) -- --
Accounts payable........................ 131,311 (12,659) (101,516) 3,520 78,991
Accrued liabilities..................... 62,882 167,477 (75,819) (104,399) (4,858)
Customer deposits....................... -- -- -- -- 87,500
----------- ----------- ---------- ----------- -----------
Net cash provided by operating
activities............................ 198,252 642,387 348,455 403,797 273,123
----------- ----------- ---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................... (13,212) (68,732) (4,176) -- --
----------- ----------- ---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to members...................... (201,265) (500,000) (324,200) (30,000) (50,100)
----------- ----------- ---------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................... (16,225) 73,655 20,079 373,797 223,023
CASH AND CASH EQUIVALENTS,
beginning of period........................... 43,394 27,169 100,824 100,824 120,903
----------- ----------- ---------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period........ $ 27,169 $ 100,824 $ 120,903 $ 474,621 $ 343,926
----------- ----------- ---------- ----------- -----------
----------- ----------- ---------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-98
<PAGE>
MULTIMEDIA RESOURCES, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
Multimedia Resources, LLC (the "Company"), a New York limited liability
company, was organized effective March 31, 1995. Using the Internet as its
primary platform, the company specializes in business development, relationship
building, development and implementation of marketing and media programs, and
technology innovation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using a
straight-line method over the estimated useful lives of the assets. The costs
and related accumulated depreciation of property and equipment sold, retired, or
disposed of are removed from the accounts and any gains or losses reflected in
the statements of operations. Expenditures for major acquisitions and
improvements are capitalized while expenditures for maintenance and repairs are
expensed as incurred.
INCOME TAXES
As a limited liability company, the Company pays no federal income tax, but
rather its members are taxed individually on the Company's taxable income or
loss. Accordingly, no provisions for federal income taxes are reflected in the
accompanying financial statements.
The unaudited pro forma tax information included in the accompanying
statements of operations reflect estimates of the Company's tax provision or
benefit as if it had been a C corporation in fiscal years 1996, 1997, and 1998.
REVENUE RECOGNITION
Revenues are recognized for time and materials-based arrangements as
services are performed and fixed fee arrangements on the
percentage-of-completion method. Under this approach, revenues and gross profit
are recognized as the work is performed, based on the ratio of costs incurred to
total estimated costs. Unbilled revenues on contracts are comprised of labor
costs incurred, plus earnings on certain contracts which have not been billed.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined.
COST OF SERVICES
Cost of services is comprised primarily of salaries, employee benefits, and
incentive compensation of billable employees and a proportionate share of
depreciation and facilities costs based on the ratio of billable employees to
total employees.
F-99
<PAGE>
MULTIMEDIA RESOURCES, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments have carrying amounts that approximate
fair value due to their relative short maturity and/or their variable interest
rates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, ("SFAS No. 130"), "REPORTING
COMPREHENSIVE INCOME," which is required to be adopted in the period ended
December 31, 1998. SFAS No. 130 requires that an enterprise (a) classify items
of other comprehensive income by their nature in the financial statements, and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in-capital in the Statement of
Stockholders' Equity. The adoption of SFAS 130 did not have any effect on the
Company's financial statements as the Company does not have any elements of
comprehensive income other than net income.
3. SIGNIFICANT CUSTOMERS:
During the year ended December 31, 1996, sales to one customer accounted for
52% of revenue. During the year ended December 31, 1997, sales to two customers
accounted for 77% of revenue. During the year ended December 31, 1998, sales to
one customer accounted for 34% of revenue.
4. PROPERTY AND EQUIPMENT:
Property and equipment is comprised of the following as of December 31, 1997
and 1998:
<TABLE>
<CAPTION>
USEFUL
LIFE 1997 1998
--------- ---------- ----------
<S> <C> <C> <C>
Computers and equipment....................................................... 3-5 $ 47,930 $ 52,106
Furniture and fixtures........................................................ 5-7 41,301 41,301
---------- ----------
89,231 93,407
Less--Accumulated depreciation................................................ (17,025) (34,521)
---------- ----------
Property and equipment, net................................................. $ 72,206 $ 58,886
---------- ----------
---------- ----------
</TABLE>
Depreciation expense was $4,939, $10,521, and $17,496 for the years ended
December 31, 1996, 1997, and 1998, respectively.
F-100
<PAGE>
MULTIMEDIA RESOURCES, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. ACCRUED LIABILITIES:
Accrued liabilities is comprised of the following as of December 31, 1997
and 1998:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Profit sharing plan contribution........................................................ $ 116,010 $ 150,344
Accrued bonuses......................................................................... 104,400 --
Other................................................................................... 10,611 4,858
----------- -----------
Accrued liabilities................................................................... $ 231,021 $ 155,202
----------- -----------
----------- -----------
</TABLE>
6. COMMITMENTS AND CONTINGENCIES:
The Company sponsors a profit sharing and money purchase plan that covers
employees who are at least 21 years old and have at least one year of service
with the Company. Contributions to the profit sharing plan are at the discretion
of the Company. The Company contributes 4.8% of employees' compensation to the
money purchase plan. Contributions to the plans were $63,744, $116,010, and
$150,344 during 1996, 1997, and 1998, respectively.
The Company leases its office facilities under noncancelable operating
leases which expire in January 2002. The leases require the payment of property
taxes, insurance, and maintenance. The Company also has operating lease
agreements related to certain equipment which expire at various dates. Rent
expense for the years ended December 1996, 1997, and 1998, totaled $2,945,
$54,939, and $77,468, respectively. Future minimum lease payments are as
follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
-----------
<S> <C>
1999............................................................................. $ 78,401
2000............................................................................. 82,242
2001............................................................................. 85,538
2002............................................................................. 7,203
2003............................................................................. --
Thereafter....................................................................... --
-----------
Total future minimum lease payments.............................................. $ 253,384
-----------
-----------
</TABLE>
In the ordinary course of business, the Company may be subject to legal
actions and claims. Management does not believe litigation or claims will have a
material effect on its financial condition or results of operations.
7. AGREEMENT TO MERGE WITH LUMINANT:
The Company intends to enter into an agreement to be acquired by Luminant.
This acquisition is subject to successful completion of an initial public
offering of the common stock of Luminant.
F-101
<PAGE>
MULTIMEDIA RESOURCES, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO THE UNAUDITED MARCH 31, 1998 AND 1999 FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION:
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to and Rule 10-01 of Regulation S-X.
Accordingly, they do not contain all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the accompanying unaudited financial statements
reflect all adjustments (consisting of only normal recurring adjustments)
considered necessary for a fair presentation of the Company's financial
condition as of March 31, 1999, the results of its operations and its cash flows
for the three-month periods ended March 31, 1998 and 1999. These financial
statements should be read in conjunction with the Company's audited 1998
financial statements, including the notes thereto. Operating results for the
three-month period ended March 31, 1999, are not necessarily indicative of the
operating results that may be expected for the year ending December 31, 1999.
F-102
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Potomac Partners Management Consulting, LLC:
We have audited the accompanying balance sheets of Potomac Partners
Management Consulting, LLC (a Delaware limited liability company) as of December
31, 1997 and 1998, and the related statements of operations, members' equity,
and cash flows for the period from inception (November 10, 1997), to December
31, 1997, and for the year ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Potomac Partners Management
Consulting, LLC as of December 31, 1997 and 1998, and the results of its
operations and its cash flows for the period from inception (November 10, 1997),
to December 31, 1997, and for the year ended December 31, 1998, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
May 5, 1999
F-103
<PAGE>
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC
(A LIMITED LIABILITY COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1997 1998 1999
----------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................... $ 164,503 $ 892,336 $ 970,794
Accounts receivable, net of allowance for doubtful accounts of
$37,400, $132,400, and $225,880 (unaudited)....................... 51,437 683,797 878,979
Unbilled revenues................................................... 185,300 420,353 170,777
Prepaid expenses and other.......................................... 934 24,015 66,530
----------- ------------- -------------
Total current assets.............................................. 402,174 2,020,501 2,087,080
PROPERTY AND EQUIPMENT, net........................................... 24,523 51,288 45,928
----------- ------------- -------------
Total assets...................................................... $ 426,697 $ 2,071,789 $ 2,133,008
----------- ------------- -------------
----------- ------------- -------------
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................... $ -- $ 175,170 $ 322,794
Accrued liabilities................................................. 129,699 2,142,854 6,945,587
----------- ------------- -------------
Total liabilities................................................. 129,699 2,318,024 7,268,381
COMMITMENTS AND CONTINGENCIES
MEMBERS' EQUITY....................................................... 296,998 (246,235) (5,135,373)
----------- ------------- -------------
Total liabilities and members' equity............................. $ 426,697 $ 2,071,789 $ 2,133,008
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-104
<PAGE>
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION FOR THE
(NOVEMBER 10, 1997) FOR THE THREE MONTHS ENDED
TO YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, ---------------------------
1997 1998 1998 1999
-------------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
(UNAUDITED)
REVENUES...................................... $ 372,600 $ 4,886,543 $ 975,950 $ 2,059,514
COST OF SERVICES.............................. 290,360 5,086,176 653,628 6,230,720
---------- -------------- ----------- --------------
GROSS PROFIT.................................. 82,240 (199,633) 322,322 (4,171,206)
SELLING, GENERAL AND ADMINISTRATIVE........... 86,239 876,226 180,086 489,038
OTHER INCOME (EXPENSE)........................ 997 30,618 1,743 (10,033)
---------- -------------- ----------- --------------
NET INCOME (LOSS)............................. $ (3,002) $ (1,045,241) $ 143,979 $ (4,670,277)
---------- -------------- ----------- --------------
---------- -------------- ----------- --------------
PRO FORMA INCOME TAX (UNAUDITED).............. -- -- -- --
---------- -------------- ----------- --------------
PRO FORMA NET INCOME (LOSS) (UNAUDITED)....... $ (3,002) $ (1,045,241) $ 143,979 $ (4,670,277)
---------- -------------- ----------- --------------
---------- -------------- ----------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-105
<PAGE>
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF MEMBERS' EQUITY
<TABLE>
<S> <C>
BALANCE, November 10, 1997 (inception)......................................... $ --
Capital contributions-
Issuance of member units at stated value................................... 600,000
Members' notes in lieu of cash contributions............................... (300,000)
-----------
Net capital contributions................................................ 300,000
Net loss..................................................................... (3,002)
-----------
BALANCE, December 31, 1997..................................................... 296,998
Capital contributions-
Issuance of member units at stated value................................... 337,500
Members' notes in lieu of cash contributions............................... (100,000)
Payments on notes from members............................................. 300,000
-----------
Net capital contributions................................................ 537,500
Redemption of member units................................................... (35,492)
Net loss..................................................................... (1,045,241)
-----------
BALANCE, December 31, 1998..................................................... (246,235)
Capital contributions-
Issuance of member units at stated value (unaudited)....................... 375,500
Members' notes in lieu of cash contributions (unaudited)................... (86,249)
Payments on notes from members (unaudited)................................. 100,000
-----------
Net capital contributions (unaudited).................................... 389,251
Redemption of member units (unaudited)....................................... (608,112)
Net loss (unaudited)......................................................... (4,670,277)
-----------
BALANCE, March 31, 1999 (unaudited)............................................ $(5,135,373)
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-106
<PAGE>
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION FOR THE
(NOVEMBER 10, 1997) FOR THE THREE MONTHS ENDED
TO YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, ---------------------------
1997 1998 1998 1999
-------------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................... $ (3,002) $ (1,045,241) $ 143,979 $ (4,670,277)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities-
Depreciation and amortization............. 205 25,528 5,885 4,031
Equity related compensation............... -- 1,503,000 -- 4,962,103
Changes in assets and liabilities-
Accounts receivable..................... (51,437) (632,360) (415,112) (660,377)
Unbilled revenues....................... (185,300) (235,053) (38,800) 249,576
Prepaid expenses and other.............. (934) (23,082) (26,976) (56,639)
Disposal of equipment................... -- -- -- --
Accounts payable........................ -- 175,170 -- 196,673
Accrued liabilities..................... 129,699 510,155 218,936 (151,592)
---------- -------------- ----------- --------------
Net cash provided by (used in)
operating activities................ (110,769) 278,117 (112,088) (126,502)
---------- -------------- ----------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................ (24,728) (52,292) (26,106) --
---------- -------------- ----------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions....................... 300,000 537,500 138,562 389,251
Redemption of member units.................. -- (35,492) -- (184,291)
---------- -------------- ----------- --------------
Net cash provided by financing
activities.......................... 300,000 502,008 138,562 204,960
---------- -------------- ----------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS..... 164,503 727,833 368 78,458
CASH AND CASH EQUIVALENTS, beginning of
period...................................... -- 164,503 164,503 892,336
---------- -------------- ----------- --------------
CASH AND CASH EQUIVALENTS, end of period...... $ 164,503 $ 892,336 $ 164,871 $ 970,794
---------- -------------- ----------- --------------
---------- -------------- ----------- --------------
SUPPLEMENTAL INFORMATION:
Issuance of member units for notes
receivable.................................. $ 300,000 $ 100,000 $ -- $ 86,249
---------- -------------- ----------- --------------
---------- -------------- ----------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-107
<PAGE>
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
Potomac Partners Management Consulting, LLC (the "Company") specializes in
electronic commerce and Internet related consulting services. The Company offers
consulting services in three primary areas: business and strategy, program
management, and application design. The Company was formed in the State of
Delaware on November 10, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using a
straight-line method over the estimated useful lives of the assets. The costs
and related accumulated depreciation of property and equipment sold, retired, or
disposed of are removed from the accounts and any gains or losses are reflected
in the statement of operations. Expenditures for major acquisitions and
improvements are capitalized while expenditures for maintenance and repairs are
expensed as incurred.
INCOME TAXES
As a limited liability company, the Company pays no federal income tax, but
rather the members are taxed individually on the Company's taxable income.
Accordingly, no provisions for federal income taxes are reflected in the
accompanying financial statements.
The unaudited pro forma tax information included in the accompanying
statements of operations reflect estimates of the Company's tax provision or
benefit as if it had been a C corporation in fiscal years 1997 and 1998. In
accordance with SFAS No. 109, "Accounting for Income Taxes," no pro forma tax
benefit was reflected due to the Company's recurring losses and the uncertainty
related to the realization of any tax assets.
REVENUE RECOGNITION
Revenues are recognized on the percentage-of-completion method. Under this
approach, revenues and gross profit are recognized as the work is performed,
based on the ratio of costs incurred to total estimated costs. Unbilled revenues
on contracts are comprised of labor costs incurred, plus earnings on certain
contracts which have not been billed. Provisions for losses are recorded in the
period such items are identified.
COST OF SERVICES
Cost of services are comprised primarily of salaries, employee benefits, and
incentive compensation of billable employees and a proportionate share of
depreciation and facilities costs based on the ratio of billable employees to
total employees.
ACCOUNTING FOR PARTICIPATION APPRECIATION RIGHTS AND MEMBER APPRECIATION RIGHTS
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 allows
F-108
<PAGE>
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
either adoption of a fair value based method of accounting for stock-based
compensation or continuation under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). The Company has chosen to
account for stock-based compensation using the intrinsic value based method
prescribed in APB 25 and to provide the pro forma disclosure provision of SFAS
123.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments have carrying amounts which approximate
fair value due to the relatively short maturity of these instruments.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS No. 130"), "REPORTING
COMPREHENSIVE INCOME," which is required to be adopted in the period ended
December 31, 1998. SFAS No. 130 requires that an enterprise (a) classify items
of other comprehensive income by their nature in the financial statements, and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in-capital in the Statement of
Stockholders' Equity. The adoption of SFAS 130 did not have any effect on the
Company's financial statements as the Company does not have any elements of
comprehensive income other than net income.
3. SIGNIFICANT CUSTOMERS:
During the period from inception (November 10, 1997) through December 31,
1997, sales to two customers accounted for 48% and 46% of revenue. During the
year ended December 31, 1998, sales to the Company's four largest customers
accounted for 26%, 18%, 17%, and 13% of revenue.
As of December 31, 1998, accounts receivable from the Company's four largest
customers accounted for 26%, 24%, 17%, and 15% of total accounts receivable.
F-109
<PAGE>
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT:
Property and equipment is comprised of the following as of December 31, 1997
and 1998:
<TABLE>
<CAPTION>
USEFUL
LIFE 1997 1998
----------- --------- ---------
<S> <C> <C> <C>
Computers and equipment........................................................... 1-3 $ 24,728 $ 76,342
Furniture and fixtures............................................................ 3 -- 679
--------- ---------
24,728 77,021
Less- Accumulated depreciation.................................................... (205) (25,733)
--------- ---------
Property and equipment, net................................................ $ 24,523 $ 51,288
--------- ---------
--------- ---------
</TABLE>
Depreciation expense was $205 and $25,528 for the periods ended December 31,
1997 and 1998.
5. ACCRUED LIABILITIES:
Accrued liabilities is comprised of the following as of December 31, 1997
and 1998:
<TABLE>
<CAPTION>
1997 1998
----------- -------------
<S> <C> <C>
Member bonus payable.............................................. $ 72,300 $ 485,332
Employee bonus payable............................................ 3,100 100,000
Participation appreciation rights................................. -- 1,503,000
Other............................................................. 54,299 54,522
----------- -------------
Accrued liabilities........................................... $ 129,699 $ 2,142,854
----------- -------------
----------- -------------
</TABLE>
6. COMMITMENTS AND CONTINGENCIES:
The Company sponsors a profit sharing plan (the "Plan") that covers
employees who are at least 21 years old and have at least one hour of service
with the Company. Contributions to the Plan are at the discretion of the
Company. There were no contributions to the Plan during 1997 and 1998.
In the ordinary course of business, the Company may be subject to legal
actions and claims. Management does not believe litigation or claims will have a
material effect on financial position or results of operations.
7. EQUITY INCENTIVE PLANS:
PARTICIPATION APPRECIATION RIGHTS
The Company offers all non-member professionals the right to share in the
Company's value in the event the Company consummates an initial public offering
or is sold to a third party. These appreciation rights (the "Non-Member Rights")
do not represent ownership or voting interests or membership in the Company. The
Non-Member Rights are awarded at the time an employee signs an employment offer
letter from the Company and at various points during employment based on
performance. Upon a defined event, such as an initial public offering of stock
or a sale of the Company, these rights will be converted into a new combination
of cash
F-110
<PAGE>
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. EQUITY INCENTIVE PLANS: (CONTINUED)
and/or securities (options, stock, restricted stock) dependent upon the
structure of the defined event. Prior to such an event, the holders of the
rights have no rights to exercise the instruments. The Non-Member Rights are
nontransferable, and will be forfeited immediately upon an employee's departure
from the Company prior to any defined event.
<TABLE>
<CAPTION>
RANGE OF NUMBER OF
GRANT PRICES RIGHTS
--------------- -----------
<S> <C> <C>
Rights outstanding at inception (November 10, 1997)................................ --
Granted.......................................................................... $0.33 90,000
Exercised........................................................................ --
Canceled......................................................................... --
-----------
Rights outstanding at December 31, 1997............................................ 90,000
Granted.......................................................................... $1.00-$4.05 223,500
Exercised........................................................................ --
Canceled......................................................................... --
-----------
Rights outstanding at December 31, 1998............................................ 313,500
-----------
-----------
</TABLE>
The Non-Member Rights are considered compensatory equity instruments. As the
Non-Member Rights will be exercisable only upon the occurrence of a defined
event, compensation expense is deferred under fixed plan accounting. The date
the event is first considered likely to occur, a compensation charge for the
cumulative appreciation in the Non-Member Rights should be recognized. The
Company believes that the condition for recognition has been met and has
recognized a $1,503,000 cost of services charge during 1998 for the cumulative
appreciation in the Non-Member Rights.
Compensation expense recognized during 1998 is equal to the increase in the
estimated fair market value of the Company's units since date of grant
multiplied by the total number of rights outstanding. The estimated fair market
value was based upon capital transactions during 1998.
MEMBER APPRECIATION RIGHTS
The Company grants member appreciation rights ("Member Rights") to its
members upon the acquisition of a membership interest in the Company and during
the year based on performance. The Member Rights vest ratably over a three-year
period. The grant price of each Member Right is equal to the estimated fair
market value of each member unit on the date of grant. Upon a defined event,
such as an initial public offering of stock or a sale of the Company, these
Member Rights will be converted into a new combination of cash and/or securities
(options, stock, restricted stock) dependent upon the structure of the defined
event. Prior to such an event, the holders of the rights have no rights to
exercise the instruments. The Member Rights are nontransferable, and will be
forfeited upon a member's departure from the Company prior to any defined event.
F-111
<PAGE>
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. EQUITY INCENTIVE PLANS: (CONTINUED)
Member Rights outstanding during 1997 and 1998, were as follows:
<TABLE>
<CAPTION>
RANGE OF NUMBER OF
GRANT PRICES RIGHTS
------------- -----------
<S> <C> <C>
Rights outstanding at inception (November 10, 1997)................ --
Granted.......................................................... --
Exercised........................................................ --
Canceled......................................................... --
-----------
Rights outstanding at December 31, 1997............................ --
Granted.......................................................... $ 6.50 33,716
Exercised........................................................ --
Canceled......................................................... --
-----------
Rights outstanding at December 31, 1998............................ 33,716
-----------
-----------
</TABLE>
The Member Rights are considered compensatory equity instruments. As the
vested Member Rights will be exercisable only upon the occurrence of a defined
event, compensation expense is deferred under fixed plan accounting. The date
the event is first considered likely to occur, a compensation charge for the
cumulative appreciation in the Member Rights should be recognized. The Company
recognized no charge during 1998 as these Member Rights were granted in December
1998 and none were vested.
8. RELATED-PARTY TRANSACTIONS:
At December 31, 1997, the Company had interest-bearing notes receivable from
two of its members totaling $150,000 each. At December 31, 1998, the Company had
a $100,000 interest-bearing note receivable from one of its members. All notes
bear interest at 6% annually and have a term of twelve months. All notes were
related to members' capital contributions and have been recorded as an offset to
members' equity. The Company recognized interest income of $18,000 during 1998.
At December 31, 1997 and 1998, the Company's accrued expenses included
employee expenses of $53,236 and $4,646, respectively.
9. SUBSEQUENT EVENTS:
Effective January 1, 1999, certain of the Company's Members (the "Exiting
Members") dissolved their interest in the Company to form a new Limited
Liability Company called Potomac Ventures, LLC. Their interest was dissolved by
the transfer of 45% of the aggregate net assets of the Company to the Exiting
Members in exchange for the Exiting Member's units in the Company. There is no
co-ownership between the companies; however, they share the same Advisory Board
(as defined).
The Company and Potomac Ventures, LLC, entered into a cross services
agreement during 1999, whereby the two companies agree to share certain
administrative services.
10. AGREEMENT TO MERGE WITH LUMINANT:
The Company intends to enter into an agreement to be acquired by Luminant.
This acquisition is subject to the successful completion of an initial public
offering of the common stock of Luminant.
F-112
<PAGE>
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO THE UNAUDITED MARCH 31, 1998 AND 1999 FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION:
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to and Rule10-01 of Regulation S-X.
Accordingly, they do not contain all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the accompanying unaudited financial statements
reflect all adjustments (consisting of only normal recurring adjustments)
considered necessary for a fair presentation of the Company's financial
condition as of March 31, 1999, the results of its operations and its cash flows
for the three-month periods ended March 31, 1998 and 1999. These financial
statements should be read in conjunction with the Company's audited 1998
financial statements, including the notes thereto. Operating results for the
three-month period ended March 31, 1999 are not necessarily indicative of the
operating results that may be expected for the year ending December 31, 1999.
B. ACCRUED LIABILITIES:
Accrued liabilities is comprised of the following as of March 31, 1999:
<TABLE>
<CAPTION>
MARCH 31,
1999
-------------
<S> <C>
Member bonus payable........................................................... $ 263,665
Employee bonus payable......................................................... 134,265
Participation appreciation rights.............................................. 6,465,103
Other.......................................................................... 82,554
-------------
Accrued liabilities........................................................ $ 6,945,587
-------------
-------------
</TABLE>
C. EQUITY INCENTIVE PLANS:
PARTICIPATION APPRECIATION RIGHTS
The Company offers all non-member professionals the right to share in the
Company's value in the event the Company consummates an initial public offering
or is sold to a third party. These appreciation rights (the "Non-Member Rights")
do not represent ownership or voting interests or membership in the Company. The
Non-Member Rights are awarded at the time an employee signs an employment offer
letter from the Company and at various points during employment based on
performance. Upon a defined event, such as an initial public offering of stock
or a sale of the Company, these rights will be converted into a new combination
of cash and/or securities (options, stock, restricted stock) dependent upon the
structure of the defined event. Prior to such an event, the holders of the
rights have no rights to exercise the
F-113
<PAGE>
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO THE UNAUDITED MARCH 31, 1998 AND 1999 FINANCIAL STATEMENTS
C. EQUITY INCENTIVE PLANS: (CONTINUED)
instruments. The Non-Member Rights are nontransferable, and will be forfeited
immediately upon an employee's departure from the Company prior to any defined
event.
<TABLE>
<CAPTION>
RANGE OF NUMBER OF
GRANT PRICES RIGHTS
-------------- -----------
<S> <C> <C>
Rights outstanding at December 31, 1998.......................... 313,500
Granted........................................................ $ 6.84-$7.58 8,950
Exercised...................................................... --
Canceled....................................................... $ 1.00-$2.85 (144,000)
-------------- -----------
Rights outstanding at March 31, 1999............................. 178,450
-----------
-----------
</TABLE>
The Non-Member Rights are considered compensatory equity instruments. As the
Non-Member Rights will be exercisable only upon the occurrence of a defined
event, compensation expense is deferred under fixed plan accounting. The date
the event is first considered likely to occur, a compensation charge for the
cumulative appreciation in the Non-Member Rights should be recognized. The
Company believes that the condition for recognition has been met and has
recognized $4,369,335 as a cost of services charge during 1999 for the
cumulative appreciation in the Non-Member Rights.
Compensation expense recognized during 1999 is equal to the increase in the
estimated fair market value of the Company's units since date of grant
multiplied by the total number of rights outstanding. The estimated fair market
value is based on the per share value to be received from the Luminant
transaction.
MEMBER APPRECIATION RIGHTS
The Company grants member appreciation rights ("Member Rights") to its
members on admission into the Company ownership and during the year based on
performance. The Member Rights vest ratably over a three-year period. The grant
price of each Member Right is equal to the estimated fair market value of each
member unit on the date of grant. Upon a defined event, such as an initial
public offering of stock or a sale of the Company, these Member Rights will be
converted into a new combination of cash and/or securities (options, stock,
restricted stock) dependent upon the structure of the defined event.
Prior to such an event, the holders of the rights have no rights to exercise
the instruments. The Member Rights are nontransferable, and will be forfeited
immediately upon a member's departure from the Company prior to any defined
event.
<TABLE>
<CAPTION>
RANGE OF NUMBER OF
GRANT PRICES RIGHTS
-------------- -----------
<S> <C> <C>
Rights outstanding at December 31, 1998.............................................. 33,716
Granted............................................................................ $ 6.50-$7.58 171,422
Exercised.......................................................................... --
Canceled........................................................................... --
-----------
Rights outstanding at March 31, 1999................................................. 205,138
-----------
-----------
</TABLE>
F-114
<PAGE>
POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO THE UNAUDITED MARCH 31, 1998 AND 1999 FINANCIAL STATEMENTS
C. EQUITY INCENTIVE PLANS: (CONTINUED)
The Member Rights are considered compensatory equity instruments. As the
vested Member Rights will be exercisable only upon the occurrence of a defined
event, compensation expense is deferred under fixed plan accounting. The date
the event is first considered likely to occur, a compensation charge for the
cumulative appreciation in the Member Rights should be recognized. The Company
believes that the condition for recognition has been met and has recognized
$592,768 cost of service charge during 1999 for the cumulative appreciation in
Member Rights. Compensation expense recognized during 1999 is equal to the
increase in the estimated fair market value of the Company's units since the
date of the grant multiplied by the total number of rights outstanding. The
estimated fair market value is based on the per share value to be received from
the Luminant transaction.
D. EQUITY:
Effective January 1, 1999, certain of the Company's members (the "Exiting
Members") dissolved their interest in the Company to form a new Limited
Liability Company called Potomac Venturers LLC. Their interest was dissolved by
the transfer of 45% of the aggregate net assets of the Company (approximately
$600,000) to the Exiting Members in exchange for the Exiting Members' units in
the Company. There is no co-ownership between the companies; however, they share
the same Advisory Board (as defined).
The Company and Potomac Ventures, LLC entered into a cross services
agreement during 1999, whereby the two companies agree to share certain
administrative services.
E. RELATED-PARTY TRANSACTIONS:
At March 31, 1999, the Company had a $86,249 interest-bearing note
receivable from one of its members. The note bears interest at 6% annually and
has a term of twelve months. The note relates to members' capital contributions
and has been recorded as an offset to members' equity.
F-115
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To RSI Group, Inc.:
We have audited the accompanying consolidated balance sheets of RSI Group,
Inc. (a Texas S corporation) and subsidiaries as of December 31, 1997 and 1998,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of RSI Group, Inc. and
subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
May 8, 1999
F-116
<PAGE>
RSI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- MARCH 31,
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 13,726 $ 30,495 $ 31,117
Accounts receivable, net of allowance for doubtful accounts of
$129,978, $199,065, and $191,460 (unaudited).................... 2,880,383 3,147,714 2,294,438
Unbilled revenues................................................. 40,868 76,542 62,299
Employee and other receivables.................................... 83,860 58,047 104,253
Prepaid expenses and other........................................ 99,773 112,739 129,764
------------- ------------- -------------
Total current assets............................................ 3,118,610 3,425,537 2,621,871
PROPERTY AND EQUIPMENT, net......................................... 248,942 325,377 298,380
OTHER ASSETS:
Goodwill, net of accumulated amortization of $2,950, $38,250 and
$47,100 (unaudited)............................................. 67,671 36,967 28,117
Other............................................................. 97,549 148,280 160,744
------------- ------------- -------------
Total assets.................................................... $ 3,532,772 $ 3,936,161 $ 3,109,112
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, including cash overdraft of $299,751, $429,461,
and $270,960 (unaudited)........................................ $ 492,088 $ 540,866 $ 536,847
Accrued liabilities............................................... 254,403 279,997 577,946
Notes payable..................................................... 1,530,990 1,750,712 788,715
Current maturities of long-term debt.............................. 82,512 62,184 68,878
------------- ------------- -------------
Total current liabilities....................................... 2,359,993 2,633,759 1,972,386
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities......................... 6,693 36,259 15,546
------------- ------------- -------------
Total liabilities............................................... 2,366,686 2,670,018 1,987,932
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST................................................... 90,183 168,310 118,832
STOCKHOLDERS' EQUITY:
Common stock, voting: $.20 par value, 175,000 shares authorized
and issued, 162,351 shares outstanding as of 1997, 1998 and 1999
(unaudited)..................................................... 35,000 35,000 35,000
Additional paid-in capital........................................ 222,268 222,268 952,268
Retained earnings................................................. 1,026,028 1,047,958 222,473
Less--Treasury stock; at cost, 12,649 shares at 1997, 1998 and
1999 (unaudited)................................................ (207,393) (207,393) (207,393)
------------- ------------- -------------
Total stockholders' equity...................................... 1,075,903 1,097,833 1,002,348
------------- ------------- -------------
Total liabilities and stockholders' equity...................... $ 3,532,772 $ 3,936,161 $ 3,109,112
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-117
<PAGE>
RSI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
-------------- -------------- -------------- ------------- -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES......................... $ 16,133,004 $ 15,723,685 $ 16,926,779 $ 4,337,584 $ 3,252,823
COST OF SERVICES................. 11,663,140 11,649,968 12,271,093 3,149,641 2,364,442
-------------- -------------- -------------- ------------- -------------
GROSS PROFIT..................... 4,469,864 4,073,717 4,655,686 1,187,943 888,381
SELLING, GENERAL AND
ADMINISTRATIVE................. 4,104,567 3,744,606 4,252,682 961,249 1,713,755
INTEREST EXPENSE................. 122,043 142,773 169,178 41,114 24,248
MINORITY INTEREST................ -- 108,767 161,896 33,181 (24,137)
-------------- -------------- -------------- ------------- -------------
NET INCOME (LOSS)................ $ 243,254 $ 77,571 $ 71,930 $ 152,399 $ (825,485)
-------------- -------------- -------------- ------------- -------------
-------------- -------------- -------------- ------------- -------------
PRO FORMA INCOME TAXES (BENEFIT)
(UNAUDITED).................... 87,109 27,716 28,477 60,335 (278,106)
-------------- -------------- -------------- ------------- -------------
PRO FORMA NET INCOME
(UNAUDITED).................... $ 156,145 $ 49,855 $ 43,453 $ 92,064 $ (547,379)
-------------- -------------- -------------- ------------- -------------
-------------- -------------- -------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-118
<PAGE>
RSI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK
--------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995.................................. $ 35,000 $ 50,083 $ 1,015,203 $ (196,370)
Purchase of treasury stock................................ -- -- -- (11,023)
Equity related compensation............................... -- 172,185 -- --
Dividends................................................. -- -- (90,000) --
Net income................................................ -- -- 243,254 --
--------- ----------- ------------- ------------
BALANCE, December 31, 1996.................................. 35,000 222,268 1,168,457 (207,393)
Dividends................................................. -- -- (220,000) --
Net income................................................ -- -- 77,571 --
--------- ----------- ------------- ------------
BALANCE, December 31, 1997.................................. 35,000 222,268 1,026,028 (207,393)
Dividends................................................. -- -- (50,000) --
Net income................................................ -- -- 71,930 --
--------- ----------- ------------- ------------
BALANCE, December 31, 1998.................................. 35,000 222,268 1,047,958 (207,393)
Equity related compensation (unaudited)................... -- 730,000 -- --
Net loss (unaudited)...................................... -- -- (825,485) --
--------- ----------- ------------- ------------
BALANCE, March 31, 1999 (unaudited)......................... $ 35,000 $ 952,268 $ 222,473 $ (207,393)
--------- ----------- ------------- ------------
--------- ----------- ------------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-119
<PAGE>
RSI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................... $ 243,254 $ 77,571 $ 71,930 $ 152,399 $ (825,485)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities-
Depreciation and amortization........... 56,754 84,884 158,148 39,538 40,689
Minority interest, net of payments
made.................................. -- 108,767 78,127 (26,784) (49,478)
Equity related compensation............. 172,185 -- -- -- 730,000
Changes in assets and liabilities-
Accounts receivable................... (270,359) (137,137) (267,331) (279,867) 853,276
Unbilled revenues..................... 13,364 (11,085) (35,674) 1,554 14,243
Employee and other receivables........ 8,969 (37,701) 25,813 12,320 (46,206)
Prepaid expenses and other............ (48,644) 30,276 (12,966) (8,981) (17,025)
Other assets.......................... (27,481) (47,186) (55,327) (12,362) (12,464)
Accounts payable, including cash
overdraft........................... 174,865 96,991 48,778 (44,138) (4,019)
Accrued liabilities................... 10,473 81,795 25,594 44,613 297,949
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities.............. 333,380 247,175 37,092 (121,708) 981,480
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................... (66,472) (178,754) (199,283) (68,767) (4,842)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (repayments) from notes payable,
net..................................... (59,548) 176,857 219,722 132,931 (961,997)
Proceeds from long-term debt.............. -- -- 124,403 81,543 --
Payments on long-term debt................ (64,260) (53,629) (115,165) (22,301) (14,019)
Purchases of treasury stock............... (11,023) -- -- -- --
Dividends................................. (90,000) (220,000) (50,000) -- --
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities.............. (224,831) (96,772) 178,960 192,173 (976,016)
------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................... 42,077 (28,351) 16,769 1,698 622
CASH AND CASH EQUIVALENTS, beginning of
period.................................... -- 42,077 13,726 13,726 30,495
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period.... $ 42,077 $ 13,726 $ 30,495 $ 15,424 $ 31,117
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
SUPPLEMENTAL INFORMATION:
Cash paid for interest.................... $ 122,043 $ 130,773 $ 170,229 $ 12,958 $ 35,197
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-120
<PAGE>
RSI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
RSI Group, Inc. (the "Company") is a professional data processing services
company incorporated in the State of Texas on October 26, 1984. The primary
activity of the Company is to provide data processing personnel to other
companies on a consulting and contract staffing basis. The Company is an S
corporation for federal income tax purposes and, accordingly, acts as a
flow-through entity for the Company's stockholders.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all majority owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. At December 31, 1998, the Company owns 80% of
a Texas limited liability company, Resource Solutions International ("RSI")
East, LLC, and has three other wholly owned subsidiaries.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is computed using
the straight-line method over the assets' estimated useful lives. The costs and
related accumulated depreciation of property and equipment sold, retired, or
disposed of are removed from the accounts and any gains or losses reflected in
the consolidated statements of operations. Repair and maintenance costs that do
not extend the useful life of the asset are charged to expense as incurred.
GOODWILL
Goodwill represents the excess of the aggregate consideration paid by the
Company in excess of the carrying value of the minority interests acquired.
Goodwill is amortized on a straight-line basis over two years. Amortization
expense totaled $2,950 and $35,300 in 1997 and 1998, respectively.
INCOME TAXES
As an S corporation, the Company pays no federal income tax, but rather the
stockholders are taxed individually on the Company's taxable income or loss.
Accordingly, no provision for federal income tax is reflected in the
accompanying consolidated financial statements.
The unaudited pro forma federal income tax information included in the
accompanying consolidated statements of operations reflect estimates of the
Company's tax provision as if it had been a C corporation in fiscal years 1996,
1997, and 1998.
F-121
<PAGE>
RSI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
MINORITY INTEREST
Minority interest represents the accumulated undistributed earnings
attributable to the minority owners of consolidated subsidiaries.
REVENUE RECOGNITION
Revenue for professional services is recognized at the time such services
are rendered.
COST OF SERVICES
Cost of services are comprised primarily of salaries, employee benefits, and
incentive compensation of billable employees.
ACCOUNTING FOR EQUITY BASED COMPENSATION
The Company has granted minority interests in its consolidated subsidiaries
to certain management personnel. At the time of grant, the Company recorded
compensation expense for the fair value of the minority interest with
corresponding credits to additional paid-in capital. In addition, in 1996 the
Company had an equity participation plan, which has been replaced with the
minority interest participation discussed above. Compensation expense was
recorded in 1996 for the appreciation in equity value under this plan.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments have carrying amounts which approximate
fair value due to their relative short maturity and/or their variable interest
rates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, ("SFAS No. 130"), "REPORTING
COMPREHENSIVE INCOME," which is required to be adopted in the period ended
December 31, 1998. SFAS No. 130 requires that an enterprise (a) classify items
of other comprehensive income by their nature in the financial statements, and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in-capital in the Statement of
Stockholders' Equity. The adoption of SFAS 130 did not have any effect on the
Company's financial statements as the Company does not have any elements of
comprehensive income other than net income.
F-122
<PAGE>
RSI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SIGNIFICANT CUSTOMERS:
During 1996, sales to two customers accounted for 21% and 18% of revenues.
During 1997, sales to three customers accounted for 28%, 17%, and 10% of
revenues. During 1998, sales to two customers accounted for 34% and 13% of
revenues.
As of December 31, 1998, two customers accounted for approximately 39% and
11% of trade accounts receivable.
4. PROPERTY AND EQUIPMENT:
Property and equipment is comprised of the following as of December 31, 1997
and 1998:
<TABLE>
<CAPTION>
USEFUL
LIFE 1997 1998
------ ------------ ------------
<S> <C> <C> <C>
Computers and equipment...................................................... 3 $ 366,261 $ 544,743
Furniture and fixtures....................................................... 5 356,511 377,312
------------ ------------
722,772 922,055
Less- Accumulated depreciation............................................... (473,830) (596,678)
------------ ------------
Property and equipment, net........................................... $ 248,942 $ 325,377
------------ ------------
------------ ------------
</TABLE>
Depreciation expense during 1996, 1997, and 1998 was $56,754, $81,934, and
$122,848, respectively.
5. ACCRUED LIABILITIES:
Accrued liabilities is comprised of the following as of December 31, 1997
and 1998:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Accrued vacation.................................................... $ 153,851 $ 184,076
Other............................................................... 100,552 95,921
----------- -----------
Accrued liabilities........................................... $ 254,403 $ 279,997
----------- -----------
----------- -----------
</TABLE>
6. DEBT:
The Company's note payable consists of a bank line of credit, in the amount
of $2,400,000, upon which $1,530,990 and $1,750,712 was drawn at December 31,
1997 and 1998. The line of credit is renewable annually on June 15, and contains
several restrictive covenants, the most restrictive of which requires the
Company to maintain certain financial ratios related to total debt, tangible net
worth, and working capital. At December 31, 1998, the Company was in compliance
with or had obtained waivers for all debt covenants. Management believes that
the Company will be able to refinance the line of credit under similar terms.
Advances on the line of credit are limited to 75% of the accounts receivable
that are less than 90 days past the invoice date, and are secured by accounts
receivable and other assets of the Company. Certain stockholders have guaranteed
the line of credit. Interest is payable monthly at 1.25% above prime, or 9.0% at
December 31, 1998. Commitment fees of one-half of one percent (.5%) per annum of
the average unused line of credit for the preceding quarter are paid quarterly.
F-123
<PAGE>
RSI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. DEBT: (CONTINUED)
The Company's long-term debt consists of a term loan from a bank and debt
payable to former minority interest holder. The term loan was obtained on July
8, 1998, to finance certain equipment and furniture purchases. The note is
secured by all equipment and furniture owned by the Company and is guaranteed by
certain stockholders. Principle and interest is payable monthly with the final
payment due on July 8, 2000. Interest is at 1.25% above prime, or 9.0% at
December 31, 1998.
Debt related to the former minority interest holder originated on November
30, 1997, in connection with the repurchase of a minority interest in a
subsidiary by the Company. The debt was non-interest bearing and was paid in
1998.
Debt at December 31, 1997 and 1998, are comprised of the following:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Term loan.............................................................. $ -- $ 98,443
Loan from former minority interest holder.............................. 89,205 --
--------- ---------
Total debt....................................................... 89,205 98,443
Less- Current maturities............................................... (82,512) (62,184)
--------- ---------
Long-term debt................................................... $ 6,693 $ 36,259
--------- ---------
--------- ---------
</TABLE>
7. COMMITMENTS AND CONTINGENCIES:
The Company maintains a defined contribution retirement plan for employees
who have at least one year of continuous service. The Plan entitles employees to
make pre-tax contributions to the Plan and the Company to make contributions at
the discretion of the Board of Directors. No Company contributions were made in
1996, 1997, or 1998.
The Company leases office space and equipment under several different
operating lease arrangements for terms ranging from one to five years. At
December 31, 1998, the Company was committed under noncancelable operating
leases which extend beyond 1998 as follows:
<TABLE>
<S> <C>
1999............................................................. $ 230,298
2000............................................................. 173,088
2001............................................................. 69,345
2002............................................................. 40,337
2003............................................................. 25,496
Thereafter....................................................... --
---------
Total future minimum lease payments.............................. $ 538,564
---------
---------
</TABLE>
Rental expense related to operating leases was $192,238, $272,567, and
$295,351 in 1996, 1997, and 1998, respectively.
In the ordinary course of business the Company may be subject to legal
actions and claims. Management does not believe litigation or claims will have a
material effect on the financial position or results of operations.
F-124
<PAGE>
RSI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. EQUITY INCENTIVE PLANS:
During 1996, certain management personnel participated in the Company's
Equity Sharing Unit Plan (the "Equity Plan"). Under the Equity Plan employees
were given the opportunity to participate in the earnings and appreciation of
the Company through periodic cash distributions and increases in the value of
their equity units. In 1996, the Company recorded expense related to the plan of
$273,435. The non-cash portion of this expense related to the appreciation of
the equity units was recorded as a credit to additional paid-in capital. The
Equity Plan was terminated on December 31, 1996, and the participants exchanged
their units in the Equity Plan for minority interests in the Company's
subsidiaries.
In 1997, the Company reacquired certain minority interests in exchange for a
loan payable in the amount of $89,205. In 1998, the Company reacquired certain
minority interests for $7,400.
9. SUBSEQUENT EVENT:
In January 1999, the Company merged all of its subsidiaries into a single
legal entity and provided a minority shareholder and employee with a 20%
interest in the resulting subsidiary. The Company recorded compensation expense
of approximately $730,000 related to this event in 1999. Concurrent with the
minority interest grant, the buyout provisions of the minority interest
agreement were amended such that upon a sale of the Company, the minority owner
will exchange his minority interest for 20% of the sale proceeds.
10. AGREEMENT TO MERGE WITH LUMINANT:
The Company intends to enter into an agreement to be acquired by Luminant.
This acquisition is subject to the successful completion of an initial public
offering of the common stock of Luminant.
F-125
<PAGE>
RSI GROUP, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED MARCH 31, 1998 AND 1999 FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION:
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to and Rule 10-01 of Regulation S-X.
Accordingly, they do not contain all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the accompanying unaudited financial statements
reflect all adjustments (consisting of only normal recurring adjustments)
considered necessary for a fair presentation of the Company's financial
condition as of March 31, 1999, the results of its operations and its cash flows
for the three-month periods ended March 31, 1998 and 1999. These financial
statements should be read in conjunction with the Company's audited 1998
financial statements, including the notes thereto. Operating results for the
three-month period ended March 31, 1999, are not necessarily indicative of the
operating results that may be expected for the year ending December 31, 1999.
B. DEBT:
The Company's note payable consists of a bank line of credit, in the amount
of $2,400,000, upon which $788,715 was drawn at March 31, 1999. The line of
credit is renewable annually on June 15, and contains several restrictive
covenants, the most restrictive of which requires the Company to maintain
certain financial ratios related to total debt, tangible net worth, and working
capital. At March 31, 1999, the Company was in compliance with or had obtained
waivers for all debt covenants. Management believes that the Company will be
able to refinance the line of credit under similar terms. Advances on the line
of credit are limited to 75% of the accounts receivable that are less than 90
days past the invoice date, and are secured by accounts receivable and other
assets of the Company. Certain stockholders have guaranteed the line of credit.
Interest is payable monthly at 1.25% above prime, or 9.0% at March 31, 1999.
Commitment fees of one-half of one percent (.5%) per annum of the average unused
line of credit for the preceding quarter are paid quarterly.
C. EQUITY INCENTIVE PLANS:
In January 1999, the Company merged all of its subsidiaries into a single
legal entity and provided a minority shareholder and employee with a 20%
interest in the resulting subsidiary. The Company recorded compensation expense
of approximately $730,000 related to this event in 1999. Concurrent with the
minority interest grant, the buyout provisions of the minority interest
agreement were amended such that upon a sale of the Company, the minority owner
will exchange his minority interest for 20% of the sale proceeds.
F-126
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Fifth Gear Media Corporation:
We have audited the accompanying balance sheets of Fifth Gear Media
Corporation (a Delaware corporation) as of December 31, 1997 and 1998, and the
related statements of operations, stockholders' equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Fifth Gear Media Corporation
as of December 31, 1997 and 1998, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
May 21, 1999
F-127
<PAGE>
FIFTH GEAR MEDIA CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1997 1998 1999
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................... $ 22,796 $ 153,031 $ 142,597
Accounts receivable, net of allowance for doubtful accounts of $5,694,
$12,283, and $12,283 (unaudited)...................................... 39,074 202,120 127,398
Deferred income taxes................................................... 1,936 4,176 9,196
----------- ----------- ------------
Total current assets................................................ 63,806 359,327 279,191
PROPERTY AND EQUIPMENT, net............................................... 22,649 77,723 90,696
DEFERRED INCOME TAXES..................................................... 19,641 -- --
OTHER ASSETS.............................................................. 3,004 3,020 9,500
----------- ----------- ------------
Total assets........................................................ $ 109,100 $ 440,070 $ 379,387
----------- ----------- ------------
----------- ----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................ $ 535 $ 2,692 $ 25,253
Customer deposits....................................................... 12,000 -- --
Accrued liabilities..................................................... 27,837 168,927 103,130
Current portion of long-term debt....................................... 98,662 59,070 56,651
----------- ----------- ------------
Total current liabilities........................................... 139,034 230,689 185,034
LONG-TERM DEBT, net of current portion.................................... -- 83,214 77,932
DEFERRED INCOME TAXES..................................................... -- 10,818 10,818
----------- ----------- ------------
Total liabilities................................................... 139,034 324,721 273,784
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock: $.001 par value, 5,000,000 shares authorized, 1,942,293
shares issued and outstanding as of December 31, 1997 and 1998........ 1,942 1,942 1,942
Retained (deficit) earnings............................................. (31,876) 113,407 103,661
----------- ----------- ------------
Total liabilities and stockholders' equity.......................... $ 109,100 $ 440,070 $ 379,387
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-128
<PAGE>
FIFTH GEAR MEDIA CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------------- ------------------------
1997 1998 1998 1999
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED)
REVENUES................................................... $ 289,450 $ 1,226,989 $ 262,560 $ 277,051
COST OF SERVICES........................................... 138,784 602,572 114,628 204,142
----------- ------------- ----------- -----------
GROSS PROFIT............................................... 150,666 624,417 147,932 72,909
SELLING, GENERAL AND ADMINISTRATIVE........................ 127,012 401,688 74,723 89,534
OTHER INCOME (EXPENSE):
Interest expense......................................... (6,077) (6,103) (1,441) (3,036)
Interest income.......................................... -- -- -- 1,201
Other income............................................. -- -- -- 3,694
----------- ------------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES.......................... 17,577 216,626 71,768 (14,766)
INCOME TAXES............................................... 5,994 71,343 24,401 (5,020)
----------- ------------- ----------- -----------
NET INCOME (LOSS).......................................... $ 11,583 $ 145,283 $ 47,367 $ (9,746)
----------- ------------- ----------- -----------
----------- ------------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-129
<PAGE>
FIFTH GEAR MEDIA CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------------- RETAINED
NUMBER OF (DEFICIT)
SHARES PAR VALUE EARNINGS
------------ ----------- -----------
<S> <C> <C> <C>
BALANCE, December 31, 1996................................................. 1,899,901 $ 1,900 $ (43,459)
Issuance of stock........................................................ 42,392 42 --
Net income............................................................... -- -- 11,583
------------ ----------- -----------
BALANCE, December 31, 1997................................................. 1,942,293 1,942 (31,876)
Net income............................................................... -- -- 145,283
------------ ----------- -----------
BALANCE, December 31, 1998................................................. 1,942,293 1,942 113,407
Net loss (unaudited)..................................................... -- -- (9,746)
------------ ----------- -----------
BALANCE, March 31, 1999 (unaudited)........................................ 1,942,293 $ 1,942 $ 103,661
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-130
<PAGE>
FIFTH GEAR MEDIA CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------ -----------------------
1997 1998 1998 1999
---------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................... $ 11,583 $ 145,283 $ 47,367 $ (9,746)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities--
Depreciation........................................... 5,320 25,460 6,365 5,168
Deferred income taxes.................................. 5,994 28,219 -- (5,020)
Changes in assets and liabilities--
Accounts receivable.................................. (39,074) (163,046) (54,828) 74,722
Other assets......................................... (3,004) (16) (1,045) (6,480)
Accounts payable..................................... 535 2,157 6,770 22,561
Customer deposits.................................... 12,000 (12,000) (12,000) --
Accrued liabilities.................................. 21,691 141,090 80,064 (65,797)
---------- ------------ ---------- -----------
Net cash provided by operating activities............ 15,045 167,147 72,693 15,408
---------- ------------ ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures....................................... (19,687) (80,534) (34,805) (18,141)
---------- ------------ ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock................................. 42 -- -- --
Payments on long-term debt................................. (19,737) (56,378) (21,531) (7,701)
Proceeds from long-term debt............................... 14,000 100,000 -- --
---------- ------------ ---------- -----------
Net cash (used in) provided by financing
activities......................................... (5,695) 43,622 (21,531) (7,701)
---------- ------------ ---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......... (10,337) 130,235 16,357 (10,434)
CASH AND CASH EQUIVALENTS, beginning of period............... 33,133 22,796 22,796 153,031
---------- ------------ ---------- -----------
CASH AND CASH EQUIVALENTS, end of period..................... $ 22,796 $ 153,031 $ 39,153 $ 142,597
---------- ------------ ---------- -----------
---------- ------------ ---------- -----------
SUPPLEMENTAL INFORMATION:
Cash paid for income taxes................................. $ -- $ 7,500 $ -- $ --
---------- ------------ ---------- -----------
---------- ------------ ---------- -----------
Cash paid for interest..................................... $ 8,546 $ 6,103 $ 1,441 $ 3,036
---------- ------------ ---------- -----------
---------- ------------ ---------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-131
<PAGE>
FIFTH GEAR MEDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
Fifth Gear Media Corporation (the "Company"), a Delaware corporation, was
organized effective May 17, 1995. Using the Internet as its primary platform,
the Company designs, develops, and maintains complex electronic commerce
websites. The areas of focus include business-to-consumer and
business-to-business applications.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets. The
costs and related accumulated depreciation of property and equipment sold,
retired, or disposed of are removed from the accounts and any gains or losses
reflected in the statement of operations. Expenditures for major acquisitions
and improvements are capitalized while expenditures for maintenance repairs are
expensed as incurred.
INCOME TAXES
Income taxes are accounted for using an asset and liability approach which
requires the recognition of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
The measurement of current and deferred tax liabilities and assets are based on
provisions of the enacted tax law; the effects of future changes in tax laws or
rates are not anticipated.
REVENUE RECOGNITION
Revenues are recognized for time and materials based arrangements as
services are performed and fixed fee arrangements on the
percentage-of-completion method. Under this approach, revenues are recognized as
the work is performed, based on the ratio of costs incurred to total estimated
costs. Customer deposits represent the amount of customer payments received in
advance of services being performed.
COST OF SERVICES
Cost of services are comprised primarily of salaries, employee benefits, and
incentive compensation of billable employees, and a proportionate share of
depreciation and facilities costs based on the ratio of billable employees to
total employees.
ACCOUNTING FOR STOCK BASED COMPENSATION
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 allows either adoption of a fair value
based method of accounting for stock-based compensation or
F-132
<PAGE>
FIFTH GEAR MEDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
continuation under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"). The Company has chosen to account for
stock-based compensation using the intrinsic value based method prescribed in
APB 25 and provide the pro forma disclosure provision of SFAS 123. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
fair market value of the Company's stock over the exercise price at the date of
the grant.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments have carrying amounts which approximate
fair value due to their relative short maturity and/or their variable interest
rates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS No. 130") "Reporting Comprehensive
Income," which is required to be adopted in the period ended December 31, 1998.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in the financial statements, and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in-capital in the Statement of
Stockholders' Equity. The adoption of SFAS 130 did not have any effect on the
Company's financial statements as the Company does not have any elements of
comprehensive income other than net income.
3. SIGNIFICANT CUSTOMERS:
During the year ended December 31, 1997, sales to three customers accounted
for approximately 53%, 21%, and 11% of revenues. During the year ended December
31, 1998, sales to one customer accounted for approximately 67% of revenues.
As of December 31, 1998, accounts receivable from two customers accounted
for 70% and 14% of accounts receivable.
F-133
<PAGE>
FIFTH GEAR MEDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT:
Property and equipment is comprised of the following as of December 31, 1997
and 1998:
<TABLE>
<CAPTION>
USEFUL
LIFE 1997 1998
----------- --------- -----------
<S> <C> <C> <C>
Computers and equipment..................................... 3-5 $ 27,414 $ 105,808
Furniture and fixtures...................................... 5 1,623 3,763
--------- -----------
29,037 109,571
Less-- Accumulated depreciation............................. (6,388) (31,848)
--------- -----------
Property and equipment, net............................. $ 22,649 $ 77,723
--------- -----------
--------- -----------
</TABLE>
Depreciation expense was $5,320 and $25,460 for the years ended December 31,
1997 and 1998.
5. ACCRUED LIABILITIES:
Accrued liabilities is comprised of the following as of December 31, 1997
and 1998:
<TABLE>
<CAPTION>
1997 1998
--------- -----------
<S> <C> <C>
Payroll tax payable.................................................. $ 4,517 $ 14,631
Sales tax payable.................................................... 2,603 18,688
Employee payable..................................................... 10,397 49,632
Accrued payroll...................................................... -- 35,273
Accrued bonuses...................................................... -- 10,213
Other................................................................ 10,320 40,490
--------- -----------
Total accrued liabilities........................................ $ 27,837 $ 168,927
--------- -----------
--------- -----------
</TABLE>
6. DEBT:
Long-term debt is comprised of the following as of December 31, 1997 and
1998:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1998
---------- -----------
<S> <C> <C>
Note payable to a stockholder, bearing interest at 6%, due on
demand............................................................ $ 98,662 $ 43,444
Note payable to a bank bearing interest at prime plus 1.25%, (9% at
December 31,1998) payable in monthly installments of principal and
interest of $2,085, maturing December 2003; secured by personal
guaranty of the majority owner.................................... -- 98,840
---------- -----------
98,662 142,284
Less-- Current maturities........................................... (98,662) (59,070)
---------- -----------
Long-term debt...................................................... $ -- $ 83,214
---------- -----------
---------- -----------
</TABLE>
F-134
<PAGE>
FIFTH GEAR MEDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. DEBT: (CONTINUED)
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ---------------------------------------------------------------------------------
<S> <C>
1999............................................................................. $ 59,070
2000............................................................................. 18,404
2001............................................................................. 20,130
2002............................................................................. 22,019
2003............................................................................. 22,661
-----------
Total............................................................................ $ 142,284
-----------
-----------
</TABLE>
Total interest expense on the debt obligations was $6,077 and $6,103 for the
years ended December 31, 1997 and 1998, respectively.
7. INCOME TAXES:
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Current................................................................. $ -- $ 43,124
Deferred................................................................ 5,994 28,219
--------- ---------
Total current and deferred.............................................. $ 5,994 $ 71,343
--------- ---------
--------- ---------
</TABLE>
The Company's effective tax rate is equivalent to the statutory tax rate.
Significant components of the Company's deferred tax liabilities and assets
as of December 31, 1997 and 1998, are shown below:
<TABLE>
<CAPTION>
1997 1998
--------- ----------
<S> <C> <C>
Deferred tax assets--
Bad debt reserve.................................................... $ 1,936 $ 4,176
Net operating loss carryforward..................................... 19,641 --
--------- ----------
Total deferred tax assets............................................. 21,577 4,176
Deferred tax liabilities--
Tax depreciation in excess of book.................................. -- (10,818)
--------- ----------
Net deferred tax assets (liabilities)................................. $ 21,577 $ (6,642)
--------- ----------
--------- ----------
</TABLE>
8. COMMITMENTS AND CONTINGENCIES:
The Company leases its office facility under a noncancelable operating lease
which expires in September 1999. The Company also has operating lease agreements
related to certain
F-135
<PAGE>
FIFTH GEAR MEDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
equipment which expire at various dates. Rent expense for the years ended
December 1997 and 1998, totaled $18,968 and $46,603, respectively. Future
minimum lease payments are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
-----------
<S> <C>
1999.............................................................................. $ 45,741
2000.............................................................................. 19,362
2001.............................................................................. 10,182
2002.............................................................................. 3,366
2003.............................................................................. 1,964
Thereafter........................................................................ --
-----------
Total minimum lease payments...................................................... $ 80,615
-----------
-----------
</TABLE>
In the ordinary course of business, the Company may be subject to legal
actions and claims. Management does not believe litigation or claims will have a
material effect on the Company's financial condition or results of operations.
9. EQUITY INCENTIVE PLAN:
Effective January 1, 1998, the Company authorized the Board of Directors to
grant incentive options to purchase common stock of the Company. The Board of
Directors determines the number of stock options to be granted, the exercise or
purchase price, vesting schedule, and expiration date of such options.
The exercise price of options qualifying as Incentive Stock Options under
Section 422 of the Internal Revenue Code may not be less than the grant date
fair market value of the common stock. Incentive Stock Options granted to any
10% stockholder may not be less than 110% of the grant date fair market value of
the common stock. Stock options granted during 1998, are immediately exercisable
and have a maximum term of ten years from the date of grant, subject to earlier
termination following the optionee's cessation of service with the Company.
Shares purchased under each option shall be subject to repurchase by the
Company, at the original exercise price paid per share, upon the optionee's
cessation of service prior to vesting in those shares. Such repurchase rights
shall lapse as the options vest over a specified period up to four years. No
options were granted prior to January 1, 1998.
Options outstanding at December 31, 1997 and 1998, were as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE WEIGHTED AVERAGE
SHARES PER SHARE EXERCISE PRICE
----------- -------------- ---------------------
<S> <C> <C> <C>
Options outstanding at December 31, 1997..... -- $ -- $ --
Granted.................................... 479,925 .001-.11 .09
Exercised.................................. -- -- --
Canceled................................... (20,000) .04 .04
-----------
Options outstanding at December 31, 1998..... 459,925 $ .09
-----------
-----------
</TABLE>
F-136
<PAGE>
FIFTH GEAR MEDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. EQUITY INCENTIVE PLAN: (CONTINUED)
The following is summary information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------------------
WEIGHTED WEIGHTED OPTIONS VESTED
AVERAGE AVERAGE ---------------------------
NUMBER OF REMAINING EXERCISE NUMBER OF
EXERCISE PRICES SHARES CONTRACT LIFE PRICE SHARES EXERCISE PRICE
- --------------- ----------- ------------------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
.001-.11 459,925 5 $ .09 201,300 .02-.11
</TABLE>
Pro forma information regarding net income has been determined as if the
Company accounted for its stock options under the fair value method of SFAS 123.
The fair value of these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions: an
exercisable event occurring in five years; risk-free interest rates ranging from
4.66% to 5.66%; dividend yield of 0%; a volatility factor of zero; and a
weighted average expected life of five years. The average fair value at date of
grant for options granted during the year ended December 31, 1998, was $0.02 per
option.
Had compensation cost for the Company's stock option plan been determined
based on the fair value at the date of grant consistent with SFAS 123, the
Company's net income would have been as follows:
<TABLE>
<CAPTION>
1997 1998
--------- -----------
<S> <C> <C>
Net income--as reported.............................................. $ 11,583 $ 145,283
Net income--pro forma................................................ $ 11,583 $ 142,101
</TABLE>
11. RELATED-PARTY TRANSACTIONS:
The Company has notes payable with a stockholder totaling $98,662 and
$43,444 as of December 31, 1997 and 1998.
12. AGREEMENT TO MERGE WITH ALIGN SOLUTIONS CORP.:
The Company has signed a letter of intent to merge with Align Solutions
Corp.
F-137
<PAGE>
NOTES TO THE UNAUDITED MARCH 31, 1998 AND 1999 FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Rule 10-01 of Regulation S-X.
Accordingly, they do not contain all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the accompanying unaudited financial statements
reflect all adjustments (consisting of only normal recurring adjustments)
considered necessary for a fair presentation of the Company's financial
condition as of March 31, 1999, the results of its operations and its cash flows
for the three-month periods ended March 31, 1999 and 1998, and the results of
its cash flows for the three months ended March 31, 1999 and 1998. These
financial statements should be read in conjunction with the Company's audited
1998 and 1997 financial statements, including the notes thereto. Operating
results for the three-month period ended March 31, 1999, are not necessarily
indicative of the operating results that may be expected for the year ending
December 31, 1999.
F-138
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To inmedia, inc.:
We have audited the accompanying balance sheets of inmedia, inc. (a Texas
corporation) as of December 31, 1997 and 1998, and the related statements of
operations, stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of inmedia, inc. as of December
31, 1997 and 1998, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations,
is in default on a significant portion of its debt and has a net capital
deficiency that raises substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are described in
Note 12. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
Dallas, Texas,
May 21, 1999 (except with respect to
the matter discussed in Note 12, as
to which the date is May 27, 1999)
F-139
<PAGE>
INMEDIA, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1998
------------ ------------ MARCH 31,
1999
------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................. $ 13,377 $ -- $ --
Accounts receivable................................................... 189,103 177,179 125,047
Unbilled revenue...................................................... -- 14,180 10,416
Prepaid expenses and other............................................ -- 24,868 5,090
------------ ------------ ------------
Total current assets................................................ 202,480 216,227 140,553
PROPERTY AND EQUIPMENT, net............................................. 93,924 84,266 73,027
OTHER ASSETS............................................................ 4,169 11,851 11,651
------------ ------------ ------------
Total assets........................................................ $ 300,573 $ 312,344 $ 225,231
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, including cash overdraft of $0, $25,700, and $35,600
(unaudited)......................................................... $ 64,418 $ 230,010 $ 217,790
Accrued liabilities................................................... 57,194 103,992 108,450
Customer deposits..................................................... 99,005 250,938 264,641
Current maturities of long-term debt.................................. 383,250 456,358 553,046
------------ ------------ ------------
Total current liabilities........................................... 603,867 1,041,298 1,143,927
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities............................. 88,801 5,712 93
------------ ------------ ------------
Total liabilities................................................... 692,668 1,047,010 1,144,020
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock; no par value, 1,000,000 shares authorized, 787,032,
787,032, and 790,032, shares issued and outstanding as of 1997,
1998, and 1999...................................................... 1,000 1,000 2,500
Additional paid-in capital............................................ -- -- 30,000
Retained deficit...................................................... (393,095) (735,666) (951,289)
------------ ------------ ------------
Total stockholders' equity.......................................... (392,095) (734,666) (918,789)
------------ ------------ ------------
Total liabilities and stockholders' equity.......................... $ 300,573 $ 312,344 $ 225,231
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-140
<PAGE>
INMEDIA, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
---------------------------- -------------------------
1997 1998 1998 1999
------------- ------------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES................................................ $ 1,531,561 $ 1,194,961 $ 448,746 $ 154,164
COST OF SERVICES........................................ 1,283,810 943,027 252,476 205,921
------------- ------------- ----------- ------------
GROSS PROFIT............................................ 247,751 251,934 196,270 (51,757)
SELLING, GENERAL AND ADMINISTRATIVE..................... 464,649 511,785 122,673 145,132
OTHER INCOME (EXPENSE):
Interest income....................................... 4 99 93 2,524
Interest expense...................................... (82,943) (82,906) (17,812) (21,258)
Other income.......................................... 51 87 -- --
------------- ------------- ----------- ------------
INCOME (LOSS) BEFORE INCOME TAXES....................... (299,786) (342,571) 55,878 (215,623)
INCOME TAXES............................................ -- -- -- --
------------- ------------- ----------- ------------
NET INCOME (LOSS)....................................... $ (299,786) $ (342,571) $ 55,878 $ (215,623)
------------- ------------- ----------- ------------
------------- ------------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-141
<PAGE>
INMEDIA, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL DEFICIT
--------- --------- ----------- ------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996....................................... 787,032 $ 1,000 $ -- $ (93,309)
Net loss....................................................... -- -- -- (299,786)
--------- --------- ----------- ------------
BALANCE, December 31, 1997....................................... 787,032 1,000 -- (393,095)
Net loss....................................................... -- -- -- (342,571)
--------- --------- ----------- ------------
BALANCE, December 31, 1998....................................... 787,032 1,000 -- (735,666)
Issuance of common stock (unaudited)........................... 3,000 1,500 -- --
Equity related compensation (unaudited)........................ -- -- 30,000 --
Net loss (unaudited)........................................... -- -- -- (215,623)
--------- --------- ----------- ------------
BALANCE, March 31, 1999 (unaudited).............................. 790,032 $ 2,500 $ 30,000 $ (951,289)
--------- --------- ----------- ------------
--------- --------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-142
<PAGE>
INMEDIA, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------- --------------------
1997 1998 1998 1999
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................. $(299,786) $(342,571) $ 55,878 $(215,623)
Depreciation and amortization................. 62,086 44,957 11,239 11,239
Equity related compensation................... -- -- -- 30,000
Adjustments to reconcile net (loss) income to
net cash provided by (used in) operating
activities--
Changes in assets and liabilities--
Accounts receivable....................... (69,325) 11,924 (97,468) 52,132
Unbilled revenue.......................... -- (14,180) (4,496) 3,764
Prepaid expenses and other................ -- (24,868) (5,867) 19,778
Other assets.............................. (1,503) (7,682) (107) 200
Accounts payable, including cash
overdraft............................... 49,842 165,592 9,111 (12,220)
Accrued liabilities....................... (1,594) 46,798 12,339 4,458
Customer deposits......................... 49,905 151,933 24,255 13,703
--------- --------- --------- ---------
Net cash (used in) provided by operating
activities.............................. (210,375) 31,903 4,884 (92,569)
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................... (33,721) (35,299) (5,569) --
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.................. 142,509 69,954 -- 97,880
Payments on long-term debt.................... (15,066) (79,935) (12,692) (6,811)
Proceeds from issuance of common stock........ -- -- -- 1,500
--------- --------- --------- ---------
Net cash provided by (used in) financing
activities.............................. 127,443 (9,981) (12,692) 92,569
--------- --------- --------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS....... (116,653) (13,377) (13,377) --
CASH AND CASH EQUIVALENTS, beginning of
period........................................ 130,030 13,377 13,377 --
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period........ $ 13,377 $ -- $ -- $ --
--------- --------- --------- ---------
--------- --------- --------- ---------
SUPPLEMENTAL INFORMATION:
Cash paid for interest........................ $ 78,684 $ 74,188 $ 12,383 $ 2,806
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-143
<PAGE>
INMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
inmedia, inc. (the "Company") specializes in electronic marketing on the
Internet. The Company is a full service developer of Internet and intranet
sites, offering services in three areas: website design, promotion, and
training. The Company was incorporated in the state of Texas in November 1992.
2. GOING CONCERN MATTERS:
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements during the years ended December 31, 1997 and 1998, the Company
incurred losses of $299,786 and $342,571, respectively, and is in default on a
significant portion of its debt. These factors among others indicate that the
Company may be unable to continue as a going concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern. As described in Note 7,
the Company is currently in default of its installment note payable. As a result
of the default, the Company has classified the balance of its installment note
payable ($413,343 at December 31, 1998) as a current liability.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using a
straight-line method over the estimated useful lives of the assets. The costs
and related accumulated depreciation of property and equipment sold, retired, or
disposed of are removed from the accounts and any gains or losses reflected in
the statements of operations. Expenditures for major acquisitions and
improvements are capitalized while expenditures for maintenance and repair costs
are expensed as incurred.
INCOME TAXES
Income taxes are accounted for using an asset and liability approach that
requires the recognition of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
The measurement of current and deferred tax liabilities and assets is based on
provisions of the enacted tax law; the effects of future changes in tax laws or
rates are not anticipated. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available evidence,
are not expected to be realized.
F-144
<PAGE>
INMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
REVENUE RECOGNITION
Revenues are recognized for time and materials-based arrangements as
services are performed and fixed fee arrangements on the
percentage-of-completion method. Under this approach, revenues and gross profit
are recognized as the work is performed, based on the ratio of costs incurred to
total estimated costs. Unbilled revenues on contracts are comprised of labor
costs incurred, plus earnings on certain contracts which have not been billed.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Customer deposits represent the amount of
customer payments received in advance of services being performed.
COST OF SERVICES
Cost of services is comprised primarily of salaries, employee benefits, and
incentive compensation of billable employees, and a proportionate share of
depreciation and facilities costs based on the ratio of billable employees to
total employees.
ACCOUNTING FOR STOCK BASED COMPENSATION
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 allows either adoption of a fair value
based method of accounting for stock-based compensation or continuation under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). The Company has chosen to account for stock-based
compensation using the intrinsic value based method prescribed in APB 25 and
provides the pro forma disclosure provision of SFAS 123. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
fair market value of the Company's stock over the exercise price at the date of
the grant.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments have carrying amounts which approximate
fair value due to their relative short maturity and/or their variable interest
rates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, ("SFAS 130"), "Reporting Comprehensive
Income" which is required to be adopted in the period ended December 31, 1998.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in the financial statements, and (b)
display the accumulated balance of other comprehensive income separately
F-145
<PAGE>
INMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
from retained earnings and additional paid-in-capital in the Statement of
Stockholders' Equity. The adoption of SFAS 130 did not have any effect on the
Company's financial statements as the Company does not have any elements of
comprehensive income other than net income.
4. SIGNIFICANT CUSTOMERS:
During the year ended December 31, 1997, sales to three customers accounted
for approximately 14%, 14%, and 11% of revenues. During the year ended December
31, 1998, sales to four customers accounted for approximately 35%, 24%, 18%, and
10% of revenues. As of December 31, 1998, accounts receivable from two customers
accounted for approximately 41% and 28% of accounts receivable.
5. PROPERTY AND EQUIPMENT:
Property and equipment is comprised of the following as of December 31, 1997
and 1998:
<TABLE>
<CAPTION>
USEFUL
LIFE 1997 1998
------ ------------ ------------
<S> <C> <C> <C>
Computers and equipment.................................. 3 $ 216,938 $ 239,873
Furniture and fixtures................................... 5 13,235 14,025
Leasehold improvements................................... 5 -- 11,574
------------ ------------
230,173 265,472
Less- Accumulated depreciation........................... (136,249) (181,206)
------------ ------------
Property and equipment, net.............................. $ 93,924 $ 84,266
------------ ------------
------------ ------------
</TABLE>
Depreciation expense was $62,086 and $44,957 for the periods ended December
31, 1997 and 1998.
6. ACCRUED LIABILITIES:
Accrued liabilities is comprised of the following as of December 31, 1997
and 1998:
<TABLE>
<CAPTION>
1997 1998
--------- -----------
<S> <C> <C>
Accrued sales tax.................................................... $ 57,194 $ 67,980
Accrued salaries..................................................... -- 36,012
--------- -----------
Accrued liabilities.................................................. $ 57,194 $ 103,992
--------- -----------
--------- -----------
</TABLE>
7. DEBT:
The Company has an installment note with equal installment payments due each
month. All interest on the note is accrued and capitalized into the note
balance. As of December 31, 1998, the Company has not made the required monthly
payments and is currently in default of this loan. As a result of the default,
the Company has classified the balance of its installment note payable as a
current liability.
Additionally, the Company has a term loan, amount not to exceed $70,000,
from a bank with interest at 1% over the bank's borrowing rate (9.25% at
December 31, 1998), not to exceed
F-146
<PAGE>
INMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. DEBT: (CONTINUED)
10%. The loan has a maturity of October 1, 1999, is secured by accounts
receivable of the Company, and is guaranteed by certain stockholders.
Debt at December 31, 1997 and 1998, is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1998
------------ ------------
<S> <C> <C>
Installment note, bearing interest at 16%, payable in monthly installments of $8,089,
maturing January 1, 2001, secured by all assets of the Company and guaranteed by
certain stockholders................................................................ $ 343,889 $ 413,343
Loan from a related party, bearing interest at 18%, due on demand and guaranteed by
certain stockholders................................................................ 20,117 20,617
Term loan............................................................................. 65,467 4,776
Equipment financing, bearing interest at rates ranging from 13% to 16%, payable in
monthly installments ranging from $85 to $485, maturing January 1999 through January
2001, secured by certain equipment.................................................. 42,578 23,334
------------ ------------
472,051 462,070
Less--Current maturities.............................................................. (383,250) (456,358)
------------ ------------
Long-term debt........................................................................ $ 88,801 $ 5,712
------------ ------------
------------ ------------
</TABLE>
Maturities on long-term debt at December 31, 1998, are as follows:
<TABLE>
<S> <C>
1999............................................................. $ 456,358
2000............................................................. 5,619
2001............................................................. 93
2002............................................................. --
2003............................................................. --
---------
$ 462,070
---------
---------
</TABLE>
8. INCOME TAXES:
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to the effective income tax is
as follows:
<TABLE>
<CAPTION>
1997 1998
----- -----
<S> <C> <C>
Tax at U.S. statutory rates.................................................. (35)% (35 )%
Meals and entertainment...................................................... 1% 1%
Net operating loss carryforward.............................................. 34% 34%
-- --
Effective income tax rate.................................................... --% --%
-- --
-- --
</TABLE>
F-147
<PAGE>
INMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES: (CONTINUED)
Significant components of the Company's deferred tax liabilities and assets
as of December 31, 1997 and 1998, are shown below.
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Deferred tax assets--
Net operating loss carryforward................................. $ 114,576 $ 102,646
Accrual to cash difference...................................... 9,571 124,902
------------ ------------
Total deferred tax assets......................................... 124,147 227,548
Valuation allowance............................................... (124,147) (227,548)
------------ ------------
Net deferred tax assets........................................... $ -- $ --
------------ ------------
------------ ------------
</TABLE>
The Company's net operating loss carryforward expires in years 2010 through
2018.
Management periodically reviews the expected realization of the Company's
deferred tax assets and records a valuation allowance, as appropriate, when
existing conditions impact the probability of ultimate realization of the
deferred tax asset. Due to the Company's recurring losses before income taxes,
management believes it is more likely than not that the Company will not realize
the net deferred tax asset. Accordingly, the Company has recorded a valuation
allowance to reflect uncertainties associated with the ultimate realization of
certain deferred tax assets.
9. COMMITMENTS AND CONTINGENCIES:
The Company leases its office facility under a noncancelable operating lease
which expires in November 2003. The lease requires the payment of property
taxes, insurance, and maintenance. The Company also has operating lease
agreements related to certain equipment which expire at various dates. Future
minimum lease payments under operating leases are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
-----------
<S> <C>
1999............................................................................. $ 108,189
2000............................................................................. 108,189
2001............................................................................. 106,935
2002............................................................................. 100,669
2003............................................................................. 83,891
Thereafter....................................................................... --
-----------
$ 507,873
-----------
-----------
</TABLE>
Rent expense for the years ended 1997 and 1998 totaled $49,580 and $57,855,
respectively.
In the ordinary course of business, the Company may be subject to legal
actions and claims. Management does not believe litigation or claims will have a
material effect on the Company's financial condition or results of operations.
F-148
<PAGE>
INMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. EQUITY INCENTIVE PLANS:
Effective May 9, 1996, the Company approved the inmedia, inc. Stock
Compensation Plan (the "Plan") authorizing the Board of Directors to grant
incentive or nonqualified options to purchase common stock of the Company. The
Board of Directors has authorized shares to be issued under the Plan. The Plan
is administered by the Board of Directors, which determines the number of stock
options to be granted, the exercise or purchase price, exercise schedule, and
expiration date of such options.
The exercise price of options qualifying as incentive stock options under
Section 422 of the Internal Revenue Code may not be less than the grant date
fair market value of the common stock. Incentive stock options granted to any
10% stockholder may not be less than 110% of the fair market value of the common
stock on the grant date. Stock options granted under the Plan are
nontransferable and generally expire ten years after the date of grant. Upon the
event that all of the outstanding shares of common stock of the Company are
acquired by an unrelated party, the optionee's exercise schedule shall be
accelerated to provide that optionee with exercisability of 100% of the options
granted. All options granted become exercisable over a four-year period of
continued employment.
Options outstanding at December 31, 1997 and 1998, were as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
----------- ---------------------
<S> <C> <C>
Options outstanding at December 31, 1996..................... 80,000 $ .50
Granted.................................................... 40,000 .50
Exercised.................................................. -- --
Canceled................................................... -- --
----------- ---
Options outstanding at December 31, 1997..................... 120,000 .50
Granted.................................................... -- --
Exercised.................................................. -- --
Canceled................................................... -- --
----------- ---
Options outstanding at December 31, 1998..................... 120,000 $ .50
----------- ---
----------- ---
</TABLE>
The following is summary information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED AVERAGE ------------------------------
NUMBER OF REMAINING WEIGHTED AVERAGE NUMBER OF
EXERCISE PRICES SHARES CONTRACT LIFE EXERCISE PRICE SHARES EXERCISE PRICE
- ----------------- ----------- --------------------------- --------------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
$ .50 120,000 8 $ .50 50,000 $ .50
</TABLE>
Pro forma information regarding net income has been determined as if the
Company accounted for its stock options under the fair value method of SFAS 123.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option-pricing model with the following assumptions used for 1997:
an exercisable event occurring in five years; risk-free interest rates ranging
from 4.90% to 5.10%; dividend yield of 0%; a volatility factor of zero and a
weighted average expected life of 5 years. The weighted average fair value at
date of grant for
F-149
<PAGE>
INMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. EQUITY INCENTIVE PLANS: (CONTINUED)
options granted during the year ended December 31, 1997, was $.11 per option.
There were no additional options granted during the year ended December 31,
1998.
Had compensation cost for the Company's stock option plan been determined
based on the fair value at the date of grant consistent with SFAS 123, the
Company's net loss would have been as follows:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Net loss--As reported............................................. $ (299,786) $ (342,571)
Net loss--Pro forma............................................... (301,458) (344,763)
</TABLE>
11. RELATED-PARTY TRANSACTIONS:
The Company has a loan payable to a related party totaling $20,117 and
$20,617 as of December 31, 1997, and 1998, respectively. The loan payable is due
on demand and is guaranteed by certain stockholders.
12. SUBSEQUENT EVENTS:
On May 27, 1999, the Company entered into an asset purchase agreement with
Align Solutions Corp. ("Align") whereby the Company will receive Align stock in
exchange for substantially all the assets and certain liabilities of the
Company. The agreement provides that the Company will retain a portion of the
installment note, certain accounts payable and the office facility lease
obligation.
F-150
<PAGE>
NOTES TO THE UNAUDITED MARCH 31, 1998 AND 1999 FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Rule 10-01 of Regulation S-X. Accordingly,
they do not contain all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, the accompanying unaudited financial statements reflect all
adjustments (consisting of only normal recurring adjustments) considered
necessary for a fair presentation of the Company's financial condition as of
March 31, 1999, and the results of its operations and its cash flows for the
three-month periods ended March 31, 1998 and 1999. These financial statements
should be read in conjunction with the Company's audited 1998 financial
statements, including the notes thereto. Operating results for the three-month
period ended March 31, 1999, are not necessarily indicative of the operating
results that may be expected for the year ending December 31, 1999.
B. DEBT
As of March 31, 1999, the Company has an additional loan payable for $35,000
to a related party with a rate of interest equal to 8%. This loan matures on
February 18, 2000, and is guaranteed by certain stockholders.
C. EQUITY INCENTIVE PLANS
The Company granted 24,000 options during the three months ended March 31,
1999, at an exercise price of $.50 per share. The Company recognized $30,000 of
compensation expense in connection with these stock option grants.
F-151
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Synapse Group, Inc.:
We have audited the accompanying balance sheets of Synapse Group, Inc. (a
Texas S corporation) as of December 31, 1997 and 1998, and the related
statements of operations, stockholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Synapse Group, Inc. as of
December 31, 1997 and 1998, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
May 28, 1999
F-152
<PAGE>
SYNAPSE GROUP, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
<S> <C> <C>
1997 1998
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................................. $ 23,944 $ --
Accounts receivable, net of allowance for doubtful accounts of $7,200 and $9,003...... 463,646 368,502
Unbilled revenues..................................................................... 10,731 171,512
Prepaid expenses and other............................................................ 25,784 13,993
----------- -----------
Total current assets.............................................................. 524,105 554,007
PROPERTY AND EQUIPMENT, net............................................................. 189,774 139,519
OTHER ASSETS............................................................................ 13,665 13,800
----------- -----------
Total assets...................................................................... $ 727,544 $ 707,326
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, including cash overdraft of $0 and $33,733.......................... $ 86,544 $ 100,606
Customer deposits..................................................................... 154,589 122,091
Accrued liabilities................................................................... 115,410 21,893
Notes payable......................................................................... 32,900 159,093
Current maturities of long-term debt.................................................. 13,062 3,558
----------- -----------
Total current liabilities......................................................... 402,505 407,241
----------- -----------
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities............................................. 1,907 4,773
----------- -----------
Total liabilities................................................................. 404,412 412,014
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock: $.01 par value, 10,000,000 shares authorized, 692,700 and 715,000 shares
issued and outstanding as of 1997 and 1998.......................................... 6,927 7,150
Additional paid-in capital............................................................ 102,377 126,837
Retained earnings..................................................................... 213,828 161,325
----------- -----------
Total liabilities and stockholders' equity........................................ $ 727,544 $ 707,326
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-153
<PAGE>
SYNAPSE GROUP, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------
1997 1998
------------- -------------
<S> <C> <C>
REVENUES............................................................................ $ 2,086,172 $ 2,540,402
COST OF SERVICES.................................................................... 1,532,652 1,907,913
------------- -------------
GROSS PROFIT........................................................................ 553,520 632,489
SELLING, GENERAL AND ADMINISTRATIVE................................................. 766,163 669,531
OTHER INCOME (EXPENSE):
Interest expense.................................................................. (5,812) (16,039)
Other income...................................................................... 7,317 578
------------- -------------
NET LOSS............................................................................ $ (211,138) $ (52,503)
------------- -------------
------------- -------------
PRO FORMA INCOME TAXES (UNAUDITED).................................................. -- --
------------- -------------
PRO FORMA NET LOSS (UNAUDITED)...................................................... $ (211,138) $ (52,503)
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-154
<PAGE>
SYNAPSE GROUP, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
--------- --------- ----------- ------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996...................................... 692,700 $ 6,927 $ 102,377 $ 547,917
Distributions................................................. -- -- -- (122,951)
Net loss...................................................... -- -- -- (211,138)
--------- --------- ----------- ------------
BALANCE, December 31, 1997...................................... 692,700 6,927 102,377 213,828
Issuance of common stock...................................... 22,300 223 24,460 --
Net loss...................................................... -- -- -- (52,503)
--------- --------- ----------- ------------
BALANCE, December 31, 1998...................................... 715,000 $ 7,150 $ 126,837 $ 161,325
--------- --------- ----------- ------------
--------- --------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-155
<PAGE>
SYNAPSE GROUP, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------
1997 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................................ $ (211,138) $ (52,503)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities--
Depreciation and amortization................................................... 135,072 138,669
Loss on disposition of assets................................................... -- 856
Changes in assets and liabilities--
Accounts receivable........................................................... (35,989) 95,144
Unbilled revenues............................................................. (10,731) (171,512)
Prepaid expenses and other.................................................... (4,306) 11,791
Other assets.................................................................. 6,556 (135)
Accounts payable, including cash overdraft.................................... (32,853) 14,062
Customer deposits............................................................. 125,093 (21,768)
Accrued liabilities........................................................... 60,331 (93,517)
------------ ------------
Net cash provided by (used in) operating activities......................... 32,035 (78,913)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................................................ (55,060) (89,269)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayments on) notes payable......................................... 27,075 126,193
Proceeds from issuance of common stock.............................................. -- 24,683
Proceeds from long-term debt........................................................ -- 8,158
Payments on long-term debt.......................................................... (20,418) (14,796)
Distributions to owners............................................................. (122,951) --
------------ ------------
Net cash provided by (used in) financing activities......................... (116,294) 144,238
NET DECREASE IN CASH AND CASH EQUIVALENTS............................................. (139,319) (23,944)
CASH AND CASH EQUIVALENTS,
beginning of period................................................................. 163,263 23,944
------------ ------------
CASH AND CASH EQUIVALENTS,
end of period....................................................................... $ 23,944 $ --
------------ ------------
------------ ------------
SUPPLEMENTAL INFORMATION:
Cash paid for interest.............................................................. $ 5,812 $ 16,039
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-156
<PAGE>
SYNAPSE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
Synapse Group, Inc. (the "Company") performs Internet and intranet
consulting services, Internet hosting, and related hardware sales for a variety
of customers utilizing the Internet for on-line marketing. The Company was
incorporated in the state of Texas in April 1995.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using a
straight-line method over the estimated useful lives of the assets. The costs
and related accumulated depreciation of property and equipment sold, retired, or
disposed of are removed from the accounts and any gains or losses are reflected
in the statements of operations. Expenditures for major acquisitions and
improvements are capitalized while expenditures for maintenance and repairs are
expensed as incurred.
INCOME TAXES
As an S corporation, the Company pays no federal income tax but rather the
stockholders are taxed individually on the Company's taxable income or loss.
Accordingly, no provisions for federal income taxes are reflected in the
accompanying financial statements.
The unaudited pro forma tax information included in the accompanying
statements of operations reflect estimates of the Company's tax provision or
benefit as if it had been a C corporation in fiscal years 1997 and 1998. In
accordance with SFAS No. 109, "Accounting for Income Taxes," no pro forma tax
benefit was reflected due to the Company's recurring losses and the uncertainty
related to the realization of any tax assets.
REVENUE RECOGNITION
Revenues are recognized for time and materials-based arrangements as
services are performed and fixed fee arrangements on the
percentage-of-completion method. Under this approach, revenues and gross profit
are recognized as the work is performed, based on the ratio of costs incurred to
total estimated costs. Unbilled revenues on contracts are comprised of labor
costs incurred, plus earnings on certain contracts which have not been billed.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Customer deposits represent the amount of
customer payments received in advance of services being performed.
COST OF SERVICES
Cost of services is comprised primarily of salaries, employee benefits,
incentive compensation of billable employees, and a proportionate share of
depreciation and facilities costs based on the ratio of billable employees to
total employees.
F-157
<PAGE>
SYNAPSE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
ACCOUNTING FOR EQUITY BASED COMPENSATION
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 allows either adoption of a fair value
based method of accounting for stock-based compensation or continuation under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). The Company has chosen to account for stock-based
compensation using the intrinsic value based method prescribed in APB 25 and
provides the pro forma disclosure provision of SFAS 123. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
fair market value of the Company's stock over the exercise price at the date of
the grant.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments have carrying amounts which approximate
fair value due to the relative short maturity of these instruments and/or their
variable interest rates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, ("SFAS No. 130") "Reporting
Comprehensive Income," which is required to be adopted in the period ended
December 31, 1998. SFAS No. 130 requires that an enterprise (a) classify items
of other comprehensive income by their nature in the financial statements, and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in-capital in the Statement of
Stockholders' Equity. The adoption of SFAS 130 did not have any effect on the
Company's financial statements as the Company does not have any elements of
comprehensive income other than net income.
3. SIGNIFICANT CUSTOMERS:
During the year ended December 31, 1997, sales to two customers accounted
for approximately 51% and 11% of revenue. During the year ended December 31,
1998, sales to three customers accounted for approximately 53%, 15%, and 10% of
revenue.
As of December 31, 1998, accounts receivable from two customers accounted
for 63% and 10% of total accounts receivable.
F-158
<PAGE>
SYNAPSE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT:
Property and equipment is comprised of the following as of December 31, 1997
and 1998:
<TABLE>
<CAPTION>
USEFUL
LIFE 1997 1998
----------- ------------ ------------
<S> <C> <C> <C>
Furniture and fixtures................................... 5 $ 53,189 $ 58,173
Computers and equipment.................................. 2-5 340,856 415,710
Leasehold improvements................................... 1-5 10,224 18,273
------------ ------------
404,269 492,156
Less--Accumulated depreciation........................... (214,495) (352,637)
------------ ------------
Property and equipment, net.......................... $ 189,774 $ 139,519
------------ ------------
------------ ------------
</TABLE>
Depreciation expense was $135,072 and $138,669 for the years ended December
31, 1997 and 1998.
5. ACCRUED LIABILITIES:
Accrued liabilities is comprised of the following as of December 31, 1997
and 1998:
<TABLE>
<CAPTION>
1997 1998
----------- ---------
<S> <C> <C>
Accrued bonus........................................................ $ 58,750 $ --
Accrued benefits..................................................... 26,046 --
Accrued payroll taxes................................................ 17,410 --
Accrued legal........................................................ -- 3,661
Accrued property and sales taxes..................................... 9,624 13,307
Accrued other........................................................ 3,580 4,925
----------- ---------
Total accrued liabilities........................................ $ 115,410 $ 21,893
----------- ---------
----------- ---------
</TABLE>
6. DEBT:
NOTES PAYABLE
The Company has a bank line of credit with a maximum availability of
$300,000. Interest is at the 30-day commercial paper rate plus 3.5% (8.37% at
December 31, 1998), and is payable monthly. The agreement is collateralized by a
security interest in substantially all of the assets of the Company and is
personally guaranteed by two of the Company's stockholders.
F-159
<PAGE>
SYNAPSE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. DEBT: (CONTINUED)
LONG-TERM DEBT
Long-term debt is comprised of the following as of December 31, 1997 and
1998:
<TABLE>
<CAPTION>
1997 1998
---------- ---------
<S> <C> <C>
Equipment financing, bearing interest at 10%, payable in monthly
installments of $278, maturing March 2002, secured by certain
equipment........................................................... $ -- $ 6,424
Equipment financing, bearing interest at 13%, payable in monthly
installments of $656, maturing March 1999, secured by certain
equipment........................................................... 8,709 1,907
Equipment financing, bearing interest at 11%, payable in monthly
installments of $660, maturing March 1998, secured by certain
equipment........................................................... 1,940 --
Equipment financing, bearing interest at 11%, payable in monthly
installments of $758, maturing June 1998, secured by certain
equipment........................................................... 4,320 --
---------- ---------
14,969 8,331
Less--Current portion................................................. (13,062) (3,558)
Long-term debt........................................................ $ 1,907 $ 4,773
---------- ---------
---------- ---------
</TABLE>
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------------------------------------------------------------------
<S> <C>
1999................................................................................ $ 3,558
2000................................................................................ 1,919
2001................................................................................ 2,214
2002................................................................................ 640
---------
$ 8,331
---------
---------
</TABLE>
7. COMMITMENTS AND CONTINGENCIES:
The Company leases office space in Dallas, Texas, and computer hardware
equipment with lease terms through September 2001.
Future minimum annual lease payments under these leases are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
-----------
<S> <C>
1999............................................................................. $ 101,124
2000............................................................................. 83,612
2001............................................................................. 56,880
2002 and thereafter.............................................................. --
-----------
Total minimum lease payments..................................................... $ 241,616
-----------
-----------
</TABLE>
F-160
<PAGE>
SYNAPSE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Rent expense for the periods ended December 31, 1997 and 1998, under these
agreements was $118,791 and $157,432, respectively.
In the ordinary course of business, the Company may be subject to legal
actions and claims. Management does not believe litigation or claims will have a
material effect on the Company's financial condition or results of operations.
8. RETIREMENT PLAN:
During the year ended December 31, 1996, the Company established a
discretionary 401(k) plan (the "Plan") that covers all full-time employees.
Contributions to the Plan are discretionary. The Company made no contributions
to the Plan for the year ended December 31, 1997 or 1998.
9. EQUITY INCENTIVE PLANS:
Effective August 20, 1998, the Company approved the 1998 Stock Option Plan
("the 1998 Plan") authorizing the Board of Directors to grant incentive or
nonqualified options to purchase common stock of the Company. The total number
of shares of common stock which may be issued under the 1998 Plan is 70,100. The
1998 Plan is administered by the Compensation Committee of the Board of
Directors which determines the number of stock options to be granted, the
exercise or purchase price, exercise schedule and expiration date of such
options. Nonqualified stock options may be granted at exercise prices which are
greater than or equal to 80% of the grant date fair market value of the common
stock.
The exercise price of options qualifying as incentive stock options under
Section 422 of the Internal Revenue Code may not be less than the grant date
fair market value of the common stock. Incentive stock options granted to any
10% stockholder may not be less than 110% of the fair market value of the common
stock on the grant date. Stock options granted under the 1998 Plan are
nontransferable and generally expire ten years after the date of grant. Upon the
event that all of the outstanding shares of common stock of the Company are
acquired by an unrelated party, the optionee's exercise schedule shall be
accelerated to provide that optionee with immediate exercisability of the
unvested options granted. All options granted become exercisable over a
five-year period of continued employment.
Options outstanding at December 31, 1997 and 1998 and granted, exercised,
and canceled during those years were as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
----------- -------------------
<S> <C> <C>
Options outstanding at December 31, 1997..................... -- $ --
Granted...................................................... 29,325 7.00
Exercised.................................................... -- --
Canceled..................................................... (800) 7.00
-----------
Options outstanding at December 31, 1998..................... 28,525 $ 7.00
-----------
-----------
</TABLE>
F-161
<PAGE>
SYNAPSE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. EQUITY INCENTIVE PLANS: (CONTINUED)
Following is summary information about stock options outstanding at December
31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- ------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED OPTIONS EXERCISABLE
NUMBER OF SHARES REMAINING EXERCISE ------------------------
UNDER OPTION CONTRACT LIFE PRICE NUMBER AMOUNT
- ------------------ --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
28,525 9.94 $ 7.00 -- $ --
</TABLE>
Pro forma information regarding net income has been determined as if the
Company accounted for its stock options under the fair value method of SFAS 123.
The fair value of these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions used for 1998:
an exercisable event occurring in five years; risk-free interest rate of 4.38%;
dividend yield of 0%; a volatility factor of zero; and a weighted average
expected life of five years. The average Black-Scholes fair value at date of
grant for options granted during the year ended December 31, 1998 was $7.02 per
option.
Had compensation cost for the Company's stock option plan been determined
based on the fair value at the grant date consistent with the provisions of SFAS
123, the Company's net loss for the year ended December 31, 1998, would have
been as follows:
<TABLE>
<S> <C>
Net loss--as reported............................................ $ (52,503)
Net loss--pro forma.............................................. (54,837)
</TABLE>
10. RELATED PARTY TRANSACTIONS:
A stockholder of the Company is a partner in a law firm which the Company
uses for legal services. There were approximately $30,000 in legal fees paid to
this law firm for each of the years ended December 31, 1997 and 1998.
11. AGREEMENT TO MERGE WITH ALIGN SOLUTIONS CORP.:
On February 15, 1999, the Company was acquired by Align Solutions Corp.
F-162
<PAGE>
[GRAPHIC OMITTED]
Sterling Software
Luminant has worked with Sterling Software to redesign Sterling's
Internet site. The look and feel of Sterling's site reflects the
state-of-the-art technology which underlies Sterling's solution-based
products. Sterling's systems allow local content providers to input and
update dynamic content on the Sterling site.
[GRAPHIC OMITTED]
MasterCard
Luminant developed several new interactive programs, games and
partnerships designed to increase site traffic for the MasterCard.com web
site. We have also worked with MasterCard to develop custom media
partnerships and secure participation relationships with over 100 merchants.
[GRAPHIC OMITTED]
M&M/Mars
Luminant has worked with M&M/Mars to create brand-building sites that
provide rich interactive media experiences, such as the M&M studios site and
the SKITTLES Portal, and electronic commerce solutions like the M&M's Network
Online Store.
<PAGE>
YOU MAY RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NEITHER WE NOR ANY
OF THE UNDERWRITERS HAVE AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM
THAT CONTAINED IN THIS PROSPECTUS. WHEN YOU MAKE A DECISION ABOUT WHETHER TO
INVEST IN OUR COMMON STOCK, YOU SHOULD NOT RELY UPON ANY INFORMATION OTHER THAN
THE INFORMATION IN THIS PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
SALE OF COMMON STOCK MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS
CORRECT AFTER THE DATE OF THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO
SELL OR SOLICITATION OF AN OFFER TO BUY THESE SHARES OF COMMON STOCK IN ANY
CIRCUMSTANCES UNDER WHICH THE OFFER OR SOLICITATION IS UNLAWFUL.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Summary......................................... 3
Summary Unaudited Pro Forma Combined Financial
Data.......................................... 6
Risk Factors.................................... 8
About Luminant Worldwide Corporation............ 18
Use of Proceeds................................. 22
Dividend Policy................................. 22
Capitalization.................................. 23
Dilution........................................ 24
Selected Historical Financial Data.............. 26
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 29
Business........................................ 49
Management...................................... 60
Certain Transactions With Related Parties....... 70
Principal Stockholders.......................... 73
Description of Capital Stock.................... 75
Shares Available for Future Sale................ 78
Underwriting.................................... 81
Legal Matters................................... 82
Experts......................................... 83
Where You Can Find Additional Information....... 83
Index to Financial Statements................... F-1
</TABLE>
DEALER PROSPECTUS DELIVERY OBLIGATIONS:
Until , 1999 (25 days after the commencement of this offering), all
dealers that buy, sell or trade these shares of common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealers' obligations to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
[LOGO]
12,575,000 SHARES
COMMON STOCK
DEUTSCHE BANC ALEXQ BROWN
HAMBRECHT & QUIST
SOUNDVIEW TECHNOLOGY GROUP
Prospectus
, 1999
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all fees and expenses, other than the
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of the common stock being registered. All amounts shown are
estimates, except for the Hart-Scott-Rodino filing fee, the registration fee,
the NASD filing fee and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
Hart-Scott-Rodino filing fee................................... $ 45,000
Securities and Exchange Commission registration fee............ 52,820
NASD filing fee................................................ 18,000
Nasdaq National Market listing fee............................. 90,000
Accounting fees and expenses................................... 3,000,000
Legal fees and expenses........................................ 2,750,000
Printing and engraving expenses................................ 600,000
Transfer agent and registrar fees.............................. 50,000
Miscellaneous expenses......................................... 439,180
----------
Total........................................................ $7,045,000
----------
----------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation and By-laws of the Registrant provide for
the indemnification of the Registrant's directors and officers to the fullest
extent authorized by, and subject to the conditions set forth in the General
Corporation Law of the State of Delaware (the "DGCL"), except that the
Registrant will indemnify a director or officer in connection with a proceeding
(or part thereof) initiated by the person only if the proceeding (or part
thereof) was authorized by the Registrant's Board of Directors. The
indemnification provided under the Certificate of Incorporation and By-laws
includes the right to be paid by the Registrant the expenses (including
attorneys' fees) in advance of any proceeding for which indemnification may be
had in advance of its final disposition, provided that the payment of such
expenses (including attorneys' fees) incurred by a director or officer in
advance of the final disposition of a proceeding may be made only upon delivery
to the Registrant of an undertaking by or on behalf of the director or officer
to repay all amounts so paid in advance if it is ultimately determined that the
director or officer is not entitled to be indemnified.
As permitted by the DGCL, the Registrant's Certificate of Incorporation, as
amended, restated and supplemented, provides that directors of the Registrant
shall not be liable to the Registrant or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Registrant or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL,
relating to unlawful payment of dividends or unlawful stock purchase or
redemption or (iv) for any transaction from which the director derived an
improper personal benefit. As a result of this provision, the Registrant and its
stockholders may be unable to obtain monetary damages from a director for breach
of his or her duty of care.
Under the By-laws, the Registrant has the power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Registrant, or is
II-1
<PAGE>
or was serving at the request of the Registrant as a director, officer,
employee, partner (limited or general) or agent of another corporation or of a
partnership, joint venture, limited liability company, trust or other
enterprise, against any liability asserted against the person or incurred by the
person in any such capacity, or arising out of the person's status as such, and
related expenses, whether or not the Registrant would have the power to
indemnify the person against such liability under the provisions of the DGCL.
The Registrant intends to purchase director and officer liability insurance on
behalf of its directors and officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following sets forth certain information as to all securities sold by us
within the last three years that were not registered under the Securities Act of
1933, as amended (the "Securities Act").
On August 22, 1998, Commonwealth Principals II, LLC purchased 7,138,701
shares of common stock for an aggregate purchase price of $1.00. An exemption is
claimed under Section 4(2) of the Securities Act.
On September 1, 1998, we sold 713,870 shares to Guillermo G. Marmol, our
Chief Executive Officer and President, for an aggregate purchase price of
$200,000. An exemption is claimed under Section 4(2) of the Securities Act.
Simultaneously with the completion of the offering and the acquisition of
the seven other companies, we will issue 6,141,806 shares of common stock to
certain former owners of Align Solutions Corp. for their respective interests in
that company. An indeterminate number of shares of common stock may be issued in
payment of contingent consideration, if earned. An exemption is claimed under
Rule 506 of Regulation D promulgated under the Securities Act.
Simultaneously with the completion of the offering and the acquisition of
the seven other companies, we will issue 4,609,091 shares of common stock to the
former owner of Brand Dialogue-New York for certain assets of Brand Dialogue. An
indeterminate number of shares of common stock may be issued in payment of
contingent consideration, if earned. An exemption is claimed under Rule 506 of
Regulation D promulgated under the Securities Act.
Simultaneously with the completion of the offering and the acquisition of
the seven other companies, we will issue 1,917,272 shares of common stock to
certain former owners of Free Range Media, Inc. for their respective interests
in that company. An indeterminate number of shares of common stock may be issued
in payment of contingent consideration, if earned. An exemption is claimed under
Rule 506 of Regulation D promulgated under the Securities Act.
Simultaneously with the completion of the offering and the acquisition of
the seven other companies, we will issue 810,091 shares of common stock to
certain former owners of Integrated Consulting, Inc., dba i.con interactive, for
their respective interests in that company. An indeterminate number of shares of
common stock may be issued in payment of contingent consideration, if earned. An
exemption is claimed under Rule 506 of Regulation D promulgated under the
Securities Act.
Simultaneously with the completion of the offering and the acquisition of
the seven other companies, we will issue 1,770,336 shares of common stock to
certain former owners of InterActive8, Inc. for their respective interests in
that company. An indeterminate number of shares of common stock may be issued in
payment of contingent consideration, if earned. An exemption is claimed under
Rule 506 of Regulation D promulgated under the Securities Act.
Simultaneously with the completion of the offering and the acquisition of
the seven other companies, we will issue 668,182 shares of common stock to
certain former owners of
II-2
<PAGE>
Multimedia Resources, LLC for their respective interests in that company. An
indeterminate number of shares of common stock may be issued in payment of
contingent consideration, if earned. An exemption is claimed under Rule 506 of
Regulation D promulgated under the Securities Act.
Simultaneously with the completion of the offering and the acquisition of
the seven other companies, we will issue 3,470,197 shares of common stock to
certain former owners of Potomac Partners Management Consulting, LLC for their
respective interests in that company. An indeterminate number of shares of
common stock may be issued in payment of contingent consideration, if earned. An
exemption is claimed under Rule 506 of Regulation D promulgated under the
Securities Act.
Simultaneously with the completion of the offering and the acquisition of
the seven other companies, we will issue 1,094,545 shares of common stock to
certain former owners of RSI Group, Inc. for their respective interests in that
company. An indeterminate number of shares of common stock may be issued in
payment of contingent consideration, if earned. An exemption is claimed under
Rule 506 of Regulation D promulgated under the Securities Act.
We will grant options exercisable for a total of 1,570,776 shares of common
stock to former option holders of Align in exchange for outstanding options of
Align. We have relied on no sale to grant those options.
Before completion of the offering and the acquisition of the eight
companies, we will grant options exercisable for a total of 3,028,141 shares of
common stock under our 1999 Long-Term Incentive Plan to our executive officers,
directors and employees. An exemption is claimed under Section 4(2) of the
Securities Act.
Before completion of the offering and the acquisition of the eight companies
we will grant options exercisable for a total of 1,000,000 shares of common
stock to Young & Rubicam outside of the 1999 Long-Term Incentive Plan. An
exemption is claimed under Section 4(2) of the Securities Act.
Before completion of the offering and the acquisition of the eight companies
we will grant options exercisable for a total of 2,205,000 shares of common
stock to persons who will become our employees upon the closing of the offering.
We have relied on no-sale to grant those options.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
1.1+ Form of Underwriting Agreement
3.1+ Certificate of Incorporation of Registrant
3.2+ Amendment to Certificate of Incorporation of Registrant
3.3+ Second Amendment to Certificate of Incorporation of Registrant
3.4+ Third Amendment to Certificate of Incorporation of Registrant
3.5+ Fourth Amendment to Certificate of Incorporation of Registrant
3.6+ Form of Amended and Restated Certificate of Incorporation of the Registrant to be in
effect upon closing of the offering made under this Registration Statement
3.7+ By-Laws of Registrant
3.8+ Form of Amended and Restated By-Laws of the Registrant to be in effect upon closing
of the offering made under this Registration Statement
4.1 Form of Common Stock Certificate
5.1* Opinion of Wilmer, Cutler & Pickering
9.1+ Agreement and Irrevocable Proxy by and between Commonwealth Principals II, LLC and
Richard M. Scruggs, dated as of July 23, 1999.
10.1 1999 Long-Term Incentive Plan, as amended from the form filed as Exhibit 10.1 to
Amendment No. 1 to this Registration Statement.
10.2+ Employment Agreement of Guillermo G. Marmol
10.3+ Form of Transition Services Agreement by and among Clarant Worldwide Corporation and
Young & Rubicam Inc.
10.4+ Agreement and Plan of Reorganization by and among Clarant, Inc., Align Solutions
Acquisition Corp., Align Solutions Corp. and the Stockholders named therein, dated
as of June 2, 1999.
10.5+ Agreement and Plan of Reorganization by and among Clarant, Inc., Free Range Media
Acquisition Corp., Free Range Media, Inc., John C. Dimmer, John B. Dimmer and Andrew
L. Fry, dated as of June 2, 1999.
10.6+ Agreement and Plan of Reorganization by and among Clarant, Inc., Icon Acquisition
Corp., Integrated Consulting, Inc. (d/b/a i.con interactive), Calvin W. Carter,
Elliot W. Hawkes and David Todd McGee, dated as of June 2, 1999.
10.7+ Agreement and Plan of Reorganization by and among Clarant, Inc. Interactive8
Acquisition Corp., Interactive8, Inc. and the Stockholders named therein, dated as
of June 1, 1999.
10.8+ Agreement and Plan of Reorganization by and among Clarant, Inc., Multimedia
Acquisition Corp., Multimedia Resources, LLC, Henry Heilbrunn, Lynn J. Branigan and
Norman L. Dawley, dated as of June 2, 1999.
10.9+ Agreement and Plan of Reorganization by and among Clarant, Inc., Potomac Partners
Acquisition LLC, Potomac Partners Management Consulting, LLC and the Members named
therein, dated as of June 1, 1999.
10.10+ Agreement and Plan of Reorganization by and among Clarant, Inc., RSI I Acquisition
Corp., RSI Group, Inc., Resource Solutions International, LLC, Charles Harrison,
Carolyn Brown and Bruce Grant, dated as of June 1, 1999.
10.11+ Contribution Agreement by and between Clarant Worldwide Corporation and Young &
Rubicam Inc., dated as of June 7, 1999.
10.12+ Credit Agreement by and between Integrated Interacitve, Inc. and Commonwealth
Principals II, LLC, dated as of September 2, 1998.
10.13+ Form of Forfeiture Agreement by and between Commonwealth Principals II, LLC and
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
Luminant Worldwide Corporation.
10.14+ Form of Registration Rights Agreement by and among Luminant Worldwide Corporation,
Commonwealth Principals II, LLC and Guillermo G. Marmol.
10.15+ Management Services Agreement by and between Webone, Inc. and Commonwealth
Principals II, LLC, dated as of September 2, 1998.
10.16+ Employment Agreement of Derek Reisfield
10.17 Luminant Worldwide Corporation Senior Bonus Plan, as amended from the form filed as
Exhibit 10.17 to Amendment No. 1 to this Registration Statement
10.18+ Employment Agreement of Thomas G. Bevivino
10.19+ Agreement by and among Commonwealth Principals II, LLC, Integrated Interactive,
Inc., Chris Meshginpoosh and Tom Bevivino, dated as of March 8, 1999.
21.1+ Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
23.2 Consent of PricewaterhouseCoopers LLP
23.3* Consent of Wilmer, Cutler & Pickering (included in Exhibit 5.1)
23.4+ Consent of Michael H. Jordan to be named in Registration Statement.
23.5+ Consent of Randolph Austin to be named in Registration Statement.
23.6+ Consent of Michael Dolan to be named in Registration Statement.
23.7+ Consent of Lynn J. Branigan to be named in Registration Statement.
23.8+ Consent of Calvin W. Carter to be named in Registration Statement.
23.9+ Consent of James R. Corey to be named in Registration Statement.
23.10+ Consent of John B. Dimmer to be named in Registration Statement.
23.11+ Consent of Bruce D. Grant to be named in Registration Statement.
23.12+ Consent of Henry Heilbrunn to be named in Registration Statement.
23.13+ Consent of Morris W. Markel to be named in Registration Statement.
23.14+ Consent of Andreas Panayi to be named in Registration Statement.
23.15+ Consent of Douglas Rice to be named in Registration Statement.
23.16+ Consent of Richard M. Scruggs to be named in Registration Statement.
24.1+ Power of Attorney (included on signature page to this Registration Statement)
27.1+ Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment.
+ Previously filed.
(b) Financial Statement Schedules
None.
II-5
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as may be required by the underwriter
to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 of this
Registration Statement, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. If a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Pre-Effective Amendment No. 2 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
District of Columbia, on the 6th day of August 1999.
LUMINANT WORLDWIDE CORPORATION
By: /s/ GUILLERMO G. MARMOL
-----------------------------------------
Guillermo G. Marmol
CHIEF EXECUTIVE OFFICER AND PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 2 to the Registration Statement has been signed by
the following persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ --------------------------- -------------------
<C> <S> <C>
/s/ GUILLERMO G. MARMOL Chief Executive Officer,
- ------------------------------ President and director August 6, 1999
Guillermo G. Marmol (chief executive officer)
*
- ------------------------------ Vice Chairman and Executive August 6, 1999
Derek R. Reisfield Vice President
Vice President of Finance
/s/ THOMAS G. BEVIVINO (principal financial
- ------------------------------ officer and principal August 6, 1999
Thomas G. Bevivino accounting officer)
*
- ------------------------------ Director August 6, 1999
George P. Stamas
</TABLE>
* By power of attorney
<TABLE>
<C> <S> <C>
/s/ GUILLERMO G. MARMOL
- ------------------------------
Guillermo G. Marmol
Attorney-in-Fact
</TABLE>
II-7
<PAGE>
Exhibit 4.1
luminant
LUMINANT WORLDWIDE CORPORATION
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
COMMON STOCK COMMON STOCK
PAR VALUE $0.1 CUSIP 550260 10 3
SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK
LUMINANT WORLDWIDE CORPORATION, transferable on the books of the Corporation
by the holder hereof in person or by duly authorized attorney upon surrender
of this Certificate properly endorsed. This Certificate and the shares
represented hereby are issued and shall be subject to all of the provisions
of the Articles of Incorporation and By-Laws of the Corporation, each as from
time to time amended, to all of which the holder by acceptance hereof
assents. This Certificate is not valid until countersigned and registered by
the Transfer Agent and Registrar.
Dated:
SEAL
Secretary President
Countersigned and Registered
AMERICAN STOCK TRANSFER & TRUST COMPANY
Transfer Agent and Registrar,
By
Authorized Officer
<PAGE>
LUMINANT WORLDWIDE CORPORATION
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -as tenants in common UNIF GIFTMIN ACT-Custodian
------------------
(Cust) (Minor)
TEN ENT -as tenants by the entireties under Uniform Gifts
to Minors
JT TEN -as joint tenants with right of
survivorship and not as tenants Act------------------
in common (State)
Additional abbreviations may also be used though not in the above list.
For value received, hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
/ /
--------------------------------------------------------
- -------------------------------------------------------------------------------
(Please print or typewrite name and address including
postal zip code of assignee)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -----------------------------------------------------------------------Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitutes and appoint
--------------------------------------------
- ---------------------------------------------------------------------Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated:
---------------
-----------------------------------
NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the Certificate, in every particular, without
alteration or enlargement or any change whatever.
<PAGE>
Exhibit 10.1
LUMINANT WORLDWIDE CORPORATION
1999 LONG-TERM INCENTIVE PLAN
PURPOSE Luminant Worldwide Corporation, a Delaware
corporation (the "COMPANY"), wishes to recruit,
reward, and retain employees and outside directors.
To further these objectives, the Company hereby sets
forth the Luminant Worldwide Corporation 1999
Long-Term Incentive Plan (the "PLAN"), effective as
of August 6, 1999 (the "EFFECTIVE DATE"), to provide
options ("OPTIONS") to employees and outside
directors of the Company and its subsidiaries to
purchase shares of the Company's common stock (the
"COMMON STOCK").
PARTICIPANTS All Employees of the Company and any Eligible
Subsidiaries are eligible for Options under this
Plan. Eligible employees become "OPTIONEES" when the
Administrator grants them an option under this Plan.
The Administrator may also grant options to
consultants and certain other service providers. The
term OPTIONEE also includes, where appropriate, a
person authorized to exercise an Option in place of
the original recipient.
EMPLOYEE means any person employed as a common law employee
of the Company or an Eligible Subsidiary.
ADMINISTRATOR The ADMINISTRATOR will be the Compensation Committee
of the Board of Directors, unless the Board specifies
another committee of the Board, but the Board may
still act under the Plan as though it were the
Compensation Committee.
The Administrator is responsible for the general operation
and administration of the Plan and for carrying out its
provisions and has full discretion in interpreting and
administering the provisions of the Plan. Subject to the
express provisions of the Plan, the Administrator may
exercise such powers and authority of the Board as the
Administrator may find necessary or appropriate to carry out
its functions. The Administrator may delegate its functions
(other than those described in the GRANTING OF OPTIONS
section) to officers or other employees of the Company.
The Administrator's powers will include, but not be limited
to, the power to amend, waive, or extend any provision or
limitation of any Option. The Administrator may act through
meetings of a majority of its members or by unanimous
consent.
- --------------------------------------------------------------------------------
Luminant Worldwide Corporation
1999 Long-Term Incentive Plan
Page 1 of 16
<PAGE>
GRANTING OF Subject to the terms of the Plan, the Administrator
OPTIONS will, in its sole discretion, determine
the persons who receive Options,
the terms of such Options,
the schedule for exercisability (including any
requirements that the optionee or the Company satisfy
performance criteria),
the time and conditions for expiration of the Option,
and
the form of payment due upon exercise.
The Administrator's determinations under the Plan need not be
uniform and need not consider whether possible recipients are
similarly situated.
Options granted to employees may be "incentive stock options"
("ISOS") within the meaning of Section 422 of the Internal
Revenue Code of 1986 (the "CODE"), or the corresponding
provision of any subsequently enacted tax statute, or
nonqualified stock options ("NQSOS"), and the Administrator
will specify which form of option it is granting. (If the
Administrator fails to specify the form, it will be an ISO.)
Options granted to outside directors, including Formula
Options, must be nonqualified stock options.
SUBSTITUTIONS The Administrator may also grant Options in
substitution for options or other equity
interests held by individuals who become
Employees of the Company or of an Eligible
Subsidiary as a result of the Company's or
Subsidiary's acquiring or merging with the
individual's employer or acquiring its
assets. In addition, the Administrator may
provide for the Plan's assumption of options
granted outside the Plan to persons who
would have been eligible under the terms of
the Plan to receive a grant, including both
persons who provided services to any
acquired company or business and persons who
provided services to the Company or any
Subsidiary. If necessary to conform the
Options to the interests for which they are
substitutes, the Administrator may grant
substitute Options under terms and
conditions that vary from those the Plan
otherwise requires.
- --------------------------------------------------------------------------------
Luminant Worldwide Corporation
1999 Long-Term Incentive Plan
Page 2 of 16
<PAGE>
DIRECTOR Each director who is not an employee of the Company
FORMULA will receive a formula stock option
OPTIONS ("FORMULA OPTION") as of effective date of the
registration of the Company's initial public
offering (the "IPO EFFECTIVE DATE") with respect
to 15,000 shares of Common Stock, as will each
non-employee director later appointed or elected
to the Board (with the grant made as of the date
of his first election or appointment). Each such
non-employee director serving on the Board at each
annual meeting of the Company's stockholders
(beginning with the meeting at least six months
after the Effective Date and excluding directors
who leave the Board on the day of the annual
meeting) will receive a Formula Option as of that
meeting with respect to 10,000 shares of Common
Stock. The Exercise Price for Formula Options will
be the Fair Market Value on the Date of Grant. The
Board or the Administrator may also make
discretionary Option grants to outside directors.
EXERCISE Unless the Administrator specifies otherwise, each
SCHEDULE Formula Option will become exercisable as to
one-sixth every six months over the three years
following the Date of Grant. A Formula Option will
become exercisable in its entirety upon the
director's death, disability, or attainment of age
70.
DATE OF GRANT The DATE OF GRANT will be the date as of which this
Plan (for Formula Options) or the Administrator
grants an Option to a participant, as specified in
the Plan or in the Administrator's minutes.
EXERCISE PRICE The EXERCISE PRICE is the value of the consideration
that an optionee must provide in exchange for one
share of Common Stock. The Administrator will
determine the Exercise Price under each Option and
may set the Exercise Price without regard to the
Exercise Price of any other Options granted at the
same or any other time. The Company may use the
consideration it receives from the optionee for
general corporate purposes.
The Exercise Price per share for NQSOs may not be less than
100% of the Fair Market Value of a share on the Date of Grant
for grants made after the IPO Effective Date. For ISOs, the
Exercise Price per share must be at least 100% of the Fair
Market Value (on the Date of Grant) of a share of Common Stock
covered by the Option; PROVIDED, HOWEVER, that if the
Administrator decides to grant an ISO to someone covered by
Code Sections 422(b)(6) and 424(d) (as a
more-than-10%-stock-owner), the Exercise Price must be at
least 110% of the Fair Market Value.
- --------------------------------------------------------------------------------
Luminant Worldwide Corporation
1999 Long-Term Incentive Plan
Page 3 of 16
<PAGE>
FAIR MARKET FAIR MARKET VALUE of a share of Common Stock for
VALUE purposes of the Plan will be determined as follows:
if the Company has no publicly-traded stock, the
Administrator will determine the Fair Market Value
for purposes of the Plan using any measure of value
it determines in good faith to be appropriate;
if the Common Stock trades on a national securities
exchange, the closing sale price on that date;
if the Common Stock does not trade on any such
exchange, the closing sale price as reported by the
National Association of Securities Dealers, Inc.
Automated Quotation System ("NASDAQ") for such date;
if no such closing sale price information is
available, the average of the closing bid and asked
prices that Nasdaq reports for such date; or
if there are no such closing bid and asked prices,
the average of the closing bid and asked prices as
reported by any other commercial service for such
date.
For any date that is not a trading day, the Fair
Market Value of a share of Common Stock for such date
will be determined by using the closing sale price or
the average of the closing bid and asked prices, as
appropriate, for the immediately preceding trading
day. The Administrator can substitute a particular
time of day or other measure of "closing sale price"
if appropriate because of changes in exchange or
market procedures.
The Fair Market Value will be treated as equal to the
price established in an IPO for any Options granted
as of the IPO if they are granted on or before the
date on which the IPO's underwriters price the IPO or
granted on the following day before trading opens in
the Common Stock.
The Administrator has sole discretion to determine
the Fair Market Value for purposes of this Plan, and
all Options are conditioned on the optionees'
agreement that the Administrator's determination is
conclusive and binding even though others might make
a different and also reasonable determination.
EXERCISABILITY The Administrator will determine the times and
conditions for exercise of each Option.
Options will become exercisable at such times and in such
manner as the
- --------------------------------------------------------------------------------
Luminant Worldwide Corporation
1999 Long-Term Incentive Plan
Page 4 of 16
<PAGE>
Administrator determines and the Option Agreement indicates;
PROVIDED, HOWEVER, that the Administrator may, on such terms
and conditions as it determines appropriate, accelerate the
time at which the optionee may exercise any portion of an
Option.
If the Administrator does not specify otherwise, Options
will become exercisable as to one sixth of the covered
shares six months following the Date of Grant and one sixth
after each following six months.
No portion of an Option that is unexercisable at an
optionee's termination of employment will thereafter become
exercisable, unless the Option Agreement provides otherwise,
either initially or by amendment.
CHANGE OF Upon a Change of Control (as defined below), all
CONTROL Options will become fully exercisable, unless the
optionee's Option Agreement provides otherwise. A
CHANGE OF CONTROL for this purpose means the
occurrence of any one or more of the following events
after the Company's IPO:
a person, entity, or group (other than the Company,
any Company subsidiary, any Company benefit plan, or
any underwriter temporarily holding securities for an
offering of such securities) acquires ownership of
more than 50% of the undiluted total voting power of
the Company's then-outstanding securities eligible to
vote to elect members of the Board ("COMPANY VOTING
SECURITIES");
completion of a merger or consolidation of the
Company with or into any other entity -- unless the
holders of the Company Voting Securities outstanding
immediately before such completion, together with any
trustee or other fiduciary holding securities under a
Company benefit plan, hold securities that represent
immediately after such merger or consolidation at
least 50% of the combined voting power of the then
outstanding voting securities of either the Company
or the other surviving entity or its parent; or
the stockholders of the Company approve (i) a plan of
complete liquidation or dissolution of the Company or
(ii) an agreement for the Company's sale or
disposition of all or substantially all the Company's
assets, AND such liquidation, dissolution, sale, or
disposition is completed.
Even if other tests are met, a Change of Control has not
occurred under any circumstance in which the Company files for
bankruptcy protection or is reorganized following a bankruptcy
filing. The Administrator may allow conditional exercises in
advance of the completion of a Change of Control that are
- --------------------------------------------------------------------------------
Luminant Worldwide Corporation
1999 Long-Term Incentive Plan
Page 5 of 16
<PAGE>
then rescinded if no Change of Control occurs. [CHECK WITH
ACCOUNTANTS: In addition, unless the Board determines
otherwise, the acceleration will not occur if it would render
unavailable "pooling of interest" accounting for any
reorganization, merger, or consolidation of the Company.]
The ADJUSTMENT UPON CHANGES IN CAPITAL STOCK provisions will
also apply if the Change of Control is a SUBSTANTIAL CORPORATE
CHANGE (as defined in those provisions). If a Change of
Control is also a Substantial Corporate Change, the Change of
Control provision will apply before the application of the
Substantial Corporate Change provision.
LIMITATION ON An Option granted to an employee will be an ISO only
ISOs to the extent that the ISOS aggregate Fair Market
Value (determined at the Date of Grant) of the stock
with respect to which are exercisable for the first
time by the optionee during any calendar year (under
the Plan and all other plans of the Company and its
subsidiary corporations, within the meaning of Code
Section 422(d)), does not exceed $100,000. This
limitation applies to Options in the order in which
such Options were granted. If, by design or
operation, the Option exceeds this limit, the excess
will be treated as an NQSO.
METHOD OF To exercise any exercisable portion of an Option, the
EXERCISE optionee must:
Deliver notice of exercise to the Secretary of the
Company (or to whomever the Administrator
designates), in a form complying with any rules the
Administrator may issue, signed or otherwise
authenticated by the optionee, and specifying the
number of shares of Common Stock underlying the
portion of the Option the optionee is exercising;
Pay the full Exercise Price by cash or a cashier's or
certified check for the shares of Common Stock with
respect to which the Option is being exercised,
unless the Administrator consents to another form of
payment (which could include loans from the Company
or the use of Common Stock); and
Deliver to the Administrator such representations and
documents as the Administrator, in its sole
discretion, may consider necessary or advisable.
After an IPO, payment in full of the Exercise Price need not
accompany the written notice of exercise if the exercise
complies with a previouslyapproved cashless exercise method,
including, for example, that the notice directs that the stock
certificates (or other indicia of ownership) for the shares
issued upon the
- --------------------------------------------------------------------------------
Luminant Worldwide Corporation
1999 Long-Term Incentive Plan
Page 6 of 16
<PAGE>
exercise be delivered to a licensed broker acceptable to the
Company as the agent for the individual exercising the option
and at the time the stock certificates (or other indicia) are
delivered to the broker, the broker will tender to the Company
cash or cash equivalents acceptable to the Company and equal
to the Exercise Price and any required withholding taxes.
If the Administrator agrees to allow an optionee to pay
through tendering shares of Common Stock to the Company, the
individual can only tender stock he has held for at least six
months at the time of surrender. Shares of stock offered as
payment will be valued, for purposes of determining the extent
to which the optionee has paid the Exercise Price, at their
Fair Market Value on the date of exercise. The Administrator
may also, in its discretion, accept attestation of ownership
of Common Stock and issue a net number of shares upon Option
exercise, or, after an IPO, by having a broker tender to the
Company cash equal to the exercise price and any withholding
taxes.
OPTION No one may exercise an Option more than ten years after its
EXPIRATION Date of Grant (or five years for ISOs granted to 10% owners
covered by Code Sections 422(b)(6) and 424(d)). Unless the
Option Agreement provides otherwise, either initially or by
amendment, no one may exercise an Option after the first to
occur of:
EMPLOYMENT The 90th day after the date of termination of
TERMINATION employment (other than for death or
Disability), where termination of employment
means the time when the employer-employee or
other serviceproviding relationship between
the employee and the Company ends for any
reason. The Administrator may provide that
Options terminate immediately upon
termination of employment for "cause" under
an employee's employment or consultant's
services agreement or under another
definition specified in the Option
Agreement. Unless the Option Agreement
provides otherwise, termination of
employment does not include instances in
which the Company immediately rehires a
common law employee as an independent
contractor. The Administrator, in its sole
discretion, will determine all questions of
whether particular terminations or leaves of
absence are terminations of employment.
- --------------------------------------------------------------------------------
Luminant Worldwide Corporation
1999 Long-Term Incentive Plan
Page 7 of 16
<PAGE>
GROSS MISCONDUCT For the Company's termination of the optionee's
employment as a result of the optionee's Gross
Misconduct, the time of such termination. For
purposes of this Plan, "GROSS MISCONDUCT" means the
optionee has
committed fraud, misappropriation, embezzlement, or
willful misconduct that has resulted or is likely to
result in material harm to the Company;
committed or been indicted for or convicted of, or
pled guilty or no contest to, any misdemeanor (other
than for minor infractions or traffic violations)
involving fraud, breach of trust, misappropriation,
or other similar activity, or any felony; or
committed an act of gross negligence or otherwise
acted with willful disregard for the Company's best
interests in a manner that has resulted or is likely
to result in material harm to the Company.
If the optionee has a written employment agreement in
effect at the time of his termination that specifies
"cause" for termination, "Gross Misconduct" for
purposes of his termination will refer to "cause"
under the employment agreement, rather than to the
foregoing definition.
DISABILITY For disability, the earlier of (i) the first
anniversary of the optionee's termination of
employment for disability and (ii) 60 days
after the optionee no longer has a
disability, where "DISABILITY" means the
inability to engage in any substantial
gainful activity because of any medically
determinable physical or mental impairment
that can be expected to result in death or
that has lasted or can be expected to last
for a continuous period of not less than 12
months; or
DEATH The date 12 months after the optionee's
death.
If exercise is permitted after termination of employment, the
Option will nevertheless expire as of the date that the former
service provider violates any covenant not to compete or other
post-employment covenant in effect between the Company and the
former service provider. In addition, an optionee who
exercises an Option more than 90 days after termination of
employment with the Company and/or Eligible Subsidiaries will
only receive ISO treatment to the extent the law permits, and
becoming or remaining an employee of another related company
(that is not an Eligible Subsidiary) or an independent
contractor will not prevent loss of ISO status because of the
formal termination of employment.
Nothing in this Plan extends the term of an Option beyond the
tenth anniversary
- --------------------------------------------------------------------------------
Luminant Worldwide Corporation
1999 Long-Term Incentive Plan
Page 8 of 16
<PAGE>
of its Date of Grant, nor does anything in this OPTION
EXPIRATION section make an Option exercisable that has not
otherwise become exercisable, unless the Administrator
specifies otherwise.
OPTION Option Agreements (which could be certificates) will
AGREEMENT set forth the terms of each Option and will include
such terms and conditions, consistent with the Plan,
as the Administrator may determine are necessary or
advisable. To the extent the agreement is
inconsistent with the Plan, the Plan will govern. The
Option Agreements may contain special rules.
PUT AND CALL The Administrator may provide in Option Agreements
RIGHTS that the Company has the right (or obligation) to
purchase outstanding Options, or the shares received
from exercising an Option, under certain
circumstances, including termination of employment
for any reason or death and may provide for rights of
first refusal. The Administrator may distinguish
between unexercisable and exercisable Options.
STOCK SUBJECT Except as adjusted below under CORPORATE CHANGES,
TO PLAN
the aggregate number of shares of Common Stock that
may be issued under Options may not exceed 12,838,602
(which will be automatically adjusted to equal 30% of
the sum of the shares of Common Stock outstanding
immediately after the IPO plus any shares reserved
for underwriter over-allotments),
the maximum number of shares that may be granted
under Options for a single individual in a calendar
year may not exceed 50% of the preceding number,
provided that the individual maximum applies only to
Options first made under this Plan and not to Options
made in substitution of a prior employer's options or
other incentives, except as Code Section 162(m)
otherwise requires, and
the aggregate number of shares of Common Stock that
may be issued under ISOs may not exceed 6,000,000,
plus the number necessary to provide ISOs in
substitution for pre-IPO ISOs.
The Common Stock will come from either authorized but unissued
shares or from previously issued shares that the Company
reacquires, including shares it purchases on the open market
or holds as treasury shares. If any Option expires, is
canceled, or terminates for any other reason, the shares of
Common Stock available under that Option will again be
available for the granting of new Options (but will be counted
against that calendar year's limit for a given
- --------------------------------------------------------------------------------
Luminant Worldwide Corporation
1999 Long-Term Incentive Plan
Page 9 of 16
<PAGE>
individual).
No adjustment will be made for a dividend or other right for
which the record date precedes the date of exercise.
The optionee will have no rights of a stockholder with respect
to the shares of stock subject to an Option except to the
extent that the Company has issued certificates for, or
otherwise confirmed ownership of, such shares upon the
exercise of the Option.
The Company will not issue fractional shares pursuant to the
exercise of an Option, but the Administrator may, in its
discretion, direct the Company to make a cash payment in lieu
of fractional shares.
PERSON WHO During the optionee's lifetime and except as provided
MAY EXERCISE under TRANSFERS, ASSIGNMENTS, AND PLEDGES, only the
optionee or his duly appointed guardian or personal
representative may exercise the Options. After his
death, his personal representative or any other
person authorized under a will or under the laws of
descent and distribution may exercise any then
exercisable portion of an Option. If someone other
than the original recipient seeks to exercise any
portion of an Option, the Administrator may request
such proof as it may consider necessary or
appropriate of the person's right to exercise the
Option.
ADJUSTMENTS Subject to any required action by the Company (which
UPON CHANGES it agrees to promptly take) or its stockholders, and
IN CAPITAL subject to the provisions of applicable corporate
STOCK law, if, after the Date of Grant of an Option,
the outstanding shares of Common Stock increase or
decrease or change into or are exchanged for a
different number or kind of security because of any
recapitalization, reclassification, stock split,
reverse stock split, combination of shares, exchange
of shares, stock dividend, or other distribution
payable in capital stock, or
some other increase or decrease in such Common Stock
occurs without the Company's receiving consideration
(excluding, unless the Administrator determines
otherwise, stock repurchases),
the Administrator must make a proportionate and
appropriate adjustment in the number of shares of
Common Stock underlying each Option, so that the
proportionate interest of the optionee immediately
following such event will, to the extent practicable,
be the same as immediately before such event. (This
- --------------------------------------------------------------------------------
Luminant Worldwide Corporation
1999 Long-Term Incentive Plan
Page 10 of 16
<PAGE>
adjustment does not apply to Common Stock that the
optionee has already purchased.) Unless the
Administrator determines another method would be
appropriate, any such adjustment to an Option will
not change the total price with respect to shares of
Common Stock underlying the unexercised portion of
the Option but will include a corresponding
proportionate adjustment in the Option's Exercise
Price.
The Administrator will make a commensurate change to
the maximum number and kind of shares provided in the
STOCK SUBJECT TO PLAN section.
All references to numbers of shares of Common Stock in
the Plan and in any Option grants made on or before
the IPO Effective Date assume the IPO is or will be
completed and thus relate to post-IPO numbers of
shares.
Any issue by the Company of any class of preferred
stock, or securities convertible into shares of common
or preferred stock of any class, will not affect, and
no adjustment by reason thereof will be made with
respect to, the number of shares of Common Stock
subject to any Option or the Exercise Price except as
this ADJUSTMENTS section specifically provides. The
grant of an Option under the Plan will not affect in
any way the right or power of the Company to make
adjustments, reclassifications, reorganizations or
changes of its capital or business structure, or to
merge or to consolidate, or to dissolve, liquidate,
sell, or transfer all or any part of its business or
assets.
SUBSTANTIAL Upon a SUBSTANTIAL CORPORATE CHANGE, the Plan and any
CORPORATE unexercised Options will TERMINATE unless provision is
CHANGE made in writing in connection with such transaction
for
the assumption or continuation of outstanding
Options, or
the substitution for such options or grants of any
options or grants covering the stock or securities of
a successor employer corporation, or a parent or
subsidiary of such successor, with appropriate
adjustments as to the number and kind of shares of
stock and prices, in which event the Options will
continue in the manner and under the terms so
provided.
If an Option would otherwise terminate under the
preceding sentence and the Fair Market Value indicated
by the Substantial Corporate Change
- --------------------------------------------------------------------------------
Luminant Worldwide Corporation
1999 Long-Term Incentive Plan
Page 11 of 16
<PAGE>
exceeds or is likely to exceed the Exercise Price,
the Administrator will either provide that
optionees will have the right, at such time before
the completion of the transaction causing such
termination as the Board or the Administrator
reasonably designates, to exercise any unexercised
portions of the Option, whether or not they had
previously become exercisable, or
cause the Company, or agree to allow the successor,
to cancel each Option after payment to the optionee
of an amount in cash, cash equivalents, or successor
equity interests substantially equal to the Fair
Market Value under the transaction minus the Exercise
Price for the shares covered by the Option (and,
where the Board or Administrator determines it is
appropriate, any required tax withholdings).
The Board or other Administrator may take any actions
described in ADJUSTMENTS UPON CHANGES IN CAPITAL STOCK
section, including the Substantial Corporate Changes section,
without any requirement to seek optionee consent. [PENDING
COMMENTS FROM ACCOUNTANTS: However, unless the Board
determines otherwise, the acceleration will not occur if it
would render unavailable "pooling of interest" accounting for
any reorganization, merger, or consolidation of the Company.]
A SUBSTANTIAL CORPORATE CHANGE means the
dissolution or liquidation of the Company,
merger, consolidation, or reorganization of
the Company with one or more corporations or
other entities in which the Company is not
the surviving corporation,
the sale of substantially all of the assets
of the Company to another entity or an
individual, or
any transaction (including a merger or
reorganization in which the Company survives)
approved by the Board that results in any
person or entity (other than any affiliate of
the Company as defined in Rule 144(a)(1)
under the Securities Act, any Company
Subsidiary, any Company benefit plan, or any
underwriter temporarily holding securities
for an offering of such securities) owning
100% of the combined voting power of all
classes of stock of the Company.
SUBSIDIARY Employees of Company Subsidiaries will be
EMPLOYEES entitled to participate in the Plan, except
as otherwise designated by the Board of
Directors or the
- --------------------------------------------------------------------------------
Luminant Worldwide Corporation
1999 Long-Term Incentive Plan
Page 12 of 16
<PAGE>
Administrator.
Eligible Subsidiary means each of the Company's
Subsidiaries, except as the Administrator otherwise
specifies. For ISO grants, SUBSIDIARY means any
corporation (other than the Company) in an unbroken
chain of corporations beginning with the Company if,
at the time an Option is granted to a Participant
under the Plan, each corporation (other than the last
corporation in the unbroken chain) owns stock
possessing 50% or more of the total combined voting
power of all classes of stock in another corporation
in such chain. For ISOs, Subsidiary also includes a
single-member limited liability company included
within the chain described in the preceding sentence.
The Board or the Administrator may use a different
definition of Subsidiary for NQSOs.
LEGAL The Company will not issue any shares of Common Stock
COMPLIANCE under an Option until all applicable requirements
imposed by Federal and state securities and other
laws, rules, and regulations, and by any applicable
regulatory agencies or stock exchanges, have been
fully met. To that end, the Company may require the
optionee to take any reasonable action to comply with
such requirements before issuing such shares. No
provision in the Plan or action taken under it
authorizes any action that Federal or state laws
otherwise prohibit.
The Plan is intended to conform to the extent
necessary with all provisions of the Securities Act of
1933 ("SECURITIES ACT") and the Securities Exchange
Act of 1934 and all regulations and rules the
Securities and Exchange Commission issues under those
laws. Notwithstanding anything in the Plan to the
contrary, the Administrator must administer the Plan,
and Options may be granted and exercised, only in a
way that conforms to such laws, rules, and
regulations. To the extent permitted by applicable
law, the Plan and any Options will be treated as
amended to the extent necessary to conform to such
laws, rules, and regulations.
PURCHASE FOR Unless a registration statement under the Securities
INVESTMENT Act covers the shares of Common Stock an optionee
AND OTHER receives upon exercising his Option, the Administrator
RESTRICTIONS may require, at the time of such exercise, that the
optionee agree in writing to acquire such shares for
investment and not for public resale or distribution,
unless and until the shares subject to the Option are
- --------------------------------------------------------------------------------
Luminant Worldwide Corporation
1999 Long-Term Incentive Plan
Page 13 of 16
<PAGE>
registered under the Securities Act. Unless the
shares are registered under the Securities Act, the
optionee must acknowledge:
that the shares purchased on exercise of the
Option are not so registered,
that the optionee may not sell or otherwise
transfer the shares unless
such sale or transfer complies with all
applicable laws, rules, and regulations,
including all applicable Federal and state
securities laws, rules, and regulations, and
either
the shares have been registered under the
Securities Act in connection with the sale
or transfer thereof, or
counsel satisfactory to the Company has
issued an opinion satisfactory to the
Company that the sale or other transfer of
such shares is exempt from registration
under the Securities Act.
Additionally, the Common Stock, when issued upon the
exercise of an Option, will be subject to any other
transfer restrictions, rights of first refusal, and
rights of repurchase set forth in or incorporated by
reference into other applicable documents, including
the Option Agreements, or the Company's articles or
certificate of incorporation, by-laws, or generally
applicable stockholders' agreements.
The Administrator may, in its sole discretion, take
whatever additional actions it deems appropriate to
comply with such restrictions and applicable laws,
including placing legends on certificates and issuing
stop-transfer orders to transfer agents and
registrars.
TAX WITHHOLDING The optionee must satisfy all applicable Federal,
state, and local income and employment tax
withholding requirements before the Company will
deliver stock certificates or otherwise recognize
ownership upon the exercise of an Option. The Company
may decide to satisfy the withholding obligations
through additional withholding on salary or wages. If
the Company does not or cannot withhold from other
compensation, the optionee must pay the Company, with
a cashier's check or certified check, the full
amounts, if any, required for withholding. Payment of
withholding obligations is due at the same time as is
payment of the Exercise Price. If the Administrator
so determines, the optionee may instead satisfy the
withholding obligations by directing the Company to
retain shares from the Option exercise, by tendering
previously owned shares, or by attesting to his
ownership of shares (with the distribution of net
shares), or, after an
- --------------------------------------------------------------------------------
Luminant Worldwide Corporation
1999 Long-Term Incentive Plan
Page 14 of 16
<PAGE>
IPO, by having a broker tender to the Company cash
equal to the withholding taxes.
TRANSFERS, Unless the Administrator otherwise approves in advance
ASSIGNMENTS, in writing for estate planning or other purposes, an
AND PLEDGES Option may not be assigned, pledged, or otherwise
transferred in any way, whether by operation of law
or otherwise or through any legal or equitable
proceedings (including bankruptcy), by the optionee
to any person, except by will or by operation of
applicable laws of descent and distribution. If
necessary to comply with Rule 16b-3, the optionee may
not transfer or pledge shares of Common Stock
acquired upon exercise of an Option until at least
six months have elapsed from (but excluding) the Date
of Grant, unless the Administrator approves otherwise
in advance in writing. The Administrator may, in its
discretion, expressly provide that an optionee may
transfer his Option, without receiving consideration,
to (i) members of his immediate family (children,
grandchildren, or spouse), (ii) trusts for the
benefit of such family members, or (iii) partnerships
whose only partners are such family members.
AMENDMENT OR The Board may amend, suspend, or terminate the Plan at
TERMINATION any time, without the consent of the optionees or
OF PLAN AND their beneficiaries; PROVIDED, HOWEVER, that no
OPTIONS amendment will deprive any optionee or beneficiary of
any previously declared Option. Except as required by
law or by the SUBSTANTIAL CORPORATE CHANGES section,
the Administrator may not, without the optionee's or
beneficiary's consent, modify the terms and
conditions of an Option so as to adversely affect the
optionee. No amendment, suspension, or termination of
the Plan will, without the optionee's or
beneficiary's consent, terminate or materially
adversely affect any right or obligations under any
outstanding Options, except as provided in the
SUBSTANTIAL CORPORATE CHANGES Section.
PRIVILEGES OF No optionee and no beneficiary or other person
STOCK claiming under or through such optionee will have any
OWNERSHIP right, title, or interest in or to any shares of
Common Stock allocated or reserved under the Plan or
subject to any Option except as to such shares of
Common Stock, if any, already issued to such
optionee.
EFFECT ON Whether exercising an Option causes the optionee to
OTHER PLANS accrue or receive additional benefits under any
pension or other plan is governed solely by the terms
of such other plan.
LIMITATIONS ON Notwithstanding any other provisions of the Plan, no
LIABILITY individual acting as a director, officer, other
employee, or agent of the Company will be liable to
any
- --------------------------------------------------------------------------------
Luminant Worldwide Corporation
1999 Long-Term Incentive Plan
Page 15 of 16
<PAGE>
optionee, former optionee, spouse, beneficiary, or
any other person for any claim, loss, liability, or
expense incurred in connection with the Plan, nor
will such individual be personally liable because of
any contract or other instrument he executes in such
other capacity. The Company will indemnify and hold
harmless each director, officer, other employee, or
agent of the Company to whom any duty or power
relating to the administration or interpretation of
the Plan has been or will be delegated, against any
cost or expense (including attorneys' fees) or
liability (including any sum paid in settlement of a
claim with the Board's approval) arising out of any
act or omission to act concerning this Plan unless
arising out of such person's own fraud or bad faith.
NO EMPLOYMENT Nothing contained in this Plan constitutes an
CONTRACT employment contract between the Company and the
optionees. The Plan does not give any optionee any
right to be retained in the Company's employ, nor
does it enlarge or diminish the Company's right to
end the optionee's employment or other relationship
with the Company.
APPLICABLE LAW The laws of the State of Delaware (other than its
choice of law provisions) govern this Plan and its
interpretation.
DURATION OF Unless the Board extends the Plan's term, the
PLAN Administrator may not grant Options after August 5,
2009. The Plan will then terminate but will continue
to govern unexercised and unexpired Options.
APPROVAL OF The Plan must be submitted to Company stockholders for
THE PLAN their approval within 12 months before or after the
Board adopts the Plan to qualify any Options
designated as ISOs for treatment as such. If the
stockholders do not so approve the Plan, the Plan and
any outstanding ISOs will be treated as void and of
no effect.
- --------------------------------------------------------------------------------
Luminant Worldwide Corporation
1999 Long-Term Incentive Plan
Page 16 of 16
<PAGE>
Exhibit 10.17
LUMINANT WORLDWIDE CORPORATION
SENIOR BONUS PLAN
PURPOSE Luminant Worldwide Corporation, a Delaware corporation (the
"COMPANY"), wishes to motivate, reward, and retain key senior
executives of the Company and its subsidiaries. To further these
objectives, the Company hereby sets forth this Luminant Worldwide
Corporation Senior Bonus Plan (the "PLAN"), effective as of August
6, 1999, to provide participants with incentives ("INDIVIDUAL
AWARD OPPORTUNITIES") to earn performance-based bonus awards
("AWARDS"), in accordance with Section 162(m) ("SECTION 162(m)")
of the Internal Revenue Code of 1986 (the "CODE"). (All references
to "Section 162(m)" or any other Code provision include successor
provisions, related regulations, and amendments.)
PARTICIPANTS During each Performance Period, the Committee may designate some
or all of the Executive Officers of the Company (including those
of any subsidiary, operating unit, or division) as eligible for
Individual Award Opportunities under this Plan. "PARTICIPANTS" are
persons the Committee designates who have not been paid all
amounts, if any, due them under the Plan. Eligible Executive
Officers are Participants only with respect to Performance Periods
for which the Committee designates them for participation under
the Plan.
"EXECUTIVE OFFICER" has the meaning set forth in Rule 3b-7 issued under
the Securities Exchange Act of 1934, each as amended from time to time,
and anyone else the Committee determines to treat as an Executive
Officer for purposes of this Plan.
ADMINISTRATOR The Plan's Administrator will be a committee (the "COMMITTEE") of
the Company's Board of Directors (the "BOARD") designated by the
Board to be responsible for administering and interpreting the
Plan. The Committee will include two or more directors, each of
whom qualifies as an "outside director" within the meaning of
Section 162(m), and those outside directors will have exclusive
authority under this Plan to make Awards and establish and
determine satisfaction of Performance Goals. The Committee may
satisfy this requirement through (i) providing that persons who
are not "outside directors" cannot vote on an issue, (ii) allowing
those persons to abstain from voting, or (iii) creating a
subcommittee of qualifying outside directors to take action with
respect to this Plan. If a Committee member intended to qualify as
an outside director does not in fact so qualify, the mere fact of
such nonqualification will not invalidate the payment of any
- -------------------------------------------------------------------------------
Luminant Worldwide Corporation
Senior Bonus Plan
Page 1 of 10
<PAGE>
Award or other action by the Committee under the Plan that was
otherwise valid under the Plan.
The Committee is responsible for the general operation and
administration of the Plan and for carrying out its provisions and has
full discretion in interpreting and administering the provisions of the
Plan. Subject to the express provisions of the Plan, the Committee may
exercise such powers and authority of the Board as the Committee may
find necessary or appropriate to carry out its functions. The Committee
will exercise its powers under the Plan in a manner that preserves the
Company's Federal income tax deduction for payments made under the
Plan, in accordance with the requirements of Section 162(m), to the
maximum practical extent.
GENERAL Subject to the terms of the Plan and after taking into
RESPONSIBILITIES account the recommendations of the Company's Chief Executive
OF THE Officer,for each Performance Period the Committee will:
COMMITTEE
determine any bonus pool award opportunities available,
designate the Executive Officers who will be Participants in the
Plan,
establish each Participant's Individual Award Opportunity,
define Performance Goals and other Award terms and conditions for
each Participant,
determine and certify the Award amounts earned, based on actual
performance as compared to the Performance Goals,
determine and make permitted Negative Discretion Adjustments to
Awards otherwise earned, and
decide whether, under what circumstances, and subject to what
terms, Awards will be paid on a deferred basis (including
automatic deferrals at the Committee's election or elective
deferrals at the election of Participants).
Unless the Plan otherwise expressly provides, all designations,
determinations, interpretations, and other decisions made under or with
respect to the Plan and all Awards made under the Plan are within the
sole and absolute discretion of the Committee and will be final,
conclusive and binding on all persons, including the Company,
Participants, and Beneficiaries or other persons having or claiming any
rights under the Plan.
- -------------------------------------------------------------------------------
Luminant Worldwide Corporation
Senior Bonus Plan
Page 2 of 10
<PAGE>
PARTICIPANT The Committee will designate the Participants in the Plan for each
DESIGNATIONS Performance Period within the Applicable Period, and with
reference to the fiscal year for which the Company would be
entitled to a Federal tax deduction for payment of Awards in
respect of the Performance Period (the "DEDUCTION YEAR"). The
Committee will make its designations primarily by taking into
account which Executive Officers:
are likely to be Executive Officers of the Company as of the last
day of the Deduction Year,
are reasonably expected to have individual compensation for the
Deduction Year that may be in excess of $1 million, not including
compensation that is excluded under Section 162(m) as payable
under a "performance based" plan other than this Plan, and
are reasonably expected to be "covered employees" for the
Deduction Year for purposes of Section 162(m).
The Committee may also take into consideration other factors that it
deems appropriate.
INDIVIDUAL INDIVIDUAL AWARD OPPORTUNITY means a Participant's opportunity to
AWARD earn an Award for a given Performance Period, based on the
OPPORTUNITIES achievement of the Participant's Performance Goals. The Committee
will establish each Participant's Individual Award Opportunity,
within the Applicable Period, for each Performance Period.
An Individual Award Opportunity may be expressed in dollars or may be
based on a formula that is consistent with the provisions of the Plan.
If Individual Award Opportunities are expressed in terms of shares of
any bonus pool, the shares of such bonus pool designated for Individual
Award Opportunities may not exceed 100% of the pool for any Performance
Period.
PERFORMANCE The Committee will, within the Applicable Period, set one or more
GOALS PERFORMANCE GOALS for a Performance Period for each Participant,
and/or each group of Participants, and/or each bonus pool (if any).
Performance
- --------------------------------------------------------------------------------
Luminant Worldwide Corporation
Senior Bonus Plan
Page 3 of 10
<PAGE>
Goals will be based exclusively on one or more of the following
corporate-wide or parent, subsidiary, division, or operating unit
financial measures:
pretax or after tax net income,
operating income,
gross revenue,
profit margin,
stock price,
cash flow(s),
strategic business criteria, consisting of
one or more objectives based on meeting
specified revenue, market penetration,
geographic business expansion goals, cost
targets, and goals relating to acquisitions
or divestitures,
or any combination of these measures (in each
case before or after such objective income
and expense allocations or adjustments as the
Committee may specify within the Applicable
Period).
Each Performance Goal may be expressed in absolute and/or relative
terms, may be based on or use comparisons with current internal
targets, the past performance of the Company (including the
performance of one or more subsidiaries, divisions and/or
operating units) and/or the past or current performance of other
companies. In the case of earnings-based measures, Performance
Goals may use comparisons relating to capital (including, but
limited to, the cost of capital), shareholders' equity and/or
shares outstanding, or to assets or net assets.
In all cases, Performance Goals are to be set in a manner that
will satisfy any applicable requirements under Treas. Reg. Sec.
1.162-27(e)(2) (as amended from time to time). Such requirements
include requirements that achieving Performance Goals be
'substantially uncertain' at the time that they are established,
that Performance Goals be defined in such a way that a third party
with knowledge of the relevant facts could determine whether and
to what extent the Goals have been met, and such a third party
could determine the maximum amount of the resulting Award payable
(subject to the Committee's right to make Negative Discretion
Adjustments).
- --------------------------------------------------------------------------------
Luminant Worldwide Corporation
Senior Bonus Plan
Page 4 of 10
<PAGE>
The measures used in setting Performance Goals under the Plan for
any given Performance Period will be determined in accordance with
generally accepted accounting principles ("GAAP") and in a manner
consistent with the methods used in the Company's audited
financial statements, without regard to (i) extraordinary items as
determined by the Company's independent public accountants in
accordance with GAAP, (ii) changes in accounting, unless, in each
case, the Committee decides otherwise within the Applicable
Period, or (iii) nonrecurring acquisition expenses and
restructuring charges.
PAYMENT Subject to the limitations set forth in this section, Awards
OF AWARDS determined under the Plan for a Performance Period will be paid to
Participants in cash or, if the Company's equity plans permit, in
shares of Company stock or other equity based awards. Awards will
be paid as soon as practicable following the end of the
Performance Period to which the Awards apply.
CERTIFICATION No Award will be paid unless and until the Committee,
based on the Company's audited financial results for
such Performance Period (as prepared and reviewed by
the Company's independent public accountants), has
certified in the manner prescribed under applicable
regulations the extent to which the Performance
Goals for the Performance Period have been satisfied
and has made its decisions regarding the extent of
any Negative Discretion Adjustment of Awards.
DEFERRAL The Committee may specify that a portion of the Award
for any given Performance Period will be paid on a
deferred basis, in accordance with any Award payment
rules the Committee may establish and announce for
the Performance Period.
CONTINUED The Committee may require that Participants for a
EMPLOYMENT Performance Period must still be employed as of end
of the Performance Period and/or as of the later
date that the Awards for the Performance Period are
announced to be eligible for an Award for the
Performance Period. Any such requirement must be
established and announced within the Applicable
Period, and may be subject to such exceptions as the
Committee may specify within the Applicable Period.
PERFORMANCE A PERFORMANCE PERIOD is a period for which Performance Goals
PERIOD are set and during which performance is to be measured to
determine whether a Participant is entitled to payment of an Award
under the Plan. A Performance Period may coincide with one or more
complete or partial fiscal years of the Company.
- --------------------------------------------------------------------------------
Luminant Worldwide Corporation
Senior Bonus Plan
Page 5 of 10
<PAGE>
APPLICABLE The APPLICABLE PERIOD with respect to any Performance Period means
PERIOD a period beginning on or before the first day of the Performance
Period and ending no later than the earlier of (i) the 90th day of
the Performance Period or (ii) the date on which 25% of the
Performance Period has been completed.
Any action required under the Plan to be taken within the
Applicable Period may be taken at a later date only if the
provisions of Section 162(m) or the regulations thereunder are
modified, or are interpreted by the Internal Revenue Service, to
permit such later date. In such event, the definition of the
Applicable Period under this Plan will be deemed to be amended
accordingly.
FORFEITURE Within the Applicable Period and subject to the Committee
OR PRORATION certification required for payment of Awards, the Committee
may adopt such forfeiture, proration, or other rules as it deems
appropriate, in its sole and absolute discretion, regarding the
impact on Awards of (i) a Participant's death, Disability,
voluntary termination of employment, termination of employment by
the Company and its subsidiaries other than for Cause, or
termination of employment by the Company and its subsidiaries for
Cause, or (ii) a Change of Control.
EMPLOYMENT "TERMINATION OF EMPLOYMENT" means the time when the
TERMINATION employer-employee or other service-providing
relationship between the Participant and the Company
and its subsidiaries ends for any reason. The
Committee, in its sole discretion, will determine
all questions of whether particular terminations or
leaves of absence are terminations of employment.
DISABILITY "DISABILITY" means 'disability' as defined in any
employment agreement then in effect between the
Participant and the Company or, if not defined in
that agreement or if there is no such agreement, as
defined in the Company's long-term disability plan
as in effect from time to time, or if there is no
plan or if not defined therein, the Participant's
physical or mental incapacity and consequent
inability for a period of 120 days in any twelve
consecutive month period to perform his duties to
the Company.
CAUSE 'CAUSE' means 'cause' as defined in any employment
agreement then in effect between the Participant and
the Company or if not defined in such an agreement
or, if there is no such agreement, where the
Participant:
commits any act of fraud, willful misconduct, or
dishonesty in connection with his employment or that
injures the Company or its direct or indirect
subsidiaries;
- --------------------------------------------------------------------------------
Luminant Worldwide Corporation
Senior Bonus Plan
Page 6 of 10
<PAGE>
breaches any other material provision of any
agreement between the Participant and the Company or
a subsidiary of the Company relating to the
Participant's employment or breaches any fiduciary
duty to the Company or its direct or indirect
subsidiaries;
fails, refuses, or neglects to timely perform any
material duty or obligation relating to his
position;
commits a material violation of any law, rule,
regulation, or bylaw of any governmental authority
(state, Federal, or foreign), any securities
exchange or association or other regulatory or self
regulatory body or agency applicable to the Company
or its direct or indirect subsidiaries;
commits a material violation of any general policy
or directive of the Company or its direct or
indirect subsidiaries communicated in writing to the
Participant; or
is charged with a crime involving dishonesty, fraud,
or unethical business conduct, or a felony.
CHANGE OF "CHANGE OF CONTROL" has the same meaning as set
CONTROL 1999 forth in the Company's Long-Term Incentive
Plan, as amended from time to time.
LIMITATION ON Notwithstanding any other provision of this Plan,
AWARDS the maximum Award payable under the Plan to any
individual Participant in any single calendar year
will be $3 million.
NEGATIVE The Committee's powers include the power to make
DISCRETION NEGATIVE DISCRETION ADJUSTMENTS, which are
ADJUSTMENTS adjustments that eliminate or reduce (but not
increase) an Award otherwise payable to a
Participant for a Performance Period. No Negative
Discretion Adjustment may cause an Award to fail to
qualify as "performance based compensation" under
Section 162(m).
OTHER A Participant in this Plan may not also participate
PLANS in the Company's general bonus plans during
any Performance Period for which such participation
would cause an Award under this Plan to fail to
qualify as "performance based" under Section 162(m).
Awards will not be treated as compensation for
purposes of any other compensation or benefit plan,
program, or arrangement of the Company or any
subsidiary unless and except to the extent that the
Board or the Committee determines in writing.
- --------------------------------------------------------------------------------
Luminant Worldwide Corporation
Senior Bonus Plan
Page 7 of 10
<PAGE>
Neither the adoption of this Plan nor the submission
of the Plan to the Company's shareholders for
approval will be construed as limiting the power of
the Board or the Committee to adopt such other
incentive arrangements as either may otherwise deem
appropriate.
LEGAL The Company will not make payments of Awards until
COMPLIANCE all applicable requirements imposed by Federal
and state laws, rules, and regulations, and by
any applicable regulatory agencies, have been
fully met. No provision in the Plan or action
taken under it authorizes any action that
Federal or state laws otherwise prohibit.
The Plan is intended to conform with all provisions
of Section 162(m) and Treas. Reg. ss. 1.162-27 to
the extent necessary to allow the Company a Federal
income tax deduction for Awards as "qualified
performance based compensation."
Notwithstanding anything in the Plan to the
contrary, the Committee must administer the Plan,
and Awards may be granted and paid, only in a manner
that conforms to such laws, rules, and regulations.
To the extent permitted by applicable law, the Plan
will be treated as amended to the extent necessary
to conform to such laws, rules, and regulations.
TAX WITHHOLDING The Company may make all appropriate provisions for
the withholding of Federal, state, and local taxes
imposed with respect to Awards, which provisions may
vary with the time and manner of payment.
NONTRANSFER Except as and to the extent the law requires,
OF RIGHTS or as the Plan expressly provides, a Participant's
rights under the Plan may not be assigned,
pledged, or otherwise transferred in any way,
whether by operation of law or otherwise or
through any legal or equitable proceedings
(including bankruptcy), by the Participant to
any person.
BENEFICIARY Each Participant may designate in a written form
DESIGNATIONS filed with the Committee (or another designated
recipipient) the person or persons (the
"BENEFICIARY" or "BENEFICIARIES") to receive
the amounts (if any) payable under the Plan if
the Participant dies before the Award payment
date for a Performance Period. A Beneficiary
designation filed under this section will not
be considered a prohibited transfer of rights.
A Participant may change a Beneficiary designation
at any time without the Beneficiary's consent
(unless otherwise required by law) by filing a new
written Beneficiary designation with the Committee.
A Beneficiary designation will be
- --------------------------------------------------------------------------------
Luminant Worldwide Corporation
Senior Bonus Plan
Page 8 of 10
<PAGE>
effective only if the Company is in receipt of the
designation before the Participant's death.
If no effective Beneficiary designation is made, the
beneficiary of any amounts due will be the
Participant's estate.
AMENDMENT OR Subject to the limitations set forth in this
TERMINATION section, the Board may amend, suspend, or
terminate the Plan at any time, without the consent
of the OF PLAN Participants or their Beneficiaries.
Without the Participant's written consent, no
amendment or termination may materially adversely
affect the Award rights (if any) of any already
designated Participant for a given Performance
Period once the Committee has announced the
Participant designations and Performance Goals for
such Performance Period.
The Board or the Committee may make any amendments
necessary to comply with applicable regulatory
requirements, including Section 162(m) and
regulations thereunder.
The Board must submit any Plan amendment to the
Company's shareholders for their approval if and to
the extent such approval is required under Section
162(m).
LIMITATIONS ON No member of the Committee and no other individual
LIABILITY acting as a director, officer, other employee or
agent of the Company will be liable to any
Participant, former Participant, spouse,
Beneficiary, or any other person for any
claim, loss, liability, or expense incurred in
connection with the Plan. No member of the
Committee will be liable for any action or
determination (including, but limited to, any
decision not to act) made in good faith with
respect to the Plan or any Award under the
Plan. If a Committee member intended to
qualify as an 'outside director' under Section
162(m) does not in fact so qualify, the mere
fact of such nonqualification will not
invalidate any award or other action made by
the Committee under the Plan that otherwise
was validly made under the Plan.
The Company will indemnify and hold harmless each
member of the Committee, director, officer, other
employee, or agent of the Company to whom it or
another has delegated or does delegate any duty or
power relating to the administration or
interpretation of the Plan, against any cost or
expense (including attorneys' fees) or liability
(including any sum paid in settlement of a claim
with the Board's approval) arising out of any act or
omission to act concerning this Plan unless arising
out of such person's own fraud or bad faith.
- --------------------------------------------------------------------------------
Luminant Worldwide Corporation
Senior Bonus Plan
Page 9 of 10
<PAGE>
NO EMPLOYMENT Nothing contained in this Plan constitutes an
CONTRACT employment contract between the Company and the
Participants. The Plan does not give any Participant
any right to be retained in the Company's employ,
nor does it enlarge or diminish the Company's right
to end the Participant's employment or other
relationship with the Company.
APPLICABLE LAW The laws of the State of Delaware (other than
its choice of law provisions) govern this Plan and
its interpretation.
DURATION OF The Plan will remain effective until terminated by
THE PLAN the Board, provided, however, that the continued
effectiveness of the Plan will be subject to the
approval of the Company's shareholders at such times
and in such manner as Section 162(m) may require.
DISCLOSURE AND The Plan must be submitted to Company shareholders
APPROVAL OF for their approval. The specific terms of the Plan,
including the class of employees eligible to THE
PLAN be Participants, the Performance Goals, and the
terms of payment of Awards, must be disclosed to the
shareholders to the extent Section 162(m) requires.
The shareholders must approve the Plan by a separate
vote after such disclosure. If the shareholders do
not approve the Plan, the Plan will be treated as
void and of no effect.
- --------------------------------------------------------------------------------
Luminant Worldwide Corporation
Senior Bonus Plan
Page 10 of 10
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of
this registration statement.
ARTHUR ANDERSEN LLP
Dallas, Texas
August 6, 1999
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated May 24, 1999, except for
Note 8 which is as of June 3, 1999, relating to the financial statements of
Brand Dialogue - New York, which appears in such Prospectus. We also consent
to the reference to us under the heading "Experts" in such Prospectus.
PricewaterhouseCoopers LLP
New York, New York
August 6, 1999
