<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended September 30, 2000 Commission File Number 000-26977
LUMINANT WORLDWIDE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 75-2783690
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
13737 NOEL ROAD, SUITE 1400, DALLAS, TEXAS 75240-7367
(Address of principal executive offices and zip code)
(972) 581-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Number of shares of common stock (including non-voting common stock)
outstanding at October 31, 2000: 27,168,480
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Pro Forma Combined Financial Information
Organization and Basis of Presentation 3
Actual and Pro Forma Combined Statements of Operations:
Actual and Pro Forma Combined Statements of Operations for the three
months ended September 30, 2000 and 1999 and the nine months ended
September 30, 2000 and 1999 (unaudited) 4
Historical Financial Statements:
Consolidated Balance Sheets, September 30, 2000 (unaudited) and
December 31, 1999 6
Consolidated Statements of Operations for the three months ended
September 30, 2000 and 1999 and the nine months ended September 30,
2000 and 1999 (unaudited) 7
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999 (unaudited) 8
Notes to Consolidated Financial Statements (unaudited) 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 3. Quantitative and Qualitative Disclosure About Market Risk 25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None 25
Item 2. Changes in Securities and Use of Proceeds 25
Item 3. Defaults upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information - None 26
Item 6. Exhibits and Reports on Form 8-K 27
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRO FORMA COMBINED FINANCIAL INFORMATION
ORGANIZATION AND BASIS OF PRESENTATION
Luminant Worldwide Corporation ("Luminant"), a Delaware corporation, was
formed in August 1998 for the purpose of acquiring existing Internet and
electronic commerce professional services businesses providing a wide range
of interactive services throughout the United States. Prior to September
1999, Luminant did not conduct any material operations. On September 21,
1999, we closed our initial public offering of 4,665,000 shares of common
stock and the direct sale of 835,000 shares of non-voting common stock to
Young & Rubicam, at a price of $18.00 per share. On October 19, 1999, we
issued 278,986 additional shares of common stock in connection with the
exercise of the underwriters' over-allotment option, at a price of $18.00 per
share.
Simultaneously with our initial public offering and sale of shares to Young
& Rubicam, we closed the acquisition of the following eight Internet and
electronic commerce professional services businesses (we may refer to these
eight businesses in this Quarterly Report on Form 10-Q as the "eight companies",
the "eight businesses", or the "Acquired Businesses"):
- Align Solutions Corp.;
- Brand Dialogue-New York, the New York branch of a division of Young &
Rubicam, Inc.;
- Free Range Media, Inc.;
- Integrated Consulting, Inc. (d/b/a/ i.con interactive);
- InterActive8, Inc.;
- Multimedia Resources, LLC;
- Potomac Partners Management Consulting, LLC; and
- RSI Group, Inc. and subsidiaries.
For financial statement presentation purposes, (i) Align Solutions
Corp.("Align"), one of the Acquired Businesses, is presented as the acquirer of
the other Acquired Businesses and Luminant, (ii) these acquisitions are
accounted for in accordance with the purchase method of accounting, and (iii)
the effective date of these acquisitions is September 21, 1999. As used in Item
1 of Part 1, the term "Company" means (1) Align prior to September 21, 1999 and
(2) Align, the other Acquired Businesses and Luminant on that date and
thereafter.
The accompanying unaudited pro forma combined statements of operations for
the three and nine months ended September 30, 1999 assume that Luminant
completed the following transactions on January 1, 1999, in each period
presented:
- issuance and sale in the IPO of 4,665,000 shares of its common stock
(excluding shares it sold on the exercise of its underwriters'
over-allotment option) at $18.00 per share;
- issuance and sale of 835,000 shares of non-voting common stock to
Young & Rubicam at $18.00 per share;
- issuance of 1,676,039 shares in payment of contingent consideration
issued under the terms of the acquisition agreements; and
- acquisition of the eight Acquired Businesses and its payment of the
purchase prices for those businesses.
The pro forma combined statement of operations for the three- and nine-month
periods ended September 30, 1999 also reflects pro forma adjustments for:
- amortization of goodwill resulting from the acquisitions of the
Acquired Businesses;
- reversal of the Acquired Businesses' income tax provision, as Luminant
has not demonstrated that it will generate future taxable income;
- a reduction in 1999 compensation expense of the Acquired Businesses,
other than Align as the accounting acquirer, related to non-recurring,
non-cash and equity-related compensation charges related to equity
appreciation rights; and
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- adjustments to increase expenses related to budgeted compensation for
additional corporate management, board of directors' expenses, other
administrative expenses, and other additional expenses of being a
public entity.
The pro forma combined results of operations of the Acquired Businesses for
the nine months ended September 30, 1999 do not represent combined results of
operations presented in accordance with generally accepted accounting
principles. They are only a summation of the revenues, costs of services and
selling, general and administrative expenses of the individual Acquired
Businesses on a pro forma basis. The pro forma combined results may not be
comparable to, and may not be indicative of, Luminant's post-combination results
of operations. The discussion of the pro forma combined results of operations
should be read in conjunction with our financial statements and related "Notes
to the Consolidated Financial Statements" appearing in "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations" of
this Quarterly Report on Form 10-Q.
LUMINANT WORLDWIDE CORPORATION AND SUBSIDIARIES
ACTUAL AND PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts; Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ------------------------
(ACTUAL) (PRO FORMA) (ACTUAL) (PRO FORMA)
2000 1999 2000 1999
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 38,028 $ 26,446 $ 111,798 $ 67,883
Cost of services 24,379 14,473 63,651 38,284
-------- -------- --------- ---------
Gross margins 13,649 11,973 48,147 29,599
Selling, general and administrative expenses 23,484 11,204 53,758 28,249
Equity-related & non-cash compensation
expense 15 9,674 1,325 15,795
Intangibles amortization 32,062 30,387 93,885 91,161
Restructuring charge 940 -- 940 --
-------- -------- --------- ---------
Loss from operations (42,852) (39,292) (101,761) (105,606)
Interest income (expense), net (303) (233) (164) (523)
Other expense, net -- (381) -- (531)
-------- -------- --------- ---------
Loss before provision for income taxes (43,155) (39,906) (101,925) (106,660)
Provision for income taxes -- -- -- --
-------- -------- --------- ---------
Net loss $(43,155) $(39,906) $(101,925) $(106,660)
======== ======== ========= =========
Net loss per share, basic & diluted $ (1.59) $ (1.67) $ (3.89) $ (4.46)
======== ======== ========= =========
Weighted average shares
outstanding, basic and diluted 27,119 23,934 26,193 23,934
======== ======== ========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE ACTUAL AND PRO FORMA COMBINED FINANCIAL STATEMENTS.
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LUMINANT WORLDWIDE CORPORATION AND SUBSIDIARIES
NOTES TO ACTUAL AND PRO FORMA COMBINED STATEMENTS OF OPERATIONS
The following table summarizes the weighted average number of shares of
common stock used in calculating actual and pro forma net loss per share:
WEIGHTED AVERAGE SHARES USED IN COMPUTING ACTUAL
AND PRO FORMA NET LOSS PER SHARE
(In thousands; Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- ---------------------
(ACTUAL) (PRO FORMA) (ACTUAL) (PRO FORMA)
------ ------ ------ ------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Number of Shares issued:
To Align's owners 4,678 4,678 4,678 4,678
To owners of Acquired Businesses other than Align 11,924 11,924 11,924 11,924
To the initial stockholders and certain management
personnel of Luminant 1,832 1,832 1,832 1,832
In the IPO, together with Young & Rubicam's direct
purchase of shares 5,500 5,500 5,500 5,500
In the exercise of underwriters' over-allotment
option 279 279
In contingent consideration to former shareholders
of Acquired Businesses 1,676 1,221
Exercise of options granted to former option
holders of Acquired Business and employee
incentives 617 535
To owners of New York Consulting Partners, LLC
("NYCP") 610 221
Other shares 3 3
------ ------ ------ ------
Number of shares used in calculating basic and
diluted net (loss) per share 27,119 23,934 26,193 23,934
====== ====== ====== ======
</TABLE>
The computation of net loss and diluted net loss per share excludes Common
Stock issuable upon exercise of certain employee stock options and upon exercise
of certain outstanding convertible debentures, warrants and other options, as
their effect is anti-dilutive.
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LUMINANT WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
(UNAUDITED)
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 20,906 $ 30,508
Accounts receivable, net of allowance of $5,150
and $1,609 34,116 20,524
Unbilled revenues 4,641 3,185
Related party, employee and other receivables 8,316 3,216
Prepaid expenses and other assets 1,757 1,432
--------- ---------
Total current assets 69,736 58,865
Property and equipment, net 14,628 6,193
Goodwill and other intangibles, net of
accumulated amortization of $125,677 and $31,792 249,785 332,679
Other assets 1,489 430
--------- ---------
Total assets $ 335,638 $ 398,167
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 10,474 9,447
Contingent consideration 3,181 45,006
Customer deposits 1,047 2,415
Accrued and other liabilities 14,462 11,167
Notes payable 27,906 6,013
Current maturities of long-term debt 268 497
--------- ---------
Total current liabilities 57,338 74,545
Long-term debt, net of current maturities 737 1,531
Other long-term liabilities 397 --
Commitments and contingencies
--------- ---------
Total long-term liabilities 1,134 1,531
Stockholders' equity:
Common stock 272 246
Additional paid-in capital 449,797 390,645
Retained deficit (172,903) (68,800)
--------- ---------
Total stockholders' equity 277,166 322,091
--------- ---------
Total liabilities and stockholders' equity $ 335,638 $ 398,167
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
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LUMINANT WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts; Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- --------- --------- --------
<S> <C> <C> <C> <C>
Revenues $ 38,028 $ 11,219 $ 111,798 $ 22,012
Cost of services 24,379 6,944 63,651 13,316
-------- --------- --------- --------
Gross margins 13,649 4,275 48,147 8,696
Operating expenses:
Selling, general and administrative expenses 23,484 3,612 53,758 10,838
Equity-related & non-cash compensation expense 15 13,020 1,325 13,020
Intangibles amortization 32,062 4,079 93,885 5,445
Restructuring charge 940 -- 940 --
-------- --------- --------- --------
Total operating expenses: 56,501 20,711 149,908 29,303
Loss from operations (42,852) (16,436) (101,761) (20,607)
Interest income (expense), net (303) (24) (164) (49)
Other expense, net -- (14) -- (14)
-------- --------- --------- --------
Loss before provision for income taxes (43,155) (16,474) (101,925) (20,670)
Provision for income taxes -- -- -- --
-------- --------- --------- --------
Net loss $(43,155) $ (16,474) $(101,925) $(20,670)
======== ========= ========= ========
Net loss per share, basic & diluted $ (1.59) $ (2.12) $ (3.89) $ (3.63)
======== ========= ========= ========
Weighted average shares
outstanding, basic & diluted 27,119 7,784 26,193 5,702
======== ========= ========= ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
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LUMINANT WORLDWIDE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands; Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $(101,925) $ (20,670)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization 97,191 5,245
Non-cash interest expense 126 --
Equity-related & non-cash compensation 1,325 14,020
Bad debt provisions 4,960 780
Expenses for warrants issued to a customer 74 1,175
Loss on disposition of assets 1 --
Changes in assets and liabilities, excluding
effects of acquisitions:
Accounts receivable (18,552) (5,705)
Unbilled revenues (1,178) 611
Related party and other receivables (5,100) --
Prepaid expenses and other current assets (325) (536)
Other non-current assets (59) 1,496
Accounts payable 1,027 7,344
Customer deposits (1,368) --
Accrued and other liabilities 2,551 (610)
Other long-term accrued liabilities 397 --
--------- ---------
Net cash used in operating activities (20,855) 3,150
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (11,677) (1,245)
Note receivable -- (35)
Payments for acquisitions accounted for as purchases (963) (33,303)
--------- ---------
Net cash used in investing activities (12,640) (34,548)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 11,572 510
Repayments of notes payable (3,359) (3,058)
Proceeds from 6% convertible debentures 13,451 1,061
Debt issue costs for 6% convertible debentures (1,000)
Repayments of long-term debt (824) (64)
Proceeds from warrants 3,549
Proceeds from issuances of common stock:
Common stock (net) -- 83,806
Distributions to stockholders -- (21,473)
Options exercised 504 --
--------- ---------
Net cash provided by financing activities 23,893 60,782
--------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (9,602) 29,349
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 30,508 --
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 20,906 $ 29,349
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 727 $ 85
========= =========
NONCASH INVESTING AND FINANCING ACTIVITY:
Extinquishment of contingent consideration through
issuance of common stock, including dividend to
Accounting Acquirer $ 47,184 $ --
Acquisition through issuance of common stock -- 213,460
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Dividend to Accounting Acquirer (2,178) --
Additional contingent consideration payable
to former owners 170 --
Options issued to non-employees 138 --
Acquisitions financed with equity 6,180 15,043
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
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LUMINANT WORLDWIDE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
Luminant Worldwide Corporation ("Luminant"), a Delaware Corporation, was
founded in August 1998 to create a leading single-source Internet service
company that provides electronic commerce professional services to Global 1000
companies, Internet based companies and other organizations. Prior to September
1999, it did not conduct any material operations. On September 21, 1999, it
completed its initial public offering of common stock and concurrently acquired
seven operating businesses and the assets of Brand Dialogue-New York (the
"Acquired Businesses").
For financial statement presentation purposes, (i) Align Solutions Corp.
("Align"), one of the Acquired Businesses, is presented as the acquirer of the
other Acquired Businesses and Luminant; (ii) these acquisitions are accounted
for in accordance with the purchase method of accounting; and (iii) the
effective date of these acquisitions is September 21, 1999. As used in Item 1 of
Part I, the term "Company" is used to describe (i) Align prior to September 21,
1999, and (ii) Align, the other Acquired Businesses and Luminant on that date
and thereafter.
Under applicable regulations of the SEC, the historical financial
statements in this report are unaudited and omit information and footnote
disclosures that financial statements prepared in accordance with generally
accepted accounting principles normally would include. In the opinion of
management, (1) the disclosures herein are adequate to make the information
presented not misleading, and (2) the financial statements reflect all
elimination entries and normal adjustments that are necessary for a fair
presentation of the results for the interim periods presented.
Operating results for interim periods are not necessarily indicative of the
results for full years. You should read these condensed consolidated financial
statements together with the audited financial statements of the Company as of
and for the year ended December 31, 1999, and the notes thereto, which are
included on the Company's 1999 Form 10-K.
Certain amounts in the prior period's consolidated financial statements
have been reclassified to conform to the current period presentation.
2. COMPREHENSIVE INCOME (LOSS)
The Company follows the Financial Accounting Standards Board Statement No.
130 - Reporting Comprehensive Income, which establishes standards for reporting
comprehensive income and its components within the financial statements.
Comprehensive income is defined as all changes in the equity of a business
enterprise from transactions and other events and circumstances, except those
resulting from investments by owners and distributions to owners. The Company's
comprehensive income components are immaterial for the three and nine months
ended September 30, 1999 and 2000; therefore, comprehensive income (loss) is the
same as net income (loss) for both periods.
3. SIGNIFICANT ACCOUNTING POLICIES
The Company has not added to or changed its accounting policies
significantly since December 31, 1999. For a description of these policies, see
Note 3 of the notes to the audited financial statements included on the
Company's 1999 Form 10-K.
4. SHARES USED IN COMPUTING NET INCOME (LOSS) PER SHARE
On September 15, 1999, Luminant declared a 16,653-for-one stock split. All
share and per-share amounts, including stock option information, have been
restated to reflect this stock split.
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The following table summarizes the number of shares (in thousands) of
common stock we have used on a weighted average basis in calculating net income
(loss) per share:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------- ----------------
2000 1999 2000 1999
------ ----- ------ -----
<S> <C> <C> <C> <C>
Number of Shares issued:
To Align's owners 4,678 4,646 4,678 4,646
To owners of Acquired Businesses other than Align 11,924 1,944 11,924 655
To the initial stockholders and certain management
personnel of Luminant 1,832 298 1,832 100
In the IPO, together with Young & Rubicam's direct
purchase of shares 5,500 896 5,500 301
In the exercise of underwriters' over-allotment
option 279 279
In contingent consideration to former shareholders
of Acquired Businesses 1,676 1,221
Exercise of options granted to former option
holders of Acquired Business and employee
incentives 617 535
To owners of NYCP 610 221
Other shares 3 3
------ ----- ------ -----
Number of shares used in calculating basic and
diluted net loss per share 27,119 7,784 26,193 5,702
====== ===== ====== =====
</TABLE>
The computation of net loss and diluted net loss per share excludes
Common Stock issuable upon exercise of certain employee stock options and
upon exercise of certain other outstanding convertible debentures, warrants
and other options, as their effect is anti-dilutive.
5. REVENUE RECOGNITION
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements,"
("SAB 101") which currently must be adopted for the fourth quarter of 2000. SAB
101 provides additional guidance on revenue recognition as well as criteria for
when revenue is generally realized and earned and also requires the deferral of
incremental costs. The Company is currently assessing the impact of SAB 101 and
does not believe that the impact of SAB 101 will be material to the Company.
6. AGREEMENT WITH UNITED AIR LINES, INC.
The Company has entered into an agreement with United Air Lines, Inc.
("United") under which it has 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 the Company. Under this
agreement, the Company has issued to United a warrant to purchase up to 300,000
shares of our common stock at an exercise price of $18.00 per share. Under the
warrant, United has the immediate right to purchase 50,000 shares of common
stock. Over the five-year term of the agreement, United will have the right to
purchase 5,000 shares of the remaining shares under the warrant for every $1
million of revenues the Company receives from United up to $50 million of
revenue. Selling, general and administrative expenses for the three and nine
months ended September 30, 2000 include a charge of approximately $1,600 and
$74,000, respectively, related to the fair market value of shares underlying the
portion of the warrant earned during these periods.
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7. SEGMENT REPORTING
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information", requires that
companies report separately information about each significant operating segment
reviewed by the chief operating decision maker. All segments that meet a
threshold of 10% of revenues, reported profit or loss, or combined assets are
defined as significant segments. The Company operated as one segment and all
operations and long-lived assets were in the United States.
8. DEBT
In March 2000, we entered into a revolving credit agreement with Wells
Fargo Business Credit, Inc. ("Wells Fargo") for a senior secured credit
facility. The initial term of the credit agreement extends until March 31, 2003
and is renewable for successive one-year terms thereafter. Borrowings under this
credit agreement accrue interest at a rate of, at our option, either (1) the
prime rate of Wells Fargo Bank, N.A.-San Francisco, or (2) the rate at which
U.S. Dollar deposits are offered to major banks in the London interbank
Eurodollar market (as adjusted to satisfy the reserve requirements of the
Federal Reserve System) plus 250 basis points. If we generate operating cash
flow of at least $14.0 million for the fiscal year ended December 31, 2000, the
available interest rates described in the preceding sentence will be reduced to
(1) the prime rate of Wells Fargo Bank, N.A. minus 25 basis points, and (2) the
rate at which U.S. Dollar deposits are offered to the major banks in the London
Eurodollar market (as adjusted to satisfy the reserve requirements of the
Federal Reserve System) plus 225 basis points, respectively. The credit
agreement also contains representations, warranties, covenants and other terms
and conditions typical of credit facilities of such size, including financial
covenants, and restrictions on certain acquisitions.
On July 14, 2000, Wells Fargo informed Luminant that the Company was in
default of various reporting and financial ratio covenants in its revolving
credit facility. Wells Fargo agreed to waive these defaults, and, pursuant to
the terms of the First Amendment to the Credit and Security Agreement, dated as
of August 31, 2000 (the "Credit Agreement Amendment"), also agreed to certain
amendments to the credit facility, in exchange for consideration of $0.2
million. Under the terms of the Amendment, Wells Fargo agreed to increase the
amount issuable under the credit agreement under the letters of credit and
expand the amount that may be spent on capital expenditures during 2000. We
agreed to increase certain of the minimum year-to-date EBITDA thresholds that
the Company must meet. The above description is qualified in its entirety by
reference to the Credit Agreement Amendment, which is attached as an exhibit to
this Quarterly Report on Form 10-Q.
As of September 30, 2000, borrowings of $11.6 million were outstanding
under this revolving credit agreement. The weighted average interest rate on
these obligations as of such date was 9.5%
On October 26, 2000, Wells Fargo informed Luminant that Luminant was in
default of certain reporting covenants, as well as the requirement that the
Company achieve minimum year-to-date EBITDA of $4.5 million as of July 31,
2000 and August 30, 2000, and $9.0 million as of September 30, 2000. Wells
Fargo has agreed to waive these defaults through December 31, 2000, and has
agreed to amend the covenants, based upon financial information obtained from
the Company, to avoid further defaults at the end of the fourth quarter of
2000, and the first quarter of 2001. Successful completion of the
convertible debenture agreements on September 26, 2000 allowed Luminant to
become compliant with certain Wells Fargo Business Credit covenants
surrounding liquidity. If this line of credit was declared in default and
payment demanded by Wells Fargo, the debenture holders would have the ability
to demand payment in cash of all principal and interest. Neither debt holder
has demanded payment.
The Company intends to finance its operations using the cash on hand at
September 30, 2000, plus positive future operating cash flows. To finance
its operations from existing cash and future operating cash flows and avoid
violations of the covenants in the fourth quarter of 2000 and the first
quarter of 2001, the Company must substantially reduce its cash expenditures
from the levels in the first nine months of the year. From late September to
November 10, 2000, the Company terminated approximately 250 employees,
severely restricted discretionary expenditures and has taken other steps to
conserve cash.
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Management believes that with the actions taken and the business plan
being pursued that the Company will be able to fund its operations
internally. However, the success of the plans described above is dependent
on the ability of the Company to execute its business plan and achieve the
planned cost reductions.
9. MATERIAL DEVELOPMENTS
CONVERTIBLE DEBENTURE FUNDING TRANSACTION
On September 21, 2000, we entered into a convertible debenture purchase
agreement with Montrose Investments Ltd., Strong River Investments Inc. and
James R. Corey, our Chief Executive Officer, President, Chief Operating Officer
and Director. Under the terms of the agreement, we sold to Montrose and Strong
River warrants to purchase up to 1,373,626 shares of our common stock at $2.73
per share, as well as 6% convertible debentures, due September 21, 2003, in an
aggregate principal amount equal to $15 million, convertible into a total of
6,000,000 shares of our common stock. Under the same agreement, we sold to Mr.
Corey warrants to purchase up to 183,150 shares of our common stock at $2.73 per
share, as well as 6% convertible debentures, due September 21, 2003, in an
aggregate principal amount equal to $2 million, convertible into a total of
800,000 shares of our common stock. The number of shares into which the
debentures may be converted, the exercise price of the warrants and in some
cases the number of warrants, will be adjusted if we issue shares of common
stock at a price lower than the conversion price or exercise price, as
applicable, or if we conduct a stock split, stock dividend or similar
transaction. The holders of the debentures have the right to put to us any
outstanding debentures, including any interest or other amounts outstanding
thereunder, in return for cash or up to the limitation described below of our
common stock, at our election, at the lower of (1) the then prevailing
conversion price of the debentures, or (2) the average closing price of our
common stock for the five trading days preceding the date such right is
exercised.
The holder of such debentures is, among other things, prohibited from
using them to acquire shares of our common stock to the extent that such
acquisition would result in such holder, together with any affiliate thereof,
beneficially owning in excess of 4.999% of the outstanding shares of out
common stock following such acquisition. This restriction may be waived by a
holder on not less than 61 days notice to us. If the debenture holders do not
waive such restriction upon conversion of the debentures, the debenture
holders could choose to require us to retain for future conversion any
principal amount tendered for conversion in excess of the 4.999% restriction
or require us to return to such debenture holder the excess principal amount
of the outstanding debentures in cash to the debenture holder.
In connection with the purchase agreement described above, we also entered
into a registration rights agreement with Montrose and Strong River. Under the
terms of the agreement, we agreed to register for resale the shares underlying
the debentures and warrants we sold to Montrose and Strong River. On October 26,
2000, we filed a registration statement on Form S-3 with the SEC for the purpose
of registering these and other shares. We expect that the registration statement
will be declared effective by mid-November.
Under the debentures, a default by Luminant under certain credit
agreements and certain other, similar agreements which results in the amounts
owed thereunder becoming due and payable prior to maturity, also triggers a
default under the debentures, and gives the holders of the debentures the
right to require Luminant to pay 107% of the principal amount plus all other
amounts outstanding under the debentures, in cash or stock at the debenture
holder's election. If Wells Fargo causes the amounts owed by Luminant under
the Wells Fargo credit agreement to become due and payable as a result of the
credit agreement default described above, the holders of the debentures would
have the right to require Luminant to pay or issue stock in the amounts
described above.
Of the $17.0 million in gross proceeds received by the Company as
consideration for the convertible debentures and warrants described above, $3.5
million was allocated to the warrants. The debt is recorded on the Company's
financial statements at September 30, 2000, at the value of $13.5 million.
Amortization of the original issue discount, using an effective interest rate of
7.54%, resulted in an additional interest expense of ten thousand dollars during
the three and nine months ended September 30, 2000. The debentures contain a
"put" option, allowing the debenture holders to require the Company to prepay
all or a portion of the then outstanding debt on the first year anniversary of
the original issue date and on each third monthly anniversary thereafter.
Consequently, all of the debt is categorized as a current liability on our
balance sheet.
REORGANIZATION AND LEADERSHIP CHANGES
On September 26, 2000, the Board of Directors designated James R. Corey as
the Company's new Chief Executive Officer. Mr. Corey succeeds Guillermo G.
Marmol, who
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resigned from the position in September 2000. Under the terms of Mr.
Marmol's employment agreement, the Company has recognized expenses related to
his resignation approximating $1.0 million, representing payments to be made
through March 2002.
In addition, the Company plans to take a charge of approximately $9.0
million in the fourth quarter of 2000 in order to position itself to return to
sequential growth and profitability. This represents charges for severance
packages related to a 25%, or approximately 250 person, reduction in
workforce. Approximately 70% of the reduction in workforce will consist of
billable employees. The remaining 30% will consist of administrative employees.
BUSINESS COMBINATION WITH NEW YORK CONSULTING PARTNERS, LLC
On June 22, 2000, the Company acquired certain assets and liabilities of New
York Consulting Partners, LLC ("NYCP"), in exchange for approximately $0.8
million in cash and 610,331 shares of common stock, valued at approximately $6.2
million on the closing date. Goodwill of approximately $7.7 million was recorded
in connection with the transaction, and is being amortized on a straight-line
basis over three years. Under the terms of the agreement, the Company was
required to issue 14,040 additional shares based on the financial performance of
NYCP during the second quarter of 2000. The Company issued those shares on
November 3, 2000.
The Company will also be required to issue up to a total of 152,583
additional shares in two equal installments on each of the first two anniversary
dates of the closing, subject to the former members of NYCP achieving certain
revenue targets or operational metrics. These additional payments will be
recorded as equity-based compensation in the event all requirements for issuance
are met.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with (1) the pro
forma and historical financial statements and related notes contained elsewhere
in this Form 10-Q, and (2) the pro forma and historical financial statements and
related notes and management's discussion and analysis of financial condition
and results of operations contained in our Annual Report on Form 10-K filed with
the Securities and Exchange Commission (the "SEC") for the year ended December
31, 1999.
This discussion contains or incorporates both historical and
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. 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 achievement expressed or implied by
such forward-looking statements. These forward-looking statements relate to
future events and/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 assume 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 Quarterly Report on Form 10-Q to conform such
statements to actual results and do not intend to do so.
On September 15, 1999, Luminant declared a 16,653-for-one stock split. All
share and per-share amounts, including stock option information, set forth in
this Quarterly Report on Form 10-Q have been restated to reflect this stock
split.
Luminant Worldwide Corporation, a Delaware corporation, was founded in
August 1998 to create a single-source Internet service company providing
electronic commerce professional services to Global 1000 companies, Internet
based companies and other organizations. Prior to September 1999, it did not
conduct any material operations. On September 21, 1999, Luminant completed its
initial public offering of 4,665,000 shares of its common stock, concurrently
with the sale of 835,000
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shares of non-voting common stock to Young & Rubicam, Inc. (collectively, the
"Offering") and the acquisition of the Acquired Businesses. On October 19, 1999,
our underwriters exercised their over-allotment option resulting in the issuance
of an additional 278,986 shares of Luminant's common stock. One of the Acquired
Businesses, Align Solutions Corp., has been identified as the "accounting
acquirer" for our financial statement presentation, and its assets and
liabilities have been recorded at historical cost levels. The acquisition of
each of the other Acquired Businesses was accounted for using the purchase
method of accounting. 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 is being amortized on a straight line
basis over three years, the estimated period of benefit. In addition, the pro
forma combined financial information covers periods during which the Acquired
Businesses had different tax structures and operated independently of each other
as private, owner-operated companies.
In September 1999, we entered into an agreement with United Air Lines,
Inc.("United") 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. Under this
agreement, we have issued to United a warrant to purchase up to 300,000 shares
of our common stock at an exercise price of $18.00 per share, our initial public
offering price. Under the warrant, United has the immediate right to purchase
50,000 shares of common stock. Over the five year term of the agreement, United
will have the right to purchase 5,000 shares of the 250,000 remaining available
shares under the warrant for every $1 million of revenues we receive from United
up to $50 million of revenue. Our selling, general and administrative expenses
for the three- and nine-month periods ended September 30, 2000 include charges
of $1,600 and $74,000, respectively, related to the estimated fair market value
of shares underlying the portion of this warrant earned during these periods.
Under the terms of the acquisition agreements by which we acquired the
Acquired Businesses, we were required to make contingent payments to the former
owners of the Acquired Companies based on the financial performance of each of
the Acquired Businesses and of Luminant as a whole and, for certain former
equity holders, based on the amount of certain types of revenues we receive from
a particular client. In March 2000, we issued approximately $47.2 million in
contingent consideration to the former owners of five of the eight Acquired
Businesses as a result of the operations of the individual Acquired Businesses
during the period from July 1, 1999 through December 31, 1999, including $0.55
million in cash and 1,661,392 shares of common stock. Of the 1,661,392 shares
issued as contingent consideration, 558,032 shares are being held by an escrow
agent pending agreement between us and a former owner of one of the eight
companies regarding the amount of the contingent consideration payable under the
terms of the acquisition agreement. Except for the consideration currently held
in escrow and except as set forth in the next paragraph, we owe no additional
contingent consideration to the former owners of the Acquired Businesses under
the terms of the aforementioned acquisition agreements.
Certain former owners of one of the Acquired Businesses are still eligible
to receive additional contingent consideration through June 30, 2002, based upon
the amount of certain types of revenues we receive from a particular client.
During the period from July 1, 1999 through December 31, 1999, the amount earned
by these former owners resulting from the aforementioned revenues totaled
approximately $170,000. On May 10, 2000, we issued 14,645 shares in payment of
this contingent consideration. During the periods from January 1, 2000 through
June 30, 2000, and July 1, 2000 through September 30, 2000, the amount of
contingent consideration earned by these former owners totaled approximately
$2.2 million and $0.5 million, respectively. This contingent consideration,
together with any additional contingent consideration earned by these former
owners through December 31, 2000, is payable no later than thirty days after
completion of our audit for the fiscal year 2000. We currently intend to pay all
of the contingent consideration earned during the aforementioned periods in
shares of Luminant common stock. The number of shares to be issued will be
determined based on the average trading price of our common stock during the
thirty-day period preceding issuance of the shares.
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
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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 actual financial
results of the project. We make 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 time and materials basis. To a
lesser extent, we also provide services on a fixed price-fixed time frame basis.
In such cases, we use internally developed processes to estimate and propose
fixed prices for our projects. The estimation process applies a standard billing
rate to each project based upon the level of expertise and number of
professionals required, the technology environment, the overall technical
complexity of the project and whether strategic, creative or technology
solutions or value-added services are being provided to the client.
Our financial results may fluctuate from quarter to quarter based on such
factors as the number, complexity, size, scope and lead time of projects in
which we are engaged. More specifically, these fluctuations can result from the
contractual terms and degree of completion of such projects, any delays incurred
in connection with projects, employee utilization rates, the adequacy of
provisions for losses, the accuracy of estimates of resources required to
complete ongoing projects and general economic conditions. In addition, revenue
from a large customer or project may constitute a significant portion of our
total revenue in a particular quarter. In the future, we anticipate that the
general size of our individual client relationships will grow as we focus our
business on larger projects for Fortune 1000 companies. As a result, a larger
portion of total revenues in any given period may be derived from these
customers.
Our cost of services is comprised primarily of salaries, employee benefits
and incentive compensation of billable employees.
Selling expenses consist of salaries, bonuses, commissions and benefits for
our sales and marketing staff as well as other marketing and advertising
expenses. General and administrative costs consist of salaries, bonuses and
related employee benefits for executive, senior management, finance and
administrative employees, training, travel, recruiting, bad debt provisions and
other corporate costs. General and administrative costs also include facilities
costs, including depreciation, and computer and office equipment operating
leases.
RESULTS OF OPERATIONS - ACTUAL AND PRO FORMA COMBINED
The following discussion and analysis compares the three- and nine-month
periods ended September 30, 2000 to the corresponding periods ended September
30, 1999 for Luminant Worldwide Corporation and its subsidiaries (in Items 2 and
3 of Part I and in Part II we will refer to Luminant Worldwide Corporation and
its subsidiaries as "Luminant," the "Company," "we," "us" and "our").
The pro forma financial statements for 1999 herein reflect pro forma
adjustments for:
- amortization of goodwill resulting from the acquisitions of the
Acquired Businesses,
- reversal of the Acquired Businesses' income tax provision, as Luminant
has not demonstrated that it will generate future taxable income,
- a reduction in 1999 compensation expense of the Acquired Businesses,
other than Align as the accounting acquirer, related to non-recurring,
non-cash and equity-related compensation charges related to equity
appreciation rights, and
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- adjustments to increase expenses related to budgeted compensation for
additional corporate management, board of directors' expenses, other
administrative expenses, and other additional expenses of being a
public entity.
The pro forma combined results of 1999 operations of the Acquired
Businesses for the periods presented do not represent combined results of
operations presented in accordance with generally accepted accounting
principles. They are only a summary of revenues, cost of services and selling,
general and administrative expenses of the individual Acquired Businesses on a
pro forma basis. The pro forma combined results may not be comparable to, and
may not be indicative of, Luminant's post-combination results of operations. The
discussion of the pro forma combined results of operations should be read in
conjunction with our financial statements and related "Notes to the Consolidated
Financial Statements" appearing in Item 1. "Financial Statements" " of this
Quarterly Report on Form 10-Q.
The following table sets forth for us on an actual and pro forma combined
basis selected statement of operations information as a percentage of revenues
for the periods indicated.
<TABLE>
<CAPTION>
ACTUAL AND PRO FORMA ACTUAL AND PRO FORMA
RESULTS FOR RESULTS FOR
THE THREE MONTHS THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------ -------------------------
(UNAUDITED) (UNAUDITED)
(ACTUAL) (PRO FORMA) (ACTUAL) (PRO FORMA)
-------- -------- --------- ---------
2000 1999 2000 1999
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 38,028 $ 26,446 $ 111,798 $ 67,883
Cost of services 24,379 14,473 63,651 38,284
-------- -------- --------- ---------
Gross margins 13,649 11,973 48,147 29,599
Selling, general and administrative
expenses 23,484 11,204 53,758 28,249
Equity-related & non-cash compensation
expense 15 9,674 1,325 15,795
Intangibles amortization 32,062 30,387 93,885 91,161
Restructuring charge 940 -- 940 --
-------- -------- --------- ---------
Loss from operations $(42,852) $(39,292) $(101,761) $(105,606)
======== ======== ========= =========
</TABLE>
REVENUES
For the three-month period ended September 30, 2000, revenues increased
$11.6 million, or 44%, to $38.0 million from $26.4 million for the
three-month period ended September 30, 1999. This increase is attributable
primarily to the increase in the average size of the projects performed for
our largest clients and secondarily to an increase in average billing rates.
Average revenues derived from our top ten clients for the three-month period
ended September 30, 2000 increased approximately $1.4 million, or 156%, to
approximately $2.3 million from $0.9 million for the three-month period ended
September 30, 1999.
For the nine-month period ended September 30, 2000, revenues increased
$43.9 million, or 65%, to $111.8 million from $67.9 million for the
comparable period ended September 30, 1999. This increase in revenue is
attributable primarily to the increase in the average size of the projects
performed for our largest clients and secondarily to an increase in average
billing rates. Average revenues derived from our top ten clients for the
nine-month period ended September 30, 2000, increased approximately $2.7
million, or 108%, to approximately $5.2 million from $2.5 million for the
nine-month period ended September 30, 1999.
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COST OF SERVICES
Cost of services consists primarily of salaries, associated employee
benefits and incentive compensation for personnel directly assigned to client
projects. Total cost of services increased $9.9 million, or 68%, to $24.4
million for the three-month period ended September 30, 2000 from $14.5 million
for the three-month period ended September 30, 1999. These increases were due
primarily to an increase in billable professionals needed to service anticipated
demand for our services as well as salary increases for existing personnel.
Total billable professionals increased by 128 persons from 608 billable
professionals at September 30, 1999 to 736 billable professionals at September
30, 2000.
Total cost of services increased $25.4 million, or 66%, to $63.7 million
for the nine-month period ended September 30, 2000 from $38.3 million for the
nine-month period ended September 30, 1999. These increases were due primarily
to an increase in billable professionals needed to service anticipated demand
for our services as well as salary increases for existing personnel. Total
billable professionals increased by 128 persons from 608 billable professionals
at September 30, 1999 to 736 billable professionals at September 30, 2000.
GROSS MARGINS
Gross margin increased $1.6 million, or 14%, to $13.6 million for the
three-month period ended September 30, 2000, from $12.0 million for the
three-month period ended September 30, 1999. The gross margin increase resulted
from an increase in revenue during the three-month period ended September 30,
2000, compared to the three-month period ended September 30, 1999. As a
percentage of revenue, gross margin declined from 45% to 36% for the three-month
periods ended September 30, 1999, and September 30, 2000, respectively. The
percentage decrease primarily resulted from a revenue growth slowdown due to an
industry-wide decline in revenues from start-up companies. Revenue from
start-ups decreased from approximately 10% of our revenues in the second quarter
to less than 5% of revenue in the current reporting period. As financing and
revenues have declined for many start-up companies, they have fewer funds to
spend on our services and also fewer funds to pay outstanding receivables owed
to us. In addition, the revenue growth slowdown resulted from extended
decision-making cycles for new work with large clients. Increases in direct
headcount expenses, including the addition of personnel at competitive market
salaries and wage adjustments to existing personnel, also contributed to the
decrease in margin as a percentage of revenue. The margin decrease was partially
offset by general increases in billing rates, an increased portion of business
revenues derived from high margin consulting projects, and an increase in the
average size of projects performed for our largest clients.
Gross margin increased $18.5 million, or 63%, to $48.1 from $29.6 million
for the nine-month periods ended September 30, 2000 and September 30, 1999,
respectively. The gross margin increase reflects an increase in revenue during
the current year's nine-month period compared to the prior year's nine-month
period. As a percentage of revenue, gross margin declined slightly from 44% for
the nine-month period ended September 30, 1999 to 43% for the nine-month period
ended September 30, 2000. The percentage decrease primarily resulted from a
third quarter revenue growth slowdown due to an industry-wide decline in
revenues from start-up companies. Revenues from start-ups have decreased to less
than 5% of total revenue for the current reporting period. As financing and
revenues have declined for many start-up companies, they have fewer funds to
spend on our services and also fewer funds to pay outstanding receivables owed
to us. In addition, the revenue growth slow down resulted from extended
decision-making cycles for new work with large clients. Increases in direct
headcount expenses, including addition of personnel at competitive market
salaries and wage adjustments to existing personnel also contributed to the
decrease in margin as a percentage of revenues. The decrease was almost entirely
offset by general increases in billing rates, an increased portion of business
revenues derived from high margin consulting projects, and an increase in the
average size of projects performed for our largest clients.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling expenses consist of salaries, bonuses, commissions, and benefits
for our sales and marketing staff, as well as other marketing and advertising
expenses.
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General and administrative costs consist of salaries, bonuses and related
employee benefits for executive, senior management, finance, recruiting and
administrative employees, training, travel, expenses for bad debt allowances and
other corporate costs. General and administrative costs also include facilities
costs, depreciation, and computer and office equipment operating leases.
Selling, general and administrative costs increased $12.3 million, or 110%,
from $11.2 million for the three month period ended September 30, 1999, to $23.5
million for the three-month period ended September 30, 2000. This increase was
due primarily to increased potential losses for bad debts related to risks
associated with amounts due from start-up companies, due to a slow-down in
revenues of, and financing available to those companies. The increase was, to a
lesser extent, due to expenses associated with the expansion of facilities to
support our growth, including recruiting fees, insurance, utilities and
depreciation of leasehold improvements, furniture, and additional computer
hardware and software. In addition, the increase was attributable to an increase
in the number of administrative personnel to service the larger number of
billable professionals on staff. Lastly, the increase was also partially due to
a $1.2 million increase in spending for sales and marketing efforts. The Company
expects selling, general and administrative costs to decrease into 2001, due to
the company-wide restructuring described in Note 9 to the financial statements.
This restructuring will reduce costs associated with administrative personnel
and facilities expenditures.
Selling, general and administrative costs increased $25.6 million, or 90%,
from $28.2 million for the nine-month period ended September 30, 1999, to $53.8
million for the nine-month period ended September 30, 2000. This increase was
due primarily to increased potential losses for bad debts related to risks
associated with amounts due from start-up companies, due to a slow-down in
revenues of, and financing available to those companies. The increase was, to a
lesser extent, due to expenses associated with the expansion of facilities to
support our growth, including recruiting fees, insurance, utilities and
depreciation of leasehold improvements, furniture, and additional computer
hardware and software. In addition, the increase was attributable to an increase
in the number of administrative personnel to service the larger number of
billable professionals on staff. Lastly, the increase was also partially due to
significantly increased spending for sales and marketing efforts. The Company
expects selling, general and administrative costs to decrease into 2001, due to
the company-wide restructuring described in Note 9 to the financial statements.
This restructuring will reduce costs associated with administrative personnel
and facilities expenditures.
As a percentage of revenue, selling, general and administrative expenses
increased from 42% for the three-month period ended September 30, 1999 to 62%
for the three-month period ended September 30, 2000. As a percentage of revenue,
selling, general and administrative expenses increased from 42% for the
nine-month period ended September 30, 1999 to 48% for the nine-month period
ended September 30, 2000. As noted above, the increases were primarily related
to increased loss provisions from bad debts related to start-up companies and
other clients.
EQUIY-RELATED AND NON-CASH COMPENSATION EXPENSE
For the three and nine months ended September 30, 1999, the pro forma
statement of operations includes $9.7 and $15.8 million, respectively, of
equity-related compensation expenses for the value of options granted at
exercise prices below fair market value to employees of Align and certain
employees of businesses acquired by Align. As all these options continue to
vest, non-cash equity-related expense relating to these options will decline.
The charges for these options are $15 thousand and $1.3 million, for the three
and nine months ended September 30, 2000, respectively.
INTANGIBLES AMORTIZATION
During 1999, Align, the accounting acquirer, completed the acquisitions of
Synapse Group, Inc., Fifth Gear Media Corporation and certain assets of inmedia,
inc. Goodwill of approximately $15.9 million was recorded in connection with
these transactions.
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As a result of the purchase of our Acquired Businesses, we initially
recorded approximately $303.6 million of goodwill. As certain contingent
consideration charges and other accruals became fixed and determinable, we
adjusted our initial estimate upward by $48.1 million, for a total of $351.7
million goodwill related to the purchase of the Acquired Businesses. This
amount, as well as goodwill resulting from certain historical acquisitions by
the Acquired Businesses, is being amortized over a period of three years. Under
the terms of the acquisition agreements by which we acquired the Acquired
Businesses, we were required to make contingent payments to the former owners of
the Acquired Companies based on the financial performance of each of the
Acquired Businesses and of Luminant as a whole and, for certain former equity
holders, based on the amount of certain types of revenues we receive from a
particular client. In March 2000, we issued approximately $47.2 million in
contingent consideration to the former owners of five of the eight Acquired
Businesses as a result of the operations of the individual Acquired Businesses
during the period from July 1, 1999 through December 31, 1999, including $0.55
million in cash and 1,661,392 shares of common stock. Of the 1,661,392 shares
issued as contingent consideration, 558,032 shares are being held by an escrow
agent pending agreement between us and a former owner of one of the eight
companies regarding the amount of the contingent consideration payable under the
terms of the acquisition agreement. Except for the consideration currently held
in escrow and except as set forth in the next paragraph, we owe no additional
contingent consideration to the former owners of the Acquired Businesses under
the terms of the aforementioned acquisition agreements.
Certain former owners of one of the Acquired Businesses are still eligible
to receive additional contingent consideration through June 30, 2002, based upon
the amount of certain types of revenues we receive from a particular client.
During the period from July 1, 1999 through December 31, 1999, the amount earned
by these former owners resulting from the aforementioned revenues totaled
approximately $170,000. On May 10, 2000, we issued 14,645 shares in payment of
this contingent consideration. During the periods from January 1, 2000 through
June 30, 2000 and July 1, 2000 through September 30, 2000, the amount earned by
these former owners totaled approximately $2.2 million and $0.5 million,
respectively. This contingent consideration, together with any additional
contingent consideration earned by these former owners through December 31,
2000, is payable no later than thirty days after completion of our audit for the
fiscal year 2000. We currently intend to pay all of the contingent consideration
earned during the aforementioned periods in shares of Luminant common stock. The
number of shares to be issued will be determined based on the average trading
price of our common stock during the thirty-day period preceding issuance of the
shares.
On June 22, 2000, the Company acquired certain assets and liabilities of
NYCP, in exchange for approximately $0.8 million in cash and 610,331 shares of
common stock, valued at approximately $6.2 million on the closing date. Goodwill
of approximately $7.7 million was recorded in connection with the transaction,
and is being amortized on a straight-line basis over three years. On November 3,
2000, the Company issued 14,040 additional shares based on the financial
performance of NYCP during the second quarter of 2000.
The Company will also be required to issue up to a total of 152,583
additional shares in two equal installments on each of the first two anniversary
dates of the closing, subject to the former members of NYCP achieving certain
revenue targets or operational metrics. These additional payments will be
recorded as equity-based compensation in the event all requirements for issuance
are met.
In connection with the goodwill resulting from the acquisition of the
Acquired Businesses and subsequent valuation of contingent consideration, we
recorded pro forma and actual amortization expense of approximately $91.2 and
$93.9 million for the pro forma and actual nine-month periods ended September
30, 1999 and 2000, respectively. Pro forma and actual amortization recorded for
the pro forma and actual three-month period ended September 30, 1999 and 2000,
was $30.4 million and $32.1 million, respectively.
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RESULTS OF OPERATIONS - HISTORICAL
For historical financial statement purposes, Align has been determined to be
the accounting acquirer. For the nine months ended September 30, 1999, the
information relates to Align on a stand-alone basis, except for the nine-day
period after the acquisition date of September 21, 1999. Activity occurring
between September 21, 1999 and September 30, 1999 was not material to the
results of operations for the quarter then ended. For the nine months ended
September 30, 2000, the information relates to Luminant and its subsidiaries on
a consolidated basis and presents Align as the accounting acquirer. Except as we
note below, the addition of the operating results for all of the Acquired
Businesses beginning on September 21, 1999 principally accounts for the changes
in the 2000 periods from the 1999 periods. For a discussion of pro forma
operations for the nine months ended September 30, 1999, see "Results of
Operations - Actual and Pro Forma Combined."
REVENUES
Revenues increased $26.8 million, or 239%, from $11.2 million for the three
months ended September 30, 1999 to $38.0 million for the three months ended
September 30, 2000.
Revenues increased $89.8 million, or 408%, from $22.0 million for the nine
months ended September 30, 1999 to $111.8 million for the nine months ended
September 30, 2000
COST OF SERVICES
Total cost of services increased $17.5 million, or 251%, to $24.4 million
for the three-month period ended September 30, 2000 from $6.9 million for the
three-month period ended September 30, 1999.
Total cost of services increased $50.4 million, or 378%, to $63.7 million
for the nine-month period ended September 30, 2000 from $13.3 million for the
nine-month period ended September 30, 1999.
GROSS MARGINS
Gross margin increased $9.3 million, or 219% from $4.3 million for the
three months ended September 30, 1999 to $13.6 million for the three months
ended September 30, 2000.
Gross margin increased $39.4 million, or 454%, from $8.7 million for the
nine months ended September 30, 1999 to $48.1 million for the nine months ended
September 30, 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $19.9 million, or
550% from $3.6 million to $23.5 million for the three months ended September 30,
1999 and 2000, respectively. As a percent of sales, this expense category
increased from 32% to 62% for the three months ended September 30, 1999 and
2000, respectively, as a result of increased allowances for bad debts, increased
recruiting fees, and costs of administrative headcount to support a larger
billable headcount.
Selling, general and administrative expenses increased $43.0 million, or
396% from $10.8 million for the nine months ended September 30, 1999 to $53.8
million for the nine months ended September 30, 2000. As a percentage of sales,
this expense category decreased from 49% to 48% for the nine months ended
September 30, 1999 and 2000, respectively.
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EQUITY-RELATED & NON-CASH COMPENSATION EXPENSE
For the three months ended September 30, 1999, Align recorded $13.0 million
of equity-related compensation expenses for the value of options granted at
exercise prices below fair market value to employees of Align and certain
employees of businesses acquired by Align. As all of these options continue to
vest, non-cash equity-related expense relating to these options will decline.
For the three months ended September 30, 2000, the charge for options was $15
thousand.
For the nine months ended September 30, 1999, Align recorded $13.0 million
of equity-related compensation expenses for the value of options granted at
exercise prices below fair market value to employees of Align and certain
employees of businesses acquired by Align. For the nine months ended September
30, 2000, the charge for these same options was $1.3 million.
INTANGIBLES AMORTIZATION
During 1999, Align, the accounting acquirer, completed the acquisitions of
Synapse Group, Inc., Fifth Gear Media Corporation and certain assets of inmedia,
inc. Goodwill of approximately $15.9 million was recorded in connection with
these transactions.
As a result of the purchase of our Acquired Businesses, we initially
recorded approximately $303.6 million of goodwill. As certain contingent
consideration charges and other accruals became fixed, we adjusted our initial
estimate upward by $48.1 million, for a total of $351.7 million goodwill related
to the purchase of the Acquired Businesses. These amounts, as well as goodwill
resulting from certain historical acquisitions by the Acquired Businesses, are
being amortized over a period of three years.
Please see "Results of Operations - Actual and Pro Forma Combined -
Intangibles Amortization" for a discussion of additional amortization related to
contingent consideration paid pursuant to the terms of the acquisition
agreements by which we acquired the Acquired Businesses and NYCP.
LIQUIDITY AND CAPITAL RESOURCES
Luminant Worldwide Corporation is a holding company that conducts its
operations through its subsidiaries. Accordingly, its principal sources of
liquidity are the cash flows of its subsidiaries, proceeds from the recent
issuance of warrants and convertible debentures, the unallocated net proceeds of
the Offering, and cash available from Luminant's line of credit.
We raised $85.9 million from the issuance of 4,665,000 shares of common
stock in our initial public offering and the simultaneous sale of 835,000 shares
of non-voting common stock to Young & Rubicam, Inc. on September 21, 1999, and
the subsequent sale of an additional 278,986 shares of Common Stock upon
exercise of the underwriters' over-allotment option, net of underwriting
discounts, commissions and the expenses of the Offering and of the acquisitions
of the Acquired Businesses. We have used and are using a portion of the net
proceeds to pay the purchase prices for the Acquired Businesses and for general
corporate purposes, including working capital expenditures. A portion of the
proceeds may also be used for the acquisition of additional businesses and
payment of contingent consideration to the former owners of the Acquired
Businesses. Pending such uses, we have invested the net proceeds of the Offering
in commercial paper.
As of September 30, 2000, we had $20.9 million in cash and cash
equivalents. Net cash used by operations for the nine months ended September
30, 2000 was $20.9 million, as compared to net cash provided by operations of
$3.2 million for the nine months ended September 30, 1999. This difference
resulted in part from a $19.9 million aggregate increase in receivables
(including receivables due from a related party) and unbilled revenues since
the beginning of 2000 caused by our expanded billing-base and increased
revenues. The third quarter saw continuing increases in aggregate receivables
driven by expansion of the size of our client relationships. Receivables also
increased in the third quarter of 2000 due to industry-wide slow-down in
financing available to start-up companies.
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The $9.6 million decrease in cash balances from $30.5 million at December
31, 1999 to $20.9 million at September 30, 2000 resulted from increased
receivables, expenditures for leasehold improvements, and repayments of debt
acquired in the Offering, offset in part by proceeds from the new debt.
Proceeds from financing activities consists of borrowings of $11.6 million
under the Wells Fargo line of credit, as well as gross consideration of $17
million in exchange for convertible debentures and warrants issued in
September 2000. The convertible debentures proceeds are offset by $1.0 million
of debt issue costs.
Net cash used in investing activities amounted to $12.6 million during the
nine months ended September 30, 2000, representing capital expenditures for
leasehold improvements to new offices in New York, New York, and Dallas, Texas,
installation of an integrated financial accounting system, and amounts paid for
the acquisition of NYCP.
Our capital expenditures for the nine months ended September 30, 2000 were
approximately $11.7 million. This amount includes $3.9 million for the
completion and occupation of our consolidated offices in New York, New York and
in Dallas, Texas. The remainder of acquisitions are primarily for additional
leasehold improvements, furniture, computer and software purchases. We expect
that capital expenditures will decrease as a result of the closing of certain
offices in connection with the restructuring discussed in Note 9 to the
financial statements.
Net cash provided by financing activities equaled $23.9 million for the
nine months ended September 30, 2000, primarily consisting of proceeds from
new debt, net of repayments of debt acquired in the Offering. Proceeds from
the financing activities consist of borrowings of $11.6 million under the
Wells Fargo line of credit, as well as gross consideration of $17 million in
exchange for 6% convertible debentures and warrants issued in September 2000.
The 6% convertible debenture's proceeds are offset by $1.0 million of debt
issue costs.
On September 21, 2000, the Company entered into a convertible debenture
purchase agreement, due September 21, 2003, with Montrose Investments Ltd.,
Strong River Investments Inc. and James R. Corey, our Chief Executive Officer,
President, Chief Operating Officer and Director. Under the terms of the
agreement, we sold to Montrose and Strong River warrants to purchase up to
1,373,626 shares of our common stock at $2.73 per share, as well as 6%
convertible debentures in an aggregate principal amount equal to $15 million,
convertible into a total of 6,000,000 shares of our common stock. Under the
same agreement, we sold to Mr. Corey warrants to purchase up to 183,150 shares
of our common stock at $2.73 per share, as well as 6% convertible debentures
in an aggregate principal amount equal to $2 million, convertible into a total
of 800,000 shares of our common stock. The number of shares into which the
debentures may be converted, the exercise price of the warrants and in some
cases the number of warrants, will be adjusted if we issue shares of common
stock at a price lower than the conversion price or exercise price, as
applicable, or if we conduct a stock split, stock dividend or similar
transaction. The holders of the debentures have the right to put to us any
outstanding debentures, including any interest or other amounts outstanding
thereunder, in return for cash or up to the limit described below of our
common stock, at our election, at the lower of (1) the then prevailing
conversion price of the debentures, or (2) the average closing price of our
common stock for the five trading days preceding the date such right is
exercised.
The holder of such debentures is, among other things, prohibited from
using them to acquire shares of our common stock to the extent that such
acquisition would result in such holder, together with any affiliate thereof,
beneficially owning in excess of 4.999% of the outstanding shares of out
common stock following such acquisition. This restriction may be waived by a
holder on not less than 61 days notice to us. If the debenture holders do not
waive such restriction upon conversion of the debentures, the debenture
holders could choose to require us to retain for future conversion any
principal amount tendered for conversion in excess of the 4.999% restriction
or require us to return to such debenture holder the excess principal amount
of the outstanding debentures in cash to the debenture holder.
Of the $17.0 million in gross proceeds, $3.5 million was allocated
to the warrants. The debt is recorded on the Company's financial statements
at September 30, 2000, at the value of $13.5 million. Amortization of the
original issue discount, using an effective interest rate of 7.54%, resulted
in an additional interest expense of ten thousand dollars during the three
and nine months ended September 30, 2000. The accretion of original issue
discount on the debt will cause an increase in indebtedness from September
30, 2000 to September 21, 2003 of $3.5 million. The debentures contain a
"put" option, allowing the debenture holders to require the Company to prepay
all or a portion of the then outstanding debt on the first year anniversary
of the original issue date and on each third monthly anniversary thereafter.
Consequently, all of the debt is categorized as a current liability on our
balance sheet.
Under the debentures, a default by Luminant under certain credit agreements
and certain other, similar agreements which results in the amounts owed
thereunder
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becoming due and payable prior to maturity, also triggers a default under the
debentures, and gives the holders of the debentures the right to require
Luminant to pay 107% of the principal amount plus all other amounts
outstanding under the debentures, in cash or stock at the debenture holder's
election. If Wells Fargo causes the amounts owed by Luminant under the Wells
Fargo credit agreement to become due and payable as a result of the credit
agreement default described above, the holders of the debentures would have
the right to require Luminant to pay or issue stock in the amounts described
above.
For a discussion of certain contingent consideration which we have paid and
may in the future be required to pay to certain former owners of the Acquired
Businesses and to the former owners of New York Consulting Partners, please see
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations - Intangibles Amortization."
In March 2000, we entered into a $15 million revolving credit agreement
with Wells Fargo Business Credit, Inc. ("Wells Fargo") for a senior secured
credit facility. The initial term of the credit agreement extends until March
31, 2003 and is renewable for successive one-year terms thereafter. Borrowings
under this credit agreement accrue interest at a rate of, at our option, either
(1) the prime rate of Wells Fargo Bank, N.A.-San Francisco, or (2) the rate at
which U.S. Dollar deposits are offered to major banks in the London interbank
Eurodollar market (as adjusted to satisfy the reserve requirements of the
Federal Reserve System) plus 250 basis points. If we generate operating cash
flow of at least $14.0 million for the fiscal year ended December 31, 2000, the
available interest rates described in the preceding sentence will be reduced to
(1) the prime rate of Wells Fargo Bank N.A. minus 25 basis points, and (2) the
rate at which U.S. Dollar deposits are offered to the major banks in the London
Eurodollar market (as adjusted to satisfy the reserve requirements of the
Federal Reserve System) plus 225 basis points, respectively. The credit
agreement also contains representations, warranties, covenants and other terms
and conditions typical of credit facilities of such size, including financial
covenants, and restriction on certain acquisitions.
On July 14, 2000, Wells Fargo informed Luminant that the Company was in
default of various reporting and financial ratio covenants in its revolving
credit facility. Wells Fargo agreed to waive these defaults and, pursuant to the
terms of the First Amendment to the Credit and Security Agreement, dated as of
August 31, 2000 (the "Credit Agreement Amendment"), also agreed to certain
amendments to the credit facility, in exchange for consideration of $0.2
million. Under the terms of the Amendment, Wells Fargo agreed to increase the
amount issuable under the credit agreement under the letters of credit and
expand the amount that may be spent on capital expenditures during 2000. We
agreed to increase certain of the minimum year-to-date EBITDA thresholds that
the Company must meet. The above description is qualified in its entirety by
reference to the Credit Agreement Amendment, which is attached as an exhibit to
this Quarterly Report on Form 10-Q.
As of September 30, 2000, borrowings of $11.6 million were outstanding
under this revolving credit agreement. The weighted average interest rate on
these obligations as of such date was 9.5%.
On October 26, 2000, Wells Fargo informed Luminant that Luminant was in
default of certain reporting covenants, as well as the requirement that the
Company achieve minimum year-to-date EBITDA of $4.5 million as of July 31,
2000 and August 30, 2000, and $9.0 million as of September 30, 2000. Wells
Fargo has agreed to waive these defaults through December 31, 2000, and has
agreed to amend the covenants, based upon financial information obtained from
the Company, to avoid further defaults at the end of the fourth quarter of
2000, and the first quarter of 2001. Successful completion of the
convertible debenture agreements on September 26, 2000 allowed Luminant to
become compliant with certain Wells Fargo Business Credit covenants
surrounding liquidity. If this line of credit was declared in default and
payment demanded by Wells Fargo, the debenture holders would have the ability
to demand payment in cash of all principal and interest. Neither debt holder
has demanded payment.
The Company intends to finance its operations using the cash on hand at
September 30, 2000, plus positive future operating cash flows. To finance
its operations from existing cash and future operating cash flows and avoid
violations of the covenants in the fourth quarter of 2000 and the first
quarter of 2001, the Company must substantially reduce its cash expenditures
from the levels in the first nine months of the year. From late September to
November 10, 2000, the Company terminated approximately 250 employees,
severely restricted discretionary expenditures and has taken other steps to
conserve cash.
Management believes that with the actions taken and the business plan
being pursued that the Company will be able to fund its operations
internally. However, the success of the plans described above is dependent
on the ability of the Company to execute its business plan and achieve the
planned cost reductions.
As a result of the acquisitions of the Acquired Businesses, we assumed
current and long-term debt of $5.7 million and $3.7 million, respectively. Of
those amounts, $1.4 million current debt and $2.6 million long-term debt were
repaid from proceeds of our initial public offerings or from operations and $2.8
was repaid from borrowings under our Wells Fargo credit facility. As of
September 30, 2000, we had a
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total of $3.9 million in outstanding current and long-term indebtedness
(excluding obligations under our revolving credit facility with Wells Fargo,
Inc. and the convertible debentures issued September 21, 2000). The weighted
average interest rate on our obligations (excluding obligations under our
revolving credit facility with Wells Fargo Business Credit, Inc.) at September
30, 2000 was 9.2%. Certain of our notes payable contain restrictive covenants,
the most restrictive of which requires us to maintain certain levels of eligible
receivables as well as financial ratios related to total debt, tangible net
worth, and working capital, among other restrictions. At September 30, 2000, we
were in compliance with, or had obtained waivers for, all debt covenants.
We intend to pursue acquisition opportunities. The timing, size or success
of any acquisition and the associated potential capital expenditures and
commitments are unpredictable. 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, creation of new debt, 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. Please see "Results of Operations -
Actual and Pro Forma Combined - Intangibles Amortization" for a description of
our acquisition of New York Consulting Partners in June 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential change in an instrument's value caused by, for
example, fluctuations in interest and currency exchange rates. We have not
purchased any futures contracts, nor have we purchased or held any derivative
financial instruments for trading purposes during the nine months ended
September 30, 2000. Our primary market risk exposure is the risk that interest
rates on our outstanding borrowings may increase.
We currently have various debentures, lines of credit, and notes payable
with aggregate maximum borrowings totaling approximately $28.9 million. An
increase in the prime rate (a benchmark pursuant to which interest rates
applicable to borrowings under the credit facilities may be set) equal to 10% of
the prime rate, for example, would have increased our consolidated interest by
less than $10,000 for the quarter ended September 30, 2000. Based on maximum
borrowing levels under the Wells Fargo line of credit, a 10% increase in the
line of credit would increase annual interest expense by approximately $40,000.
We have not entered into any interest rate swaps or other hedging arrangements
with respect to the interest obligations under these lines of credit.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Unregistered Sales of Securities
The following sets forth information as to all equity securities sold by us
during the period covered by this report that were not registered under the
Securities Act of 1933, as amended (the "Securities Act").
On September 7, 2000, David Faulkner exercised options to purchase 775
shares of our common stock at a price of $2.86 per share, which were not
registered under our Registration Statement on Form S-8. An exemption is claimed
under Section 4(2) of the Securities Act.
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On November 3, 2000, we issued an aggregate of 14,040 shares of common
stock to the former owners of New York Consulting Partners, LLC, as contingent
consideration pursuant to the terms of the agreement by which we acquired
certain assets and liabilities of New York Consulting Partners, LLC. Additional
terms of the acquisition are described in "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Intangibles Amortization. An
exemption is claimed under Section 4(2) of the Securities Act.
On September 26, 2000, pursuant to a convertible debenture purchase
agreement dated September 21, 2000, we sold to Montrose Investments Ltd., Strong
River Investments, Inc. and James R. Corey certain convertible debentures and
warrants. Under the agreement, we sold to Montrose and Strong River, for total
consideration of $15 million, warrants to purchase up to 1,373,626 shares of out
common stock at $2.73 per share, as well as convertible debentures in aggregate
principal amount equal to $15 million, convertible into a total of 6,000,000
shares of our common stock. Under the agreement, we also sold to Mr. Corey, for
total consideration of $2 million, warrants to purchase up to 183,150 shares of
our common stock at $2.73 per share, as well as convertible debentures in an
aggregate principal amount equal to $2 million, convertible into a total of
800,000 shares of our common stock. Additional terms of the transaction,
including terms of conversion and exercise of the warrants and debentures, are
set forth in "Management's Discussion and Analysis of Financial Conditions and
Results of Operations - Liquidity and Capital Resources." An exemption is
claimed under Section 4(2) of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On July 14, 2000, Wells Fargo Business Credit, Inc. ("Wells Fargo")
informed Luminant that the Company was in default of various reporting and
financial ratio covenants in its revolving credit facility. Wells Fargo agreed
to waive these defaults and, pursuant to the terms of the First Amendment to the
Credit and Security Agreement, dated as of August 31, 2000 (the "Credit
Agreement Amendment"), and also agreed to certain amendments to the credit
facility, in exchange for consideration of $0.2 million. Under the terms of the
of the Amendment, Wells Fargo agreed to increase the amount issuable under the
credit agreement under the letters of credit and expand the amount that may be
spent on capital expenditures during 2000. We agreed to increase certain of the
minimum year-to-date EBITDA thresholds that the Company must meet. The above
description is qualified in its entirety by reference to the Credit Agreement
Amendment, which is attached as an exhibit to this Quarterly Report on Form
10-Q.
As of September 30, 2000, borrowings of $11.6 million were outstanding
under this revolving credit agreement. The weighted average interest rate on
these obligations as of such date was 9.5%.
On October 26, 2000, Wells Fargo informed the Company that Luminant was in
default of certain reporting covenants, as well as the requirement that the
Company achieve minimum year-to-date EBITDA of $4.5 million as of July 31, 2000
and August 30, 2000. Wells Fargo has not yet exercised any remedies under the
credit agreement and Luminant is currently negotiating with Wells Fargo to
obtain a permanent waiver of the defaults referred to in the letter of October
26, 2000 and to amend certain of the financial covenants. Luminant cannot
guarantee that it will reach agreement regarding any such waiver on reasonable
terms or at all, or that it will successfully negotiate a waiver on reasonable
terms or at all. If the Company is not able to successfully renegotiate the
credit agreement, it intends to delay capital and other discretionary
expenditures in order to ensure that it maintains sufficient working capital
balances.
Under the debentures, a default by Luminant under certain credit
agreements and certain other, similar agreements which results in the amounts
owed thereunder becoming due and payable prior to maturity also triggers a
default under the debentures, and gives the holders of the debentures the
right to cause Luminant to pay 107% of the principal plus all other amounts
outstanding under the debentures, in cash or stock at the holder's election.
If Wells Fargo causes the amounts owed by Luminant under the Wells Fargo
credit agreement to become due and payable as a result of the default
described above, the holders of the debentures would have the right to cause
Luminant to pay or issue the amounts described above.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------- -----------
4.1 Convertible Debenture Purchase Agreement dated as of September
21, 2000 by and among Luminant Worldwide Corporation, Montrose
Investments Ltd. and Strong River Investments, Inc.
(incorporated herein by reference from Exhibit 99.1 to the
Current Report on Form 8-K filed by Luminant Worldwide
Corporation on October 11, 2000 (SEC File No. 26977)).
4.2 6% Convertible Debenture issued to Montrose Investments Ltd.
in the principal amount of $10,000,000 due September 21, 2003
(incorporated herein by reference from Exhibit 99.2 to the
Current Report on Form 8-K filed by Luminant Worldwide
Corporation on October 11, 2000 (SEC File No. 000-26977)).
4.3 6% Convertible Debenture issued to Strong River Investments,
Inc. in the principal amount of $5,000,000 due September 21,
2003 (incorporated herein by reference from Exhibit 99.3 to
the Current Report on Form 8-K filed by Luminant Worldwide
Corporation on October 11, 2000 (SEC File No. 000-26977)).
4.4 6% Convertible Debenture issued to James R. Corey in the
principal amount of $5,000,000 due September 21, 2003
(incorporated herein by reference from Exhibit 99.4 to the
Current Report on Form 8-K filed by Luminant Worldwide
Corporation on October 11, 2000 (SEC File No. 000-26977)).
4.5 Form of Common Stock Purchase Warrant (incorporated herein by
reference from Exhibit 99.5 to the Current Report on Form 8-K
filed by Luminant Worldwide Corporation on October 11, 2000
(SEC File No. 000-26977)).
4.6 First Amendment to Credit and Security Agreement dated as of
April 5, 2000, by and among Wells Fargo Business Credit, Inc.,
Luminant Worldwide Corporation and the subsidiaries of
Luminant named therein, dated as of August 31, 2000.
4.7 Second Amendment to Credit and Security Agreement dated as of
April 5, 2000, by and among Wells Fargo Business Credit, Inc.,
Luminant Worldwide Corporation and the subsidiaries of
Luminant named therein, dated as of September 21, 2000.
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed one report on Form 8-K during the quarter ended
September 30, 2000. Information regarding the items reported on is as follows:
Date Item Reported On
---- ----------------
October 11, 2000 The Company announced it had entered into a convertible
debenture purchase agreement with Montrose Investments Ltd.,
Strong River Investments Inc., and James R. Corey. This
agreement is further described in this Form 10-Q in Note 9 of
the Notes to Consolidated Financial Statements (unaudited) and
Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity & Capital Resources.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Form 10-Q to be signed on its behalf by the
undersigned thereunto duly authorized.
LUMINANT WORLDWIDE CORPORATION
Date: November 14, 2000 By: /S/ JAMES R. COREY
--------------------------------------
James R. Corey
Chief Executive Officer, President,
Chief Operating Officer and Director
Date: November 14, 2000 By: /S/ THOMAS G. BEVIVINO
--------------------------------------
Thomas G. Bevivino
Chief Financial Officer & Secretary
(Principal Accounting and Chief
Financial Officer)
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