Selling, general and administrative costs decreased $6.9 million, or 43%, from $16.3 million for the three-month period ended June 30, 2000, to $9.4 million for the three-month period ended June 30, 2001. This decrease was due primarily to the company-wide restructuring described in Note 8 to the financial statements, management’s continued efforts to reduce costs associated with administrative personnel and facilities expenditures and the revision of prior estimates including the allowance for bad debt and the 2000 bonus accruals totaling approximately $2.1 million. Total non-billable professionals decreased by 65 persons from 205 non-billable professionals at June 30, 2000 to 140 non-billable professionals at June 30, 2001. In addition, we reduced our lease square footage commitments in New York, New York, Seattle, Washington, and Washington, D.C., in the second quarter of 2001.
Selling, general and administrative costs decreased $10.5 million, or 35%, from $30.3 million for the six-month period ended June 30, 2000, to $19.8 million for the six-month period ended June 30, 2001. This decrease was due primarily to the company-wide restructuring described in Note 8 to the financial statements, management’s continued efforts to reduce costs associated with administrative personnel and facilities expenditures and the revision of prior estimates including the allowance for bad debt and the 2000 bonus accruals totaling approximately $2.1 million. Total non-billable professionals decreased by 65 persons from 205 non-billable professionals at June 30, 2000 to 140 non-billable professionals at June 30, 2001. In addition, we reduced our lease square footage commitments in New York, New York, Seattle, Washington, and Washington, D.C., in the second quarter of 2001.
As a percentage of revenue, selling, general and administrative expenses increased from 41% for the three-month period ended June 30, 2000 to 46% for the three-month period ended June 30, 2001. As a percentage of revenue, selling general and administrative expenses increased from 41% for the six-month periods ended June 30, 2000 to 45% for the six-month period ended June 30, 2001. The percentage increase primarily resulted from a larger decline in revenues through the three and six months ended June 30, 2001 compared to the decline in selling, general and administrative costs for the same periods.
The Company has equity based compensation expense relating to 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, equity based compensation expense in a given period relating to these options will decline. Equity based compensation expense incurred with respect to these options was approximately $0.2 million and $0.4 million, for the three- and six- month periods ended June 30, 2001, respectively.
The Company will be required to issue up to a total of 152,583 shares in two installments on each of the first two anniversary dates of the closing of the acquisition of New York Consulting Partners, subject to the former members of New York Consulting Partners achieving certain revenue targets or operational metrics. The Company is currently in the process of finalizing the calculation of the first installment of these payments and expects to issue the shares due to the former members of New York Consulting Partners in the third quarter of 2001. This payment, as well as any amounts earned during the periods from June 22, 2001 through June 22, 2002, will be recorded as equity–based compensation.
INTANGIBLES AMORTIZATION
As a result of acquisitions made in 1999 by Align, the purchase of our Acquired Businesses, and contingent consideration totaling approximately $48.9 million paid to former owners of the Acquired Businesses through June 30, 2001, we recorded approximately $370.0 million of goodwill. On June 22, 2000, the Company acquired certain assets and liabilities of New York Consulting Partners and recorded additional goodwill of approximately $7.7 million. These amounts are being amortized over a period of three years. Management of the Company has continually reviewed the impairment and potential recoverability of the goodwill, as events and changes in circumstances have warranted, determining whether or not any of the goodwill associated with the acquisitions described above has been impaired. In the fourth quarter of 2000, as part of the Company's restructuring plan, the Company exited certain lines of business of four of the Acquired Businesses and $114.5 million of unamortized goodwill was written off.
The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," ("SFAS 142") in June 2001. SFAS 142 defines the accounting treatment for all intangible assets, including goodwill, and provides methodology to be used to assess possible impairment of such intangibles. The Company is currently evaluating the potential impact of SFAS 142 on its financial position and results of operations.
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 periods from January 1, 2000 through December 31, 2000, the amount of contingent consideration earned by these former owners totaled approximately $3.3 million. On June 18, 2001, we issued 1,813,780 shares of Luminant common stock in partial payment of this contingent consideration. Payment of the remaining portion of the contingent consideration earned during the periods noted above will be paid out in shares of Luminant common stock at a later date. Luminant is currently in negotiation with the former owners of one of the Acquired Businesses in order to determine the specific date at which the payment will be made. During the period from January 1, 2001 through June 30, 2001, the amount earned by these former owners totaled approximately $1.1 million. This contingent consideration, along with any additional contingent consideration earned by these former owners during the period from July 1, 2001 through December 31, 2001, is payable no later than thirty days after completion of our audit for the fiscal year 2001. We currently intend to pay all of the contingent consideration earned 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 and is expected to be issued in the second quarter of 2002.
In connection with the goodwill described above, we recorded amortization expense of approximately $61.8 and $30.8 million for the six months ended June 30, 2000 and 2001, respectively.
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, unallocated proceeds from the issuance of warrants and convertible debentures and cash available from its line of credit.
Cash and cash equivalents, including cash pledged as security for the line of credit, decreased to $10.8 million at June 30, 2001 from $15.3 million at December 31, 2000. This decrease was primarily the result of cash used for operating activities of approximately $2.1 million and cash used in investing activities of approximately $2.4 million. Net cash used in operations for the six months ended June 30, 2000 was approximately $10.4 million, as compared to net cash used in operations of approximately $2.1 million for the six months ended June 30, 2001. Net cash used in operating activities during the six months ended June 30, 2001 was mainly due to a net loss of $34.9 million and a decrease in accounts payable, customer deposits and accrued liabilities totaling $15.8 million. This was partially offset by collections of accounts receivable and a decrease in unbilled revenues and related party and other receivables totaling $14.1 million.
Net cash used in investing activities decreased from approximately $10.5 million for the six months ended June 30, 2000 as compared to approximately $2.4 million for the six months ended June 30, 2001. The use of cash for investing activities during the six months ended June 30, 2001 was primarily a result of capital expenditures for leasehold improvements relating to the relocation of our Houston, Texas facility. We expect capital expenditures to decrease throughout the remainder of the year due to provisions of the Wells Fargo line of credit that limit our total capital expenditures for the year 2001 to $4.5 million.
Net cash used in financing activities was approximately $0.7 million for the six months ended June 30, 2000, compared to net cash used in financing activities of approximately $15,000 for the six months ended June 30, 2001. The cash used in financing activities during the six months ended June 30, 2001 primarily consisted of approximately $1.9 million in proceeds from our Wells Fargo line of credit, as well as proceeds from issuances of common stock under the employee stock purchase plan and the exercise of options. The cash provided by financing activities was partially offset by repayments of the line of credit and other long–term debt in an aggregate amount of approximately $1.9 million.
On September 21, 2000, the Company entered into a convertible debentures purchase agreement with Montrose Investments Ltd., Strong River Investments, Inc. and James R. Corey, our Chief Executive Officer, President and Director. Under the terms of the agreement, we sold to Montrose and Strong River warrants, exercisable through September 21, 2005, 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, exercisable through September 21, 2005, 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, on September 21, 2001 and on a quarterly basis thereafter, all or any portion of the outstanding debentures, including any interest or other amounts outstanding thereunder, in return for cash or, up to the limit described below, 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 Company has delivered a letter to the holders of the convertible debentures indicating that, until further notice, the Company intends to satisfy its payment obligations in connection with any exercise of the put right entirely in shares of common stock.
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 our common stock following such acquisition. This restriction may be waived by a holder upon not less than 60 days prior 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 to the debenture holder.
Of the $17.0 million in gross proceeds from the issuance of the debentures and warrants, $3.5 million was allocated to the warrants. The debt is recorded on the Company's consolidated balance sheet at June 30, 2001, as a current liability of $14.3 million. As a result of the put option applicable to the debentures, all of the debt is categorized as a current liability. Amortization of the original issue discount on the debt, using an effective interest rate of 16.90%, resulted in an additional interest expense of $0.6 million during the six months ended June 30, 2001. The accretion of original issue discount on the debt will cause an increase in indebtedness from June 30, 2001 to September 21, 2003 of $2.7 million.
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 a default under the credit agreement, the holders of the debentures would have the right to require Luminant to pay or issue stock in the amounts described above.
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 automatically renewable for successive one-year terms thereafter, unless Luminant provides Wells Fargo with ninety days written notice of its election not to renew the credit facility. 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. 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. As of June 30, 2001, borrowings of $7.2 million were outstanding under this revolving credit agreement. The weighted average interest rate on these obligations as of such date was 6.6%.
In March 2001, Wells Fargo and Luminant entered into the Third Amendment to the Credit and Security Agreement. Among other terms, the Third Amendment replaced certain existing financial covenants with the requirements that (1) we maintain certain fixed charge coverage as specified therein, and (2) we do not incur more than $4.5 million in capital expenditures during the year ended December 31, 2001. The terms of the Third Amendment also prohibit us from, or permitting any of our controlled affiliates from, consolidating or merging with or into any other person or acquiring all or substantially all of the assets of another person.
The Company's management believes that cash flows from operations, cash on hand, and amounts available under the Wells Fargo credit agreement will be sufficient to finance operations through June 30, 2002. To finance its operations as described in the preceding sentence and avoid future violations of the credit facility covenants, the Company in 2001 expects to substantially reduce its cash expenditures from the levels incurred during the year 2000. During the second half of 2000, the Company terminated approximately 250 employees, and the Company terminated an additional 44 employees in July 2001. The Company has also canceled or renegotiated certain facility leases, restricted discretionary expenditures and canceled certain contracts not critical to the Company's core business strategy, to conserve cash.
Management believes that with the actions taken and the business plan being pursued, the Company will be able to fund its operations from cash flows, cash on hand, and cash available under the Wells Fargo credit agreement. 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. In addition, whether the Company's operating revenues will exceed operating expenses depends on a wide variety of factors, including general business trends and the development of our markets. To the extent we are unable to fund our operations from cash flows, cash on hand, and cash available under the Wells Fargo credit agreement, we may need to obtain financing in the form of either additional equity or indebtedness. Additional financing may not be available on terms acceptable to us, if at all.
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 offering or from operations and $2.8 was repaid from borrowings under our Wells Fargo credit facility. As of June 30, 2001, we had a total of $3.0 million in outstanding current and long-term indebtedness (excluding obligations under our revolving credit facility with Wells Fargo and the convertible debentures issued September 21, 2000). The weighted average interest rate on these obligations at June 30, 2001 was 11.5%. Certain of our notes payable contain restrictive covenants. At June 30, 2001, we were in compliance with all debt covenants.
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 six months ended June 31, 2001. Our primary market risk exposure is the risk that interest rates on our outstanding borrowings may increase.
We currently have various lines of credit, capital leases, and notes payable, excluding our debentures, with aggregate maximum borrowings totaling approximately $10.2 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 $15,000 for the two quarters ended June 30, 2001. 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 $12,000. We have not entered into any interest rate swaps or other hedging arrangements with respect to the interest obligations under these lines of credit.
We are exposed to interest rate risk on our convertible debentures. The fair value of this fixed rate debt is sensitive to changes in interest rates. If market rates decline, the required payments may exceed those based on current market rates. Under our current policy, we do not use interest rate derivative instruments to manage our risk of interest rate fluctuations. We do not believe such risk is material to our results of operations.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Unregistered Sales of Securities
On June 18, 2001, we issued an aggregate of 1,813,780 shares of common stock to the former owners of one of the Acquired Companies as payment of additional contingent consideration for their equity interest in the Acquired Company. The number of shares issued as contingent consideration was based on revenues we derived from a particular client from contracts we entered into with that client between January 1, 2000 and December 31, 2000. An exemption is claimed under Rule 506 of Regulation D promulgated under the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the stockholders of Luminant was held on June 8, 2001 in New York City, New York. Luminant did solicit proxies. The stockholders of the shares of Luminant common stock entitled to vote at the Annual Meeting voted on and approved the following matters:
A. Election of the nine directors, each to serve for a term expiring at the Annual Meeting of Luminant’s stockholders to be held in 2002 and until his successor is duly elected and qualified.
| | Number of Shares | |
| |
| |
| Name of Director | For | | Against | | Withheld | |
| |
| |
| |
| |
| Randolph L. Austin | 20,357,191 | | 124,526 | | — | |
| James R. Corey | 19,698,222 | | 783,495 | | — | |
| Michael J. Dolan | 20,357,191 | | 124,526 | | — | |
| Michael H. Jordan | 19,603,787 | | 877,930 | | — | |
| Jerry K. Pearlman | 20,357,191 | | 124,526 | | — | |
| Donald S. Perkins | 20,357,191 | | 124,526 | | — | |
| John M. Richman | 20,357,191 | | 124,526 | | — | |
| Richard M. Scruggs | 20,451,626 | | 30,091 | | — | |
| George P. Stamas | 20,302,510 | | 179,207 | | — | |
B. Ratification of Arthur Andersen LLP as Luminant’s independent accountants for the fiscal year ending December 31, 2001.
| Number of Shares |
|
| For | | Against | | Abstentions |
| |
| |
|
| 20,365,652 | | 110,763 | | 5,302 |
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
| (a) | | Exhibits |
| | | |
Exhibit
Number | | Description |
| |
|
| | | |
| (b) | | Reports on Form 8-K: |
None.
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: | August 13, 2001 | By: | /S/ JAMES R. COREY |
| | | |
|
| | | | James R. Corey |
| | | | Chief Executive Officer, President, and Director
|
| Date: | August 13, 2001 | By: | /S/ THOMAS G. BEVIVINO |
| | | |
|
| | | | Thomas G. Bevivino |
| | | | Chief Financial Officer & Secretary
(Principal Accounting and Chief Financial Officer) |
