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 June 30, 2000 Commission File Number 000-26977
LUMINANT WORLDWIDE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 752783690
(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 July 31, 2000: 27,095,479
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TABLE OF CONTENTS
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Organization and Basis of Presentation 2
Actual and Pro Forma Combined Statements of Operations:
Actual and Pro Forma Combined Statements of
Operations for the three months ended June 30, 2000
and 1999 and the six months ended June 30, 2000 and
1999 (unaudited) 5
Historical Financial Statements:
Consolidated Balance Sheets, June 30, 2000
(unaudited) and December 31, 1999 7
Consolidated Statements of Operations for the three
months ended June 30, 2000 and 1999 and the six
months ended June 30, 2000 and 1999 (unaudited) 8
Consolidated Statements of Cash Flows for the three
months ended June 30, 2000 and 1999 and the six
months ended June 30, 2000 and 1999 (unaudited) 9
Notes to Consolidated Financial Statements
(unaudited) 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 6. Exhibits and Reports on Form 8-K 26
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRO FORMA COMBINED FINANCIAL INFORMATION
ORGANIZATION AND BASIS OF PRESENTATION
Luminant Worldwide Corporation, 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
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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.,
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 pro forma combined statements of operations for the
three months ended June 30, 1999 and the six months ended June 30, 1999,
respectively, assume that Luminant completed the following transactions on
January 1 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;
- acquisition of the eight Acquired Businesses and its payment of
the purchase prices for those businesses; and
The pro forma combined statement of operations for the six months ended June
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
- 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 six months ended June 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, 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
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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.
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LUMINANT WORLDWIDE CORPORATION AND SUBSIDIARIES
ACTUAL AND PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts; Unaudited)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------------- -----------------------------------
(ACTUAL) (PRO FORMA) (ACTUAL) (PRO FORMA)
-------- ----------- -------- -----------
2000 1999 2000 1999
---- ---- ---- ----
Revenues $ 40,165 $ 23,023 $ 73,770 $ 41,437
Cost of services 21,417 12,927 39,272 23,811
-------- -------- -------- --------
Gross margins 18,748 10,096 34,498 17,626
Selling, general and
administrative expenses 16,304 9,291 30,274 17,045
Equity-related & non-cash
compensation expense 562 98 1,310 6,121
Intangibles amortization 31,044 30,387 61,823 60,774
-------- -------- -------- --------
Loss from operations (29,162) (29,680) (58,909) (66,314)
Interest income (expense), net 38 (162) 139 (290)
Other expense, net -- (133) -- (150)
-------- -------- -------- --------
Loss before provision for income taxes (29,124) (29,975) (58,770) (66,754)
Provision for income taxes -- -- -- --
-------- -------- -------- --------
Net loss $(29,124) $(29,975) $(58,770) $(66,754)
======== ======== ======== ========
Net loss per share:
Basic & fully diluted $ (1.10) $ (1.25) $ (2.28) $ (2.79)
======== ======== ======== ========
Weighted average shares
outstanding 26,491 23,934 25,727 23,934
======== ======== ======= ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE ACTUAL AND PRO FORMA COMBINED FINANCIAL STATEMENTS.
LUMINANT WORLDWIDE CORPORATION AND SUBSIDIARIES
NOTES TO ACTUAL AND PRO FORMA COMBINED STATEMENTS OF OPERATIONS
The following table summarizes the number of shares of common stock used
in calculating actual pro forma net loss per share:
SHARES USED IN COMPUTING ACTUAL PRO FORMA NET LOSS PER SHARE
(In thousands; Unaudited)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------------- --------------------------------
(ACTUAL) (PRO FORMA) (ACTUAL) (PRO FORMA)
-------- ----------- -------- -----------
2000 1999 2000 1999
---- ---- ---- ----
Shares issued:
To owners of the Acquired
Businesses 16,602 16,602 16,602 16,602
To 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
For contingent consideration 1,672 -- 993 --
Under underwriters' over-allotment
option 279 -- 279 --
For option exercises 553 -- 494 --
To owners of New York Consulting
Partners, LLC 53 -- 27 --
------ ------ ------ ------
Total 26,491 23,934 25,727 23,934
====== ====== ====== ======
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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 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; Unaudited)
JUNE 30, DECEMBER 31,
2000 1999
----------------- -----------------
ASSETS
Current Assets:
Cash and cash equivalents $ 8,898 $ 30,508
Accounts receivable, net of allowance of
$1,941 and $1,609, respectively 25,851 20,524
Unbilled revenues 11,027 3,185
Related party, employee and other
receivables 1,663 3,216
Prepaid expenses and other assets 1,206 1,432
--------- ---------
Total current assets 48,645 58,865
Property and equipment, net 13,733 6,193
Other assets:
Goodwill and other intangibles, net of
accumulated amortization of $93,615
and $31,792 280,724 332,679
Other assets 442 430
--------- ---------
Total assets $ 343,544 $ 398,167
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, including cash
overdraft of $3,086 and $380,
respectively 7,312 9,447
Contingent consideration 2,716 45,006
Customer deposits 1,213 2,415
Accrued liabilities 8,877 11,167
Notes payable 5,897 6,013
Current maturities of long-term debt 303 497
-------- --------
Total current liabilities 26,318 74,545
Long-term liabilities:
Long-term debt, net of current
maturities 823 1,531
-------- --------
Total liabilities 27,141 76,076
Stockholders' equity:
Common stock 271 246
Additional paid-in capital 445,880 390,645
Retained deficit (129,748) (68,800)
--------- ---------
Total stockholders' equity 316,403 322,091
--------- ---------
Total liabilities and stockholders'
equity $ 343,544 $ 398,167
========= =========
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)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------------------- -----------------------------------
2000 1999 2000 1999
---- ---- ---- ----
Revenues $ 40,165 $6,453 $ 73,770 $10,794
Cost of services 21,417 3,876 39,272 6,102
-------- -------- -------- --------
Gross margins 18,748 2,577 34,498 4,692
Selling, general and administrative expenses 16,304 3,331 30,274 5,516
Equity-related & non-cash compensation
expense 562 98 1,310 3,346
Intangibles amortization 31,044 -- 61,823 --
-------- -------- -------- -------
Loss from operations (29,162) (852) (58,909) (4,170)
Interest income (expense), net 38 (12) 139 (25)
-------- -------- -------- -------
Loss before provision for income taxes (29,124) (864) (58,770) (4,195)
Provision for income taxes -- -- -- --
-------- -------- -------- -------
Net loss $(29,124) $ (864) $(58,770) $(4,195)
======== ======== ======== =======
Net loss per share:
Basic & diluted $(1.10) $(0.19) $(2.28) $ (0.98)
======== ======== ======== =======
Weighted average shares outstanding 26,491 4,492 25,727 4,291
======== ======== ======== =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
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LUMINANT WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands; Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
---- ---- ---- ----
Net loss $(29,124) $(864) $(58,770) $(4,195)
Equity related and non-cash compensation expenses 564 98 1,312 3,346
Expenses related to warrants issued to a customer 30 -- 72 --
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 32,201 1,084 63,792 1,591
Non-cash interest expense (48) -- 33 --
Loss on disposition of assets -- -- 1 --
Changes in assets and liabilities, excluding effects of
acquisitions:
Accounts receivable (1,133) (1,186) (5,327) (1,044)
Unbilled revenues (7,387) 714 (7,565) 105
Related party and other receivables 6,538 -- 1,553 --
Prepaid expenses and other current assets (646) 16 227 26
Other non-current assets 19 (58) (12) (183)
Accounts payable 4,502 (777) (2,134) (444)
Customer deposits 392 -- (1,202) --
Accrued liabilities (1,834) 984 (2,422) 575
----------- ------- ----------- -------
Net cash provided by (used in)
operating activities 4,074 11 (10,442) (223)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (4,069) (187) (9,448) (361)
Note Receivable -- (35) -- (35)
Payment for NYCP (1,044) -- (1,044) --
Payments for acquisitions accounted for as purchases 176 62 -- 27
----------- ------- ----------- -------
Net cash used in investing activities (4,937) (160) (10,492) (369)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 3,025 646 3,025 686
Repayments of notes payable (2,695) 18 (3,335) --
Proceeds from long-term debt -- 40 -- 40
Repayments of long-term debt (104) (716) (728) (86)
Proceeds from issuances of common stock:
Options exercised 99 -- 362 --
----------- ------- ----------- -------
Net cash provided by (used in) financing activities 325 (12) (676) 640
----------- ------- ----------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (538) (161) (21,610) 48
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,436 -- 30,508 --
----------- ------- ----------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $8,898 $ (161) $ 8,898 $ 48
=========== ======= =========== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 183 $ 12 $ 287 $ 25
=========== ======= =========== =======
NONCASH INVESTING AND FINANCING ACTIVITY:
Extinquishment of contingent consideration through
issuance of common stock, including dividend to
Accounting Acquirer $ 115 -- $ 47,184 $ --
Dividend to Accounting Acquirer -- -- (2,178) --
Additional contingent consideration payable to former
owners 2,716 -- 2,716 --
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Acquisitions financed with equity (NYCP) 6,180 -- 6,180 --
Acquisitions financed with equity -- -- -- 15,043
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, 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 its 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 and the
notes thereto of Luminant and the Acquired Businesses which Luminant's 1999
Annual Report on Form 10-K includes.
2. 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 Notes to Financial Statements of Luminant Worldwide Corporation
and Subsidiaries in Luminant's December 31, 1999 Annual Report on Form 10-K.
3. SHARES USED IN COMPUTING NET INCOME (LOSS) PER SHARE
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:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------------- ---------------------------
2000 1999 2000 1999
---- ---- ---- ----
Number of Shares issued:
To Align's owners 4,678 4,492 4,678 4,291
To owners of Acquired Businesses other
than Align 11,924 11,924
To the initial stockholders and certain
management personnel of Luminant 1,832 1,832
In the IPO, together with Young &
Rubicam's direct purchase of shares 5,500 5,500
In the exercise of underwriters' over-
allotment option 279 279
In contingent consideration to former
shareholders of Acquired Businesses 1,672 993
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Exercise of options granted to former
option holders of Acquired Business
and employee incentives 552 494
To owners of New York Consulting
Partners, LLC 54 27
Number of shares used in calculating
basic and diluted net (loss) per
share ------ ----- ------ -----
26,491 4,492 25,727 4,291
====== ===== ====== =====
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 warrants and other options, as their
effect is anti-dilutive.
4. 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 six-month periods ended June 30, 2000 include a charge of
approximately $30,000 and $72,000, respectively, related to the fair market
value of shares underlying the portion of the warrant earned during the period.
5. 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.
6. DEBT
In March 2000, we entered into a revolving credit agreement with Wells
Fargo Business Credit, Inc. 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. Among other financial
covenants, the credit agreement requires us to maintain liquid assets of at
least $15 million and unrestricted cash of at least $10 million at all times.
Under the terms of the credit facility, we are required to use net proceeds of
any borrowing under the credit agreement to repay existing debt and for
working capital purposes. As of
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PAGE 12
June 30, 2000, borrowings of $3.0 million were outstanding under this
revolving credit agreement. During the quarterly period ended June 30, 2000,
Luminant used these borrowings, combined with other operating cash flows, to
retire $2.7 million of other outstanding secured indebtedness.
On July 14, 2000, Wells Fargo Business Credit informed Luminant that
Luminant was in default of various reporting and financial ratio covenants in
its revolving credit facility. Wells Fargo has agreed to waive these defaults
through September 29, 2000, provided that on September 30, 2000, the original
covenants will be reinstated. Luminant is currently negotiating with Wells
Fargo to amend the revolving credit facility to adjust certain of the
financial ratio covenants therein and obtain a permanent waiver of the
defaults referred to in the letter of July 14. In connection with negotiating
such amendment and waiver, Luminant is also negotiating with certain
potential outside investors for potential debt or equity financing which
would cure the defaults referred to in the letter of July 14 and help
Luminant to comply with applicable financial covenants going forward.
Luminant cannot guarantee that it will reach agreement regarding any such
outside investment, or that it will successfully negotiate the amendment and
waiver described above. If Luminant were not able to obtain additional
debt or equity financing or renegotiate the financial covenants, it would
have to delay capital and other discretionary expenditures in order to ensure
that it maintains sufficient working capital balances to fund its operations
for the next twelve months. Luminant intends to improve its cash flow by
billing its clients more frequently and increasing its efforts regarding
collections of outstanding accounts receivable balances, in addition to its
continuing efforts to improve the efficiency of its operating and capital
expenditures.
7. MATERIAL DEVELOPMENTS
Business Combination
On June 22, 2000, the Company acquired certain assets and liabilities of
New York Consulting Partners, LLC, 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 $6.8 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 may be required to issue up to 58,967 additional shares based on the
financial performance of New York Consulting Partners during the second
quarter of 2000. We anticipate any such shares will be issued during the third
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 New York
Consulting Partners 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 and analysis compares the three- and six-month
periods ended June 30, 2000 to the corresponding periods ended June 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
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
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PAGE 13
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 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 six-month periods ended June 30,
2000 include charges of $30,000 and $72,000, respectively, related to the
estimated fair market value of shares underlying the portion of this warrant
earned during this period.
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. 558,032
of the 1,661,392 shares issued as contingent consideration 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
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PAGE 14
under the terms of the acquisition agreement. The former owners of the
Acquired Businesses earned no additional contingent consideration during the
period from January 1, 2000 through June 30, 2000, and, 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
period from January 1, 2000 through June 30, 2000, the amount of contingent
consideration earned by these former owners totaled approximately $2,159,000.
This contingent consideration, together with any additional contingent
consideration earned by these former owners during the period from July 1,
2000 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. We have the discretion to
pay anywhere from 0% to 50% of the contingent consideration described in this
paragraph in cash, with the balance to be paid in stock, although under our
credit agreement with Wells Fargo we have agreed not to pay more than 25% of
the total contingent consideration in cash.
Our customers generally retain us on a project-by-project basis. We
typically do not have material contracts that commit a customer to use our
services on a long-term basis. Revenue is recognized primarily using the
percentage of completion method on a contract-by-contract basis. Our use of
the percentage of completion method of revenue recognition requires management
to estimate the degree of completion of each project. To the extent these
estimates prove to be inaccurate, the revenues and gross profits reported for
periods during which work on the project is ongoing may not accurately reflect
the 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. 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. To a lesser extent, we also provide
services on a fixed price-fixed time frame basis.
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 projects will grow and that a
larger portion of total revenues in any given period may be derived from our
largest 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,
recruiting and administrative employees, training, travel and other corporate
costs. General and administrative costs also include facilities costs
including depreciation, and computer and office equipment operating leases.
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PAGE 15
RESULTS OF OPERATIONS - ACTUAL AND PRO FORMA COMBINED
The pro forma financial statements 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
- 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 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 Finance 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.
ACTUAL AND PRO FORMA ACTUAL AND PRO FORMA
RESULTS FOR RESULTS FOR
THE THREE MONTHS THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------------- -------------------------------
(ACTUAL) (PRO FORMA) (ACTUAL) (PRO FORMA)
-------- ----------- -------- -----------
2000 1999 2000 1999
---- ---- ---- ----
Revenues $ 40,165 $ 23,023 $ 73,770 $ 41,437
Cost of services 21,417 12,927 39,272 23,811
-------- -------- -------- --------
Gross margins 18,748 10,096 34,498 17,626
Selling, general and
administrative expenses 16,304 9,291 30,274 17,045
Equity-related & non-cash
compensation expense 562 98 1,310 6,121
Intangibles amortization 31,044 30,387 61,823 60,774
-------- -------- -------- --------
Loss from operations $(29,162) $(29,680) $(58,909) $(66,314)
======== ======== ======== ========
REVENUES
For the three-month period ended June 30, 2000, revenue increased $17.2
million, or 74%, to $40.2 million from $23.0 million for the three-month
period ended June 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
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PAGE 16
our top ten clients for the three-month period ended June 30, 2000, increased
approximately $0.9 million, or 113%, to approximately $1.7 million from $0.8
million for the three-month period ended June 30, 1999.
For the six-month period ended June 30, 2000, revenue increased $32.4
million, or 78%, to $73.8 million from $41.4 million for the six-month period
ended June 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 six-month period ended June 30, 2000,
increased approximately $1.3 million, or 81%, to approximately $2.9 million
from $1.6 million for the six-month period ended June 30, 1999.
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 $8.5 million, or 66%, to $21.4
million for the three-month period ended June 30, 2000 from $12.9 million for
the three-month period ended June 30, 1999. These increases were due primarily
to an increase of approximately 273 additional billable professionals needed
to service anticipated demand for our services as well as salary increases for
existing personnel.
Total cost of services increased $15.5 million, or 65%, to $39.3 million
for the six-month period ended June 30, 2000 from $23.8 million for the
six-month period ended June 30, 1999. These increases were due primarily to an
increase of approximately 273 additional billable professionals needed to
service anticipated demand for our services as well as salary increases for
existing personnel.
GROSS MARGINS
Gross margin increased $8.6 million, or 85%, to $18.7 million for the
three-month period ended June 30, 2000 from $10.1 million for the three-month
period ended June 30, 1999. The gross margin increase resulted from an
increase in revenue during the three-month period ended June 30, 2000 compared
to the three-month period ended June 30, 1999. As a percentage of revenue,
gross margin improved from 44% for the three-month period ended June 30, 1999
to 47% for the three-month period ended June 30, 2000. The percentage increase
primarily resulted from general increases in billing rates and an increased
portion of business revenues derived from high margin consulting projects. The
margin improvement was offset to some extent by increases in direct headcount
expenses, including the addition of personnel at competitive market salaries
and wage adjustments to existing personnel.
Gross margin increased $16.9 million, or 96%, to $34.5 million for the
six-month period ended June 30, 2000 from $17.6 million for the six-month
period ended June 30, 1999. The gross margin increase reflects an increase in
revenue during the six-month period ended June 30, 2000 compared to the
six-month period ended June 30, 1999. As a percentage of revenue, gross margin
improved from 43% for the six-month period ended June 30, 1999 to 47% for the
six-month period ended June 30, 2000. The percentage increase primarily
resulted from general increases in billing rates and an increased portion of
business revenues derived from high margin consulting projects. The margin
improvement was offset to some extent by increases in direct headcount
expenses, including addition of personnel at competitive market salaries and
wage adjustments to existing personnel.
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. General and administrative costs consist of salaries, bonuses and
related employee benefits for executive, senior management, finance,
recruiting and administrative employees, training, travel 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 $7.0 million, or 75%, from $9.3
million for the three month period ended June 30, 1999, to $16.3
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PAGE 17
million for the three-month period ended June 30, 2000. This increase was due
primarily to expenses associated with the expansion of facilities to support
our growth, including insurance, utilities and depreciation of leasehold
improvements, furniture, and additional computer hardware and software. The
increase was also 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 $1.0 million increase in
spending for sales and marketing efforts.
Selling, general and administrative costs increased $13.3 million, or
78%, from $17.0 million for the six-month period ended June 30, 1999, to $30.3
million for the six-month period ended June 30, 2000. This increase was due
primarily to expenses associated with the expansion of facilities to support
our growth, including insurance, utilities and depreciation of leasehold
improvements, furniture, and additional computer hardware and software. The
increase was also attributable to an increase in the number of administrative
personnel to service the larger number of billable professionals on staff.
As a percentage of revenue, selling, general and administrative expenses
increased from 40% for the three-month period ended June 30, 1999 to 41% for
the three-month period ended June 30, 2000. As a percentage of revenue,
selling, general and administrative expenses remained constant at 41% for the
six-month periods ended June 30, 1999 and 2000. We do not expect that selling,
general and administrative expenses will increase materially as a percentage
of revenues during the remainder of 2000.
EQUIY-RELATED AND NON-CASH COMPENSATION EXPENSE
For the three- and six-month periods ended June 30, 1999, the pro forma
statement of operations includes $1.3 and $6.1 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 aqcuired by Align. As all of these options continue to
vest, non-cash equity-related expense relating to these options will decline.
The charges for these options are $1.3 million and $0.7 million, for the
six months ended June 30, 2000 and the three months ended March 31, 2000,
respectively.
INTANGIBLES AMORTIZATION
As a result of the purchase of our Acquired Businesses, we recorded
approximately $303.6 million of goodwill. 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. 558,032 of the 1,661,392 shares
issued as contingent consideration 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. The former owners of the Acquired Businesses
earned no additional contingent consideration during the period from January
1, 2000 through June 30, 2000, and, 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
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PAGE 18
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 period from January 1,
2000 through June 30, 2000, the amount earned by these former owners totaled
approximately $2,159,000. This contingent consideration, together with any
additional contingent consideration earned by these former owners during the
period from July 1, 2000 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. We have the discretion to pay anywhere from 0% to 50% of the
contingent consideration described in this paragraph in cash, with the
balance to be paid in stock, although under our credit agreement with Wells
Fargo we have agreed not to pay more than 25% of the total contingent
consideration in cash.
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 $60.8 and
$61.8 of the pro forma and actual six-month periods ended June 30, 1999 and
2000, respectively.
On June 22, 2000, the Company acquired certain assets and liabilities of
New York Consulting Partners, LLC, 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 $6.8 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 may be required to issue up to 58,967 additional shares based on the
financial performance of New York Consulting Partners during the second
quarter of 2000. We anticipate any such shares will be issued during the third
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 New York
Consulting Partners 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.
RESULTS OF OPERATIONS - HISTORICAL
For historical financial statement purposes, Align has been determined to
be the accounting acquirer. For the six months ended June 30, 1999, the
information relates to Align on a stand-alone basis. For the six months ended
June 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 year ended December 31, 1999, see "Results of
Operations - Pro Forma Combined."
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2000
REVENUES
Revenues increased $63.0 million, or 583%, from $10.8 million for the six
months ended June 30, 1999 to $73.8 million for the six months ended June 30,
2000.
GROSS MARGINS
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PAGE 19
Gross margin increased $29.8 million, or 634%, from $4.7 million for the
six months ended June 30, 1999 to $34.5 million for the six months ended June
30, 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $24.8 million, or
451% from $5.5 million for the six months ended June 30, 1999 to $30.3 million
for the six months ended June 30, 2000. As a percent of sales, this expense
category decreased from 51% to 41% for the six months ended June 30, 1999 and
2000, respectively, as a result of increased efficiencies in our
administrative process.
EQUITY-RELATED & NON-CASH COMPENSATION EXPENSE
For the six months ended June 30, 1999, Align recorded $3.3 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 six months ended June 30, 2000, the charge for options is $1.3 million.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2000
REVENUES
Revenues increased $33.7 million, or 518%, from $6.5 million for the
three months ended June 30, 1999 to $40.2 million for the three months ended
June 30, 2000.
GROSS MARGINS
Gross margin increased $16.1 million, or 619% from $2.6 million for the
three months ended June 30, 1999 to $18.7 million for the three months ended
June 30, 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $13.0 million, or
394% from $3.3 million for the three months ended June 30, 1999 to $16.3
million for the three months ended June 30, 2000. As a percent of sales, this
expense category decreased from 52% to 41% for the three months ended June 30,
1999 and 2000, respectively, as a result of increased efficiencies in our
administrative process.
EQUITY-RELATED & NON-CASH COMPENSATION EXPENSE
For the three months ended June 30, 1999, Align recorded $0.1 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 three months ended June 30,
2000, the charge for options is $0.6 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 recorded
approximately $303.6 million of goodwill. These amounts, as well as goodwill
resulting from
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PAGE 20
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 New York
Consulting Partners.
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, 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 investment grade, interest-bearing securities.
As of June 30, 2000, we had $8.9 million in cash, cash equivalents and
short-term investments. Net cash used by operations for the six months ended
June 30, 2000 was $10.4 million, as compared to net cash used in operations of
$0.2 million for the six months ended June 30, 1999. This difference resulted
in part from a $11.3 million aggregate increase in receivables (including
receivables due from a related party) and unbilled revenues caused by our
expanded billing-base and increased revenues. In the second quarter of 2000,
cash flow from operations was $4.1 million. The second quarter saw continuing
increases in aggregate receivables driven by expansion of the size of our
client relationships.
The decrease in cash balances from $30.5 million at December 31, 1999 to
$8.9 million at June 30, 2000 resulted from the fact that while we paid
salaries and other employment related costs for personnel during this period
on a current basis, the amount of uncollected revenues earned by these
personnel related to services performed for our clients, grew from December
31, 1999 to June 30, 2000. Simultaneously, accounts payable decreased $2.1
million in the first two quarters of the year, the decrease primarily driven
by centralization of accounts payable functions.
At June 30, 2000, cash overdrafts of $3.1 million represent uncleared
checks on our zero-balance disbursement account. As checks are presented for
payment, funds are covered by operating cash or increases in the company's
line of credit.
Net cash used in investing activities amounted to $10.5 million during
the six months ended June 30, 2000, representing primarily capital
expenditures for leasehold improvements to new offices in New York, New York
and in Dallas, Texas, as well as installation of an integrated financial
accounting system.
Our capital expenditures for the six months ended June 30, 2000 were
approximately $9.4 million. This amount includes $4.8 million for the
completion and occupation of our consolidated offices in New York and in
Dallas. Also, we incurred $0.6 million for implementation of an integrated
financial accounting platform consolidating the financial reporting systems of
the Acquired Businesses. Historically, capital expenditures have been used
primarily for leasehold improvements, furniture, computer and software
purchases. We expect that capital expenditures will continue to increase to
the extent we continue to increase our headcount or expand our operations.
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PAGE 21
Net cash used by financing activities equaled $0.7 million for the six
months ended June 30, 2000, primarily representing a reduction of our
outstanding borrowings under long-term debt and debt paid by our new line of
credit and operating cash flow. Debt reduction was partially offset by
proceeds from the exercise of stock options under our long-term incentive plan.
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."
Prior to the initial filing of the Registration Statement, we entered
into agreements to acquire the Acquired Businesses. On or about September 2,
1999, we amended the acquisition agreements to change what the former owners
of the Acquired Businesses would receive as consideration for their interests
in the Acquired Businesses. It is possible that the former owners of the
Acquired Businesses who received common stock as part of the acquisition may
allege that the offering and sale of the shares of common stock to them should
be integrated with the offering and sale of the common stock to the public in
connection with our initial public offering, and that the offering and sale of
shares to the former owners of the Acquired Businesses was not made in
accordance with the requirements of Section 5 of the Securities Act of 1933.
Generally, the statute of limitations for this type of claim is one year after
the date of the alleged violation and, if successful, would entitle the owners
to rescind the issuance of the shares to them and demand a return to them of
the shares of the applicable Acquired Business or make a monetary claim for
the value of those shares. This claim could be made for all of the 18,278,501
shares of voting and non-voting common stock received by the owners of the
Acquired Businesses as consideration (including the shares issued as
contingent consideration in March 2000 and May 2000), which represents a total
potential claim of $346.2 million. We believe that the offer and sale of
common stock to the former owners of the Acquired Businesses qualifies for a
private placement exemption and should not be integrated with the offer and
sale of the common stock to the public in connection with our initial public
offering. We also believe that the agreement by the former owners of the
Acquired Businesses to release and not to pursue any rescission or other
claims and to recontribute proceeds from any rescission or other claims should
be enforceable and not in violation of Section 14 because the former owners
entered into these agreements with knowledge of the existence of their
potential rescission and other claims after those potential claims had matured
by virtue of their execution of the amended acquisition agreements. We cannot
assure you, however, that the former owners of the Acquired Businesses would
fail in arguing that the offering of shares of common stock to them should be
integrated with the initial public offering, or that their agreements to
forego any rescission or other claims and to recontribute the proceeds of any
rescission or other claims to us will be enforceable under applicable law. We
intend to vigorously defend any rescission or other claim by the owners of the
eight companies.
In March 2000, we entered into a $15 million revolving credit agreement
with Wells Fargo Business Credit, Inc. 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, restriction on certain acquisitions.
Among other financial covenants, the credit agreement requires us to maintain
liquid assets of at least $15 million and unrestricted cash of at least $10
million at all times. Under the terms of the credit facility, we are required
to use net proceeds of any borrowing under the
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credit agreement to repay existing debt and for working capital purposes. As
of June 30, 2000, we had total borrowings of $3.0 million outstanding under
the facility, incurring interest at 9% per annum.
On July 14, 2000, Wells Fargo Business Credit informed Luminant that
Luminant was in default of various reporting and financial ratio covenants in
its revolving credit facility. Wells Fargo has agreed to waive these defaults
through September 29, 2000, provided that on September 30, 2000, the original
covenants will be reinstated. Luminant is currently negotiating with Wells
Fargo to amend the revolving credit facility to adjust certain of the
financial ratio covenants therein and obtain a permanent waiver of the
defaults referred to in the letter of July 14. In connection with negotiating
such amendment and waiver, Luminant is also negotiating with certain
potential outside investors for potential debt or equity financing which
would cure the defaults referred to in the letter of July 14 and help
Luminant to comply with applicable financial covenants going forward.
Luminant cannot guarantee that it will reach agreement regarding any such
outside investment, or that it will successfully negotiate the amendment and
waiver described above. If Luminant were not able to obtain additional debt
or equity financing or renegotiate the financial covenants, it would have to
delay capital and other discretionary expenditures in order to ensure that it
maintains sufficient working capital balances to fund its operations for the
next twelve months. Luminant intends to improve its cash flow by billing its
clients more frequently and increasing its efforts regarding collections of
outstanding accounts receivable balances, in addition to its continuing
efforts to improve the efficiency of its operating and capital expenditures.
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
June 30, 2000, we had a total of $4.0 million in outstanding current and
long-term indebtedness (excluding obligations under our revolving credit
facility with Wells Fargo Business Credit, Inc.). The weighted average
interest rate on our obligations (excluding obligations under our revolving
credit facility with Wells Fargo Business Credit, Inc.) at June 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 August 1, 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
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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.
Luminant has devoted substantial time and resources to integration. In
addition, as a result of the integration and combination of eight
privately-held businesses into a single, publicly-held business, we are
incurring additional costs and expenditures for corporate management and
administration, corporate expenses related to being a public company, systems
integration and expansion of facilities. These costs may make comparison of
historical operating results not comparable to, or indicative of, future
performance.
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
30, 2000. Our primary market risk exposure is the risk that interest rates on
our outstanding borrowings may increase.
We currently have various lines of credit and notes payable with
aggregate maximum borrowings totaling approximately $19.0 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
$20,000 for the quarter ended June 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 $77,000. 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 May 1, 2000, Eric Reed exercised options to purchase 6,115 shares of
our common stock at a price of $1.52 per share. An exemption is claimed under
Section 4(2) of the Securities Act.
On June 22, 2000, Luminant acquired certain assets and liabilities of New
York Consulting Partners, LLC, 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. Under the terms of the agreement, Luminant may be
required to issue up to 58,967 additional shares based on the financial
performance of New York Consulting Partners during the second quarter of 2000.
Luminant will also be required to issue up to a total of 152,583 additional
shares of common stock in two equal installments on each of the first two
anniversary dates of the closing, subject to the former members of New York
Consulting Partners achieving certain revenue targets or operational metrics.
An exemption is claimed under Rule 506 of Regulation D promulgated under the
Securities Act.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On July 14, 2000, Wells Fargo Business Credit informed Luminant that
Luminant was in default of various reporting and financial ratio covenants in
its revolving credit facility. Wells Fargo has agreed to waive these defaults
through September 29, 2000, provided that on September 30, 2000, the original
covenants will be reinstated. Luminant is currently negotiating with Wells
Fargo to amend the revolving credit facility to adjust certain of the
financial ratio covenants therein and obtain a permanent waiver of the
defaults referred to in the letter of July 14. In connection with negotiating
such amendment and waiver, Luminant is also negotiating with certain
potential outside investors for potential debt or equity financing which
would cure the defaults referred to in the letter of July 14 and help
Luminant to comply with applicable financial covenants going forward.
Luminant cannot guarantee that it will reach agreement regarding any such
outside investment, or that it will successfully negotiate the amendment and
waiver described above. If Luminant were not able to obtain additional debt
or equity financing or renegotiate the financial covenants, it would delay
capital and other discretionary expenditures in order to ensure that it
maintains sufficient working capital balances. Luminant intends to improve
its cash flow by billing its clients more frequently and increasing its
efforts regarding collections of outstanding accounts receivable balances, in
addition to its continuing efforts to improve the efficiency of its operating
and capital expenditures.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the stockholders of Luminant was held on May
22, 2000. 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 eight directors, each to serve for a term expiring at
the Annual Meeting of Luminant's stockholders to be held in 2001 and until his
successor is duly elected and qualified.
Number of Shares
----------------
Name of Director For Withheld
---------------- --- --------
Randolph L. Austin 14,599,024 168,305
James R. Corey 13,857,484 909,845
Michael J. Dolan 14,599,024 168,305
Michael H. Jordan 14,599,024 168,305
Guillermo G. Marmol 13,857,484 909,845
Donald S. Perkins 14,599,024 168,305
Richard M. Scruggs 14,599,024 168,305
George P. Stamas 14,599,024 168,305
B. Ratification of Arthur Andersen LLP as Luminant's independent
accountants for the fiscal year ending December 31, 2000.
Number of Shares
----------------
For Against Abstentions
--- ------- -----------
14,688,826 96,873 1,630
C. Approval of Luminant's 2000 Employee Stock Purchase Plan.
Number of Shares
----------------
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For Against Abstentions
--- ------- -----------
14,727,365 37,504 2,460
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
- ------ -----------
10.1 2000 Employee Stock Purchase Plan (incorporated by reference
to Schedule 14A of the Company filed with the Securities and
Exchange Commission on April 19, 2000).
10.2 Employment Agreement dated June 29, 1999 by and between
Christopher Meshginpoosh and Luminant Worldwide Corporation.
10.3 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.
27.1 Financial Data Schedule
(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 14, 2000 By: /S/ GUILLERMO G. MARMOL
--------------------------------------
Guillermo G. Marmol
Chief Executive Officer and Director
Date: August 14, 2000 By: /S/ THOMAS G. BEVIVINO
--------------------------------------
Thomas G. Bevivino
Chief Financial Officer & Secretary
(Principal Accounting and Chief Financial
Officer)
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