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 March 31, 2001 Commission File Number 000-26977
LUMINANT WORLDWIDE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 75-2783690
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
13737 NOEL ROAD, SUITE 1400, DALLAS, TEXAS 75240-7367
(Address of principal executive offices and zip code)
(972) 581-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
Number of shares of common stock (including non-voting common stock)
outstanding at May 8, 2001: 27,959,584
TABLE OF CONTENTS
PAGE NO.
--------
PART I - FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Consolidated Balance Sheets as of March 31, 2001 (unaudited) and
December 31, 2000 3
Consolidated Statements of Operations for the three months ended
March 31, 2001 and 2000 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2001 and 2000 (unaudited) 6
Notes to the Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosure about Market Risk 17
PART II - OTHER INFORMATION 17
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
-2-
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LUMINANT WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
March 31, December 31,
2001 2000
---- ----
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 2,853 $ 7,794
Cash pledged as security for line of credit 7,500 7,500
Accounts receivable (net of allowance of $11,018 and $11,813, at
March 31, 2001 and December 31, 2000, respectively) 16,994 20,297
Unbilled revenues 1,504 2,017
Related party, employee and other receivable (net of allowance
of $1,516 and $1,988, at March 31, 2001 and December 31, 2000,
respectively) 1,339 6,209
Prepaid expenses and other assets 777 239
--------- ---------
Total current assets 30,967 44,056
Property and equipment (net of accumulated depreciation of $7,374 and
$5,910 at March 31, 2001 and December 31, 2000, respectively) 13,621 13,815
Other assets:
Goodwill and other intangibles (net of accumulated amortization of
$91,931 and $75,834 at March 31, 2001 and December 31, 2000,
respectively) 89,303 103,607
Other assets 1,235 1,287
--------- ---------
Total assets $ 135,126 $ 162,765
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable (including cash overdraft of $193 and $1,774
at March 31, 2001 and December 31, 2000, respectively) $ 8,992 $ 17,617
Customer deposits 843 1,262
Accrued and other liabilities 12,968 15,712
Contingent consideration 4,293 3,292
Line of credit 6,842 7,177
6% convertible debentures 14,018 13,716
Current maturities of long-term debt 793 803
--------- ---------
Total current liabilities 48,749 59,579
-3-
Long-term liabilities:
Long-term debt, net of current maturities 2,267 2,313
Other long-term liabilities 309 309
--------- ---------
Total long-term liabilities 2,576 2,622
--------- ---------
Total liabilities 51,325 62,201
Commitments and contingencies
Stockholders' equity:
Common stock: $0.01 par value, 100,000,000 shares authorized,
27,469,936 and 27,837,900 shares outstanding at December 31,
2000 and March 31, 2001, respectively 278 275
Additional paid-in capital 450,670 450,203
Retained deficit (367,147) (349,914)
--------- ---------
Total stockholders' equity 83,801 100,564
--------- ---------
Total liabilities and stockholders' equity $ 135,126 $ 162,765
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
-4-
LUMINANT WORLDWIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts; Unaudited)
Three Months
Ended March 31,
---------------
2001 2000
---- ----
Revenue $ 23,897 $ 33,605
Cost of service 14,213 17,855
-------- --------
Gross margins 9,684 15,750
Selling, general and administrative expenses 10,424 13,970
Equity-based compensation expense 188 748
Goodwill and other intangibles amortization 15,305 30,779
-------- --------
Loss from operations (16,233) (29,747)
Interest income (expense), net (1,001) 101
Other expense, net 1 --
-------- --------
Loss before provision for income taxes (17,233) (29,646)
Provision for income taxes -- --
-------- --------
Net loss $(17,233) $(29,646)
-------- --------
Net loss per share:
Basic and diluted $ (0.63) $ (1.19)
Weighted average shares outstanding 27,500 24,963
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
-5-
LUMINANT WORLDWIDE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands; Unaudited)
Three Months Ended
March 31,
---------
2001 2000
---- ----
Net loss $(17,233) $(29,646)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization 16,769 31,591
Amortization of debt issue costs 120 --
Accretion of original issue discount 302 --
Non-cash interest expense -- 81
Equity related compensation expense 188 748
Bad debt provisions (1,267) 425
Expenses related to warrants issued to a customer 1 42
Loss on disposition of assets -- 1
Changes in assets and liabilities, excluding effects of acquisitions:
Decrease (increase) in accounts receivable 4,098 (4,619)
Decrease (increase) in unbilled revenues 513 (178)
Decrease (increase) in related party and other receivables 5,342 (4,985)
(Increase) decrease in prepaid expenses and other current assets (538) 873
Increase in other non-current assets (68) (31)
Decrease in accounts payable (8,625) (6,636)
Decrease in customer deposits (419) (1,594)
Decrease in accrued liabilities (2,473) (588)
-------- --------
Net cash used in operating activities (3,290) (14,516)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,270) (5,379)
Payments for acquisitions accounted for as purchases -- (176)
-------- --------
Net cash used in investing activities (1,270) (5,555)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of notes payable (335) (640)
Repayments of long-term debt (56) (624)
Proceeds from issuance of common stock:
Options exercised 10 263
-------- --------
Net cash used in financing activities (381) (1,001)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS, INCLUDING CASH PLEDGED AS
SECURITY FOR LINE OF CREDIT
(4,941) (21,072)
-6-
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD, INCLUDING CASH PLEDGED AS
SECURITY FOR LINE OF CREDIT 15,294 30,508
CASH AND CASH EQUIVALENTS, INCLUDING CASH PLEDGED AS SECURITY FOR LINE OF
CREDIT, AT END OF PERIOD $ 10,353 $ 9,436
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 357 $ 93
Cash paid during the period for taxes $ -- $ --
NONCASH INVESTING AND FINANCING ACTIVITY:
Extinguishment of contingent consideration through issuance
of common stock, including distribution to Accounting
Acquirer $ -- $ 47,184
Dividend to Accounting Acquirer $ -- $ (2,178)
Additional contingent consideration payable to former owners $ -- $ 170
Extinguishment of liability through issuance of common stock $ 272 $ --
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
-7-
LUMINANT WORLDWIDE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
Luminant Worldwide Corporation ("Luminant" or the "Company"), a Delaware
Corporation, was founded in August 1998 to create a leading single-source
Internet service company that provides electronic commerce professional services
to Global 1000 companies, Internet based companies and other organizations.
Prior to September 1999, it did not conduct any material operations. On
September 21, 1999, it completed its initial public offering of common stock and
concurrently acquired seven operating businesses and the assets of Brand
Dialogue-New York (the "Acquired Businesses").
Operating results for interim periods are not necessarily indicative of the
results for full years. You should read these condensed consolidated financial
statements together with the audited financial statements of the Company as of
and for the year ended December 31, 2000, and the notes thereto, which are
included on the Company's 2000 Form 10-K.
2. COMPREHENSIVE INCOME (LOSS)
The Company follows the Financial Accounting Standards Board Statement No.
130 - Reporting Comprehensive Income, which establishes standards for reporting
comprehensive income and its components within the financial statements.
Comprehensive income is defined as all changes in the equity of a business
enterprise from transactions and other events and circumstances, except those
resulting from investments by owners and distributions to owners. The Company's
comprehensive income components are immaterial for the three months ended March
31, 2000 and 2001; therefore, comprehensive income (loss) is the same as net
income (loss) for both periods.
3. SIGNIFICANT ACCOUNTING POLICIES
The Company has not added to or changed its accounting policies
significantly, since December 31, 2000. For a description of these policies, see
Note 3 of the notes to the audited consolidated financial statements included on
the Company's 2000 Form 10-K.
4. SHARES USED IN COMPUTING NET INCOME (LOSS) PER SHARE
On September 15, 1999, Luminant declared a 16,653-for-one stock split. All
share and per-share amounts, including stock option information, have been
restated to reflect this stock split.
-8-
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 Ended
March 31,
---------
2001 2000
---- ----
Number of shares issued:
To Align's owners 4,678 4,678
To owners of the 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 the underwriters' over-allotment option 279 279
In contingent consideration to the former shareholders of
the Acquired Businesses 1,676 314
Exercise of options granted to former option holders of
Acquired Businesses on employee incentives 691 436
To owners of NYCP 624 --
Through the employee stock purchase plan 286 --
To 6% convertible debenture holders 7 --
Other shares 3 --
------ ------
Number of shares used in calculating basic and diluted net
loss per share 27,500 24,963
====== ======
The computation of net loss and diluted net loss per share excludes common
stock issuable upon exercise of certain employee stock options and upon exercise
of certain other outstanding convertible debentures, warrants and other options,
as their effect is anti-dilutive.
5. REVENUE RECOGNITION
The Securities and Exchange Commission ("SEC") issued Staff Accounting
Bulletin 101, "Revenue Recognition in Financial Statements," ("SAB 101") in
December 1999. SAB 101 summarizes some of the SEC staff's views in applying
accounting principles generally accepted in the United States to revenue
recognition in financial statements. The Company completed a thorough review of
its revenue recognition policies and determined that its policies are consistent
with SAB 101.
6. AGREEMENT WITH UNITED AIR LINES, INC.
In September 1999, the Company entered into an agreement with United Air
Lines, Inc. ("United") under which the Company has agreed to provide electronic
commerce strategy, business planning, and design services to United until June
30, 2004; however, United has no obligation to purchase any services. Under this
agreement, the Company has issued to United a warrant to purchase up to 300,000
shares of Luminant common stock at an exercise price of $18.00 per share, the
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
the Company receives from United up to
-9-
$50 million of revenue. Selling, general, and administrative expenses for the
three months ended March 31, 2000 and 2001 include charges of $42,000 and
$1,000, respectively, related to the estimated fair market value of shares
underlying the portion of this warrant earned during these periods.
7. SEGMENT REPORTING
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information", ("SFAS 131") 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. During the three months ended March 31, 2001,
the Company operated as one segment and all operations and long-lived assets
were in the United States.
8. MATERIAL DEVELOPMENTS
Amendment to Credit and Security Agreement
In March 2001, Wells Fargo and Luminant entered into the Third Amendment to
the Credit and Security Agreement, which waived all prior covenant violations
and amended and modified those covenants. Among other terms, the Third Amendment
replaced certain existing financial covenants with the requirements that (1) the
Company maintains certain fixed charge coverage as specified therein, and (2)
the Company does 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
the Company from, or permitting any controlled affiliates from consolidating or
merging with or into any other person or acquiring all or substantially all of
the assets of another person. Management of the Company believes that it can
maintain compliance with the revised covenants through March 2002.
9. RESTRUCTURING CHARGE
During the third and fourth quarters of 2000, Luminant recorded
restructuring charges for severance and for cancellation or negotiated
reductions of certain facility leases, cancellation of contracts for services
that are not critical to the Company's core business strategy, and other related
restructuring charges. These restructuring charges were to align Luminant's cost
structure with the changing market conditions, decreased demand for Luminant's
services and to create a more efficient organization. The plan resulted in
headcount reductions of approximately 250 employees. Many of the positions that
were eliminated related to planned office closures in Reston, Virginia, and
Denver, Colorado, as well as office reductions in New York, New York, Seattle,
Washington, and Washington, D.C.
Total cash outlay for the restructuring charges was approximately $4.7
million in 2000. Of the remaining $3.0 million of restructuring charges,
$650,000 was paid in during the first quarter of 2001. The remaining amounts
will be paid throughout 2001 and primarily relate to severance payments.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with (1) the
historical financial statements and related notes contained elsewhere in this
Form 10-Q, and (2) the historical financial statements and related notes and
management's discussion and analysis of financial condition and results
-10-
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,
2000.
This discussion contains or incorporates both historical and
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These statements involve known and unknown risks, uncertainties and
other factors that may cause our or our industry's actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievement expressed or implied by
such forward-looking statements. These forward-looking statements relate to
future events and/or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "intends," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue" or the negative of such terms or other
comparable terminology. These statements are only predictions. Moreover, neither
we nor any other person assume responsibility for the accuracy and completeness
of such statements. We are under no duty to update any of the forward-looking
statements after the date of this Quarterly Report on Form 10-Q to conform such
statements to actual results and do not intend to do so.
During the second half of 2000, the Company recorded a restructuring charge
of approximately $7.7 million. This restructuring charge was taken to align the
Company's cost structure with changing market conditions and to create a more
efficient organization. The restructuring plan resulted in the termination of
approximately 250 employees, cancellation or renegotiation of certain facility
leases as a result of those employee terminations, and cancellation of contracts
for services that are not critical to the Company's core business strategy.
The Company was founded in August 1998. Prior to September 1999, it did not
conduct any material operations. On September 21, 1999, Luminant completed its
initial public offering and the acquisition of the Acquired Businesses. 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.
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. Revenues are recognized for time and materials
arrangements as services are performed and for fixed fee arrangements using the
percentage-of-completion method. Our use of the percentage of completion method
of revenue recognition requires management to estimate the degree of completion
of each project. To the extent these estimates prove to be inaccurate, the
revenues and gross profits reported for periods during which work on the project
is ongoing may not accurately reflect the actual financial results of the
project. We make provisions for estimated losses on uncompleted contracts on a
contract-by-contract basis and recognize these provisions in the period in which
the losses are determined.
We provide our services primarily on a time and materials basis. To a
lesser extent, we also provide services on a fixed price-fixed time frame basis.
In such cases, we use internally developed processes to estimate and propose
fixed prices for our projects. The estimation process applies a standard billing
rate to each project based upon the level of expertise and number of
professionals required, the technology environment, the overall technical
complexity of the project and whether strategic, creative or technology
solutions or value-added services are being provided to the client.
Our financial results may fluctuate from quarter to quarter based on such
factors as the number, complexity, size, scope and lead time of projects in
which we are engaged. More specifically, these fluctuations can result from the
contractual terms and degree of completion of such projects, any delays incurred
in connection with projects, employee utilization rates, the adequacy of
provisions for losses, the accuracy of estimates of resources required to
complete ongoing projects and general economic conditions. In addition, revenue
from a large customer or project may constitute a significant portion of our
total
-11-
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.
Although Luminant has previously experienced growth in revenues, we did
experience a decline in revenue from the second quarter of 2000 to the third
quarter of 2000, and from the third quarter of 2000 to the fourth quarter of
2000. We believe that the decline in revenues was primarily due to a general
economic slowdown, an extension in the sales cycle for many of our customers and
delays in the use of our services by Global 1000 companies and increased
competition from traditional management consulting companies.
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, recruiting, bad debt provisions
and other corporate costs. General and administrative costs also include
facilities costs including depreciation and computer and office equipment
operating leases.
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenues of certain items
included in our consolidated statement of operations:
Three Months
Ended March 31,
---------------
2001 2000
---- ----
Revenue 100% 100%
Cost of service 59% 53%
---- ----
Gross margins 41% 47%
Selling, general and administrative expenses 44% 42%
Equity-related and non-cash compensation expense 1% 2%
Intangibles amortization 64% 92%
---- ----
Loss from operations (68%) (89%)
Interest income (expense), net (4%) 1%
Other expense, net -- --
---- ----
Loss before provision for income taxes (72%) (88%)
Provision for income taxes -- --
---- ----
Net loss (72%) (88%)
==== ====
REVENUES
For the three-month period ended March 31, 2001, revenues decreased $9.7
million, or 29%, to $23.9 million from $33.6 million for the three-month period
ended March 31, 2000. This decrease is attributable to a general economic
slowdown resulting in an extension in the sales cycle for many of our
-12-
customers and delays in the use of our services by Global 1000 companies. In
addition, revenues decreased as a result of increased competition from
traditional management consulting companies.
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 decreased $3.6 million, or 20%, to $14.2
million for the three-month period ended March 31, 2001 from $17.8 million for
the three-month period ended March 31, 2000. These decreases were due primarily
to a decrease in billable professionals. Total billable professionals decreased
by 233 persons from 722 billable professionals at March 31, 2000 to 489 billable
professionals at March 31, 2001. This decrease in billable professionals was
primarily the result of the restructuring actions taken in the third and fourth
quarters of the year ended December 31, 2000.
GROSS MARGINS
Gross margin decreased $6.1 million, or 39%, to $9.7 million for the
three-month period ended March 31, 2001, from $15.8 million for the three-month
period ended March 31, 2000. As a percentage of revenue, gross margin declined
from 47% to 41% for the three-month periods ended March 31, 2000, and March 31,
2001, respectively. The percentage decrease primarily resulted from a revenue
growth slowdown due to an industry-wide decline in revenues, lengthened sales
cycles, and delays in the use of our services by Global 1000 companies. The
margin decrease was partially offset by general increases in billing rates, an
increased portion of business revenues derived from high margin consulting
projects, and an increase in the average size of projects performed for our
largest clients.
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,
bad debt expenses, and computer and office equipment operating leases.
Selling, general and administrative costs decreased $3.6 million, or 26%,
from $14.0 million for the three-month period ended March 31, 2000, to $10.4
million for the three-month period ended March 31, 2001. This decrease was due
primarily to the company-wide restructuring described in Note 9 to the financial
statements. This restructuring has reduced costs associated with administrative
personnel and facilities expenditures. Total non-billable professionals
decreased by 24 persons from 183 non-billable professionals at March 31, 2000 to
159 non-billable professionals at March 31, 2001. In addition, we reduced our
lease square footage commitments in New York, New York, Seattle, Washington, and
Washington, D.C., subsequent to the quarter ended March 31, 2000.
As a percentage of revenue, selling, general and administrative expenses
increased from 42% for the three-month period ended March 31, 2000 to 44% for
the three-month period ended March 31, 2001. The percentage increase primarily
resulted from a larger decline in sequential growth in revenues through the
first quarter of 2001 compared to the decline in selling, general and
administrative costs for the same period.
-13-
EQUIY-RELATED COMPENSATION EXPENSE
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 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, for the three months
ended March 31, 2001.
The Company will be required to issue up to a total of 152,583 shares in
two equal 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. These payments will be recorded as equity-based
compensation in the event all requirements for issuance are met.
INTANGIBLES AMORTIZATION
As a result of acquisitions made in 1999 by Align, the purchase of our
Acquired Businesses, and contingent consideration totaling approximately $47.2
million paid to former owners of the Acquired Businesses in 2000, we recorded
approximately $368.3 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.
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. This contingent consideration 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 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
2001.
In connection with the goodwill recorded as a result of the acquisition of
the Acquired Businesses and subsequent payment of contingent consideration, we
recorded amortization expense of approximately $30.8 and $15.3 million for three
months ended March 31, 2000 and 2001, respectively.
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.
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.
Net cash used in operations for the three months ended March 31, 2000 was
approximately $14.5 million, as compared to net cash used in operations of
approximately $3.3 million for the three months ended March 31, 2001. The net
use of cash by operations during the first quarter of 2001 was primarily the
-14-
result of payments of certain accounts payable and accrued liabilities totaling
$11.1 million, offset by collections of certain accounts receivable and related
party receivables totaling $9.4 million. The decrease in cash used in operations
from the quarter ended March 31, 2000 compared to the quarter ended March 31,
2001, was a result of a decrease in the net loss incurred in the first quarter
of 2000 as compared to the net loss incurred in the first quarter of 2001. The
difference also resulted from a decrease in depreciation and amortization
expenses in the first quarter of 2000 compared to the first quarter of 2001.
Net cash used in investing activities decreased from approximately $5.6
million for the three months ended March 31, 2000 as compared to approximately
$1.3 million for the three months ended March 31, 2001. The use of cash during
the first quarter of 2001 was a result of capital expenditures for leasehold
improvements relating to the relocation of our Houston, Texas facility. We have
committed to approximately $0.6 million in additional leasehold improvements
during the second quarter of 2001 relating this relocation. We expect capital
expenditures to remain consistent with capital expenditures in the first quarter
of 2001 for 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 $1.0 million for
the three months ended March 31, 2000, compared to net cash used in financing
activities of approximately $0.4 million for the three months ended March 31,
2001. The cash used in financing activities during the first quarter of 2001
primarily consisted of repayments of our Wells Fargo line of credit, as well as
repayments of other long-term debt.
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 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 March 31, 2001, as a current
liability of $14.0 million. As a result of the put option applicable to the
-15-
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 $0.3 million during the
three months ended March 31, 2001. The accretion of original issue discount on
the debt will cause an increase in indebtedness from March 31, 2001 to September
21, 2003 of $3.0 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 March 31, 2001, borrowings of $6.8 million were
outstanding under this revolving credit agreement. The weighted average interest
rate on these obligations as of such date was 8.5%.
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 March 31, 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. 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.
-16-
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 March 31,
2001, we had a total of $3.1 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 March 31, 2001 was 10.3%.
Certain of our notes payable contain restrictive covenants. At March 31, 2001,
we were in compliance with, or had obtained waivers for, 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 three months ended March
31, 2001. Our primary market risk exposure is the risk that interest rates on
our outstanding borrowings may increase.
We currently have various debentures, lines of credit, and notes payable
with aggregate maximum borrowings totaling approximately $23.9 million. An
increase in the prime rate (a benchmark pursuant to which interest rates
applicable to borrowings under the credit facilities may be set) equal to 10% of
the prime rate, for example, would have increased our consolidated interest by
less than $16,000 for the quarter ended March 31, 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 $10,000.
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 will 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
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
In March 2001, Wells Fargo notified us that we were in default of the
covenant in our credit agreement with them which requires us to maintain a
minimum tangible net worth of $30 million, as well as the covenant which
prohibited us from incurring, for the year ended December 31, 2000, a loss
(before
-17-
interest, income taxes, depreciation and amortization) in excess of $12.5
million. Wells Fargo agreed to waive these defaults and amend certain terms of
the credit agreement, see "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources," in exchange for consideration of $200,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
- ------- -----------
10.1 Third Agreement to Credit and Security Agreement dated as of April 5,
2000, by and among Wells Fargo Business Credit, Inc., Luminant
Worldwide Corporation and the subsidiaries of Luminant named therein,
dated as of March 30, 2001.
(b) Reports on Form 8-K:
None.
-18-
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: May 11, 2001 By: /S/ JAMES R. COREY
------------------------------------
James R. Corey
Chief Executive Officer, President,
and Director
Date: May 11, 2001 By: /S/ THOMAS G. BEVIVINO
------------------------------------
Thomas G. Bevivino
Chief Financial Officer & Secretary
(Principal Accounting and Chief
Financial Officer)
-19-