-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MU58uu1Ak1iULS3xcSZvFeZ8aR8LJkBOsB7d0J75/QrLEYJ3GifC1XnScVmlw2IS lAIPqPSklv9SRcqbnLlmxw== /in/edgar/work/20000814/0000912057-00-037468/0000912057-00-037468.txt : 20000921 0000912057-00-037468.hdr.sgml : 20000921 ACCESSION NUMBER: 0000912057-00-037468 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LUMINANT WORLDWIDE CORP CENTRAL INDEX KEY: 0001087322 STANDARD INDUSTRIAL CLASSIFICATION: [7370 ] IRS NUMBER: 752783690 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26977 FILM NUMBER: 700473 BUSINESS ADDRESS: STREET 1: 2665 VILLA CREEK DRIVE STREET 2: SUITE 200 CITY: DALLAS STATE: TX ZIP: 75234 BUSINESS PHONE: 9724887202 MAIL ADDRESS: STREET 1: 2665 VILLA CREEK DRIVE STREET 2: SUITE 200 CITY: DALLAS STATE: TX ZIP: 75234 FORMER COMPANY: FORMER CONFORMED NAME: CLARANT WORLDWIDE CORP DATE OF NAME CHANGE: 19990604 FORMER COMPANY: FORMER CONFORMED NAME: RADIANT WORLDWIDE CORP DATE OF NAME CHANGE: 19990528 FORMER COMPANY: FORMER CONFORMED NAME: CLARANT INC DATE OF NAME CHANGE: 19990526 10-Q 1 a10-q.txt FORM 10Q 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 - ------------------------------------------------------------------------------- PAGE 1 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 - ------------------------------------------------------------------------------- PAGE 2 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 - ------------------------------------------------------------------------------- PAGE 3 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. - ------------------------------------------------------------------------------- PAGE 4 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 ====== ====== ====== ======
- ------------------------------------------------------------------------------- PAGE 5 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. - ------------------------------------------------------------------------------- PAGE 6 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. - ------------------------------------------------------------------------------- PAGE 7 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. - -------------------------------------------------------------------------------- PAGE 8 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 -- - -------------------------------------------------------------------------------- PAGE 9 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. - -------------------------------------------------------------------------------- PAGE 10 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 - -------------------------------------------------------------------------------- PAGE 11 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 - ------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------- 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. - ------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------- 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. - ------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------- PAGE 22 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 - ------------------------------------------------------------------------------- PAGE 23 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. - ------------------------------------------------------------------------------- PAGE 24 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 ---------------- - ------------------------------------------------------------------------------- PAGE 25 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) - ------------------------------------------------------------------------------- PAGE 26 EX-10.2 2 ex-10_2.txt EXHIBIT 10.2 EXHIBIT 10.2 EXECUTION COPY |__| Employee's Copy |__| Company's Copy CLARANT WORLDWIDE CORPORATION EMPLOYMENT AGREEMENT To CHRISTOPHER F. MESHGINPOOSH: This Agreement establishes the terms of your employment with Clarant Worldwide Corporation, a Delaware corporation (the "COMPANY"). The Company has been formed as a parent company to acquire companies engaged in the business of providing internet professional services and to make an initial public offering ("IPO") of the Company's common stock. EMPLOYMENT AND DUTIES You and the Company agree to your employment as Vice President, Finance, Eastern Region on the terms contained herein. You agree to perform whatever duties the Company's Board of Directors (the "BOARD") or person the Board or the Company's Chief Executive Officer specifies as your direct report (the "DIRECT REPORT") may assign you from time to time that are reasonably consistent with your position as Vice President, Finance, Eastern Region. During your employment, you agree to devote your full business time, attention, and energies to performing those duties (except as your Direct Report otherwise agrees from time to time). You agree to comply with the noncompetition, secrecy, and other provisions of Exhibit A to this Agreement. TERM OF EMPLOYMENT Your employment under this Agreement begins as of your execution of this Agreement (the "EFFECTIVE DATE"). Unless sooner terminated under this Agreement, your employment ends at 6:00 p.m. Central Time on (i) December 31, 1999 (or such earlier date as of which the Board or the CEO notifies you the Company is abandoning its efforts for 1999 to complete an IPO), if the Company has not completed its IPO by that date, or Employment Agreement with Christopher F. Meshginpoosh Page 1 of 25 (ii) the third anniversary of the Effective Date if the Company has completed its IPO on or before December 31, 1999. The period running from the Effective Date to the applicable date in the preceding sentence is the "TERM." Termination or expiration of this Agreement ends your employment but does not end your obligation to comply with Exhibit A or the Company's obligation, if any, to make payments under the PAYMENTS ON TERMINATION and SEVERANCE provisions as specified below. COMPENSATION SALARY The Company will pay you an annual salary (the "SALARY") from the Effective Date at the rate of not less than $140,000 in accordance with its generally applicable payroll practices. The Board or your Direct Report will review your Salary annually and consider you for increases. BONUS The Board or its Compensation Committee, or if the Board directs, your Direct Report will establish annual bonus targets under which you will be eligible for an annual bonus equal to up to 100% of your Salary. It is the Company's good faith intention to establish bonus targets for the first year, in consultation with you, within 90 days following the Effective Date. OPTIONS The Company will grant options to you under the Company's 1999 Equity Incentive Plan, exercisable at the IPO price, to acquire 80,000 shares of common stock. The options will consist of incentive stock options under Section 422 of the Internal Revenue Code to the extent the tax laws permit and of nonqualified stock options for the remainder. The options will become exercisable, so long as you remain employed, in sixths every six months after the closing date of the IPO and will remain exercisable for up to 10 years, subject to the option plan's rules on expiration on or after termination of employment. EMPLOYEE BENEFITS While the Company employs you under this Agreement, the Company will provide you with the same benefits as it makes Employment Agreement with Christopher F. Meshginpoosh Page 2 of 25 generally available from time to time to the Company's employees, as those benefits are amended or terminated from time to time. Your participation in the Company's benefit plans will be subject to the terms of the applicable plan documents and the Company's generally applied policies, and the Company in its sole discretion may from time to time adopt, modify, interpret, or discontinue such plans or policies. PLACE OF EMPLOYMENT Your principal place of employment will be within 35 miles of Horsham, Pennsylvania. You understand and agree that you must travel from time to time for business reasons; however, you will not be required to spend more than a cumulative maximum of 12 days per month away on travel. (The monthly travel obligations may vary, so long as you are not required on a cumulative basis to have been away on travel more than 12 days times the number of months of employment, and any days in excess of that amount will reduce the obligations for succeeding months.) EXPENSES The Company will reimburse you for reasonable and necessary travel and other business-related expenses (including costs associated with maintaining your CPA license) you incur for the Company in performing your duties under this Agreement. You must itemize and substantiate all requests for reimbursements. You must submit requests for reimbursement in accordance with the policies and practices of the Company. From the Effective Date through the IPO Closing Date, the Company will reimburse such expenses on a biweekly basis and will reimburse them after that date according to its normal schedule. NO OTHER EMPLOYMENT While the Company employs you, you agree that you will not, directly or indirectly, provide services to any person or organization for which you receive compensation or otherwise engage in activities that would conflict or interfere significantly with your faithful performance of your duties as an employee without the Board's prior written consent. (This prohibition Employment Agreement with Christopher F. Meshginpoosh Page 3 of 25 excludes any work performed at the Company's direction.) The Company acknowledges that, as of the Effective Date, you serve as a director or comparable position of ARC Group LLC and agrees that such positions do not violate the prohibition on other employment, so long as you do not violate the provisions of Exhibit A. You may manage your personal investments, as long as the management takes only minimal amounts of time and is consistent with the provisions of the NO CONFLICTS OF INTEREST Section and the NO COMPETITION Section in Exhibit A. You represent to the Company that you are not subject to any agreement, commitment, or policy of any third party that would prevent you from entering into or performing your duties under this Agreement, and you agree that you will not enter into any agreement or commitment or agree to any policy that would prevent or hinder your performance of duties and obligations under this Agreement, including Exhibit A. NO CONFLICTS OF INTEREST You confirm that you have fully disclosed to the Company, to the best of your knowledge, all circumstances under which you, your spouse, and other persons who reside in your household have or may have a conflict of interest with the Company. You further agree to fully disclose to the Company any such circumstances that might arise during your employment upon your becoming aware of such circumstances. You agree to fully comply with the Company's policy and practices relating to conflicts of interest. NO IMPROPER You will neither pay nor permit payment of PAYMENTS any remuneration to or on behalf of any governmental official other than payments required or permitted by applicable law. You will comply fully with the Foreign Corrupt Practices Act of 1977, as amended. You will not, directly or indirectly, make or permit any contribution, gift, bribe, rebate, payoff, influence payment, kickback, or other payment to Employment Agreement with Christopher F. Meshginpoosh Page 4 of 25 any person or entity, private or public, regardless of what form, whether in money, property, or services to obtain favorable treatment for business secured, to pay for favorable treatment for business secured, to obtain special concessions or for special concessions already obtained, or in violation of any legal requirement, or establish or maintain any fund or asset related to the Company that is not recorded in the Company's books and records, or take any action that would violate (or would be part of a series of actions that would violate) any U.S. law relating to international trade or commerce, including those laws relating to trading with the enemy, export control, and boycotts of Israel or Israeli products (as is sought by certain Arab countries). TERMINATION Subject to the provisions of this section, you and the Company agree that it may terminate your employment, or you may resign, except that, if you voluntarily resign, you must provide the Company with 90 days' prior written notice (unless the Board or your Direct Report has previously waived such notice in writing or authorized a shorter notice period). FOR CAUSE The Company may terminate your employment for "CAUSE" if you: (i) commit a material breach of your obligations or agreements under this Agreement, including Exhibit A; Employment Agreement with Christopher F. Meshginpoosh Page 5 of 25 (ii) commit an act of gross negligence with respect to the Company or otherwise act with willful disregard for the Company's best interests; (iii) fail or refuse to perform any duties delegated to you that are consistent with the duties of similarly-situated senior executives or are otherwise required under this Agreement, provided that these duties do not conflict with any other provision of this Agreement; (iv) seize a corporate opportunity for yourself instead of offering such opportunity to the Company if within the scope of the Company's or its subsidiaries' business; or (v) are convicted of or plead guilty or no contest to a felony (or to a felony charge reduced to misdemeanor), or, with respect to your employment, to any misdemeanor (other than a traffic violation) or, with respect to your employment, commit either a material dishonest act or common law fraud or knowingly violate any federal or state securities or tax laws. Your termination for Cause will be effective immediately upon the Company's mailing or written transmission of notice of such termination. Before terminating your employment for Cause under clauses (i) - (iv) above, the Company will specify in writing to you the nature of the act, omission, refusal, or failure that it deems to constitute Cause and, unless the Board or your Direct Report reasonably concludes the situation could not be corrected, give you 30 days after you receive such notice to correct the situation (and thus avoid termination for Cause), unless the Company agrees to extend the time for correction. You agree that the Board or your Direct Report will have the discretion to determine in good faith whether your correction is sufficient, provided that this decision does not foreclose you from using the Dispute Resolution provisions of Exhibit B. Employment Agreement with Christopher F. Meshginpoosh Page 6 of 25 WITHOUT CAUSE Subject to the provisions below under PAYMENTS ON TERMINATION and SEVERANCE, the Company may terminate your employment under this Agreement before the end of the Term without CAUSE. DISABILITY If you become "DISABLED" (as defined below), the Company may terminate your employment. You are "disabled" if you are unable, despite whatever reasonable accommodations the law requires, to render services to the Company for more than 90 consecutive days because of physical or mental disability, incapacity, or illness. You are also disabled if you are found to be disabled within the meaning of the Company's long-term disability insurance coverage as then in effect (or would be so found if you applied for the coverage). GOOD REASON You may resign for Good Reason with 45 days' advance written notice. "GOOD REASON" for this purposes means, without your consent, (i) the Company materially breaches this Agreement or (ii) the Company relocates your primary office by more than 35 miles from Horsham, Pennsylvania. You must give notice to the Company of your intention to resign for Good Reason within 30 days after the occurrence of the event that you assert entitles you to resign for Good Reason. In that notice, you must state the condition that you consider provides you with Good Reason and, if such reason relates to clause (i) above, must give the Company an opportunity to cure the condition within 30 days after your notice. Before or during the 30 day period, either party may request mediation under Exhibit B to resolve any such disputes, and, if so requested, the parties agree to cooperate to arrange a prompt mediation during no more than a 30 day period. If the Company fails to cure the condition, your resignation will be effective on the 45th day after your notice (unless the Board has previously waived such notice period in writing or agreed to a shorter notice period or unless mediation is proceeding in good faith), in which case such resignation will become effective 15 days after the end of such mediation, if not previously cured. Employment Agreement with Christopher F. Meshginpoosh Page 7 of 25 You will not be treated as resigning for GOOD REASON if the Company already had given notice of termination for CAUSE as of the date of your notice of resignation. DEATH If you die during the Term, the Term will end as of the date of your death. PAYMENTS ON If you resign or the Company terminates your TERMINATION employment with or without Cause or because of disability or death or because the Company does not complete its IPO, the Company will pay you any unpaid portion of your Salary pro-rated through the date of actual termination (and any annual bonuses already determined by such date but not yet paid unless your employment is terminated with CAUSE or because the IPO has been canceled), reimburse any substantiated but unreimbursed business expenses, pay any accrued and unused vacation time (to the extent consistent with the Company's policies), and provide such other benefits as applicable laws or the terms of the benefits require. Except to the extent the law requires otherwise or as provided in the SEVERANCE paragraph or in your option agreements, neither you nor your beneficiary or estate will have any rights or claims under this Agreement or otherwise to receive severance or any other compensation, or to participate in any other plan, arrangement, or benefit, after such termination or resignation. If your employment is terminated because the Company does not complete its IPO in 1999, you acknowledge that you have no rights to the Severance set forth below or to any other payments under or with respect to this Agreement. SEVERANCE In addition to the foregoing payments, if after the completion of the IPO but before the end of the Term, the Company terminates your employment without CAUSE or you resign for GOOD REASON, the Company will Employment Agreement with Christopher F. Meshginpoosh Page 8 of 25 pay you severance equal to your Salary, as then in effect, for 18 months on the same schedule as though you had remained employed during such period, even though you are no longer employed; pay the after-tax premium cost for you to receive any group health coverage the Company must offer you under Section 4980B of the Internal Revenue Code of 1986 ("COBRA COVERAGE") for the period of such coverage (unless the coverage is then provided under a self-insured plan); pay you, at the time the Company would otherwise pay your annual bonus, your pro rata share of the bonus for the year of your termination, where the pro rata factor is based on days elapsed in your year of termination till date of termination over 365, less any portion of the bonus for the year of your termination already paid; and accelerate your options such that any options that would become exercisable within the six months after your date of termination or resignation will become exercisable as a result of your termination or resignation (and will expire in accordance with the option's terms within 90 days after such date). You are not required to mitigate amounts payable under the SEVERANCE paragraph by seeking other employment or otherwise, nor must you return to the Company amounts earned under subsequent employment. EXPIRATION Expiration of this Agreement, whether because of notice of non-renewal or otherwise, does not constitute termination without CAUSE nor provide you with GOOD REASON and does not entitle you to SEVERANCE, unless the Company's general severance practices entitle you to severance in that situation. If you remain Employment Agreement with Christopher F. Meshginpoosh Page 9 of 25 employed at the end of the Term and your employment then ends as a result of expiration of the Agreement, the Company will pay you severance equal to your Salary, as then in effect, for 12 months on the same schedule as though you had remained employed during such period, even though you are no longer employed, which payments you agree compensate you for the restrictions under Exhibit A upon contract expiration. ASSIGNMENT The Company may assign or otherwise transfer this Agreement and any and all of its rights, duties, obligations, or interests under it to any of the affiliates or subsidiaries of the Company or to any business entity that at any time by merger, consolidation, or otherwise acquires all or substantially all of the Company's stock or assets or to which the Company transfers all or substantially all of its assets. Upon such assignment or transfer, any such business entity will be deemed to be substituted for the Company for all purposes (except that the Company will remain secondarily liable if it transfers this Agreement to a subsidiary). You agree that assignment or transfer does not entitle you to Severance. This Agreement binds and benefits the Company, its successors or assigns, and your heirs and the personal representatives of your estate. Without the Board's or your Direct Report's prior written consent, you may not assign or delegate this Agreement or any or all rights, duties, obligations, or interests under it. SEVERABILITY If the final determination of an arbitrator or a court of competent jurisdiction declares, after the expiration of the time within which judicial review (if permitted) of such determination may be perfected, that any term or provision of this Agreement, including any provision of Exhibit A, is invalid or unenforceable, the remaining terms and provisions will be unimpaired, and the invalid or unenforceable term or provision will be deemed replaced by a term or provision that is valid and Employment Agreement with Christopher F. Meshginpoosh Page 10 of 25 enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision. AMENDMENT; WAIVER Neither you nor the Company may modify, amend, or waive the terms of this Agreement other than by a written instrument signed by you and an executive officer of the Company duly authorized by the Board. Either party's waiver of the other party's compliance with any provision of this Agreement is not a waiver of any other provision of this Agreement or of any subsequent breach by such party of a provision of this Agreement. WITHHOLDING The Company will reduce its compensatory payments to you for withholding and FICA taxes and any other withholdings and contributions required by law. THIRD PARTY BENEFICIARY You understand and agree that, until the IPO is completed, Commonwealth Principals II LLC is a third party beneficiary of this Agreement, which means that Commonwealth may enforce this Agreement even though not a party to it. GOVERNING LAW The laws of the State of Texas (other than its conflict of laws provisions) govern this Agreement. NOTICES Notices must be given in writing by personal delivery, by certified mail, return receipt requested, by telecopy, or by overnight delivery. You should send or deliver your notices to the Company's corporate headquarters. The Company will send or deliver any notice given to you at your address as reflected on the Company's personnel records. You and the Company may change the address for notice by like notice to the others. You and the Company agree that notice is received on the date it is personally delivered, the date it is received by certified mail, the date of guaranteed delivery by the overnight service, or the date the fax machine confirms effective transmission. Employment Agreement with Christopher F. Meshginpoosh Page 11 of 25 SUPERSEDING EFFECT This Agreement supersedes any prior oral or written employment, severance, option, or fringe benefit agreements between you and the Company, other than with respect to your eligibility for generally applicable employee benefit plans. This Agreement supersedes all prior or contemporaneous negotiations, commitments, agreements, and writings with respect to the subject matter of this Agreement, other than the agreement among the Company, ARC Group LLC and Commonwealth Principals II LLC dated as of March 8, 1999, under which ARC Group LLC will receive a $240,000 payment upon successful completion of the IPO. All such other negotiations, commitments, agreements, and writings will have no further force or effect; and the parties to any such other negotiation, commitment, agreement, or writing will have no further rights or obligations thereunder. Employment Agreement with Christopher F. Meshginpoosh Page 12 of 25 If you accept the terms of this Agreement, please sign in the space indicated below. We encourage you to consult with any advisors you choose. CLARANT WORLDWIDE CORPORATION By: /S/ Guillermo G. Marmol ----------------------- Guillermo G. Marmol Chief Executive Officer I accept and agree to the terms of employment set forth in this Agreement: /S/ Christopher F. Meshginpoosh - ------------------------------- Christopher F. Meshginpoosh Dated: June 29, 1999 Employment Agreement with Christopher F. Meshginpoosh Page 13 of 25 EXHIBIT A NO COMPETITION You agree to the provisions of this Exhibit A in consideration of your employment by the Company and salary and benefits under this Agreement and the training you will receive in connection with such employment, and you agree that Exhibit A should be considered ancillary to the option agreements by which you will receive options from the Company. While the Company (or its successor or transferee) employs you and to the end of the Restricted Period (as defined below), you agree as follows: You will not, directly or indirectly, be employed by, lend money to, or engage in any Competing Business within the Market Area (each as defined below). That prohibition includes, but is not limited to, acting, either singly or jointly or as agent for, or as an employee of or consultant to, any one or more persons, firms, entities, or corporations directly or indirectly (as a director, independent contractor, representative, consultant, member, or otherwise) that constitutes such a Competing Business. You also will not invest or hold equity or options in any Competing Business, provided that you may own up to 3% of the outstanding capital stock of any corporation that is actively publicly traded without violating this NO COMPETITION covenant, so long as you have no involvement beyond passive investing in such business and you comply with the second sentence of this paragraph. If, during the Restricted Period, you are offered and want to accept employment with a business that engages in activities similar to the Company's, you will inform your Direct Report in writing of the identity of the business, your proposed duties with that business, and the proposed starting date of that employment. You will also inform that business of the terms of this Exhibit A. The Company will analyze the proposed employment and make a Employment Agreement with Christopher F. Meshginpoosh Page 14 of 25 good faith determination as to whether it would threaten the Company's legitimate competitive interests. If the Company determines that the proposed employment would not pose an unacceptable threat to its interests, the Company will notify you that it does not object to the employment. You acknowledge that, during the portion of the Restricted Period that follows your employment, you may engage in any business activity or gainful employment of any type and in any place except as described above. You acknowledge that you will be reasonably able to earn a livelihood without violating the terms of this Agreement. You understand and agree that the rights and obligations set forth in this NO COMPETITION Section will continue and will survive through the Restricted Period. DEFINITIONS COMPETING COMPETING BUSINESS means any service or BUSINESS product of any person or organization other than the Company and its successors, assigns, or subsidiaries (collectively, the "COMPANY GROUP") that competes with any service or product of the Company Group provided by any member of the Company Group during your employment. COMPETING BUSINESS includes any enterprise engaged in the formation or operation of internet professional services firms that provide strategic, interactive design and technical business services, information technology and interactive business consulting, and other related services to assist clients in integrating and maintaining their electronic commerce capabilities. MARKET AREA The Market Area consists of the United States and Canada. You agree that the Company provides services both at its facilities and at the locations of its customers or clients and that, by the nature of its business, it operates globally. Employment Agreement with Christopher F. Meshginpoosh Page 15 of 25 RESTRICTED For purposes of this Agreement, the PERIOD RESTRICTED PERIOD ends at the first anniversary of the date your employment with the Company Group ends for any reason. NO INTERFERENCE; During the Restricted Period, you agree that NO SOLICITATION you will not, directly or indirectly, whether for yourself or for any other individual or entity (other than the Company or its affiliates or subsidiaries), intentionally solicit any person or entity who is, or was, within the 24 months preceding your date of termination or resignation, a customer, prospect (with respect to which any member of the Company Group has incurred substantial costs or with which you have been involved), or client of the Company Group within the Market Area, with the 24 month period reduced to 12 months for prospects with which you have not been involved; hire away or endeavor to entice away from the Company Group any employee or any other person or entity whom the Company Group engages to perform services or supply products and including, but not limited to, any independent contractors, consultants, engineers, or sales representatives or any contractor, subcontractor, supplier, or vendor; or hire any person whom the Company Group employs or employed within the prior 12 months. SECRECY PRESERVING Your employment with the Company under and, COMPANY if applicable, before this Agreement (with a CONFIDENCES predecessor to a member of the Company Group), has given and will give you access to Confidential Information (as defined below). You acknowledge and agree that using, disclosing, or publishing any Confidential Employment Agreement with Christopher F. Meshginpoosh Page 16 of 25 Information in an unauthorized or improper manner could cause the Company or Company Group to incur substantial loss and damages that could not be readily calculated and for which no remedy at law would be adequate. Accordingly, you agree with the Company that you will not at any time, except in performing your employment duties to the Company or the Company Group under this Agreement (or with the Board's or your Direct Report's prior written consent), directly or indirectly, use, disclose, or publish, or permit others not so authorized to use, disclose, or publish any Confidential Information that you may learn or become aware of, or may have learned or become aware of, because of your prior or continuing employment, ownership, or association with the Company or the Company Group or any of their predecessors, or use any such information in a manner detrimental to the interests of the Company or the Company Group. PRESERVING You agree not to use in working for the OTHERS' Company Group and not to disclose to the CONFIDENCES Company Group any trade secrets or other information you do not have the right to use or disclose and that the Company Group is not free to use without liability of any kind. You agree to promptly inform the Company in writing of any patents, copyrights, trademarks, or other proprietary rights known to you that the Company or the Company Group might violate because of information you provide. CONFIDENTIAL "CONFIDENTIAL INFORMATION" includes, without INFORMATION limitation, information that the Company or the Company Group has not previously disclosed to the public or to the trade with respect to the Company's or the Company Group's present or future business, including its operations, services, products, research, inventions, discoveries, drawings, designs, plans, processes, models, technical information, facilities, methods, trade secrets, copyrights, software, source code, systems, patents, procedures, manuals, specifications, any other intellectual property, confidential reports, price lists, pricing formulas, customer lists, financial information (including the revenues, costs, or profits Employment Agreement with Christopher F. Meshginpoosh Page 17 of 25 associated with any of the Company's or the Company Group's products or services), business plans, lease structure, projections, prospects, opportunities or strategies, acquisitions or mergers, advertising or promotions, personnel matters, legal matters, any other confidential and proprietary information, and any other information not generally known outside the Company or the Company Group that may be of value to the Company or the Company Group but, notwithstanding anything to the contrary, excludes any information already properly in the public domain. "CONFIDENTIAL INFORMATION" also includes confidential and proprietary information and trade secrets that third parties entrust to the Company or the Company Group in confidence. You understand and agree that the rights and obligations set forth in this SECRECY Section will continue indefinitely and will survive termination of this Agreement and your employment with the Company or the Company Group. EXCLUSIVE PROPERTY You confirm that all Confidential Information is and must remain the exclusive property of the Company or the relevant member of the Company Group. Any office equipment (including computers) you receive from the Company Group in the course of your employment and all business records, business papers, and business documents you keep or make, whether on digital media or otherwise, in the course of your employment by the Company relating to the Company or any member of the Company Group must be and remain the property of the Company or the relevant member of the Company Group. Upon the termination of this Agreement with the Company or upon the Company's request at any time, you must promptly deliver to the Company or to the relevant member of the Company Group any such office equipment (including computers) and any Confidential Information or other materials (written or otherwise) not available to the public or made available to the public in a manner you know or reasonably should recognize the Company did not authorize, and any copies, excerpts, summaries, compilations, records, or documents you made or that came into Employment Agreement with Christopher F. Meshginpoosh Page 18 of 25 your possession during your employment. You agree that you will not, without the Company's consent, retain copies, excerpts, summaries, or compilations of the foregoing information and materials. You understand and agree that the rights and obligations set forth in this EXCLUSIVE PROPERTY Section will continue indefinitely and will survive termination of this Agreement and your employment with the Company Group. COPYRIGHTS, You agree that all records, in whatever DISCOVERIES, media (including written works), documents, INVENTIONS, AND papers, notebooks, drawings, designs, PATENTS technical information, source code, object code, processes, methods or other copyrightable or otherwise protected works you conceive, create, make, invent, or discover that relate to or result from any work you perform or performed for the Company or the Company Group or that arise from the use or assistance of the Company Group's facilities, materials, personnel, or Confidential Information in the course of your employment (whether or not during usual working hours), whether conceived, created, discovered, made, or invented individually or jointly with others, will be and remain the absolute property of the Company (or another appropriate member of the Company Group, as specified by the Company), as will all the worldwide patent, copyright, trade secret, or other intellectual property rights in all such works. (All references in this section to the Company include the members of the Company Group, unless the Company determines otherwise.) You irrevocably and unconditionally waive all rights, wherever in the world enforceable, that vest in you (whether before, on, or after the date of this Agreement) in connection with your authorship of any such copyrightable works in the course of your employment with the Company Group or any predecessor. Without limitation, you waive the right to be identified as the author of any such works and the right not to have any such works subjected to derogatory treatment. YOU RECOGNIZE ANY SUCH WORKS ARE "WORKS FOR HIRE" OF WHICH THE COMPANY IS THE AUTHOR. Employment Agreement with Christopher F. Meshginpoosh Page 19 of 25 You will promptly disclose, grant, and assign ownership to the Company for its sole use and benefit any and all ideas, processes, inventions, discoveries, improvements, technical information, and copyrightable works (whether patentable or not) that you develop, acquire, conceive or reduce to practice (whether or not during usual working hours) while the Company or the Company Group employs you. You will promptly disclose and hereby grant and assign ownership to the Company of all patent applications, letters patent, utility and design patents, copyrights, and reissues thereof or any foreign equivalents thereof, that may at any time be filed or granted for or upon any such invention, improvement, or information. In connection therewith: You will, without charge but at the Company's expense, promptly execute and deliver such applications, assignments, descriptions, and other instruments as the Company may consider reasonably necessary or proper to vest title to any such inventions, discoveries, improvements, technical information, patent applications, patents, copyrightable works, or reissues thereof in the Company and to enable it to obtain and maintain the entire worldwide right and title thereto; and You will provide to the Company at its expense all such assistance as the Company may reasonably require in the prosecution of applications for such patents, copyrights, or reissues thereof, in the prosecution or defense of interferences that may be declared involving any such applications, patents, or copyrights and in any litigation in which the Company may be involved relating to any such patents, inventions, discoveries, improvements, technical information, or copyrightable works or reissues thereof. The Company will reimburse you for reasonable out-of-pocket expenses you incur and pay you reasonable compensation for your time if the Company Group no longer employs you. Employment Agreement with Christopher F. Meshginpoosh Page 20 of 25 To the extent, if any, that you own rights to works, inventions, discoveries, proprietary information, and copyrighted or copyrightable works, or other forms of intellectual property that are incorporated in the work product you create for the Company Group, you agree that the Company will have an unrestricted, non-exclusive, royalty-free, perpetual, transferable license to make, use, sell, offer for sale, and sublicense such works and property in whatever form, and you hereby grant such license to the Company (and the Company Group). This COPYRIGHTS, DISCOVERIES, INVENTIONS AND PATENTS section does not apply to an invention or discovery for which no equipment, supplies, facility or trade secret information of the Company Group (including its predecessors) was used and that was developed entirely on your own time, unless (a) the invention relates (i) directly to the business of the Company Group, or (ii) the Company Group's actual or then reasonably anticipated research or development, or (b) the invention results from any work you performed for the Company Group or any predecessor. MAXIMUM LIMITS If any of the provisions of Exhibit A are ever deemed to exceed the time, geographic area, or activity limitations the law permits, you and the Company agree to reduce the limitations to the maximum permissible limitation, and you and the Company authorize a court or arbitrator having jurisdiction to reform the provisions to the maximum time, geographic area, and activity limitations the law permits; PROVIDED, HOWEVER, that such reductions apply only with respect to the operation of such provision in the particular jurisdiction with respect to which such adjudication is made. INJUNCTIVE RELIEF Without limiting the remedies available to the Company, you acknowledge that a breach of any of the covenants in this Exhibit A may result in material irreparable injury to the Company Employment Agreement with Christopher F. Meshginpoosh Page 21 of 25 and Company Group for which there is no adequate remedy at law, and that it will not be possible to measure damages for such injuries precisely. You agree that, if there is a breach or threatened breach, the Company or any member of the Company Group may be entitled to obtain a temporary restraining order and/or a preliminary or permanent injunction restraining you from engaging in activities prohibited by any provisions of this Exhibit A or such other relief as may be required to specifically enforce any of the covenants in this Exhibit A. The Company or any member of the Company Group will, in addition to the remedies provided in this Agreement, be entitled to avail itself of all such other remedies as may now or hereafter exist at law or in equity for compensation and for the specific enforcement of the covenants contained in this Agreement. Resort to any remedy provided for in this Section or provided for by law will not prevent the concurrent or subsequent employment of any other appropriate remedy or remedies, or preclude the Company's or the Company Group's recovery of monetary damages and compensation. You also agree that the Restricted Period or such longer period during which the covenants hereunder by their terms survive will extend for any and all periods for which a court with personal jurisdiction over you finds that you violated the covenants contained in this Exhibit A. EXHIBIT B DISPUTE RESOLUTION MEDIATION If either party has a dispute or claim relating to this Agreement or their relationship and except as set forth in ALTERNATIVES, the parties must first seek to mediate the same before an impartial mediator the parties mutually designate, and the parties must equally share the expenses of Employment Agreement with Christopher F. Meshginpoosh Page 22 of 25 such proceeding (other than their respective attorneys' fees). Subject to the mediator's schedule, the mediation must occur within 45 days of either party's written demand. However, in an appropriate circumstance, a party may seek emergency equitable relief from a court of competent jurisdiction notwithstanding this obligation to mediate. BINDING If the mediation reaches no solution or the parties ARBITRATION agree to forego mediation, the parties will promptly submit their disputes to binding arbitration before one or more arbitrators (collectively or singly, the "ARBITRATOR") the parties agree to select (or whom, absent agreement, a court of competent jurisdiction selects). The arbitration must follow applicable law related to arbitration proceedings and, where appropriate, the Commercial Arbitration Rules of the American Arbitration Association. ARBITRATION All statutes of limitations and substantive laws PRINCIPLES applicable to a court proceeding will apply to this proceeding. The Arbitrator will have the power to grant relief in equity as well as at law, to issue subpoenas duces tecum, to question witnesses, to consider affidavits (provided there is a fair opportunity to rebut the affidavits), to require briefs and written summaries of the material evidence, and to relax the rules of evidence and procedure, provided that the Arbitrator must not admit evidence it does not consider reliable. The Arbitrator will not have the authority to add to, detract from, or modify any provision of this Agreement. The parties agree (and the Arbitrator must agree) that all proceedings and decisions of the Arbitrator will be maintained in confidence, to the extent legally permissible, and not be made public by any party or the Arbitrator without the prior written consent of all parties to the arbitration, except as the law may otherwise require. DISCOVERY; The parties have selected arbitration to expedite the EVIDENCE; resolution of disputes and to reduce the costs and PRESUMPTIONS burdens associated with litigation. The parties agree that the Arbitrator should take these concerns into account when determining whether to authorize discovery and, if so, the scope of permissible discovery and other hearing and pre-hearing procedures. The Arbitrator may permit reasonable discovery rights in preparation for Employment Agreement with Christopher F. Meshginpoosh Page 23 of 25 the arbitration, provided that it should accelerate the scheduling of and responses to such discovery so as not to unreasonably delay the arbitration. Exhibits must be marked and left with the Arbitrator until it has rendered a decision. Either party may elect, at its expense, to record the proceedings by audiotape or stenographic recorder (but not by video). The Arbitrator may conclude that the applicable law of any foreign jurisdiction would be identical to that of Texas on the pertinent issue(s), absent a party's providing the Arbitrator with relevant authorities (and copying the opposing party) at least five business days before the arbitration hearing. NATURE OF AWARD The Arbitrator must render its award, to the extent feasible, within 30 days after the close of the hearing. The award must set forth the material findings of fact and legal conclusions supporting the award. The parties agree that it will be final, binding, and enforceable by any court of competent jurisdiction. Where necessary or appropriate to effectuate relief, the Arbitrator may issue equitable orders as part of or ancillary to the award. The Arbitrator must equitably allocate the costs and fees of the proceeding and may consider in doing so the relative fault of the parties. The Arbitrator may award reasonable attorneys' fees to the prevailing party to the extent a court could have made such an award. APPEAL The parties may appeal the award based on the grounds allowed by statute, as well as upon the ground that the award misapplies the law to the facts, provided that such appeal is filed within the applicable time limits law allows. If the award is appealed, the court may consider the ruling, evidence submitted during the arbitration, briefs, and arguments but must not try the case DE NOVO. The parties will bear the costs and fees associated with the appeal in accordance with the arbitration award or, in the event of a successful appeal, in accordance with the court's final judgment. ALTERNATIVES This DISPUTE RESOLUTION provision does not preclude a party from seeking equitable relief from a court (i) to prevent imminent or irreparable injury or (ii) pending arbitration, to preserve the last peaceable status quo, nor does it preclude the parties from agreeing to a less expensive and faster means of dispute resolution. It does not Employment Agreement with Christopher F. Meshginpoosh Page 24 of 25 prevent the Company from immediately seeking in court an injunction or other remedy with respect to Exhibit A. Employment Agreement with Christopher F. Meshginpoosh Page 25 of 25 EX-10.3 3 ex-10_3.txt EXHIBIT 10.3 EXHIBIT 10.3 ---------------------------------------------- ---------------------------------------------- CREDIT AND SECURITY AGREEMENT BY AND AMONG LUMINANT WORLDWIDE CORPORATION, LWC OPERATING CORP., LWC MANAGEMENT CORP., POTOMAC I HOLDINGS, INC., MULTIMEDIA I HOLDINGS, INC., RSI GROUP, INC., ALIGN SOLUTIONS CORP., POTOMAC PARTNERS MANAGEMENT CONSULTING LLC, MULTIMEDIA RESOURCES LLC, INTERACTIVE8, INC., BD ACQUISITION CORP., RESOURCE SOLUTIONS INTERNATIONAL, LLC, INTEGRATED CONSULTING, INC., FREE RANGE MEDIA, INC., ALIGN-FIFTH GEAR ACQUISITION CORPORATION, ALIGN-SYNAPSE ACQUISITION CORPORATION AND WELLS FARGO BUSINESS CREDIT, INC. DATED AS OF: APRIL 5 ,2000 ---------------------------------------------- ---------------------------------------------- TABLE OF CONTENTS ARTICLE I.........................................................................................................1 Section 1.1 Definitions.......................................................................................1 Section 1.2 Cross References.................................................................................12 ARTICLE II Amount and Terms of the Credit Facility..............................................................12 Section 2.1 Revolving Advances...............................................................................12 Section 2.2 Procedures for Borrowing.........................................................................12 Section 2.3 Letters of Credit................................................................................13 Section 2.4 Payment of Amounts Drawn Under Letters of Credit; Obligation of Reimbursement....................14 Section 2.5 Special Account..................................................................................15 Section 2.6 Obligations Absolute.............................................................................15 Section 2.7 Converting US Floating Rate Advances to Eurodollar Rate Advances;PROCEDURES......................16 Section 2.8 Procedures at End of a Interest Period...........................................................16 Section 2.9 Setting and Notice of Rates......................................................................17 Section 2.10 Funding Losses..................................................................................17 Section 2.11 Right of Lender to Fund through Other Offices...................................................17 Section 2.12 Discretion of Lenders as to Manner of Funding...................................................17 Section 2.13 Interest; MinimumInterest Charge; DefaultInterest; Participations; Usury........................18 Section 2.14 Fees............................................................................................19 Section 2.15 Computation of Interest and Fees; When Interest Due and Payable.................................20 Section 2.16 Capital Adequacy; Increased Costs and Reduced Return............................................20 Section 2.18 Voluntary Prepayment; Reduction of the Maximum Line; Termination of the Credit Facility by Borrowers........................................................................22 Section 2.19 Termination, Line Reduction; Waiver of Termination, and Line Reduction Fees.....................23 Section 2.20 Mandatory Prepayment............................................................................23 Section 2.21 Payment.........................................................................................23 Section 2.22 Payment on Non-Banking Days.....................................................................23 Section 2.23 Use of Proceeds.................................................................................24 Section 2.24 Liability Records...............................................................................24 ARTICLE III Security Interest; Occupancy; Setoff................................................................24 Section 3.1 Grant of Security Interest.......................................................................24 Section 3.2 Notification of Account Debtors and Other Obligors...............................................24 Section 3.3 Assignment of Insurance..........................................................................24 Section 3.4 Occupancy........................................................................................25 Section 3.5 License..........................................................................................25 Section 3.6 Financing Statement..............................................................................25 Section 3.7 Setoff...........................................................................................26 Section 3.8 ACCOMMODATION PARTY DEFENSES WAIVED..............................................................26 ARTICLE IV Conditions of Lending................................................................................26 Section 4.1 Conditions Precedent to theInitial Revolving Advance.............................................26 Section 4.2 Conditions Precedent to All Advances and Letters of Credit.......................................28 ARTICLE V Representations and Warranties........................................................................28 Section 5.1 EXISTENCE AND POWER; NAME; CHIEF EXECUTIVE OFFICE; INVENTORY AND EQUIPMENT LOCATIONS; TAX IDENTIFICATION NUMBER....................................................................28 Section 5.2 Capitalization...................................................................................29 Section 5.3 Authorization of Borrowing; No Conflict as to Law or Agreements..................................29 Section 5.4 Legal Agreements.................................................................................29 Section 5.5 Subsidiaries.....................................................................................30 Section 5.6 Financial Condition; No Adverse Change...........................................................30 Section 5.7 Litigation.......................................................................................30 Section 5.8 Regulation U.....................................................................................30 Section 5.9 Taxes............................................................................................30 Section 5.10 Titles and Liens................................................................................30 Section 5.11 Intellectual Property Rights....................................................................31 Section 5.12 Plans...........................................................................................31 Section 5.13 Default.........................................................................................31 Section 5.14 Environmental Matters...........................................................................32 Section 5.15 Submissions to Lender...........................................................................33 Section 5.16 Financing Statements............................................................................33 Section 5.17 Rights to Payment...............................................................................33 Section 5.18 Financial Solvency..............................................................................33 ARTICLE VI Borrowers' Affirmative Covenants.....................................................................34 Section 6.1 Reporting Requirements...........................................................................34 Section 6.2 Books and Records; Inspection and Examination....................................................37 Section 6.3 Account Verification.............................................................................37 Section 6.4 Compliance with Laws.............................................................................37 Section 6.5 Payment of Taxes and Other Claims................................................................37 Section 6.6 Maintenance of Properties........................................................................38 Section 6.7 Insurance........................................................................................38 Section 6.8 Preservation of Existence........................................................................38 Section 6.9 Delivery of Instruments, etc.....................................................................39 Section 6.10 Lockbox; Lender ACCOUNT.........................................................................39 Section 6.11 Performance by the Lender.......................................................................40 Section 6.12 Minimum Tangible Net Worth......................................................................40 Section 6.13 Minimum EBITDA..................................................................................40 Section 6.14 Minimum Liquidity...............................................................................41 Section 6.15 Minimum Unrestricted Cash.......................................................................41 -ii- Section 6.16 New Covenants...................................................................................41 ARTICLE VII Negative Covenants..................................................................................41 Section 7.1 Liens............................................................................................41 Section 7.2 Indebtedness.....................................................................................42 Section 7.3 Guaranties.......................................................................................42 Section 7.4 Investments and Subsidiaries.....................................................................43 Section 7.5 Dividends........................................................................................43 Section 7.6 Sale or Transfer of Assets; Suspension of Business Operations....................................43 Section 7.7 Intellectual Property............................................................................44 Section 7.8 Consolidation and Merger; Asset Acquisitions.....................................................44 Section 7.9 Sale and Leaseback...............................................................................44 Section 7.10 Restrictions on Nature of Business..............................................................44 Section 7.11 Capital Expenditures............................................................................44 Section 7.12 Accounting......................................................................................44 Section 7.13 Discounts, Etc..................................................................................44 Section 7.14 Defined Benefit Pension Plans...................................................................45 Section 7.15 Other Defaults..................................................................................45 Section 7.16 Place of Business; Name.........................................................................45 Section 7.17 Organizational Documents........................................................................45 Section 7.18 Contingent Consideration........................................................................45 ARTICLE VIII Events of Default, Rights and Remedies.............................................................45 Section 8.1 Events of Default................................................................................45 Section 8.2 Rights and Remedies..............................................................................47 Section 8.3 Certain Notices..................................................................................48 ARTICLE IX Miscellaneous........................................................................................49 Section 9.1 No Waiver; Cumulative Remedies...................................................................49 Section 9.2 Amendments, Etc..................................................................................49 Section 9.3 Addresses for Notices, Etc.......................................................................49 Section 9.4 Further Documents................................................................................50 Section 9.5 Collateral.......................................................................................50 Section 9.6 Costs and Expenses...............................................................................50 Section 9.7 Indemnity........................................................................................50 Section 9.8 Participants.....................................................................................51 Section 9.9 Execution in Counterparts........................................................................51 Section 9.10 Binding Effect; Assignment; Complete Agreement; Exchanging Information.........................52 Section 9.11 Severability of Provisions......................................................................52 Section 9.12 Headings........................................................................................52 Section 9.13 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial........................................52
-iii- CREDIT AND SECURITY AGREEMENT Dated as of April 5, 2000 Luminant Worldwide Corporation, a Delaware corporation ("Luminant Worldwide Corporation"), LWC Operating Corp., a Delaware corporation, LWC Management Corp., a Delaware corporation, Potomac I Holdings, Inc., a Delaware corporation, Multimedia I Holdings, Inc., a Delaware corporation, RSI Group, Inc., a Texas corporation, Align Solutions Corp., a Delaware corporation, Potomac Partners Management Consulting, LLC, a Delaware limited liability company, Multimedia Resources, LLC, a New York limited liability company, Interactive8, Inc., a New York corporation, BD Acquisition Corp., a Delaware corporation, Resource Solutions International, LLC, a Texas limited liability company, Integrated Consulting, Inc., a Texas corporation, Free Range Media, Inc., a Washington corporation, Align-Fifth Gear Acquisition Corporation, a Delaware corporation, and Align-Synapse Acquisition Corporation, a Texas corporation (collectively, the "Borrowers" and each a "Borrower"), and Wells Fargo Business Credit, Inc., a Minnesota corporation (the "Lender"), hereby agree as follows: ARTICLE I DEFINITIONS Section 1.1 DEFINITIONS. For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular; and (b) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP. "Accounts" means as to any Person, all of that Person's accounts, as such term is defined in the UCC, including without limitation the aggregate unpaid obligations of customers and other account debtors to that Person arising out of the sale or lease of goods or rendition of services by that Person on an open account or deferred payment basis. "Advance" means a Revolving Advance. "Affiliate" means, with respect to any specified person, any other person controlling or controlled by or under common control with such specified person. For the purposes of this definition, "control," when used with respect to any specified person, means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agreement" means this Credit and Security Agreement, as amended, supplemented or restated from time to time. "Availability" means the difference of (i) the Borrowing Base and (ii) the sum of (A) the outstanding principal balance of the Revolving Note and (B) the L/C Amount. "Availability Test" as of a given date means: (a) average daily Availability exceeded $4,000,000 during the thirty (30) day period ending on such date; and (b) Availability did not fall below $2,000,000 at any time during the thirty (30) day period ending on such date. "Banking Day" means a day other than a Saturday, Sunday or other day on which banks are generally not open for business in Dallas, Texas and Minneapolis, Minnesota and, if such day relates to a Eurodollar Rate Advance, a day on which dealings are carried on in the London interbank Eurodollar market. "Borrowing Base" means, at any time the lesser of: (a) the Maximum Line; or (b) subject to change from time to time in the Lender's sole discretion, the sum of: (i) 60% of Eligible Accounts, plus (ii) during the Foreign Accounts Eligibility Period, the lesser of (A) 1,000,000; or (B) 60% of Eligible Foreign Accounts. "Capital Expenditures" , as to any Person, means any expenditure of money for the lease, purchase or other acquisition of any capital asset, or for the lease of any other asset whether payable currently or in the future. "Change of Control" means the occurrence of any of the following events: (a) Any Person or "group" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person will be deemed to have "beneficial ownership" of all securities that such Person has -2- the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than a majority of the voting power of all classes of voting stock of the Parent Borrower. (b) During any consecutive two-year period, individuals who at the beginning of such period constituted the board of directors of the Parent Borrower (together with any new directors whose election to such board of directors, or whose nomination for election by the stockholders of the Parent Borrower, was approved by a vote of 66-2/3% of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Parent Borrower then in office. (c) The Parent Borrower is liquidated or dissolved or adopts a plan of liquidation or dissolution. "Collateral" means all of the Borrowers' Equipment, General Intangibles, Inventory, Receivables, all sums on deposit in any Lender Account, and any items in any Lockbox; together with (i) all substitutions and replacements for and products of any of the foregoing; (ii) proceeds of any and all of the foregoing; (iii) in the case of all tangible goods, all accessions; (iv) all accessories, attachments, parts, equipment and repairs now or hereafter attached or affixed to or used in connection with any tangible goods; (v) all warehouse receipts, bills of lading and other documents of title now or hereafter covering such goods; and (vi) all sums on deposit in the Special Account. "Commitment" means the Lender's commitment to make Advances and to cause the Issuer to issue Letters of Credit to or for the Borrowers' account pursuant to Article II. "Contingent Consideration" means payments made by the Borrowers to former owners, with such total amount dependent upon the financial results of an individual Borrower and on the financial results of the combined Borrowers. "Credit Facility" means the credit facility being made available to the Borrowers by the Lender pursuant to Article II. "Debt" of any Person means all items of indebtedness or liability which in accordance with GAAP would be included in determining total liabilities as shown on the liabilities side of a balance sheet of that Person on a consolidated basis as of the date as of which Debt is to be determined. For purposes of determining a Person's aggregate Debt at any time, "Debt" shall also include the aggregate payments required to be made by such Person at any time under any lease that is considered a capitalized lease under GAAP. -3- "Default" means an event that, with giving of notice and after expiry of any applicable notice or remedy period, would constitute an Event of Default. "Default Period" means any period of time beginning on the first day of any month during which an Event of Default has occurred and ending on the date the Lender notifies the Parent Borrower in writing that such Event of Default has been cured or waived. "Default Rate" means, with respect to the Revolving Advances, an annual rate equal to three percent (3%) over the Floating Rate or Eurodollar Rate, as applicable, which rate shall change when and as the Floating Rate or Eurodollar Rate, as applicable, changes. "EBITDA" for a period means, the sum of (i) pretax earnings from continuing operations, (ii) Interest Expense and (iii) depreciation, depletion, and amortization of tangible and intangible assets, adjusted to exclude the following items (without duplication) of income or expense to the extent such items are included in the calculation of pretax earnings: (a) any non-cash expenses and charges, (b) any extraordinary or non-recurring gains or losses, (c) minority interests, and (d) miscellaneous gains and losses, in each case for such period, computed and calculated in accordance with GAAP. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Eligible Accounts" means all unpaid Accounts owed to a Borrower, net of any credits, except the following shall not in any event be deemed Eligible Accounts: (i) Except as set forth in clause (ii) below, from the date hereof to and including September 30, 2000, that portion of Accounts unpaid 120 days or more after the invoice date; and, thereafter, that portion of Accounts unpaid 90 days or more after the invoice date thereafter; (ii) Accounts owed by Young & Rubicam, Inc. which are unpaid 60 days or more after the invoice date. (iii) That portion of Accounts that is disputed or subject to a claim of offset or a contra account; (iv) Accounts owed by any unit of government, whether foreign or domestic (provided, however, that there shall be included in Eligible Accounts that portion of Accounts owed by such units of government for which the Borrowers have provided evidence satisfactory to the Lender that (A) the Lender has a first priority perfected security interest and (B) such Accounts may be enforced by the Lender directly against such unit of government under all applicable laws); -4- (v) Accounts owed by an account debtor located outside the United States which are not (A) backed by a bank letter of credit naming the Lender as beneficiary or assigned to the Lender, in the Lender's possession and acceptable to the Lender in all material respects, or (B) covered by a foreign receivables insurance policy acceptable to the Lender in its sole discretion; (vi) Accounts owed by an account debtor that is insolvent, the subject of bankruptcy proceedings or has gone out of business; (vii) Accounts owed by a shareholder, Subsidiary, Affiliate, officer or employee of any Borrower, other than those Accounts owed by Young & Rubicam, Inc. unless such Accounts are otherwise not Eligible Accounts; (viii) Accounts not subject to a duly perfected security interest in the Lender's favor or which are subject to any lien, security interest or claim in favor of any Person other than the Lender including without limitation any payment or performance bond; (ix) That portion of Accounts that has been restructured, extended, amended or modified; (x) That portion of Accounts that constitutes advertising, finance charges, service charges or sales or excise taxes; (xi) Accounts owed by Young & Rubicam, Inc., regardless of whether otherwise eligible, if 50% or more of the total amount due under Accounts from such debtor is ineligible under clauses (i),(iii) or (ix) above; (xii) Accounts owed by an account debtor other than Young & Rubicam, regardless of whether otherwise eligible, if 25% or more of the total amount due under Accounts from such debtor is ineligible under clauses (i), (iii) or (ix) above; and (xiii) Accounts, or portions thereof, otherwise deemed ineligible by the Lender in its sole discretion. "Eligible Foreign Accounts" means Accounts due and owing to a Borrower by an Account debtor located outside the United States; but excluding any Accounts having the following characteristics: (i) (A) That portion of Accounts (other than dated Accounts) unpaid 90 days or more after the invoice date, (B) that portion of dated Accounts unpaid more than 60 days after the stated due date, (C) that portion of Accounts that do not provide for payment in full within 180 days after the shipment date; (ii) That portion of Accounts that is disputed or subject to a claim of offset or a contra account; (iii) Accounts owed by any unit of government; -5- (iv) Accounts owed by an account debtor that is insolvent, the subject of bankruptcy proceedings or has gone out of business; (v) Accounts owed by a shareholder, Subsidiary, Affiliate, officer or employee of any Borrower; (vi) Accounts not subject to a duly perfected security interest in the Lender's favor or which are subject to any lien, security interest or claim in favor of any Person other than the Lender including without limitation any payment or performance bond; (vii) That portion of Accounts that has been restructured, extended, amended or modified; (viii) That portion of Accounts that constitutes advertising, finance charges, service charges or sales or excise taxes; (ix) That portion of Accounts owed by any one Account debtor that would permit Revolving Advances supported by such Account debtor's Accounts to exceed $200,000 at any one time; (x) Accounts denominated in any currency other than United States dollars, Canadian dollars, French francs, Swiss francs, German marks, Japanese yen, United Kingdom pounds sterling; (xi) Accounts with respect to which the applicable Borrower has not instructed the Account debtor to pay the Account to the Lender Account; (xii) Accounts owed by debtors located in countries not acceptable to the Lender in its sole discretion; (xiii) Accounts owed by an account debtor, regardless of whether otherwise eligible, if 25% or more of the total amount due under Accounts from such debtor is ineligible under clauses (i), (ii) or (vii) above; and (xiv) Accounts otherwise deemed unacceptable to the Lender in its sole discretion. "Environmental Laws" has the meaning specified in Section 5.14. "Equipment" means, as to any Person, all of that Person's equipment, as such term is defined in the UCC, whether now owned or hereafter acquired, including but not limited to all present and future machinery, vehicles, furniture, fixtures, manufacturing equipment, shop equipment, office and recordkeeping equipment, parts, tools, supplies, and including specifically (without limitation) the goods described in any equipment schedule or list herewith or hereafter furnished to the Lender by that Person. "Eurodollar Rate Advance" means any Advance which bears interest at a rate determined by reference to a Eurodollar Rate. -6- "Eurodollar Base Rate" means, with respect to an Interest Period for a Eurodollar Rate Advance, the interest rate per annum equal to the rate (rounded up to the nearest one-eighth of one percent (1/8%)) determined by the Lender in accordance with Section 2.14 to be a rate at which US Dollar deposits are offered to major banks in the London interbank eurodollar market for an amount equal to the amount of the Eurodollar Rate Advance requested by the Borrowers, to be made available on the first day of such Interest Period and maturing at the end of such Interest Period. "Eurodollar Rate" means, with respect to an Interest Period for a Eurodollar Rate Advance, the rate obtained by adding (a) the applicable Margin to (b) the rate obtained by dividing (i) the applicable Eurodollar Base Rate by (ii) a percentage equal to one (1.00) minus the applicable percentage (expressed as a decimal) prescribed by the Board of Governors of the Federal Reserve System (or any successor thereto) for determining the maximum reserve requirements applicable to eurodollar fundings (currently referred to as "Eurocurrency Liabilities" in Regulation D) or any other maximum reserve requirements applicable to a member bank of the Federal Reserve System with respect to Eurodollar Rate Advances. "Event of Default" has the meaning specified in Section 8.1. "Floating Rate" means an annual rate equal to the Prime Rate plus the applicable Margin, which annual rate shall change when and as the Prime Rate changes. "Foreign Accounts Eligibility Period" means any period for which the following is true: (a) the Lender has purchased an insurance policy protecting it from extending credit to the Borrower on the basis of foreign accounts, (b) no Default Period exists, (c) the Parent Borrower has given the Lender at least thirty (30) days prior written notice of its desire to borrow against foreign accounts, and (d) the Lender, in its sole discretion has granted the Parent Borrower's request. "Funding Date" has the meaning given in Section 2.1. "GAAP" means at any time generally accepted accounting principles in the United States, applied on a consistent basis. "General Intangibles" means, as to any Person, all of that Person's general intangibles, as such term is defined in the UCC, whether now owned or hereafter acquired, including (without limitation) all present and future patents, patent applications, copyrights, service marks, trademarks, trade names, trade secrets, customer or supplier lists and contracts, manuals, operating instructions, permits, franchises, the right to use that Person's name, and the goodwill of that Person's business. "Hazardous Substance" has the meaning given in Section 5.14. -7- "Interest Expense" means, for a fiscal year-to-date period, the Borrowers' total gross interest expense during such period (excluding interest income), and shall in any event include, without limitation, (i) interest expensed (whether or not paid) on all Debt, (ii) the amortization of debt discounts, (iii) the amortization of all fees payable in connection with the incurrence of Debt to the extent included in interest expense, and (iv) the portion of any capitalized lease obligation allocable to interest expense on a consolidated basis. "Interest Period" means, relative to any Eurodollar Rate Advance, the period beginning on (and including) the date on which such Eurodollar Rate Advance is made or continued as, or the date on which a Floating Rate Advance is converted to a Eurodollar Rate Advance pursuant to Sections 2.2, 2.7, 2.12 or 2.13, as applicable, and shall end on (but exclude) the day which numerically corresponds to such date one (1), two (2), three (3) or six (6) months thereafter (or, if such month has no numerically corresponding day, on the last Eurodollar Business Day of such month), as the Parent Borrower may select in its relevant notice pursuant to Sections; 2.2, 2.7, 2.12 or 2.13 provided, however, that: (a) no more than four (4) different Interest Periods may be outstanding at any one time; (b) if an Interest Period would otherwise end on a day which is not a Banking Day, such Interest Period shall end on the next following Banking Day (unless such next following Banking Day is the first Banking Day of a month, in which case such Interest Period shall end on the next preceding Banking Day); (c) no Interest Period may end later than the Maturity Date; and (d) in no event shall the Parent Borrower select Interest Periods with respect to Eurodollar Rate Advances which would require payment of funding losses under Section 2.10. "Inventory" means, as to any Person, all of that Person's inventory, as such term is defined in the UCC, whether now owned or hereafter acquired, whether consisting of whole goods, spare parts or components, supplies or materials, whether acquired, held or furnished for sale, for lease or under service contracts or for manufacture or processing, and wherever located. "Issuer" means the issuer of any Letter of Credit. "Key Officers" means those officers listed on Exhibit G attached hereto. "L/C Amount" means the sum of (i) the aggregate face amount of any issued and outstanding Letters of Credit and (ii) the unpaid amount of the Obligation of Reimbursement. -8- "L/C Application" means an application and agreement for letters of credit in a form acceptable to the Issuer and the Lender. "Lender Account" has the meaning given in the Lockbox and Collection Account Agreement. "Letter of Credit" has the meaning specified in Section 2.3. "Liquidity" as of a given date means the sum of Unrestricted Cash plus the average daily Availability for the immediately preceding thirty (30) days or the period beginning on the Funding Date, whichever is shorter. "Loan Documents" means this Agreement, the Note and the Security Documents. "Lockbox" has the meaning given in the Lockbox and Collection Account Agreement. "Lockbox and Collection Account Agreement" means the Lockbox and Collection Account Agreement by and among the Borrowers, Regulus, LLC, Wells Fargo Bank Texas, and the Lender, of even date herewith. "Margin" means, as of any date, the following: (a) as applied to Eurodollar Rate Advances and as used in the definition "Eurodollar Rate," two and one half percent (2.50%); provided however, if no Default Period exists and the Borrowers generate operating cash flow of at least $14,000,000 for their fiscal year ending December 31, 2000, then "Margin" shall mean two and one quarter percent (2.25%); and (b) as applied to Revolving Advances and as used in the definition of "Floating Rate," zero (0); provided however, if no Default Period exists and the Borrowers generate operating cash flow of at least $14,000,000 for their fiscal year ending December 31, 2000, then "Margin" shall mean minus one quarter percent (-0.25%); provided that any change in the Margin shall occur within thirty (30) days of the Lender's receipt of the Borrowers' audited fiscal year end financial statements. "Maximum Line" means $15,000,000, unless said amount is reduced pursuant to Section 2.18, in which event it means the amount to which said amount is reduced. "Minimum Interest Charge" has the meaning given in Section 2.13. "Net Income" means fiscal year-to-date after-tax net income from continuing operations as determined in accordance with GAAP. -9- "Note" means the Revolving Note. "Obligations" means the Note and each and every other debt, liability and obligation of every type and description which any Borrower may now or at any time hereafter owe to the Lender, whether such debt, liability or obligation now exists or is hereafter created or incurred, whether it arises in a transaction involving the Lender alone or in a transaction involving other creditors of such Borrower, and whether it is direct or indirect, due or to become due, absolute or contingent, primary or secondary, liquidated or unliquidated, or sole, joint, several or joint and several, and including specifically, but not limited to, the Obligation of Reimbursement and all indebtedness of the Borrowers arising under this Agreement, the Note, any L/C Application completed by any Borrower, or any other loan or credit agreement or guaranty between any Borrower and the Lender, whether now in effect or hereafter entered into. "Obligation of Reimbursement" has the meaning given in Section 2.4(a). "Original Maturity Date" means March 31, 2003. "Organizational Documents" means (i) for each Borrower that is a corporation, its by-laws, articles of incorporation and any other corporate organizational documents, or (ii) for each Borrower that is a limited liability company, its limited liability company agreement, its articles of organization, and any other organizational documents. "Parent Borrower" means Luminant Worldwide Corporation. "Permitted Lien" has the meaning given in Section 7.17.1. "Person" means any individual, corporation, partnership, joint venture, limited liability company, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Plan" means an employee benefit plan or other plan maintained for any Borrower's employees and covered by Title IV of ERISA. "Premises" means all premises where the Borrowers have any rights of possession, including (without limitation) the premises legally described in Exhibit C attached hereto. "Prime Rate" means the rate of interest publicly announced from time to time by Wells Fargo Bank, N.A.-San Francisco as its "prime rate" or, if such bank ceases to announce a rate so designated, any similar successor rate reasonably designated by the Lender. -10- "Receivables" means each and every right of each Borrower to the payment of money, whether such right to payment now exists or hereafter arises, whether such right to payment arises out of a sale, lease or other disposition of goods or other property, out of a rendering of services, out of a loan, out of the overpayment of taxes or other liabilities, or otherwise arises under any contract or agreement, whether such right to payment is created, generated or earned by such Borrower or by some other person who subsequently transfers such person's interest to such Borrower, whether such right to payment is or is not already earned by performance, and howsoever such right to payment may be evidenced, together with all other rights and interests (including all liens and security interests) which such Borrower may at any time have by law or agreement against any account debtor or other obligor obligated to make any such payment or against any property of such account debtor or other obligor; all including but not limited to all present and future accounts, contract rights, loans and obligations receivable, chattel papers, bonds, notes and other debt instruments, tax refunds and rights to payment in the nature of general intangibles. "Reportable Event" shall have the meaning assigned to that term in Title IV of ERISA. "Revolving Advance" has the meaning given in Section 2.1. "Revolving Note" means the Borrowers' revolving promissory note, payable to the order of the Lender in substantially the form of Exhibit A hereto and any note or notes issued in substitution therefor, as the same may hereafter be amended, supplemented or restated from time to time. "Security Documents" means this Agreement, the Lockbox and Collection Account Agreement and any other document delivered to the Lender from time to time to secure the Obligations, as the same may hereafter be amended, supplemented or restated from time to time. "Security Interest" has the meaning given in Section 3.1. "Special Account" means a specified cash collateral account maintained by a financial institution acceptable to the Lender in connection with Letters of Credit, as contemplated by Section 2.5. "Subsidiary" means any corporation of which more than 50% of the outstanding shares of capital stock having general voting power under ordinary circumstances to elect a majority of the board of directors of such corporation, irrespective of whether or not at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency, is at the time directly or indirectly owned by any Borrower, by any Borrower and one or more other Subsidiaries, or by one or more other Subsidiaries. -11- "Tangible Net Worth" means the difference between (i) the tangible assets of the Borrowers on a consolidated basis, which, in accordance with GAAP are tangible assets, after deducting adequate reserves in each case where, in accordance with GAAP, a reserve is proper and (ii) all Debt of the Borrowers; EXCLUDING, HOWEVER, patents, trademarks, service marks, trade names, copyrights, licenses, goodwill, receivables from Affiliates, directors, officers or employees, prepaid expenses, deposits, deferred charges or treasury stock or any securities or Debt of any Borrower or any other securities unless the same are readily marketable in the United States of America or entitled to be used as a credit against federal income tax liabilities and non-compete agreements. "Termination Date" means the earliest of (i) the Maturity Date, (ii) the date the Borrowers terminate the Credit Facility, or (iii) the date the Lender demands payment of the Obligations after an Event of Default pursuant to Section 8.2. "UCC" means the Uniform Commercial Code as in effect from time to time in the state designated in Section 9.13 as the state whose laws shall govern this Agreement, or in any other state whose laws are held to govern this Agreement or any portion hereof. "Unrestricted Cash" means, at any time, the consolidated cash and cash equivalents (determined in accordance with GAAP) of the Borrowers to the extent such cash is not subject to any lien (other than a lien in favor of the Lender). Section 1.2 CROSS REFERENCES. All references in this Agreement to Articles, Sections and subsections, shall be to Articles, Sections and subsections of this Agreement unless otherwise explicitly specified. ARTICLE II AMOUNT AND TERMS OF THE CREDIT FACILITY Section 2.1 REVOLVING ADVANCES. The Lender agrees, on the terms and subject to the conditions herein set forth, to make advances to the Borrowers from time to time from the date all of the conditions set forth in Section 4.1 are satisfied or waived in writing by the Lender (the "Funding Date") to the Termination Date (the "Revolving Advances"). The Lender shall have no obligation to make a Revolving Advance to the extent it exceeds Availability. The Borrowers' obligation to pay the Revolving Advances shall be evidenced by the Revolving Note and shall be secured by the Collateral as provided in Article III. Within the limits set forth in this Section 2.1, the Borrowers may borrow, prepay pursuant to Section 2.18 and reborrow. Section 2.2 PROCEDURES FOR BORROWING. The Borrowers agree to comply with the following procedures in requesting Revolving Advances under Section 2.1: -12- (a) Each Advance that the Lender may make shall be funded as either a Floating Rate Advance or a Eurodollar Rate Advance, as the Parent Borrower shall specify in the related notice of borrowing or notice of conversion pursuant to this Section 2.2, or Section 2.7, provided that during Default Periods, no Eurodollar Rate Advances shall be made. Floating Rate Advances and Eurodollar Rate Advances may be outstanding at the same time. It is understood, however, that in the case of a Eurodollar Rate Advance, the principal amount of the Advance shall be in an amount equal to $500,000 or a higher integral multiple of $100,000. The Parent Borrower shall request each Advance not later than 11:00 a.m., Dallas, Texas time, on a Banking Day which, in the case of a Floating Rate Advance, is the Advance date, or, in the case of a Eurodollar Rate Advance, is at least three (3) Banking Days prior to the date the Advance is to be made. Each such request shall be effective upon receipt by the Lender, shall be in writing or by telephone or telecopy transmission, to be confirmed in writing by the Parent Borrower if so requested by the Lender (in the form of Exhibit D), shall be by (i) an officer of the Parent Borrower; or (ii) a person designated as the Parent Borrower's agent by an officer of the Parent Borrower in a writing delivered to the Lender; or (iii) a person whom the Lender reasonably believes to be an officer of the Parent Borrower or such a designated agent, and shall specify whether the Advance is to bear interest initially at a Floating Rate or a Eurodollar Rate, and in the case of an Advance that is to bear interest initially at a Eurodollar Rate, shall specify the Interest Period to be applicable thereto. (b) The Parent Borrower shall make each request for a Revolving Advance to the Lender before 11:00 a.m. (Dallas, Texas time) of the day of the requested Revolving Advance. Requests may be made in writing or by telephone, specifying the date of the requested Revolving Advance and the amount thereof. Each request shall be by (i) any officer of the Parent Borrower; or (ii) any person designated as the Parent Borrower's agent by any officer of the Parent Borrower in a writing delivered to the Lender; or (iii) any person whom the Lender reasonably believes to be an officer of the Parent Borrower or such a designated agent. (c) Upon fulfillment of the applicable conditions set forth in Article IV, the Lender shall disburse the proceeds of the requested Revolving Advance by crediting the same to the Parent Borrower's demand deposit account maintained with Wells Fargo Bank (Texas), N.A. unless the Lender and the Parent Borrower shall agree in writing to another manner of disbursement. Upon the Lender's request, the Parent Borrower shall promptly confirm each telephonic request for an Advance by executing and delivering an appropriate confirmation certificate to the Lender. The Borrowers shall repay all Advances even if the Lender does not receive such confirmation and even if the person requesting an Advance was not in fact authorized to do so. Any request for an Advance, whether written or telephonic, shall be deemed to be a representation by the Borrowers that the conditions set forth in Section 4.2 have been satisfied as of the time of the request. -13- Section 2.3 LETTERS OF CREDIT. (a) The Lender agrees, on the terms and subject to the conditions herein set forth, to cause an Issuer to issue, from the Funding Date to the Termination Date, one or more irrevocable standby or documentary letters of credit (each, a "Letter of Credit") for the Borrowers' account. The Lender shall have no obligation to cause an Issuer to issue any Letter of Credit if the face amount of the Letter of Credit to be issued, would exceed the lesser of: (i) $3,000,000 less the L/C Amount, or (ii) Availability. Each Letter of Credit, if any, shall be issued pursuant to a separate L/C Application entered into by the applicable Borrower and the Lender for the benefit of the Issuer, completed in a manner satisfactory to the Lender and the Issuer. The terms and conditions set forth in each such L/C Application shall supplement the terms and conditions hereof, but if the terms of any such L/C Application and the terms of this Agreement are inconsistent, the terms hereof shall control. (b) No Letter of Credit shall be issued with an expiry date later than the Termination Date in effect as of the date of issuance. (c) Any request to cause an Issuer to issue a Letter of Credit under this Section 2.3 shall be deemed to be a representation by the Borrowers that the conditions set forth in Section 4.2 have been satisfied as of the date of the request. Section 2.4 PAYMENT OF AMOUNTS DRAWN UNDER LETTERS OF CREDIT; OBLIGATION OF REIMBURSEMENT. The Borrowers acknowledge that the Lender, as co-applicant, will be liable to the Issuer for reimbursement of any and all draws under Letters of Credit and for all other amounts required to be paid under the applicable L/C Application. Accordingly, the Borrowers agree to pay to the Lender any and all amounts required to be paid under the applicable L/C Application, when and as required to be paid thereby, and, to the extent not included in the foregoing, the amounts designated below, when and as designated: (a) The Borrowers shall pay to the Lender on the day a draft is honored under any Letter of Credit a sum equal to all amounts drawn under such Letter of Credit plus any and all reasonable charges and expenses that the Issuer or the Lender may pay or incur relative to such draw and the applicable L/C Application, plus interest on all such amounts, charges and expenses as set forth below (the Borrowers' obligation to pay all such amounts is herein referred to as the "Obligation of Reimbursement"). (b) Whenever a draft is submitted under a Letter of Credit, the Lender shall make a Revolving Advance in the amount of the Obligation of Reimbursement (less any amounts paid by the Borrowers under Section 2.4(a))and shall apply the proceeds of such Revolving Advance thereto. Such Revolving Advance shall be repayable in -14- accordance with and be treated in all other respects as a Revolving Advance hereunder. (c) If a draft is submitted under a Letter of Credit when the Borrowers are unable, because a Default Period exists or for any other reason, to obtain a Revolving Advance to pay the Obligation of Reimbursement, the Borrowers shall pay to the Lender on demand and in immediately available funds, the amount of the Obligation of Reimbursement (less any amounts paid by the Borrowers under Section 2.4(a)) together with interest, accrued from the date of the draft until payment in full at the Default Rate. Notwithstanding the Borrowers' inability to obtain a Revolving Advance for any reason, the Lender is irrevocably authorized, in its sole discretion, to make a Revolving Advance in an amount sufficient to discharge the Obligation of Reimbursement and all accrued but unpaid interest thereon (less any amounts paid by the Borrowers under Section 2.4(a)). (d) The Borrowers' obligation to pay any Revolving Advance made under this Section 2.4, shall be evidenced by the Revolving Note and shall bear interest as provided in Section 2.13. Section 2.5 SPECIAL ACCOUNT. If the Credit Facility is terminated for any reason whatsoever while any Letter of Credit is outstanding, the Borrowers shall thereupon pay the Lender in immediately available funds for deposit in the Special Account an amount equal to the L/C Amount. The Special Account shall be an interest bearing account maintained for the Lender by any financial institution acceptable to the Lender. Any interest earned on amounts deposited in the Special Account shall be credited to the Special Account. Amounts on deposit in the Special Account may be applied by the Lender at any time or from time to time to the Obligations in the Lender's sole discretion, and shall not be subject to withdrawal by the Borrowers so long as the Lender maintains a security interest therein. The Lender agrees to transfer any balance in the Special Account to the Parent Borrower at such time as the Lender is required to release its security interest in the Special Account under applicable law. Section 2.6 OBLIGATIONS ABSOLUTE. The Borrowers' obligations arising under Section 2.4 shall be absolute, unconditional and irrevocable, and shall be paid strictly in accordance with the terms of Section 2.4, under all circumstances whatsoever, including (without limitation) the following circumstances: (a) any lack of validity or enforceability of any Letter of Credit or any other agreement or instrument relating to any Letter of Credit (collectively the "Related Documents"); (b) any amendment or waiver of or any consent to departure from all or any of the Related Documents; (c) the existence of any claim, setoff, defense or other right which any Borrower may have at any time, against any beneficiary or any transferee of any Letter of Credit (or any persons or entities for whom any such beneficiary or any such -15- transferee may be acting), or other person or entity, whether in connection with this Agreement, the transactions contemplated herein or in the Related Documents or any unrelated transactions; (d) any statement or any other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect whatsoever; (e) payment by or on behalf of the Issuer or the Lender under any Letter of Credit against presentation of a draft or certificate which does not strictly comply with the terms of such Letter of Credit; or (f) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing other than the making of a payment under a Letter of Credit not in conformity with the terms hereof. This Section shall not relieve the Lender or the Issuer of any liability resulting from the gross negligence or willful misconduct of the Lender or Issuer, or otherwise affect any defense or right any of the Borrowers may have as a result of such gross negligence or willful misconduct. Section 2.7 CONVERTING US FLOATING RATE ADVANCES TO EURODOLLAR RATE ADVANCES; PROCEDURES. So long as no Default Period exists, the Parent Borrower may convert all or any part of any outstanding Floating Rate Advance into a Eurodollar Rate Advance by giving notice to the Lender of such conversion not later than 11:00 a.m., Dallas, Texas time, on a Banking Day which is at least three (3) Banking Days prior to the date of the requested conversion. Each such notice shall be effective upon receipt by the Lender, shall be in writing or by telephone or telecopy transmission, to be confirmed in writing by the Parent Borrower if so requested by the Lender (in the form of Exhibit E), shall specify the date and amount of such conversion, the total amount of the Advance to be so converted and the Interest Period therefor. Each conversion of an Advance shall be on a Banking Day, and the aggregate amount of each such conversion of a Floating Rate Advance to a Eurodollar Rate Advance shall be in an amount equal to $500,000 or a higher integral multiple of $100,000. Section 2.8 PROCEDURES AT END OF A INTEREST PERIOD. Unless the Parent Borrower requests a new Eurodollar Rate Advance in accordance with the procedures set forth below, or prepays the principal of an outstanding Eurodollar Rate Advance at the expiration of an Interest Period, the Lender shall automatically and without request of the Parent Borrower convert each Eurodollar Rate Advance to a Floating Rate Advance on the last day of the relevant Interest Period. So long as no Default Period shall exist, the Parent Borrower may cause all or any part of any outstanding Eurodollar Rate Advance to continue to bear interest at the applicable Eurodollar Rate after the end of the then applicable Interest Period by notifying the Lender not later than 11:00 a.m., Dallas, Texas time, on a Banking Day which is at least three (3) Banking Days prior to the first day of the new Interest Period. Each such notice shall be in writing or by telephone or telecopy transmission, to be confirmed in writing -16- by the Parent Borrower if so requested by the Lender (in the form of Exhibit E), shall be effective when received by the Lender, and shall specify the first day of the applicable Interest Period, the amount of the expiring Eurodollar Rate Advance to be continued and the Interest Period therefor. Each new Interest Period shall begin on a Banking Day and the amount of each Advance bearing a new Eurodollar Rate shall be in an amount equal to $500,000 or a higher integral multiple of $100,000. Section 2.9 SETTING AND NOTICE OF RATES. The applicable Eurodollar Rate for each Interest Period shall be determined by the Lender between the opening of business and 12:00 Noon, Dallas, Texas time, on the second Banking Day prior to the beginning of such Interest Period, whereupon notice thereof (which may be by telephone) shall be given by the Lender to the Parent Borrower. Each such determination of the applicable Eurodollar Rate shall be conclusive and binding upon the parties hereto, in the absence of demonstrable error. The Lender, upon written request of the Parent Borrower, shall deliver to the Parent Borrower a statement showing the computations used by the Lender in determining the applicable Eurodollar Rate. Section 2.10 FUNDING LOSSES. The Borrowers shall, upon demand by the Lender (which demand shall be accompanied by a statement setting forth the basis for the calculations of the amount being claimed), indemnify the Lender against any loss or expense which the Lender may have sustained or incurred (including, without limitation, any net loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by the Lender to fund or maintain Eurodollar Rate Advances) or which the Lender may be deemed to have sustained or incurred, as reasonably determined by the Lender, (a) as a consequence of any failure by any Borrower to make any payment when due of any amount due hereunder in connection with any Eurodollar Rate Advances, (b) due to any failure of the Parent Borrower to borrow or convert any Eurodollar Rate Advances on a date specified therefor in a notice thereof or (c) due to any payment or prepayment of any Eurodollar Rate Advance on a date other than the last day of the applicable Interest Period for such Eurodollar Rate Advance. For this purpose, all notices under Sections 2.2, 2.7, or 2.8 shall be deemed to be irrevocable. Section 2.11 RIGHT OF LENDER TO FUND THROUGH OTHER OFFICES. The Lender may fulfill its agreements hereunder with respect to any Eurodollar Rate Advance by causing a foreign branch or affiliate of the Lender to make such Eurodollar Rate Advance; PROVIDED, that in such event the obligation of the Borrowers to repay such Eurodollar Rate Advance shall nevertheless be to the Lender and such Eurodollar Rate Advance shall be deemed held by the Lender for the account of such branch or affiliate. Section 2.12 DISCRETION OF LENDERS AS TO MANNER OF FUNDING. Notwithstanding any provision of this Agreement to the contrary, the Lender shall be entitled to fund and maintain all or any part of its Eurodollar Rate Advances in any manner it deems fit, it being understood, however, that for the purposes of this Agreement (specifically including, without limitation, Section 2.10) all determinations hereunder shall be made as if the Lender had actually funded and maintained each Eurodollar Rate Advance during each Interest Period -17- for such Eurodollar Rate Advance through the purchase of deposits having a maturity corresponding to such Interest Period and bearing an interest rate equal to the appropriate Eurodollar Rate for such Interest Period. Section 2.13 INTEREST; MINIMUM INTEREST CHARGE; DEFAULT INTEREST; PARTICIPATIONS; USURY. (a) FLOATING RATE ADVANCES. Except as set forth in Sections 2.13 (d) and 2.13(f), the outstanding principal balance of Floating Rate Advances shall bear interest at the Floating Rate. (b) EURODOLLAR RATE ADVANCES. Except as set forth in Sections 2.13(d) and 2.13(f) the outstanding principal balance of Eurodollar Rate Advances shall bear interest at the Eurodollar Rate. (c) MINIMUM INTEREST CHARGE. Notwithstanding the interest payable pursuant to Section 2.13(a) or 2.13(b), the Borrowers shall pay to the Lender interest of not less than $75,000 per calendar quarter (the "Minimum Interest Charge") during the term of this Agreement, and the Borrowers shall pay any deficiency between the Minimum Interest Charge and the amount of interest otherwise calculated under Sections 2.13(a) and 2.13(b) on the date and in the manner provided in Section 2.15. (d) DEFAULT INTEREST RATE. At any time during any Default Period, in the Lender's sole discretion and without waiving any of its other rights and remedies, the principal of the Advances outstanding from time to time shall bear interest at the Default Rate, effective for any periods designated in writing by the Lender from time to time during that Default Period. (e) PARTICIPATIONS. If any Person shall acquire a participation in the Advances or the Obligation of Reimbursement, the Borrowers shall be obligated to the Lender to pay the full amount of all interest calculated under this Section 2.13, along with all other fees, charges and other amounts due under this Agreement, regardless if such Person elects to accept interest with respect to its participation at a lower rate than the Floating Rate, or otherwise elects to accept less than its prorata share of such fees, charges and other amounts due under this Agreement. (f) USURY. In any event no rate change shall be put into effect which would result in a rate greater than the highest rate permitted by law. Notwithstanding anything to the contrary contained in any Loan Document, all agreements which either now are or which shall become agreements between any of the Borrowers and the Lender are hereby limited so that in no contingency or event whatsoever shall the total liability for payments in the nature of interest, additional interest and other charges exceed the applicable limits imposed by any applicable usury laws. If any payments in the nature of interest, additional interest and other charges made under any Loan Document are held to be in excess of the limits imposed by any applicable usury laws, it is agreed that any such amount held to be in excess shall be considered -18- payment of principal hereunder, and the indebtedness evidenced hereby shall be reduced by such amount so that the total liability for payments in the nature of interest, additional interest and other charges shall not exceed the applicable limits imposed by any applicable usury laws, in compliance with the desires of the Borrowers and the Lender. This provision shall never be superseded or waived and shall control every other provision of the Loan Documents and all agreements between any of the Borrowers and the Lender, or their successors and assigns. Section 2.14 FEES. (a) COMMITMENT FEE. The Borrower shall pay to the Lender a fully earned and nonrefundable commitment fee of $75,000, due and payable to the Lender upon the Lender's issuance of its commitment to provide the Credit Facility. The Lender acknowledges receipt of $75,000 toward payment of this fee and the fees, costs and expenses described in Sections 2.14(c) and 9.6. (b) UNUSED LINE FEE. For the purposes of this Section 2.14(b), "Unused Amount" means the Maximum Line reduced by (1) outstanding Revolving Advances and (2) the L/C Amount. The Borrowers shall pay to the Lender an unused line fee at the rate of one half of one percent (0.5%) per annum on the average daily Unused Amount from the date of this Agreement to and including the Termination Date, due and payable monthly in arrears on the first day of the month, commencing April 1, 2000, and on the Termination Date. (c) LETTER OF CREDIT FEES. The Borrowers shall pay to the Lender a fee with respect to each Letter of Credit, if any, accruing on a daily basis and computed at the annual rate of two percent (2%) of the aggregate amount that may then be drawn on such Letter of Credit assuming compliance with all conditions for drawing thereunder (the "Aggregate Face Amount"), from and including the date of issuance of such Letter of Credit until such date as such Letter of Credit shall terminate by its terms or be returned to the Lender, due and payable monthly in arrears on the first day of each month and on the Termination Date; PROVIDED, HOWEVER that during Default Periods, in the Lender's sole discretion and without waiving any of its other rights and remedies, such fee shall increase to four percent (4%) of the Aggregate Face Amount. The foregoing fee shall be in addition to any and all fees, commissions and charges of any Issuer of a Letter of Credit with respect to or in connection with such Letter of Credit. (d) LETTER OF CREDIT ADMINISTRATIVE FEES. The Borrowers shall pay to the Lender, on written demand, the administrative fees charged by the Issuer in connection with the honoring of drafts under any Letter of Credit, amendments thereto, transfers thereof and all other activity with respect to the Letters of Credit at the then-current rates published by the Issuer for such services rendered on behalf of customers of the Issuer generally. -19- (e) AUDIT FEES. The Borrowers shall pay to the Lender, on demand, audit fees in connection with any audits or inspections conducted by the Lender of any Collateral or the Borrowers' operations or business at the rates established from time to time by the Lender as its audit fees (which fees are currently $700 per day per auditor), together with all reasonable actual out-of-pocket costs and expenses incurred in conducting any such audit or inspection. Such costs and fees include, among other things, the pre-loan survey and any collateral audit reviews conducted by the Lender thereafter. The Borrowers shall also pay to the Lender an initial fully earned audit fee deposit in the amount of $50,000 (the "Audit Deposit"), which amount shall be non-refundable and retained by the Lender if (i) the Credit Facility fails to close due to any action or inaction by the Borrowers or (ii) during the course of the Lender's collateral audit and credit review, the Lender discovers any material information that the Borrower failed previously disclose to the Lender and which adversely affects the Lender's approval of the Credit Facility. Otherwise, the Audit Deposit shall be applied to any and all closing fees and out-of-pocket expenses incurred by the Lender in connection with the Credit Facility, with any remaining amount refunded to the Borrowers. (f) FOREIGN RECEIVABLES FEE. For purposes of this Section 2.14(f), "Foreign Receivables Limit" means $1,000,000. During each Foreign Accounts Eligibility Period, the Borrowers shall pay to the Lender a fee at the rate of at least one and three quarters percent (1.75%) per annum on the Foreign Receivables Limit due and payable in arrears on the first day of each month. (g) DOCUMENTATION DEPOSIT. The Borrower shall pay to the Lender a fully earned and non refundable documentation fee of $50,000 (the "Documentation Deposit"). The Documentation Fee shall be applied to any and all closing fees and out-of-pocket expenses incurred by the Lender in connection with the Credit Facility, with any remaining amount refunded to the Borrowers. (h) SUCCESS FEE. On the date the Credit Facility is terminated and all other Obligations are paid in full, the Borrowers shall pay to the Lender a fee equal to one-half of one percent (0.5%) of the Maximum Line. The foregoing fee shall be in addition to any and all other fees, commissions and other charges due and owing by the Borrowers to the Lender hereunder. Section 2.15 COMPUTATION OF INTEREST AND FEES; WHEN INTEREST DUE AND PAYABLE. Fees hereunder and interest accruing on the outstanding principal balance of the Advances and the Obligation of Reimbursement outstanding from time to time shall be computed on the basis of actual number of days elapsed in a year of 360 days. Interest on Floating Rate Advances shall be payable in arrears on the first day of each month and on the Termination Date. Accrued interest on each Eurodollar Rate Advance shall be due and payable on the last day of the Interest Period relating to such Eurodollar Rate Advance; provided, however, that if any Interest Period is longer than three (3) months, interest shall be due and payable monthly in arrears on the last day of the third month occurring after -20- commencement of such Interest Period, on the last day of each three-month period thereafter (if any) and on the last day of such Interest Period. Section 2.16 CAPITAL ADEQUACY; INCREASED COSTS AND REDUCED RETURN. (a) CAPITAL ADEQUACY. If any Related Lender determines at any time that its Return has been reduced solely as a result of any Rule Change, such Related Lender may require the Borrowers to pay it the amount necessary to restore its Return to what it would have been had there been no Rule Change provided that the Lender and Related Lender make similar adjustments to all of their other credit facilities. For purposes of this Section 2.16(a): (i) "Capital Adequacy Rule" means any law, rule, regulation, guideline, directive, requirement or request regarding capital adequacy, or the interpretation or administration thereof by any governmental or regulatory authority, central bank or comparable agency, whether or not having the force of law, that applies to any Related Lender. Such rules include rules requiring financial institutions to maintain total capital in amounts based upon percentages of outstanding loans, binding loan commitments and letters of credit. (ii) "Eurodollar Rule" means Regulation D of the Board of Governors of the Federal Reserve System, any applicable law, rule or regulation, with respect to (A) taxes, duties or other charges, exemptions with respect to Eurodollar Rate Advances or the Lender's obligation to make Eurodollar advances, and (B) reserves imposed by the Board of Governors of the Federal Reserve System (but excluding any reserve included in the determination of interest rates pursuant to Section 2.9), special deposits or similar requirements against assets of, deposits with or for the account of, or credit extended by, any Related Lender, and any other condition affecting the Lender's making, maintaining or funding of Eurodollar Rate Advances or its obligation to make Eurodollar Rate Advances. (iii) "L/C Rule" means any law, rule, regulation, guideline, directive, requirement or request regarding letters of credit, or the interpretation or administration thereof by any governmental or regulatory authority, central bank or comparable agency, whether or not having the force of law, that applies to any Related Lender. Such rules include rules imposing taxes, duties or other similar charges, or mandating reserves, special deposits or similar requirements against assets of, deposits with or for the account of, or credit extended by any Related Lender, on letters of credit. (iv) "Related Lender" includes (but is not limited to) the Lender, the Issuer, any parent corporation of the Lender or the Issuer and any assignee of any interest of the Lender hereunder and any participant in the loans made hereunder. -21- (v) "Return", for any period, means the return as determined by a Related Lender on the Advances and Letters of Credit based upon its total capital requirements and a reasonable attribution formula that takes account of the Capital Adequacy Rules, Eurodollar Rules, and L/C Rules then in effect, costs of issuing or maintaining any Advance or Letter of Credit and amounts received or receivable under this Agreement or the Notes with respect to any Advance or Letter of Credit. Return may be calculated for each calendar quarter and for the shorter period between the end of a calendar quarter and the date of termination in whole of this Agreement. (vi) "Rule Change" means any change in any Capital Adequacy Rule, Eurodollar Rule, or L/C Rule occurring after the date of this Agreement, but the term does not include any changes in applicable requirements that at the Closing Date are scheduled to take place under the existing Capital Adequacy Rules, Eurodollar Rules, or L/C Rules or any increases in the capital that any Related Lender is required to maintain to the extent that the increases are required due to a regulatory authority's assessment of the financial condition of such Related Lender. The Lender will promptly notify the Parent Borrower of any event of which it has knowledge, occurring after the date hereof, which will entitle the Lender to compensation pursuant to this Section 2.16. Certificates of any Related Lender sent to the Parent Borrower from time to time claiming compensation under this Section 2.16, stating the reason therefor and setting forth in reasonable detail the calculation of the additional amount or amounts to be paid to the Related Lender hereunder to restore its Return shall be conclusive absent manifest error. In determining such amounts, the Related Lender may use any reasonable averaging and attribution methods. Section 2.17 TERMINATION OF CREDIT FACILITY; AUTOMATIC RENEWAL. Unless terminated by the Lender during a Default Period or by the Borrowers pursuant to Section 2.18, the Credit Facility shall remain in effect until the Original Maturity Date, and thereafter, shall automatically renew for successive one year periods (the Original Maturity Date and each anniversary date thereof which is at the end of any year for which the Credit Facility has been automatically renewed, is herein referred to as a "Maturity Date") unless the Parent Borrower provides the Lender with 90 days written notice of its election not to renew the Credit Facility. Section 2.18 VOLUNTARY PREPAYMENT; REDUCTION OF THE MAXIMUM LINE; TERMINATION OF THE CREDIT FACILITY BY BORROWERS. Except as otherwise provided herein, the Borrowers may prepay the Revolving Advances, L/C Amounts and/or Obligations of Reimbursement in whole at any time or from time to time in part. The Borrowers may terminate the Credit Facility or reduce the Maximum Line at any time if (i) the Parent Borrower gives the Lender at least 30 days' prior written notice and (ii) the Borrowers pay the Lender the termination or line reduction fees in accordance with Section 2.19. Any reduction in the Maximum Line must be in an amount not less than $1,000,000 or an integral multiple thereof. If the Borrowers reduce the Maximum Line to zero, all Obligations shall be -22- immediately due and payable. Upon termination of the Credit Facility and payment and performance of all Obligations, the Lender shall release or terminate the Security Interest and the Security Documents. Section 2.19 TERMINATION, LINE REDUCTION; WAIVER OF TERMINATION, AND LINE REDUCTION FEES. (a) TERMINATION AND LINE REDUCTION FEES. If the Lender or the Borrowers terminate the Credit Facility for any reason as of a date other than the Maturity Date, or if the Borrowers reduce the Maximum Line, the Borrowers shall pay the Lender a fee in an amount equal to a percentage of the Maximum Line (or the reduction, as the case may be) as follows: (i) three percent (3.00%) if the termination or reduction occurs on or before the first anniversary of the Funding Date; (ii) two percent (2.00%) if the termination or reduction occurs after the first anniversary of the Funding Date but on or before the second anniversary of the Funding Date; and (iii) one percent (1.00%) if the termination or reduction occurs after the second anniversary of the Funding Date, but not on the Maturity Date. (b) WAIVER OF TERMINATION AND LINE REDUCTION FEES. The Borrowers will not be required to pay the termination or line reduction fees otherwise due under this Section 2.19 if such termination or line reduction is made because of cash flow generated from the operations of the Borrowers or refinancing by an affiliate of the Lender. Nothing herein shall be construed as a waiver of the fee imposed under Section 2.14(h). Section 2.20 MANDATORY PREPAYMENT. Without notice or demand, if the sum of the outstanding principal balance of the Revolving Advances plus the L/C Amount shall at any time exceed the Borrowing Base, the Borrowers shall (i) first immediately prepay the Revolving Advances to the extent necessary to eliminate such excess; and (ii) if prepayment in full of the Revolving Advances is insufficient to eliminate such excess, pay to the Lender in immediately available funds for deposit in the Special Account an amount equal to the remaining excess. Any payment received by the Lender under this Section 2.20 or under Section 2.18 will be applied to the Obligations, in such order and in such amounts as the Lender, in its reasonable discretion, may from time to time determine. Section 2.21 PAYMENT. All payments to the Lender shall be made in immediately available funds and shall be applied to the Obligations upon receipt by the Lender. The Lender may hold all payments not constituting immediately available funds for three (3) days before applying them to the Obligations. Notwithstanding anything in Section 2.1, the Borrowers hereby authorize the Lender, in its reasonable discretion at any time or from time to time without the Borrowers' request and even if the conditions set forth in Section 4.2 would not be satisfied, to make a Revolving Advance in an amount equal to the portion of the Obligations from time to time due and payable and apply such Revolving Advance to the Obligations. -23- Section 2.22 PAYMENT ON NON-BANKING DAYS. Whenever any payment to be made hereunder shall be stated to be due on a day which is not a Banking Day, such payment may be made on the next succeeding Banking Day, and such extension of time shall in such case be included in the computation of interest on the Advances or the fees hereunder, as the case may be. Section 2.23 USE OF PROCEEDS. The Borrowers shall use the proceeds of Advances, and each Letter of Credit, if any, to refinance existing debt in accordance with Schedule 2.23 and for ordinary working capital purposes. Section 2.24 LIABILITY RECORDS. The Lender may maintain from time to time, at its discretion, liability records as to the Obligations. All entries made on any such record shall be presumed correct until the Borrowers establish the contrary. Upon the Lender's demand, the Borrowers will admit and certify in writing the exact principal balance of the Obligations that the Borrowers then assert to be outstanding. Any billing statement or accounting rendered by the Lender shall be conclusive and fully binding on the Borrowers unless the Parent Borrower gives the Lender specific written notice of exception within 30 days after receipt by the Parent Borrower. ARTICLE III SECURITY INTEREST; OCCUPANCY; SETOFF Section 3.1 GRANT OF SECURITY INTEREST. The Borrowers hereby pledge, assign and grant to the Lender a security interest (collectively referred to as the "Security Interest") in the Collateral, as security for the payment and performance of the Obligations. Section 3.2 NOTIFICATION OF ACCOUNT DEBTORS AND OTHER OBLIGORS. At any time after the occurrence and during the continuance of an Event of Default, the Lender may notify any account debtor or other person obligated to pay the amount due that such right to payment has been assigned or transferred to the Lender for security and shall be paid directly to the Lender. The applicable Borrower will join in giving such notice if the Lender so requests. At any time after the applicable Borrower or the Lender gives such notice to an account debtor or other obligor, the Lender may, but need not, in the Lender's name or in the applicable Borrower's name, (a) demand, sue for, collect or receive any money or property at any time payable or receivable on account of, or securing, any such right to payment, or grant any extension to, make any compromise or settlement with or otherwise agree to waive, modify, amend or change the obligations (including collateral obligations) of any such account debtor or other obligor; and (b) as the Borrowers' agent and attorney-in-fact, notify the United States Postal Service to change the address for delivery of the Borrowers' mail to any address designated by the Lender, otherwise intercept the Borrowers' mail, and receive, open and dispose of the Borrowers' mail, applying all Collateral as permitted under this Agreement and holding all other mail for the Borrowers' account or forwarding such mail to the Borrowers' last known address. -24- Section 3.3 ASSIGNMENT OF INSURANCE. As additional security for the payment and performance of the Obligations, the Borrowers hereby assign to the Lender any and all monies (including, without limitation, proceeds of insurance and refunds of unearned premiums) due or to become due under, and all other rights of the Borrowers with respect to, any and all policies of insurance now or at any time hereafter covering the Collateral or any evidence thereof or any business records or valuable papers pertaining thereto, and the Borrowers hereby direct the issuer of any such policy to pay all such monies directly to the Lender during any Default Period. At any time, whether or not a Default Period then exists, the Lender may (but need not), in the Lender's name or in any Borrower's name, execute and deliver proof of claim, receive all such monies, endorse checks and other instruments representing payment of such monies, and adjust, litigate, compromise or release any claim against the issuer of any such policy. Section 3.4 OCCUPANCY. (a) Each Borrower hereby irrevocably grants to the Lender the right to take exclusive possession of the Premises at any time during a Default Period. (b) The Lender may use the Premises only to hold, process, manufacture, sell, use, store, liquidate, realize upon or otherwise dispose of goods that are Collateral and for other purposes that the Lender may in good faith deem to be related or incidental purposes. (c) The Lender's right to hold the Premises shall cease and terminate upon the earlier of (i) payment in full and discharge of all Obligations and termination of the Commitment, (ii) termination of the relevant Default Period, and (iii) final sale or disposition of all goods constituting Collateral and delivery of all such goods to purchasers. (d) The Lender shall not be obligated to pay or account for any rent or other compensation for the possession, occupancy or use of any of the Premises; provided, however, that if the Lender does pay or account for any rent or other compensation for the possession, occupancy or use of any of the Premises, the Borrowers shall reimburse the Lender promptly for the full amount thereof. In addition, the Borrowers will pay, or reimburse the Lender for, all taxes, fees, duties, imposts, charges and expenses at any time incurred by or imposed upon the Lender by reason of the execution, delivery, existence, recordation, performance or enforcement of this Agreement or the provisions of this Section 3.4. Section 3.5 LICENSE. Each Borrower hereby grants to the Lender a non-exclusive, worldwide and royalty-free license to use or otherwise exploit all trademarks, franchises, trade names, copyrights and patents of that Borrower for the purpose of selling, leasing or otherwise disposing of any or all Collateral during any Default Period. Section 3.6 FINANCING STATEMENT. A carbon, photographic or other reproduction of this Agreement or of any financing statements signed by a Borrower is -25- sufficient as a financing statement and may be filed as a financing statement in any state to perfect the security interests granted hereby. For this purpose, certain information is set out in Schedule 3.6. Section 3.7 SETOFF. The Borrowers agree that the Lender may at any time during a Default Period, at its sole discretion and without demand and without notice to anyone, setoff any liability owed to any Borrower by the Lender, whether or not due, against any Obligation, whether or not due. In addition, each other Person holding a participating interest in any Obligations shall have the right to appropriate or setoff any deposit or other liability then owed by such Person to any Borrower, whether or not due, and apply the same to the payment of said participating interest, as fully as if such Person had lent directly to that Borrower the amount of such participating interest. Section 3.8 ACCOMMODATION PARTY DEFENSES WAIVED. The parties intend that each Borrower shall be fully liable, jointly and severally, for all Obligations. Nonetheless, in case a court finds that any Borrower is not such a primary obligor with respect to all or any part of the Obligations, the Borrowers expressly waive the benefit of any and all defenses and discharges available to a guarantor, surety, endorser or accommodation party dependent on an obligor's character as such. Without limiting the generality of the foregoing, the liability of the Borrowers hereunder shall not be affected or impaired in any way by any of the following acts or things (which the Lender is hereby expressly authorized to do, omit or suffer from time to time without notice to or consent of anyone): (i) any acceptance of collateral security, guarantors, accommodation parties or sureties for any Obligations; (ii) any extension or renewal of any Obligations (whether or not for longer than the original period) or any modification of the interest rate, maturity or other terms of any Obligations; (iii) any waiver or indulgence granted to any Borrower, and any delay or lack of diligence in the enforcement of the Obligations; (iv) any full or partial release of, compromise or settlement with, or agreement not to sue, any Borrower, Guarantor or other person liable on any Obligations; (v) any release, surrender, cancellation or other discharge of any Obligations or the acceptance of any instrument in renewal or substitution for any instrument evidencing any Obligations; (vi) any failure to obtain collateral security (including rights of setoff) for any Obligations, or to see to the proper or sufficient creation and perfection thereof, or to establish the priority thereof, or to preserve, protect, insure, care for, exercise or enforce any collateral security for any Obligations; (vii) any modification, alteration, substitution, exchange, surrender, cancellation, termination, release or other change, impairment, limitation, loss or discharge of any Collateral, Guarantor Collateral or other collateral security for the Obligations; (viii) any assignment, sale, pledge or other transfer of any of Obligations; or (ix) any manner, order or method of application of any payments or credits on any Obligations. -26- ARTICLE IV CONDITIONS OF LENDING Section 4.1 CONDITIONS PRECEDENT TO THE INITIAL REVOLVING ADVANCE AND THE INITIAL LETTER OF CREDIT. The Lender's obligation to make the initial Revolving Advance or to cause to be issued the initial Letter of Credit hereunder shall be subject to the condition precedent that the Lender shall have received all of the following, each in form and substance satisfactory to the Lender: (a) This Agreement, properly executed by each Borrower. (b) The Note, properly executed by each Borrower. (c) A true and correct copy of any and all leases pursuant to which any Borrower is leasing any Premises, together with a landlord's disclaimer and consent with respect to each such lease. (d) The Lockbox and Collection Account Agreement, properly executed by the Borrowers, the Lender, Wells Fargo Bank (Texas), N.A. and Regulus, LLC. (e) Current searches of appropriate filing offices showing that (i) no state or federal tax liens have been filed and remain in effect against any Borrower, (ii) no financing statements or assignments of patents, trademarks or copyrights have been filed and remain in effect against any Borrower except those financing statements and assignments of patents, trademarks or copyrights relating to Permitted Liens or to liens held by Persons who have agreed in writing that upon receipt of proceeds of the Advances, they will deliver UCC releases and/or terminations and releases of such liens and assignments of patents, trademarks or copyrights reasonably satisfactory to the Lender, and (iii) the Lender has duly filed all financing statements necessary to perfect the Security Interest, to the extent the Security Interest is capable of being perfected by filing. (f) A certificate of each Borrower's secretary or assistant secretary certifying as to (i) the resolutions of the Borrower's Board of Directors or Members, as applicable, and if required, shareholders, authorizing the execution, delivery and performance of the Loan Documents, (ii) that Borrower's Organizational Documents, and (iii) the signatures of that Borrower's officers or agents authorized to execute and deliver the Loan Documents and other instruments, agreements and certificates, including Advance requests, on that Borrower's behalf. (g) For each Borrower a current certificate issued by the Secretary of State of that Borrower's jurisdiction of organization, certifying that that Borrower is validly existing and in good standing in such State. -27- (h) Evidence that each Borrower is duly licensed or qualified to transact business in all jurisdictions where the character of the property owned or leased or the nature of the business transacted by it makes such licensing or qualification necessary. (i) An opinion of counsel to the Borrowers, addressed to the Lender. (j) Certificates of the insurance required hereunder, with all hazard insurance containing a lender's loss payable endorsement in the Lender's favor and with all liability insurance naming the Lender as an additional insured. (k) Payment of the fees and commissions due through the date of the initial Advance or Letter of Credit under Section 2.14 and, to the extent not paid out of the foregoing fees and commissions in the manner required by Section 2.14, expenses incurred by the Lender through such date and required to be paid by the Borrowers under Section 9.6, including all legal expenses incurred through the date of this Agreement. (l) Evidence that after making the initial Revolving Advance and satisfying all senior secured debt as set forth on Schedule 2.23, trade payables older than 60 days from the invoice date, book overdrafts and closing costs, Availability shall be not less than $2,500,000. (m) Completion of an audit, satisfactory to the Lender in its sole discretion, that demonstrates that all accounting and billing functions of the Borrowers have been centralized and consolidated. (n) Satisfactory completion of vendor and customer references. (o) Receipt and review by the Lender of the Parent Borrower's fiscal year 2000 balance sheet and monthly income statement projections. (p) Such other documents as the Lender in its reasonable discretion may require. Section 4.2 CONDITIONS PRECEDENT TO ALL ADVANCES AND LETTERS OF CREDIT. The Lender's obligation to make each Advance or to cause the Issuer to issue any Letter of Credit shall be subject to the further conditions precedent that on such date: (a) the representations and warranties contained in Article V are correct in all material respects on and as of the date of such Advance or issuance of Letter of Credit as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date; and -28- (b) no event has occurred and is continuing, or would result from such Advance or the issuance of such Letter of Credit, as the case may be which constitutes a Default or an Event of Default. ARTICLE V REPRESENTATIONS AND WARRANTIES Each Borrower represents and warrants to the Lender as follows: Section 5.1 EXISTENCE AND POWER; NAME; CHIEF EXECUTIVE OFFICE; INVENTORY AND EQUIPMENT LOCATIONS; TAX IDENTIFICATION NUMBER. Each Borrower is a corporation or a limited liability company, duly organized, validly existing and in good standing under the laws of the State of its organization and is duly licensed or qualified to transact business in all jurisdictions where the character of the property owned or leased or the nature of the business transacted by it makes such licensing or qualification necessary. No dissolution or termination of any Borrower has occurred, and no notice of dissolution or articles of termination have been filed with respect to any Borrower. Each Borrower has all requisite power and authority, corporate or otherwise, to conduct its business, to own its properties and to execute and deliver, and to perform all of its obligations under, the Loan Documents. For each Borrower, during its existence, (i) it has done business solely under the names set forth in Schedule 5.1, (ii) its chief executive office and principal place of business is located at the address set forth in Schedule 5.1, (iii) all of its records relating to its business or the Collateral are kept at that location, (iv) all of its Inventory and Equipment is located at that location or at one of the other locations set forth in Schedule 5.1 hereto, and (v) its tax identification number is correctly set forth in Schedule 3.6 hereto. Section 5.2 CAPITALIZATION. Schedule 5.2 constitutes a correct and complete list of all owners holding more than 10 percent (10%) of any Borrower's issued and outstanding ownership interests and rights to acquire ownership interests, including the amount and record holder thereof and an organizational chart showing the ownership structure of all Subsidiaries of each Borrower. Section 5.3 AUTHORIZATION OF BORROWING; NO CONFLICT AS TO LAW OR AGREEMENTS. The execution, delivery and performance by the Borrowers of the Loan Documents and the borrowings from time to time hereunder have been duly authorized by all necessary organizational action and do not and will not (i) require any further consent or approval of any Borrower's shareholders or, as applicable, members; (ii) require any authorization, consent or approval by, or registration, declaration or filing with, or notice to, any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, or any third party, except such authorization, consent, approval, registration, declaration, filing or notice as has been obtained, accomplished or given prior to the date hereof; (iii) violate any provision of any law, rule or regulation (including, without limitation, Regulation X of the Board of Governors of the Federal Reserve System) or of any order, writ, injunction or decree presently in effect having applicability to any Borrower or -29- its Organizational Documents; (iv) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other material agreement, lease or instrument to which any Borrower is a party or by which it or its properties may be bound or affected except for breaches or defaults which will not have a material adverse effect on the Borrowers taken as a whole; or (v) result in, or require, the creation or imposition of any mortgage, deed of trust, pledge, lien, security interest or other charge or encumbrance of any nature (other than the Security Interest) upon or with respect to any of the properties now owned or hereafter acquired by any Borrower. Section 5.4 LEGAL AGREEMENTS. This Agreement constitutes and, upon due execution by the Borrowers, the other Loan Documents will constitute the legal, valid and binding obligations of the Borrowers, enforceable against the Borrowers in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium, or similar laws affecting the enforcement of creditor's rights generally and by general equitable principles. Section 5.5 SUBSIDIARIES. Schedule 5.5 is a complete and correct list of all present Subsidiaries and of the percentage of the ownership of any Borrower or any other Subsidiary in each as of the date of this Agreement. Except as otherwise indicated in that Schedule, all shares of each Subsidiary owned by any Borrower or by any other Subsidiary are validly issued and fully paid and nonassessable. Section 5.6 FINANCIAL CONDITION; NO ADVERSE CHANGE. The Borrowers have heretofore furnished to the Lender audited financial statements for fiscal year ended December 31, 1999, and unaudited interim financial statements for fiscal year-to-date period ended January 31, 2000 and those statements fairly present the Borrowers' financial condition on the dates thereof and the results of their operations and cash flows for the periods then ended and were prepared in accordance with generally accepted accounting principles except that the interim financial statements do not contain footnotes required by GAAP and are subject to normal, period-end adjustments. Since the date of the most recent financial statements, there has been no material adverse change in the business, properties or condition (financial or otherwise) of the Borrowers as a whole. Section 5.7 LITIGATION. There are no actions, suits or proceedings pending or, to the knowledge of the Key Officers, threatened against or affecting any Borrower or the properties of any Borrower before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which, if determined adversely to that Borrower or any of its Affiliates, would have a material adverse effect on the financial condition, properties or operations of the Borrowers as a whole. Section 5.8 REGULATION U. No Borrower is engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any Advance will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock. -30- Section 5.9 TAXES. Each Borrower has paid or caused to be paid to the proper authorities when due all federal, state and local taxes required to be withheld by each of them except to the extent the same are being contested in good faith by appropriate proceedings and such Borrower has adequately reserved therefor. Each Borrower has filed all federal, state and local tax returns which to the knowledge of the Key Officers are required to be filed, and each Borrower has paid or caused to be paid to the respective taxing authorities all taxes as shown on said returns or on any assessment received by any of them to the extent such taxes have become due, except to the extent the same are being contested in good faith by proper proceedings and for which such Borrower shall have set aside on its books adequate reserves therefor. Section 5.10 TITLES AND LIENS. Each Borrower has good and absolute title to all Collateral described in the collateral reports provided to the Lender and all other Collateral, properties and assets reflected in the latest financial statements referred to in Section 5.6 and all proceeds thereof, free and clear of all mortgages, security interests, liens, and encumbrances, except for Permitted Liens. No financing statement naming any Borrower as debtor is on file in any office except to perfect only Permitted Liens and except for financing statements held by the Lender and for financing statements held by Persons who have agreed in writing that upon receipt of proceeds of the Advances, they will deliver UCC releases and/or terminations and releases of the liens to which such financing statements relate. Section 5.11 INTELLECTUAL PROPERTY RIGHTS. Each Borrower owns or has the exclusive right to use, free and clear of all material liens, claims and restrictions except for Permitted Liens, all patents, trademarks, service marks, trade names, copyrights, licenses and rights with respect to the foregoing, used in the conduct of its business as now conducted. No Borrower is obligated or under any liability whatsoever to make any payments of a material nature by way of royalties, fees or otherwise to any owner of, licensor of, or other claimant to, any patent, trademark, trade name, copyright or other intangible asset, with respect to the use thereof or in connection with the conduct of its business or otherwise. Each Borrower owns or has the unrestricted right to use all trade secrets, including know-how, inventions, designs, processes, computer programs and technical data necessary to the development, operation and sale of all products and services sold or proposed to be sold by it, free and clear of any rights, liens or claims of others except for Permitted Liens. No Borrower is using, on an unauthorized basis, any confidential information or trade secrets of others. To the knowledge of the Key Officers, no Borrower is, nor has any Borrower received notice with respect to, infringing upon or otherwise acting adversely to any known right or claimed right of any person under or with respect to any patents, trademarks, service marks, trade names, copyrights, licenses or rights with respect to the foregoing. Section 5.12 PLANS. Except as disclosed to the Lender in writing prior to the date hereof, neither the Borrowers nor any of their Affiliates maintains or has maintained any Plan. Neither the Borrowers nor any of their Affiliates have received any notice or has any knowledge to the effect that they are not in full compliance with any of the requirements of ERISA. No Reportable Event or other fact or circumstance which may have an adverse effect -31- on the Plan's tax qualified status exists in connection with any Plan. Neither the Borrowers nor any of their Affiliates have: (a) Any accumulated funding deficiency within the meaning of ERISA; or (b) Any liability or know of any fact or circumstances which could result in any liability to the Pension Benefit Guaranty Corporation, the Internal Revenue Service, the Department of Labor or any participant in connection with any Plan (other than accrued benefits which or which may become payable to participants or beneficiaries of any such Plan). Section 5.13 DEFAULT. Each Borrower is in compliance with all provisions of all agreements, instruments, decrees and orders to which it is a party or by which it or its property is bound or affected, except where a failure to comply would not reasonably be expected to have a material adverse effect on the financial condition, properties or operations of the Borrowers as a whole. Section 5.14 ENVIRONMENTAL MATTERS. (a) DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings: (i) "Environmental Law" means any federal, state, local or other governmental statute, regulation, law or ordinance dealing with the protection of human health and the environment. (ii) "Hazardous Substances" means pollutants, contaminants, hazardous substances, hazardous wastes, petroleum and fractions thereof, and all other chemicals, wastes, substances and materials listed in, regulated by or identified in any Environmental Law. (b) To the best knowledge of each Key Officer, there are not present in, on or under the Premises any Hazardous Substances in such form or quantity as to create any liability or obligation for any Borrower or the Lender under common law of any jurisdiction or under any Environmental Law, and no Hazardous Substances have ever been stored, buried, spilled, leaked, discharged, emitted or released in, on or under the Premises in such a way as to create any such liability. (c) To the best knowledge of each Key Officer, no Borrower has disposed of Hazardous Substances in such a manner as to create any liability under any Environmental Law. (d) To the knowledge of the Key Officers, there are not and there never have been any requests, claims, notices, investigations, demands, administrative proceedings, hearings or litigation, relating in any way to the Premises or any Borrower, alleging liability under, violation of, or noncompliance with any Environmental Law or any license, permit or other authorization issued pursuant -32- thereto. To the best knowledge of the Key Officers, no such matter is threatened or impending. (e) To the best knowledge of each Key Officer, that Borrower's businesses are and have in the past always been conducted materially in accordance with all Environmental Laws and all licenses, permits and other authorizations required pursuant to any Environmental Law and necessary for the lawful and efficient operation of such businesses are in that Borrower's possession and are in full force and effect. To the knowledge of the Key Officers, no permit required under any Environmental Law is scheduled to expire within 12 months and there is no threat that any such permit will be withdrawn, terminated, limited or materially changed. (f) To the best knowledge of each Key Officer, the Premises are not listed on the National Priorities List, the Comprehensive Environmental Response, Compensation and Liability Information System or any similar federal, state or local list, schedule, log, inventory or database. (g) The Borrowers have delivered to Lender all environmental assessments, audits, reports, permits, licenses and other documents describing or relating in any way to any Borrower's businesses. Section 5.15 SUBMISSIONS TO LENDER. All financial and other information provided to the Lender by or on behalf of the Borrowers in connection with the Borrowers' request for the Credit Facility is true and correct in all material respects and, as to projections, valuations or proforma financial statements, present a good faith opinion as to such projections, valuations and proforma condition and results. Section 5.16 FINANCING STATEMENTS. The Borrowers have provided to the Lender signed financing statements sufficient when filed to perfect the Security Interest and the other security interests created by the Security Documents, to the extent the Security Interest and other interests are capable of being perfected by filing such financing statements. When such financing statements are filed in the offices noted therein, the Lender will have a valid and perfected security interest in all Collateral and all other collateral described in the Security Documents to the extent such interest is capable of being perfected by filing financing statements. None of the Collateral or other collateral covered by the Security Documents is or will become a fixture on real estate, unless a sufficient fixture filing is in effect with respect thereto. Section 5.17 RIGHTS TO PAYMENT. Each right to payment and each instrument, document, chattel paper and other agreement constituting or evidencing Collateral or other collateral covered by the Security Documents is (or, in the case of all future Collateral or such other collateral, will be when arising or issued) the valid, genuine and legally enforceable obligation, subject to no defense, setoff or counterclaim, of the account debtor or other obligor named therein or in the applicable Borrower's records pertaining thereto as being obligated to pay such obligation. -33- Section 5.18 FINANCIAL SOLVENCY. Both before and after giving effect to the transactions contemplated in the Loan Documents, the Borrowers, as a whole,: (a) were not and will not be insolvent, as that term is used and defined in Section 101(32) of the United States Bankruptcy Code and Section 2 of the Uniform Fraudulent Transfer Act; (b) do not have unreasonably small capital and are not engaged or about to engage in a business or a transaction for which any remaining assets of the Borrowers are unreasonably small; (c) by executing, delivering or performing their obligations under the Loan Documents and other documents to which they are a party or by taking any action with respect thereto, do not intend to, nor believe that they will, incur debts beyond their ability to pay them as they mature; (d) by executing, delivering or performing their obligations under the Loan Documents or other documents to which they are party to or by taking any action with respect thereto, do not intend to hinder, delay or defraud either their present or future creditors; and (e) at this time do not contemplate filing a petition in bankruptcy or for an arrangement or reorganization or similar proceeding under any law any jurisdiction, nor, to the best knowledge of the Key Officers, is the subject of any actual, pending or threatened bankruptcy, insolvency or similar proceedings under any law of any jurisdiction. ARTICLE VI BORROWERS' AFFIRMATIVE COVENANTS So long as the Obligations shall remain unpaid, or the Credit Facility shall remain outstanding, the Borrowers will comply with the following requirements, unless the Lender shall otherwise consent in writing: Section 6.1 REPORTING REQUIREMENTS. The Borrowers will deliver, or cause to be delivered, to the Lender each of the following, which shall be in form and detail reasonably acceptable to the Lender: (a) as soon as available, and in any event within 90 days after the end of each fiscal year of the Parent Borrower, the Parent Borrower's audited financial statements with the unqualified opinion of independent certified public accountants selected by the Parent Borrower and reasonably acceptable to the Lender, which annual financial statements shall include the Parent Borrower's balance sheet as at the end of such fiscal year and the related statements of the Parent Borrower's income, retained earnings and cash flows for the fiscal year then ended, prepared on a -34- consolidated basis to include all Borrowers, all in reasonable detail and prepared in accordance with GAAP, together with (i) copies of all management letters prepared by such accountants; (ii) a report signed by such accountants stating that in making the investigations necessary for said opinion they obtained no knowledge, except as specifically stated, of any Default or Event of Default hereunder and all relevant facts in reasonable detail to evidence, and the computations as to, whether or not the Parent Borrower is in compliance with the requirements set forth in Sections 6.12, 6.13, 6.14, 6.15, 7.11 and 7.19; and (iii) a certificate of the Parent Borrower's chief financial officer stating that such financial statements have been prepared in accordance with GAAP, fairly represent the Parent Borrower's financial position and the results of its operations, and whether or not such officer has knowledge of the occurrence of any Default or Event of Default hereunder and, if so, stating in reasonable detail the facts with respect thereto; (b) as soon as available and in any event within 30 days after the end of each month, an unaudited/internal balance sheet and statements of income and retained earnings of the Parent Borrower as at the end of and for such month and for the year to date period then ended, prepared on a consolidated basis to include all of the Borrowers, in reasonable detail and stating in comparative form the figures for the corresponding date and periods in the previous year, all prepared in accordance with GAAP, subject to year-end audit adjustments, and except for the absence of footnotes and accompanied by a certificate of the Parent Borrower's chief financial officer, substantially in the form of Exhibit B hereto stating (i) that such financial statements have been prepared in accordance with GAAP, subject to year-end audit adjustments and except for the absence of footnotes, and fairly represent the Parent Borrower's financial position and the results of its operations, (ii) whether or not such officer has knowledge of the occurrence of any Default or Event of Default hereunder not theretofore reported and remedied and, if so, stating in reasonable detail the facts with respect thereto, and (iii) all relevant facts in reasonable detail to evidence, and the computations as to, whether or not the Parent Borrower is in compliance with the requirements set forth in Sections 6.12, 6.13, 6.14, 6.15, and 7.11. (c) within 15 days after the end of each month or more frequently if the Lender so requires, agings of all of the Borrowers' accounts receivable on a consolidated basis and their accounts payable and a calculation of their Accounts and Eligible Accounts as of the end of such period; (d) if the Availability Test is satisfied, then within fifteen (15) days after the end of the month, a report of sales, credit memos, collections for the Borrowers at the end of the prior month, PROVIDED HOWEVER, if the Availability Test is not satisfied, then such reports shall be required on the first day of every half-month period until the Availability Test is satisfied for sixty (60) consecutive days; -35- (e) at least 30 days before the beginning of each fiscal year of the Borrowers, the projected balance sheets and income statements for each month of such year, each in reasonable detail, representing the Borrowers' good faith projections and certified by the Parent Borrower's chief financial officer as being the most accurate projections available and identical to the projections used by the Borrowers for internal planning purposes, together with such supporting schedules and information as the Lender may in its discretion require; (f) promptly after an executive officer of the Parent Borrower obtains knowledge, notice in writing of all litigation and of all proceedings before any governmental or regulatory agency and affecting any Borrower of the type described in Section 5.14 or which seek a monetary recovery against any Borrower in excess of $250,000; (g) as promptly as practicable (but in any event not later than five Banking Days) after an executive officer of the Parent Borrower obtains knowledge of the occurrence of any material breach, default or event of default under any Security Document or any event which constitutes a Default or Event of Default hereunder, notice of such occurrence, together with a detailed statement by a responsible officer of the Parent Borrower of the steps being taken by the Borrowers to cure the effect of such breach, default or event; (h) as promptly as practicable and in any event within 30 days after any Borrower knows or has reason to know that any Reportable Event with respect to any Plan has occurred, the statement of the Parent Borrower's chief financial officer setting forth details as to such Reportable Event and the action which the Borrowers propose to take with respect thereto, together with a copy of the notice of such Reportable Event to the Pension Benefit Guaranty Corporation; (i) as promptly as practicable, and in any event within 10 days after any Borrower fails to make any quarterly contribution required with respect to any Plan under Section 412(m) of the Internal Revenue Code of 1986, as amended, the statement of the Parent Borrower's chief financial officer setting forth details as to such failure and the action which the Borrowers propose to take with respect thereto, together with a copy of any notice of such failure required to be provided to the Pension Benefit Guaranty Corporation; (j) promptly upon knowledge thereof, notice of (i) any disputes or claims by any Borrower's customers exceeding $250,000 individually during any fiscal year; (ii) credit memos; (iii) any material goods returned to or recovered by any Borrower; and (iv) any change in the persons constituting the Key Officers; (k) promptly upon knowledge thereof, notice of any loss of or material damage to any material portion of the Collateral or other collateral covered by the Security Documents or of any substantial adverse change in any Collateral or such other collateral or the prospect of payment thereof; -36- (l) promptly upon their distribution, copies of all financial statements, reports and proxy statements which the Borrowers shall have sent to their stockholders; (m) promptly after the sending or filing thereof, copies of all regular and periodic reports which any Borrower shall file with the Securities and Exchange Commission or any national securities exchange; (n) promptly upon knowledge thereof, notice of any Borrower's violation of any law, rule or regulation, the non-compliance with which could materially and adversely affect the business or financial condition of the Borrowers as a whole; and (o) from time to time, with reasonable promptness, any and all receivables schedules, collection reports, deposit records, equipment schedules, copies of invoices to account debtors, shipment documents and delivery receipts for goods sold, and such other material, reports, records or information as the Lender may request. Section 6.2 BOOKS AND RECORDS; INSPECTION AND EXAMINATION. Each Borrower will keep accurate books of record and account for itself pertaining to its portion of the Collateral and pertaining to its business and financial condition and such other matters as the Lender may from time to time request in which true and complete entries will be made in accordance with GAAP and, upon the Lender's request, will permit any officer, employee, attorney or accountant for the Lender to audit, review, make extracts from or copy any and all corporate and financial books and records at all times during ordinary business hours, to send and discuss with account debtors and other obligors requests for verification of amounts owed to such Borrower, and to discuss such Borrower's affairs with any of its directors, officers, or employees or agents to the extent such employees or agents are reasonably likely to have specific knowledge of a matter as to which the Lender requires further information. Each Borrower will permit the Lender, or its employees, accountants, attorneys or agents, to examine and inspect any Collateral, other collateral covered by the Security Documents or any other property of such Borrower at any time during ordinary business hours. Section 6.3 ACCOUNT VERIFICATION. The Lender may at any time and from time to time send or require any Borrower to send requests for verification of accounts or notices of assignment to account debtors and other obligors. The Lender may also at any time and from time to time telephone account debtors and other obligors to verify accounts. Section 6.4 COMPLIANCE WITH LAWS. (a) Each Borrower will (i) comply with the requirements of applicable laws and regulations, the non-compliance with which would materially and adversely affect its business or its financial condition and (ii) use and keep the Collateral, and require that others use and keep the Collateral, only for lawful purposes, without violation of any federal, state or local law, statute or ordinance except where any non-compliance or violation would not reasonably be expected to have a material adverse effect on the Borrowers' business or financial condition as a whole. -37- (b) Without limiting the foregoing undertakings, each Borrower specifically agrees that it will comply in all material respects with all applicable Environmental Laws and obtain and comply in all material respects with all permits, licenses and similar approvals required by any Environmental Laws, and will not generate, use, transport, treat, store or dispose of any Hazardous Substances in such a manner as to create any material liability or obligation under the common law of any jurisdiction or any Environmental Law. Section 6.5 PAYMENT OF TAXES AND OTHER CLAIMS. Each Borrower will pay or discharge, when due, (a) all taxes, assessments and governmental charges levied or imposed upon it or upon its income or profits, upon any properties belonging to it (including, without limitation, the Collateral) or upon or against the creation, perfection or continuance of the Security Interest, prior to the date on which penalties attach thereto, (b) all federal, state and local taxes required to be withheld by it, and (c) all lawful claims for labor, materials and supplies which, if unpaid, are likely by law to become a lien or charge upon any properties of such Borrower; provided, that no Borrower will be required to pay any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which proper reserves have been made. Section 6.6 MAINTENANCE OF PROPERTIES. (a) Each Borrower will keep and maintain its portion of the Collateral, the other collateral covered by the Security Documents and all of its other properties necessary or useful in its business in good condition, repair and working order (normal wear and tear excepted) and will from time to time replace or repair any worn, defective or broken parts; provided, however, that nothing in this Section 6.6 shall prevent any Borrower from discontinuing the operation and maintenance of any of its properties if such discontinuance is, in such Borrower's judgment, desirable in the conduct of its business and not disadvantageous in any material respect to the Lender as holder of the Obligations. (b) Each Borrower will defend the Collateral against all claims or demands of all persons (other than the Lender) claiming the Collateral or any interest therein. (c) Each Borrower will keep all Collateral and other collateral covered by the Security Documents free and clear of all security interests, liens and encumbrances except Permitted Liens. Section 6.7 INSURANCE. Each Borrower will obtain and at all times maintain insurance with insurers believed by that Borrower to be responsible and reputable, in such amounts and against such risks as may from time to time be reasonably required by the Lender, but in all events in such amounts and against such risks as is usually carried by companies engaged in similar business and owning similar properties in the same general areas in which that Borrower operates. Without limiting the generality of the foregoing, each Borrower will at all times maintain business interruption insurance including coverage for force majeure and keep all tangible Collateral insured against risks of fire (including so- -38- called extended coverage), theft, collision (for Collateral consisting of motor vehicles) and such other risks and in such amounts as the Lender may reasonably request, with any loss payable to the Lender to the extent of its interest therein, and all policies of such insurance shall contain a lender's loss payable endorsement for the Lender's benefit reasonably acceptable to the Lender. All policies of liability insurance required hereunder shall name the Lender as an additional insured. Section 6.8 PRESERVATION OF EXISTENCE. Except as otherwise contemplated hereunder, each Borrower will preserve and maintain its existence and all of its rights, privileges and franchises necessary or desirable in the normal conduct of its business and shall conduct its business in an orderly, efficient and regular manner. Section 6.9 DELIVERY OF INSTRUMENTS, ETC. Upon request by the Lender, each Borrower will promptly deliver to the Lender in pledge all instruments, documents and chattel papers constituting Collateral, duly endorsed or assigned by that Borrower. Section 6.10 LOCKBOX; LENDER ACCOUNT. (a) Each Borrower will irrevocably direct all present and future account debtors and other Persons obligated to make payments on Receivables to make such payments directly to the Lockbox to be under the Lender's control in accordance with the terms of the Lockbox and Collection Account Agreement. After such request, all invoices, account statements and other written or oral communications directing, instructing, demanding or requesting payment of any Receivable or any other amount constituting Collateral shall conspicuously direct that all payments be made to the Lockbox and shall include the Lockbox address. All payments received in the Lockbox shall be processed to the Lender Account. (b) If, notwithstanding the instructions to debtors to make payments to the Lockbox, any Borrower receives any payments on Receivables, the applicable Borrower shall deposit such payments into the Lender Account. Until so deposited, each Borrower shall hold all such payments in trust for and as the property of the Lender and shall not commingle such payments with any of its other funds or property. (c) Amounts deposited in the Lender Account shall not bear interest and shall not be subject to withdrawal by any Borrower, except after full payment and discharge of all Obligations. Notwithstanding anything to the contrary contained herein or in any of the Loan Documents, if the outstanding balance of the Obligations equals zero (0), then the Lender shall remit amounts deposited in the Lender Account as the Parent Borrower shall request and Parent Borrower shall have all right, title and interest in such amounts. (d) All deposits in the Lender Account shall constitute proceeds of Collateral and shall not constitute payment of the Obligations. The Lender shall, after allowing one (1) Banking Day, apply deposited funds in the Lender Account to the -39- payment of the Obligations, in any order or manner of application satisfactory to the Lender, by transferring such funds to the Lender's general account. (e) All items deposited in the Lender Account shall be subject to final payment. If any such item for which any Borrower has received credit in the Lender Account is returned uncollected, the Borrowers will immediately pay the Lender, or, for items deposited in the Lender Account, the bank maintaining such account, the amount of that item, or such bank at its discretion may charge any uncollected item to the Borrowers' commercial account or other account. The Borrowers shall be liable as an endorser on all items deposited in the Lender Account, and for which any Borrower has received credit in the Lender Account, whether or not in fact endorsed by a Borrower. Section 6.11 PERFORMANCE BY THE LENDER. Following an Event of Default, the Lender may, but need not, perform or observe any covenant which any of the Borrowers has failed to perform on behalf and in the name, place and stead of the applicable Borrower (or, at the Lender's option, in the Lender's name) and may, but need not, take any and all other actions which the Lender may reasonably deem necessary to cure or correct such failure (including, without limitation, the payment of taxes, the satisfaction of security interests, liens or encumbrances, the performance of obligations owed to account debtors or other obligors, the procurement and maintenance of insurance, the execution of assignments, security agreements and financing statements, and the endorsement of instruments); and the Borrowers shall thereupon pay to the Lender on demand the amount of all monies reasonably expended and all costs and expenses (including reasonable attorneys' fees and legal expenses) reasonably incurred by the Lender in connection with or as a result of the performance or observance of such agreements or the taking of such action by the Lender, together with interest thereon from the date expended or incurred at the Default Rate. To facilitate the Lender's performance or observance of such covenants of the Borrowers, each Borrower hereby irrevocably appoints the Lender, or the Lender's delegate, acting alone, as that Borrower's attorney in fact (which appointment is coupled with an interest) with the right (but not the duty) from time to time to create, prepare, complete, execute, deliver, endorse or file in the name and on behalf of that Borrower any and all instruments, documents, assignments, security agreements, financing statements, applications for insurance and other agreements and writings required to be obtained, executed, delivered or endorsed by that Borrower under this Section 6.11. Section 6.12 MINIMUM TANGIBLE NET WORTH. The Borrowers will maintain their consolidated Tangible Net Worth at an amount not less than the greater of (i) $30,000,000 or (ii) the Borrowers' Tangible Net Worth as of December 31, 1999. The Borrowers' Tangible Net Worth shall be determined quarterly before June 30, 2000, and monthly thereafter. Section 6.13 MINIMUM EBITDA. The Borrowers will achieve, for each period described below, minimum year-to-date EBITDA determined quarterly prior to June 30, 2000 and monthly thereafter, of not less than the amount set forth opposite such period: -40-
Period Minimum Year-to-Date EBITDA ------ --------------------------- January 1, 2000 through $ 0 March 30, 2000 March 31, 2000 through $ 2,000,000 June 29, 2000 June 30, 2000 through $ 4,500,000 September 29, 2000 September 30, 2000 through December 30, 2000 $ 8,000,000 December 31, 2000 $11,000,000 January 1, 2001 through $ 0 March 30, 2001 March 31, 2001 $ 2,000,000
Section 6.14 MINIMUM LIQUIDITY. At all times, the Borrowers shall maintain Liquidity, determined at the end of each month, of not less than $15,000,000. Section 6.15 MINIMUM UNRESTRICTED CASH. At all times, the Borrowers shall maintain Unrestricted Cash, determined at the end of each month, of not less than $10,000,000. Section 6.16 NEW COVENANTS. On or before January 31 of each year, the Borrowers and the Lender shall agree on new covenant levels for Sections 6.12, 6.13, 6.14, 6.15 and 7.11 for periods after such date. The new covenant levels will be based on the Borrowers' projections for such periods and shall be no less stringent than the present levels. ARTICLE VII NEGATIVE COVENANTS So long as the Obligations shall remain unpaid, or the Credit Facility shall remain outstanding, the Borrowers agree that, without the Lender's prior written consent: Section 7.1 LIENS. No Borrower will create, incur or suffer to exist any mortgage, deed of trust, pledge, lien, security interest, assignment or transfer upon or of any -41- of its assets, now owned or hereafter acquired, to secure any indebtedness; EXCLUDING, HOWEVER, from the operation of the foregoing, the following (collectively, "Permitted Liens"): (a) in the case of any Borrower's property which is not Collateral or other collateral described in the Security Documents, covenants, restrictions, liens, rights, easements and minor irregularities in title which do not materially interfere with that Borrower's business or operations as presently conducted; (b) mortgages, deeds of trust, pledges, liens, security interests and assignments in existence on the date hereof and listed in Schedule 7.1 hereto, securing indebtedness for borrowed money permitted under Section 7.2; (c) the Security Interest and liens and security interests created by the Security Documents; (d) purchase money security interests relating to the acquisition of machinery and equipment of any Borrower not exceeding the lesser of cost or fair market value thereof, not exceeding $1,000,000 for any one purchase or $3,000,000 in the aggregate during any fiscal year and so long as no Default Period is then in existence and none would exist immediately after such acquisition; (e) liens of carriers, warehousemen, mechanics and materialmen, and other like liens arising in the ordinary course of business for sums not due; (f) deposits or pledges, or liens incurred, to secure payment of worker's compensation, unemployment insurance, old age pension or other social security obligations, in the ordinary course of business of the Borrower; (g) liens for taxes, fees, assessments and governmental charges not delinquent or to the extent that payment therefor shall not at the time be required if the same are being contested in good faith by appropriate proceedings, and for which adequate reserves with respect thereto have been made; and (h) banker's liens, rights of setoff and similar liens incurred on deposits made in the ordinary course of business. Section 7.2 INDEBTEDNESS. No Borrower will incur, create, assume or permit to exist any indebtedness or liability on account of deposits or advances or any indebtedness for borrowed money or letters of credit issued on its behalf, or any other indebtedness or liability evidenced by notes, bonds, debentures or similar obligations, except: (a) indebtedness arising hereunder; (b) indebtedness in existence on the date hereof and listed in Schedule 7.2 hereto; and -42- (c) indebtedness relating to liens permitted in accordance with Section 7.1. Section 7.3 GUARANTIES. No Borrower will assume, guarantee, endorse or otherwise become directly or contingently liable in connection with any obligations of any other Person, except: (a) the endorsement of negotiable instruments by a Borrower for deposit or collection or similar transactions in the ordinary course of business; and (b) guaranties, endorsements and other direct or contingent liabilities in connection with the obligations of other Persons, in existence on the date hereof and listed in Schedule 7.2 hereto. Section 7.4 INVESTMENTS AND SUBSIDIARIES. (a) No Borrower will purchase or hold beneficially any stock or other securities or evidences of indebtedness of, make or permit to exist any loans or advances to, or make any investment or acquire any interest whatsoever in, any other Person, including specifically but without limitation any partnership or joint venture, except: (i) investments in direct obligations of the United States of America or any agency or instrumentality thereof whose obligations constitute full faith and credit obligations of the United States of America having a maturity of one year or less, commercial paper issued by U.S. corporations rated "A-1" or "A-2" by Standard & Poors Corporation or "P-1" or "P-2" by Moody's Investors Service or certificates of deposit or bankers' acceptances having a maturity of one year or less issued by members of the Federal Reserve System having deposits in excess of $100,000,000 (which certificates of deposit or bankers' acceptances are fully insured by the Federal Deposit Insurance Corporation); (ii) travel advances or loans to the Borrowers' officers and employees not exceeding at any one time an aggregate of $100,000; (iii) advances in the form of progress payments, prepaid rent; (iv) acquisitions permitted under Section 7.8; and (v) interests in any Borrower. (b) No Borrower will create or permit to exist any Subsidiary, other than the Subsidiaries in existence on the date hereof and listed in Schedule 5.5. Section 7.5 DIVIDENDS. Except for dividends from a Borrower to another Borrower, no Borrower will declare or pay any dividends (other than dividends payable solely in stock of the applicable Borrower) on any class of its stock or make any payment on account of the purchase, redemption or other retirement of any shares of such stock or make any distribution in respect thereof, either directly or indirectly -43- Section 7.6 SALE OR TRANSFER OF ASSETS; SUSPENSION OF BUSINESS OPERATIONS. The Borrowers will not sell, lease, assign, transfer or otherwise dispose of (i) the stock of any Subsidiary, (ii) all or a substantial part of the assets of the Borrowers as a whole, or (iii) any Collateral or any interest therein (whether in one transaction or in a series of transactions) to any other Person other than the sale of Inventory in the ordinary course of business and will not liquidate, dissolve or suspend business operations; PROVIDED, HOWEVER, nothing contained herein shall limit the Borrowers' right to use any funds on deposit in the Borrowers' investment accounts. No Borrower will in any manner transfer any property without prior or present receipt of full and adequate consideration. Section 7.7 INTELLECTUAL PROPERTY. No Borrower will sell, assign or grant licenses to use, any of its applications for patents, patents, copyrights, trademarks, trade secrets, trade names or other intellectual property to any other Person except in the ordinary course of business. Section 7.8 CONSOLIDATION AND MERGER; ASSET ACQUISITIONS. Any merger, consolidation or acquisition pursuant to which a Borrower would consolidate with or merge into any Person, or permit any other Person to merge into it, or acquire (in a transaction analogous in purpose or effect to a consolidation or merger) all or substantially all the assets of any other Person is prohibited unless such action is (a) solicited by the other Person, (b) such other Person is engaged in the electronic commerce or internet field or in a line of business substantially related thereto, and (c) upon completion of the proposed merger, acquisition or consolidation (i) Availability would be equal to or greater than $5,000,000 and (ii) no Default Period exists. Except as set forth in this Section 7.8, no Borrower will consolidate with or merge into any Person, or permit any other Person to merge into it, or acquire (in a transaction analogous in purpose or effect to a consolidation or merger) all or substantially all the assets of any other Person. Section 7.9 SALE AND LEASEBACK. No Borrower will enter into any arrangement, directly or indirectly, with any other Person whereby that Borrower shall sell or transfer any real or personal property, whether now owned or hereafter acquired, and then or thereafter rent or lease as lessee such property or any part thereof or any other property which that Borrower intends to use for substantially the same purpose or purposes as the property being sold or transferred. Section 7.10 RESTRICTIONS ON NATURE OF BUSINESS. No Borrower will engage in any line of business materially different from that in which the Borrowers as a whole are presently engaged and will not purchase, lease or otherwise acquire any material assets not related to the business of the Borrowers as a whole. Section 7.11 CAPITAL EXPENDITURES. The Borrowers will not incur or contract to incur Capital Expenditures of more than $3,500,000 during fiscal year 2000. Section 7.12 ACCOUNTING. No Borrower will adopt any material change in accounting principles other than as required by GAAP. No Borrower will adopt, permit or consent to any change in its fiscal year. -44- Section 7.13 DISCOUNTS, ETC. No Borrower will, after notice from the Lender, grant any discount, credit or allowance to any customer on any then-outstanding receivable or accept any return of goods sold. No Borrower will at any time (whether before or after notice from the Lender) modify, amend, subordinate, cancel or terminate a material obligation of any account debtor or other obligor of such Borrower. Section 7.14 DEFINED BENEFIT PENSION PLANS. No Borrower will adopt, create, assume or become a party to any defined benefit pension plan, unless disclosed to the Lender pursuant to Section 5.12. Section 7.15 OTHER DEFAULTS. No Borrower will permit any breach, default or event of default to occur under any note, loan agreement, indenture, lease, mortgage, contract for deed, security agreement or other contractual obligation binding upon it that would have a material adverse effect upon the Borrowers as a whole or on the Lender's rights and privileges under the Loan Documents. Section 7.16 PLACE OF BUSINESS; NAME. Except as otherwise disclosed in writing to the Lender prior to the date of this Agreement, no Borrower will transfer its chief executive office or principal place of business, or move, relocate, close or sell any business location. No Borrower will permit any tangible Collateral or any records pertaining to the Collateral to be located in any state or area in which, in the event of such location, a financing statement covering such Collateral would be required to be, but has not in fact been, filed in order to perfect the Security Interest. No Borrower will change its name. Section 7.17 ORGANIZATIONAL DOCUMENTS. Except as otherwise disclosed in writing to the Lender prior to the date of this Agreement, no Borrower will amend its articles of incorporation and bylaws. No Borrower will become an S Corporation within the meaning of the Internal Revenue Code of 1986, as amended. Section 7.18 CONTINGENT CONSIDERATION. Cash payments of Contingent Consideration shall not exceed twenty-five percent (25%) of the total amount of any payments of Contingent Consideration by the Borrowers and Availability must not be less than $3,000,000 after giving effect to such payments. ARTICLE VIII EVENTS OF DEFAULT, RIGHTS AND REMEDIES Section 8.1 EVENTS OF DEFAULT. "Event of Default", wherever used herein, means any one of the following events: (a) Default in the payment of the Obligations when they become due and payable; (b) Failure to pay when due any amount specified in Section 2.4 relating to the Obligation of Reimbursement, or failure to pay immediately when due or upon -45- termination of the Credit Facility any amounts required to be paid for deposit in the Special Account under Section 2.5 or; (c) Default in the payment of any fees, commissions, costs or expenses required to be paid by any Borrower under this Agreement which default continues unremedied for five (5) days after written notice thereof is given by Lender to Parent Borrower; (d) Default in the performance, or breach, of any covenant or agreement of any Borrower contained in this Agreement; provided, however, that any such Default occurring under any of Sections 6.1(a), 6.3, 6.9 and 6.11 of this Agreement shall not be deemed to be an Event of Default unless such Default continues unremedied for fifteen (15) days after written notice thereof is given by the Lender to the Parent Borrower; provided, further, however, that (i) any Default occurring under any other subdivision of Section 6.1, or under Section 6.2, 6.5, 6.6 or 6.8 shall not be deemed to be an Event of Default unless such Default continues unremedied for five (5) days and (ii) any Default occurring under Section 6.4 shall, if the applicable governmental agency or authority has provided the Borrower some time period to remedy its noncompliance, only be deemed an Event of Default if such noncompliance continues unremedied beyond that designated time period. (e) A Change of Control shall occur; (f) Any Borrower shall be or become insolvent, or admit in writing its inability to pay its debts as they mature, or make an assignment for the benefit of creditors; or any Borrower shall apply for or consent to the appointment of any receiver, trustee, or similar officer for it or for all or any substantial part of its property; or such receiver, trustee or similar officer shall be appointed without the application or consent of the applicable Borrower; or any Borrower shall institute (by petition, application, answer, consent or otherwise) any bankruptcy, insolvency, reorganization, arrangement, readjustment of debt, dissolution, liquidation or similar proceeding relating to it under the laws of any jurisdiction; or any such proceeding shall be instituted (by petition, application or otherwise) against any Borrower; or any judgment, writ, warrant of attachment or execution or similar process shall be issued or levied against a substantial part of the property of any Borrower; (g) A petition shall be filed by or against any Borrower under the United States Bankruptcy Code naming that Borrower as debtor; (h) Any representation or warranty made by any Borrower in this Agreement or by any Borrower (or by any of its officers) in any agreement, certificate, instrument or financial statement or other statement contemplated by or made or delivered pursuant to or in connection with this Agreement shall prove to have been incorrect in any material respect when deemed to be effective; -46- (i) The rendering against any Borrower of a final and non-appealable judgment, decree or order for the payment of money in excess of $250,000 and the continuance of such judgment, decree or order unsatisfied and in effect for any period of 60 consecutive days without a stay of execution or bond pending appeal; (j) Any unwaived default under any bond, debenture, note or other evidence of indebtedness of any Borrower owed to any Person other than the Lender, or under any indenture or other instrument under which any such evidence of indebtedness has been issued or by which it is governed, or under any material lease of any of the Premises, and the expiration of the applicable period of grace, if any, specified in such evidence of indebtedness, indenture, other instrument or lease; (k) Any Reportable Event, which the Lender determines in good faith might constitute grounds for the termination of any Plan or for the appointment by the appropriate United States District Court of a trustee to administer any Plan, shall have occurred and be continuing 30 days after written notice to such effect shall have been given to the Parent Borrower by the Lender; or a trustee shall have been appointed by an appropriate United States District Court to administer any Plan; or the Pension Benefit Guaranty Corporation shall have instituted proceedings to terminate any Plan or to appoint a trustee to administer any Plan; or any Borrower shall have filed for a distress termination of any Plan under Title IV of ERISA; or any Borrower shall have failed to make any quarterly contribution required with respect to any Plan under Section 412(m) of the Internal Revenue Code of 1986, as amended, which the Lender determines in good faith may by itself, or in combination with any such failures that the Lender may determine are likely to occur in the future, result in the imposition of a lien on any Borrower's assets in favor of the Plan; (l) An event of default by the Borrower shall occur under any Security Document or under any other security agreement, mortgage, deed of trust, assignment or other instrument or agreement securing any obligations of the Borrowers hereunder or under any note; (m) The Borrowers as a whole shall liquidate, dissolve, terminate or suspend its business operations or otherwise materially fail to operate their business in the ordinary course, or sell all or substantially all of their assets, without the Lender's prior written consent; (n) Any Borrower shall fail to pay, withhold, collect or remit any tax or tax deficiency when assessed or due (other than any tax deficiency which is being contested in good faith and by proper proceedings and for which it shall have set aside on its books adequate reserves therefor) and such failure shall continue unremedied for five (5) days, or notice of any state or federal tax liens shall be filed or issued (other than any tax lien with respect to which a tax deficiency is being contested in good faith and by proper proceedings and for which the Borrower shall have set aside on its books adequate reserves therefor); or -47- (o) Default in the payment of any amount owed by any Borrower to the Lender other than any Obligations arising hereunder or under any of the other Loan Documents. Section 8.2 RIGHTS AND REMEDIES. During any Default Period, the Lender may exercise any or all of the following rights and remedies: (a) the Lender may, by notice to the Parent Borrower, declare the Commitment to be terminated, whereupon the same shall forthwith terminate; (b) the Lender may, by notice to the Parent Borrower, declare the Obligations to be forthwith due and payable, whereupon all Obligations shall become and be forthwith due and payable, without presentment, notice of dishonor, protest or further notice of any kind, all of which the Borrowers hereby expressly waive; (c) the Lender may, without notice to any Borrower and without further action, apply any and all money owing by the Lender to any Borrower to the payment of the Obligations; (d) the Lender may make demand upon the Borrowers and, forthwith upon such demand, the Borrowers will pay to the Lender in immediately available funds for deposit in the Special Account pursuant to Section 2.20 an amount equal to the aggregate maximum amount available to be drawn under all Letters of Credit then outstanding, assuming compliance with all conditions for drawing thereunder; (e) the Lender may exercise and enforce any and all rights and remedies available upon default to a secured party under the UCC, including, without limitation, the right to take possession of Collateral, or any evidence thereof, proceeding without judicial process or by judicial process (without a prior hearing or notice thereof, which the Borrowers hereby expressly waive) and the right to sell, lease or otherwise dispose of any or all of the Collateral, and, in connection therewith, the Borrowers will on demand assemble the Collateral and make it available to the Lender at a place to be designated by the Lender which is reasonably convenient to both parties; (f) the Lender may exercise and enforce its rights and remedies under the Loan Documents; and (g) the Lender may exercise any other rights and remedies available to it by law or agreement. Notwithstanding the foregoing, upon the occurrence of an Event of Default described in subsections (f) or (g) of Section 8.1, the Obligations shall be immediately due and payable automatically without presentment, demand, protest or notice of any kind. -48- Section 8.3 CERTAIN NOTICES. If notice to the Borrowers of any intended disposition of Collateral or any other intended action is required by law in a particular instance, such notice shall be deemed commercially reasonable if given (in the manner specified in Section 9.3) at least ten calendar days before the date of intended disposition or other action. ARTICLE IX MISCELLANEOUS Section 9.1 NO WAIVER; CUMULATIVE REMEDIES. No failure or delay by the Lender in exercising any right, power or remedy under the Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy under the Loan Documents. The remedies provided in the Loan Documents are cumulative and not exclusive of any remedies provided by law. Section 9.2 AMENDMENTS, ETC. No amendment, modification, termination or waiver of any provision of any Loan Document or consent to any departure by any Borrower therefrom or any release of a Security Interest shall be effective unless the same shall be in writing and signed by the Lender and each of the Borrowers, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No notice to or demand on any Borrower in any case shall entitle any Borrower to any other or further notice or demand in similar or other circumstances. Section 9.3 ADDRESSES FOR NOTICES, ETC. Except as otherwise expressly provided herein, all notices, requests, demands and other communications provided for under the Loan Documents shall be in writing and shall be (a) personally delivered, (b) sent by first class United States mail, (c) sent by overnight courier of national reputation, or (d) transmitted by telecopy, in each case addressed or telecopied to the party to whom notice is being given at its address or telecopier number as set forth below: If to the Borrowers: Luminant Worldwide Corporation 13737 Noel Road Suite 1400 Dallas, Texas 75240-7367 Telecopier: (972)-581-7002 Attention: Thomas G. Bevivino If to the Lender: Wells Fargo Business Credit, Inc. 4975 Preston Park Blvd. Suite 280 Plano, Texas 75093 -49- Telecopier: (972) 867-7838 Attention: Thomas J. Krueger or, as to each party, at such other address or telecopier number as may hereafter be designated by such party in a written notice to the other party complying as to delivery with the terms of this Section. All such notices, requests, demands and other communications shall be deemed to have been given on (a) the date received if personally delivered, (b) three (3) business days after deposit in the mail, postage prepaid, if delivered by mail, (c) the first business day after the date sent if sent by overnight courier, or (d) the date of transmission if delivered by telecopy, except that notices or requests to the Lender pursuant to any of the provisions of Article II shall not be effective until received by the Lender. Section 9.4 FURTHER DOCUMENTS. Each Borrower will from time to time execute and deliver or endorse any and all instruments, documents, conveyances, assignments, security agreements, financing statements and other agreements and writings that the Lender may reasonably request in order to secure, protect, perfect or enforce the Security Interest or the Lender's rights under the Loan Documents (but any failure to request or assure that the applicable Borrower executes, delivers or endorses any such item shall not affect or impair the validity, sufficiency or enforceability of the Loan Documents and the Security Interest, regardless of whether any such item was or was not executed, delivered or endorsed in a similar context or on a prior occasion). Without limiting the generality of the foregoing, each Borrower authorizes the Lender to file any such financing statements without its signature. Section 9.5 COLLATERAL. This Agreement does not contemplate a sale of accounts, contract rights or chattel paper, and, as provided by law, the Borrowers are entitled to any surplus and shall remain liable for any deficiency. The Lender's duty of care with respect to Collateral in its possession (as imposed by law) shall be deemed fulfilled if it exercises reasonable care in physically keeping such Collateral, or in the case of Collateral in the custody or possession of a bailee or other third person, exercises reasonable care in the selection of the bailee or other third person, and the Lender need not otherwise preserve, protect, insure or care for any Collateral. The Lender shall not be obligated to preserve any rights any Borrower may have against prior parties, to realize on the Collateral at all or in any particular manner or order or to apply any cash proceeds of the Collateral in any particular order of application. Section 9.6 COSTS AND EXPENSES. The Borrowers shall pay on demand all costs and expenses, including (without limitation) attorneys' fees reasonably incurred by the Lender in connection with the Obligations, this Agreement, the Loan Documents, any Letters of Credit and any other document or agreement related hereto or thereto, and the transactions contemplated hereby, including without limitation all such costs, expenses and fees incurred in connection with the negotiation, preparation, execution, amendment, administration, performance, collection and enforcement of the Obligations and all such documents and agreements and the creation, perfection, protection, satisfaction, foreclosure or enforcement of the Security Interest. -50- Section 9.7 INDEMNITY. In addition to the payment of expenses pursuant to Section 9.6, the Borrowers shall indemnify, defend and hold harmless the Lender, and any of its participants, parent corporations, subsidiary corporations, affiliated corporations, successor corporations, and all present and future officers, directors, employees, attorneys and agents of the foregoing (the "Indemnitees") from and against any of the following (collectively, "Indemnified Liabilities"): (i) any and all transfer taxes, documentary taxes, assessments or charges made by any governmental authority by reason of the execution and delivery of the Loan Documents or the making of the Advances; (ii) any claims, loss or damage to which any Indemnitee may be subjected if any representation or warranty contained in Section 5.14 proves to be incorrect in any respect or as a result of any violation of the covenant contained in Section 6.4(b); and (iii) any and all other liabilities, losses, damages, penalties, judgments, suits, claims, costs and expenses of any kind or nature whatsoever (including, without limitation, the reasonable fees and disbursements of counsel) in connection with the foregoing and any other investigative, administrative or judicial proceedings, whether or not such Indemnitee shall be designated a party thereto, which may be imposed on, incurred by or asserted against any such Indemnitee, in any manner related to or arising out of or in connection with the making of the Advances and the Loan Documents or the use or intended use of the proceeds of the Advances except to the extent resulting from the gross negligence or willful misconduct of any Indemnitee. If any investigative, judicial or administrative proceeding arising from any of the foregoing is brought against any Indemnitee, upon such Indemnitee's request, the Borrowers, or counsel designated by the Parent Borrower and satisfactory to the Indemnitee, will resist and defend such action, suit or proceeding, at the Borrowers' sole costs and expense; provided, however, if the resistance or defense provided by the Borrowers or their counsel prove unsatisfactory to the Lender, the Lender shall have the right to appoint and hire alternate counsel to resist and defend such action, suit or proceeding, at the Borrowers' sole cost and expense. Each Indemnitee will use its best efforts to cooperate in the defense of any such action, suit or proceeding. If the foregoing undertaking to indemnify, defend and hold harmless may be held to be unenforceable because it violates any law or public policy, the Borrowers shall nevertheless make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. The Borrowers' obligation under this Section 9.7 shall survive the termination of this Agreement and the discharge of the Borrowers' other obligations hereunder. Section 9.8 PARTICIPANTS. The Lender and its participants, if any, are not partners or joint venturers, and the Lender shall not have any liability or responsibility for any obligation, act or omission of any of its participants. All rights and powers specifically conferred upon the Lender may be transferred or delegated to any of the Lender's participants, successors or assigns. -51- Section 9.9 EXECUTION IN COUNTERPARTS. This Agreement and other Loan Documents may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same instrument. Section 9.10 BINDING EFFECT; ASSIGNMENT; COMPLETE AGREEMENT; EXCHANGING INFORMATION. The Loan Documents shall be binding upon and inure to the benefit of the Borrowers and the Lender and their respective successors and assigns, except that no Borrower will have the right to assign its rights thereunder or any interest therein without the Lender's prior written consent. This Agreement, together with the Loan Documents, comprises the complete and integrated agreement of the parties on the subject matter hereof and supersedes all prior agreements, written or oral, on the subject matter hereof. Without limiting the Lender's right to share information regarding any Borrower and its Affiliates with the Lender's participants, accountants, lawyers and other advisors, the Lender, Wells Fargo & Company, and all direct and indirect subsidiaries of Wells Fargo & Company, may exchange any and all information they may have in their possession regarding any Borrower and its Affiliates, and the Borrowers waive any right of confidentiality it may have with respect to such exchange of such information. Section 9.11 SEVERABILITY OF PROVISIONS. Any provision of this Agreement which is prohibited or unenforceable shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Section 9.12 HEADINGS. Article and Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. Section 9.13 GOVERNING LAW; JURISDICTION, VENUE; WAIVER OF JURY TRIAL. THE PARTIES AGREE THAT THE LAW OF THE STATE OF MINNESOTA (OTHER THAN CONFLICT OF LAWS RULES OF THE STATE OF MINNESOTA) SHALL BE APPLICABLE TO AND GOVERN ALL ASPECTS OF THIS TRANSACTION AND, WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, THE PARTIES AGREE THAT ALL DOCUMENTS AND AGREEMENTS EXECUTED AND DELIVERED IN CONNECTION WITH THIS AGREEMENT INCLUDING, WITHOUT LIMITATION, ALL MATTERS PERTAINING TO THE VALIDITY OR ENFORCEABILITY OF SUCH DOCUMENTS AND AGREEMENTS AS WELL AS ALL MATTERS PERTAINING TO THE INTERPRETATION OR CONSTRUCTION OF SUCH DOCUMENTS AND AGREEMENTS, SHALL BE DETERMINED UNDER AND GOVERNED BY THE LAWS (OTHER THAN CONFLICT OF LAWS RULES) OF THE STATE OF MINNESOTA. FURTHER, THE PARTIES AGREE THAT THE TRANSACTIONS CONTEMPLATED BY THE LOAN DOCUMENTS AND THE SUBJECT MATTER OF SUCH TRANSACTIONS BEAR A REASONABLE RELATION TO THE STATE OF MINNESOTA. THE PARTIES HERETO HEREBY (I) CONSENT TO THE PERSONAL JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN THE STATE OF -52- MINNESOTA IN CONNECTION WITH ANY CONTROVERSY RELATED TO THIS AGREEMENT; (II) WAIVE ANY ARGUMENT THAT VENUE IN ANY SUCH FORUM IS NOT CONVENIENT, (III) AGREE THAT ANY LITIGATION INITIATED BY THE LENDER OR ANY BORROWER IN CONNECTION WITH THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS SHALL BE VENUED IN EITHER THE DISTRICT COURT OF HENNEPIN COUNTY, MINNESOTA, OR THE UNITED STATES DISTRICT COURT, DISTRICT OF MINNESOTA, FOURTH DIVISION; AND (IV) AGREE THAT A FINAL JUDGMENT IN ANY SUCH SUIT, ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED ON OR PERTAINING TO THIS AGREEMENT. Section 9.14 CONFIDENTIALITY. Notwithstanding anything to the contrary herein, the Lender and its Affiliates shall, and shall cause all of their respective employees, agents and representatives to, at all times take all steps necessary to preserve the confidentiality of all non-public information furnished or made available by any of the Borrowers to the Lender or any of its Affiliates or any of their respective employees, agents or representatives, under this Agreement, any of the Loan Documents or otherwise and neither the Lender nor any of its Affiliates nor any of their respective employees, agents or representatives shall use any such information for any purpose in any manner other than pursuant to the terms contemplated by the Loan Documents. [SIGNATURE PAGES TO FOLLOW] -53- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written. WELLS FARGO BUSINESS CREDIT, INC. By /s/ Thomas J. Krueger ---------------------- Thomas J. Krueger ITS VICE PRESIDENT LUMINANT WORLDWIDE CORPORATION By /s/ Guillermo G. Marmol --------------------------- Guillermo G. Marmol Its Chief Executive Officer LWC OPERATING CORP. By /s/ Guillermo G. Marmol --------------------------- Guillermo G. Marmol Its President LWC MANAGEMENT CORP. By /s/ Guillermo G. Marmol --------------------------- Guillermo G. Marmol Its President POTOMAC I HOLDINGS, INC. By /s/ Guillermo G. Marmol --------------------------- Guillermo G. Marmol Its President MULTIMEDIA I HOLDINGS, INC. By /s/ Guillermo G. Marmol --------------------------- Guillermo G. Marmol Its President (SIGNATURE PAGE 1 OF 3 TO CREDIT AND SECURITY AGREEMENT) RSI GROUP, INC. By /s/ Guillermo G. Marmol --------------------------- Guillermo G. Marmol Its President ALIGN SOLUTIONS CORP. By /s/ Guillermo G. Marmol --------------------------- Guillermo G. Marmol Its President POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC By /s/ Guillermo G. Marmol --------------------------- Guillermo G. Marmol Its Manager MULTIMEDIA RESOURCES, LLC By /s/ Guillermo G. Marmol --------------------------- Guillermo G. Marmol Its President INTERACTIVE8, INC. By /s/ Guillermo G. Marmol --------------------------- Guillermo G. Marmol Its President BD ACQUISITION CORP. By /s/ Guillermo G. Marmol --------------------------- Guillermo G. Marmol Its President (SIGNATURE PAGE 2 OF 3 TO CREDIT AND SECURITY AGREEMENT) -2- RESOURCE SOLUTIONS INTERNATIONAL, LLC By /s/ Guillermo G. Marmol --------------------------- Guillermo G. Marmol Its President INTEGRATED CONSULTING, INC. By /s/ Guillermo G. Marmol --------------------------- Guillermo G. Marmol Its President FREE RANGE MEDIA, INC. By /s/ Guillermo G. Marmol --------------------------- Guillermo G. Marmol Its President ALIGN-FIFTH GEAR ACQUISITION CORPORATION By /s/ Guillermo G. Marmol --------------------------- Guillermo G. Marmol Its President ALIGN-SYNAPSE ACQUISITION CORPORATION By /s/ Guillermo G. Marmol --------------------------- Guillermo G. Marmol Its President (SIGNATURE PAGE 3 OF 3 TO CREDIT AND SECURITY AGREEMENT) -3- EX-27.1 4 ex-27_1.txt EXHIBIT 27.1 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF LUMINANT WORLDWIDE CORPORATION AS OF JUNE 30, 2000 AND DECEMBER 31, 1999 AND THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 3-MOS DEC-31-2000 DEC-31-1999 APR-01-2000 APR-01-1999 JUN-30-2000 JUN-30-1999 8,898 0 0 0 27,792 0 1,941 0 0 0 48,645 0 17,014 0 3,281 0 343,544 0 26,318 0 823 0 0 0 0 0 271 0 316,132 0 343,544 0 0 0 40,165 6,453 0 0 21,417 3,876 47,910 3,429 0 0 (38) 12 (29,124) (864) 0 0 0 0 0 0 0 0 0 0 (29,124) (864) (1.10) (0.19) 0 0
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